Farming Joint Ventures. Craig Macfie, CPA, CA, PAg

Transcription

1 Farming Joint Ventures Craig Macfie, CPA, CA, PAg February 13, 2018

2 About me

3 Outline 1. Distinguishing the Joint Venture 2. Joint Ventures for a growing or transitioning operation 3. Formalizing your Farming Joint Venture

4 1. Distinguishing the joint venture

5 Formal Joint Ventures (JV) or Informal Arrangements Proprietor (Joe Farmer) Partnership (Farmer Ben & Mrs. Ben) Corporation (Old MacDonald's Farm Inc.) Formal Joint Venture agreement (contract) Relative Informal arrangement (handshake) Neighbour Consider: - Farm management - Legal - Taxation

6 Formal (JV) agreement vs. Informal arrangement General comments Who has decision making authority? How many profit centres are there? New (SCI) specified corporate income rules Informal arrangement No legal fees Formal (JV) agreement Lessen risk of being assessed by CRA as a partnership (unwanted tax consequences & assumption of partners debt) Improved communication A habit of top performers

7 In equilibrium the top end are profitable and growing, the average are hanging in there, and the bottom end are losing money and exiting the industry Danny Klinefelter retired professor Texas A & M University regarding farm business

8 Dollars and Sense report July 2015 Agri-food Management Institute Top Habits of Top $ Performers Top Quartile of Canadian farms 50% more likely to have a formal written business plan that is reviewed and updated annually 30% more likely to work regularly with a trusted farm business advisor, or team of advisors Bottom Quartile of Canadian farms 3x more likely to not seek out new information, training or learning opportunities 3x more likely to have financial records that are months behind and not used on a regular basis for decision making Almost 3x more likely not to monitor cost of production and use it for benchmarking and management decisions

9 Examples of Farming Joint Ventures Shared equipment and/or labour Enterprise specific i.e. livestock Crop share Land pooling arrangement Other

10 Pooling land in a Formal Joint Venture Pros & Cons Pros Co-venturers are fairly compensated for their labour contribution & asset investment Flexible compared to a partnership or corporate structure No issues over order of seeding and harvest Management hierarchy and business plan and direction can be formalized no more competing Grain can be stored and marketed together Not fighting over new rented land Grain tickets and contracts can all come in Joint Venture name Potential to simplify AgriStability reporting one operation Only 1 account needed at suppliers Cons Only 1 CCGA $100,000 interest free advance available maybe not Additional bank account needed Additional accounting required Lawyer Fees for legal agreement Crop Insurance - lesser chance of a payment in one field disaster situations

11 2. Joint ventures for a growing or transitioning operation

12 Why Consider a Farming Joint Venture? Growth & Expansion business stage Farming is capital intensive, align yourself with others with similar goals (increased profitability) Stop competing with family/neighbours, spend more time at what you re good at/enjoy more down time? Already using an informal cost share/strategic alliance arrangement formalize it, realize efficiencies

13 Farming is Capital Intensive Used with permission, Les Henry 90 years of Saskatchewan farmland prices

14 Farming is Capital Intensive Equipment costs from SMCPA benchmarking database: 2009 crop year = $39.38/ac 2016 crop year = $82.11/ac *information to date (Amortization, equipment repairs, equipment rent) Ways to track equipment costs: Accrual accounting (above) Cash flow Fair market value

15 Why Consider a Farming Joint Venture? Transitioning business stage Kids are coming back to the farm transfer responsibilities Not interested in full retirement ease into it Retiring, but corporate owned land (50 2/3% corporate tax rate) Active income treatment (12% corporate tax rate) for your crop share Intergenerational land transfer (farm land, shares of family farm corporation, or interest in a family farm partnership)

16 Why Consider a Farming Joint Venture? CONS Shared decision making Risk of being assessed as a partnership (partnership liabilities & unwanted tax consequences) Additional accounting Cost of legal agreement

17 3. Formalizing your Farming Joint Venture

18 3. Formalizing your Farming Joint Venture Client Checklist a. Agree on vision and goals/business strategy b. Agree on roles and responsibilities c. Determine revenue and expense allocation d. Determine year-end (cut-off) e. Determine when profit will be extracted f. Designate an Operator for GST purposes g. Legal agreement

19 a. Vision & goals/business strategy Might fit under one of these categories: Minimize costs/capture economies of scale Active farm income treatment (corporate owned land or crop share) Farm transition

20 b. Agree on Roles & Responsibilities Organization chart Job descriptions

21 c. Determine revenue & expense allocation No right answer! But, can we quantify a fair allocation? I think so

22 Assets and labour are being contributed to the joint venture! Use fair market value of assets Consider management labour vs operator labour Allocating based on acres easy asset and labour contribution may not be equitable Allocating based on assets and labour treatment of rented land

23 Identifying the income and expenses the joint venture accounts for

24 Projecting the joint venture allocation

25 Simple example Joe Farmer Farmer Ben & Mrs. Ben Joint Venture Land FMV 500,000 2,000,000 Equipment FMV 225,000 1,000,000 Buildings FMV 100, ,000 Total 825,000 3,300,000 % of assets 20% 80% Net Income 500,000 Allocation 100, ,000 (500,000) -

26 Detailed example Joe Farmer Farmer Ben & Mrs. Ben Land FMV 500,000 2,000,000 Equipment FMV 225,000 1,000,000 Buildings FMV 100, ,000 Total 825,000 3,300,000 Joint Venture % of Assets 20% 80% Net Income 500,000 Labour (management & operations) (80,000) (60,000) (140,000) Return on investment Land (4%) (20,000) (80,000) (100,000) Equipment & Buildings (6%) (19,500) (78,000) (97,500) 162,500 % of assets (32,500) (130,000) (162,500) Total allocation (152,000) (348,000) -

27 d. Determine year-end (cut-off) Multiple cut-offs periods or change year-end date!

28 e. When are profits extracted? Option A or B? A. Grain cheques are split at the elevator Co-venturers are just financing expenses Joint venture financial information less meaningful Multiple CCGA loans available B. Grain cheques are deposited into the joint venture Once grain sales are made, joint venture should finance itself How/when to extract money to co-venturers? Extra accounting if % change happens

29 f. Designate the Operator for GST purposes

30 Draft yourself first g. Legal Agreement

31 Thank you Craig Macfie, CPA, CA, PAg Formalizing your farming joint venture The case for cash flow projections