Do you and your family members operate your own individual farming operation?
Are your operations interconnected due to combined input purchases, shared or jointly owned assets or shared lending agreements?
If this is the case, it could be of value to consider simplifying operations through the transfer of your assets into one entity.
That’s not to say sole proprietorships lack advantages. Such benefits typically include simplified tax filings, reduced legal costs and the peace of mind knowing you own 100 percent of the business with no one able to tell you what you can and can’t do.
These advantages, however, can start to dwindle as the farm grows.
In many cases, we see family farm operations that essentially operate as one farm but report multiple individual farming operations for tax purposes.
One example of this is in the case of siblings who farm together. From the outside looking in, these operations look like one large farm. Everyone uses the same equipment, farms the same land and even consults on which crops to seed. Essentially, they are one farm but continue to operate as multiple sole proprietors.
Regardless of the reasons for operating independently, combining all of the farming activities into one operation may offer substantial benefits.
The steps to combining all of the activities of these farms into one operation will not be the same for everyone.
The options can vary from incorporating one large farming company to setting up a partnership or even organizing a joint venture. Each comes with advantages and disadvantages and each can be effective depending on the situation.
As an example, by incorporating all of the farming operations into a corporation there may no longer be a need to worry about paying high personal tax rates.
The income from the farm would be picked up in the company and taxed at low corporate rates offered to companies.
For example, in Alberta income earned by a company is taxed at a rate of 14 percent (up to a taxable income level of $500,000) as opposed to the top personal tax rate of 39 percent.
This savings in tax would allow for additional cash flow to be used to pay down debt, buy new assets and potentially allow the business to grow even faster.
Perhaps combining your operations makes sense, but the question of ownership and control is a concern.
Unlike a sole proprietor, under a corporation, partnership or a joint venture, more than one person can own the business.
Depending on the situation, this could allow for additional opportunities to address issues such as income splitting with other family members or even succession planning with the next generation while still maintaining control.
When using one of these combined structures, it will be important to determine which person or persons has oversight and control of the operations.
Combining all of the farming activities into one operation can also simplify the tracking of assets.
Among the difficulties that can arise in multiple family farm operations is the sharing of assets to meet the needs of the individual farm.
It’s not uncommon for family members to buy assets such as equipment together because it’s not economically viable to make the purchase independently.
This may be favourable as it allows for the purchase of needed equipment, but there can be complications.
The question of who can use the equipment and when, who will be responsible for the cost of maintaining it and even the task of determining how to record the equipment for purposes of tax and accounting can be complicated.
By combining all of the assets into one operation, most of these issues are removed. Also, the farm will have a larger asset base, which often allows for an increased ability to borrow or to participate in programs that may have not been an option as multiple independent operations.
It is important to step back and evaluate whether continuing to operate as a sole proprietor still makes sense. There may be significant opportunities to simplify the operations and save while doing it.
This is, however, a big decision and it is important to ensure that each of the advantages and disadvantages of the options available are fully understood.
Consider contacting a professional to discuss whether your current operation is most suitable for you.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: [email protected].