IS YOUR WIFE YOUR BUSINESS PARTNER?
Originally published on February 24, 2005
Off-farm income has become increasingly important to Canadian farms.
With off-farm and farm incomes lumped together on the same personal income tax return, farm taxpayers are quick to structure their farm businesses in such a way as to ensure the optimum split of the reported farm income or loss.
Farm partnerships are one way to do this. In its simplest form, a farm partnership involves the husband and wife agreeing to share equally in the farm's income or loss.
In recent years husband-wife farm partnerships have moved away from the traditional 50-50 split to more uneven partner allocations, which are based on the partners' measurable contributions.
The Canada Revenue Agency acknowledged at the 2003 Canadian Tax Foundation CRA-Practitioners Roundtable that "there is no legal impediment to a partnership issuing ... a preferential share of the profits or losses in the partnership ... provided that the allocations are not unreasonable."
This means that if the husband partner contributed more time and energy to the farm than his spouse, there is nothing wrong in allocating more of the reported farm income to his personal income tax return and less to the spouse.
If the husband partner's marginal tax rate is lower than that of the spouse, then this is one more reason to measure each partner's contribution and report an uneven allocation. For example, if you perform 80 percent of the farm work, an 80-20 split is acceptable.
What if your farm partnership reported a loss? If your wife has off-farm income, you have the potential to apply more of the loss to her income resulting in the least amount of tax as a couple.
To support the uneven allocation, the wife who was working off the farm acknowledges her husband's time and effort and for this reason recognizes that he does not deserve as much of the loss as her. Out of fairness, the wife accepts 80 percent of the farm loss, resulting in an 80-20 split. To safeguard this from reassessment, the couple should avoid referring to it as a "salary" allocation because the agency no longer allows it.
Readers should be cautioned that a joint farm chequing account and jointly owned farmland does not automatically result in a farm partnership.
While the partnership's name doesn't have to be registered, at a minimum a written partnership agreement should exist.
The farm's deposits and expenditures should be run through a partnership bank account and if uneven allocations are made, they should be based on measurable logic and not random allocations. If the allocations are unreasonable, the tax agency reserves the right to make adjustments.
When reviewing the tax court cases relating to husband-wife partnerships, I was surprised at how often the court acknowledged the efforts of the husband and wife in building the business.
However, the judge often stated that the wife helped because she was his wife and not because she was his business partner.
For this reason the partnership was disallowed. In many of these cases a written partnership agreement would have yielded different results.
I was reminded of my first year of marriage when my father-in-law, as a ruse, made me a sign for the farm that read "Allyn Tastad and Wife."
While I put the sign up on a tree by our farm's fire pit, I have only seen one other "Mr. Farmer and Wife" sign in my many travels to farms.
This tells me that the judge might have had it wrong. Prairie farmers view their wives as business partners. For them to suggest otherwise, especially in the presence of their wives, could be suicidal.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.