It has been my experience that a great way to improve myself is by leveraging the knowledge and expertise of the people around me. One way a farm might do this is by using a joint venture arrangement.
Unlike a partnership, where “partners” can contractually bind other partners and partnership assets are jointly owned, a joint venture is a non-permanent agreement between multiple participants to achieve a specific goal using each other’s separately owned resources.
Joint ventures can be a very flexible arrangement between parties. A commonly seen agreement is for one farmer to contribute land and the other labour and equipment. They then share in the expenses and crop produced. However, there are many more scenarios where a joint venture could make sense for your operation.
A joint venture could be right for your farm in the following situations:
- As a way to test potential business relationships.
- To provide access to land, equipment and expertise without the initial cash injection. For example, if you are looking to get into a new crop or market, entering into an agreement with someone who has experience might provide the initial exposure you are looking for.
- For producers who want to slow down, it can allow you to stay involved in some aspects of the farm (management, help during busy times) with more flexibility for time away. This also helps you stay onside of specific tax rules that allow for preferential treatment of capital gains and intergenerational farm property transfers.
- If not set up or managed properly, it could be interpreted as a partnership by the government, potentially resulting in negative tax consequences.
- It may come with additional administration. Due to the added complexity, it is imperative that accounting records are well maintained.
- You may have to give up some control regarding how farm decisions are made inside the joint venture operations.
- It is important a clear agreement is in place to ensure disagreements can be settled appropriately when they arise.
To illustrate a few simple ideas:
Example 1: A new producer who is willing to contribute a majority of the labour may wish to enter into a joint venture with a partially retired farmer who is willing to contribute expertise, equipment and land. This arrangement benefits the new farmer by providing valuable mentorship, and access to equipment and land without having to rent or buy.
This is different than the common one-third crop share deal, in that the experienced farmer would likely get a higher percentage of income from the operations due to contributing equipment and management in addition to land. There is also the added benefit that the arrangement potentially helps to keep the assets onside of preferential tax rules.
Example 2: A grain farmer may agree to provide feed to a rancher for a season in exchange for a portion of the revenue when the livestock are sold. In this agreement, there is potential that the farmer realizes a higher return on this grain compared to market prices and the rancher can secure a season worth of feed while avoiding the upfront cash expense.
A joint venture could be created for virtually any purpose and tailored to satisfy all participants. It is a great option to consider. However, it is not the solution to all situations.
If you have questions, I recommend you speak to your trusted adviser.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. He would like to thank Riley Honess and Joseph Opper of KPMG for their assistance with writing this article. Contact: firstname.lastname@example.org.