Originally published on March 15, 2007


More and more farmers and ranchers are choosing to structure their farms as partnerships versus sole proprietorships.  I attended a professional update course where the key-note speaker stated emphatically that every non-incorporated farmer in Western Canada should be farming in a partnership.  Why is the farm partnership a smarter choice?

It gives considerable flexibility in the transfer of inventory

First the farm partnership provides you with a means of removing the inherent tax cost which is hiding in your accumulated livestock or crop inventories.  If Dad retires and decides to transfer his herd of beef cows to his active farming son there is nothing in the Income Tax Act (ITA) which would permit a tax-deferred rollover or transfer of the herd.  Instead subparagraph 69(1)(b)(ii) of the ITA will force Dad to report on his income tax return an income inclusion equal to the fair market value of the herd transferred.  If Dad failed to report this income and it was uncovered by the Canada Revenue Agency then the whole transaction could be subject to “double-tax”.  Dad would be reassessed tax on the missed income inclusion and Son would be assessed tax on the sale proceeds realized on any sale of livestock which he acquired from his Dad at  no cost. Ouch!

Alternatively if Dad and Son formed a partnership then Dad could transfer his beef cows to the partnership, receiving partner’s capital equal to the fair market value of his herd.  Dad could then transfer his partnership interest to his Son using the rollover rules found in subsection 73(3) of the ITA.  Since Son is now the “sole partner” he would be able to wind-up the partnership on a tax-deferred basis under subsection 98(5) of the ITA.  What Dad wasn’t able to accomplish as a sole-proprietor, with a few twists and turns, he accomplishes as a partner.

If Dad continues to farm on his own and dies with his herd of beef cows then the unsold herd is considered a “right or thing” for tax purposes.   The executor of Dad’s estate then has the option of reporting the value of the herd as income on Dad’s regular terminal return or reporting the value of the herd as “right or thing” income on a separate return or in directly in the hands of Dad’s beneficiaries.  If the executor elects to file a separate return in the year that Dad died, then the personal tax credits which were claimed on the regular terminal return can be doubled-up and applied again to the separate return.  The ITA does not allow you to “split” the value of any “right or thing” between the regular terminal return and the elected separate return.  All or part of the “right or thing” income must be taxed either on the elected separate return or directly in the hands of the Dad’s beneficiaries who received the “right or thing” and ultimately dispose of it.    In our earlier example Dad would be able to bequest his beef cows to his Son as a “right or thing” provided that the executor transferred the herd within a specified time directly to son.   In Dushenski versus MNR (90 DTC 1391), the farmer’s herd was sold with the realized proceeds deposited to the farmer’s estate account.  The Tax Court Judge ruled that this income would not be taxed in the hands of the widow since she never formally received it.  Since the cattle were never formally transferred by the executor to the widow, the sale proceeds were taxed in Dushenski’s regular terminal return.



Alternatively, if Dushenski and his wife were categorized as a partnership then his cattle which comprise his partnership interest would have been transferred at no tax cost to his wife as the surviving partner. We encourage our farmers and ranchers to draft a written farm partnership agreement that anticipates the death of any partner.  If the farm partnership continues after the death of a partner then there is no “right or thing” income inclusion and the opportunity to income split with the partner’s estate return.  We can wind-up the estate of the deceased partner at the most opportune time and even consider transferring the estate’s partnership interest to a corporation should there be a benefit in doing so.

It translates into real savings should you decide to incorporate

Second, for those considering incorporation, the farm partnership is the preferred first step in securing real savings on the transfer of inventories and depreciable properties to your own farming company via the transfer of your partnership interest.   Farmers and ranchers are the only businesspersons in Canada who are able to claim a capital gains deduction on the transfer of their partnership interest.

Incorporating the farm partnership may be the only way to transfer a large herd of livestock inventory when the debt against this livestock exceeds its cost.

For the farmer’s partnership interest to qualify for the capital gains exemption, it must pass a two-year holding period test.  For those waiting for that big crop or large herd before they incorporate, if they are not in a formal farm partnership for at least two years then they will not be eligible for the incorporation of their partnership interests.  Even if you are planning to leave agriculture after that big crop or large herd is realized then you should still consider incorporation as an alternative in your exit and a means of minimizing taxes overall.

It is a simple alternative to those who want to split income without the complexity of incorporation

Third the farm partnership is considerably simpler and less costly to maintain than its “cousin” the company.  If you pay no income taxes since you continually monitor your taxable income through pre-purchases and deferred crop sales then you won’t need a company but will rather accomplish the same end with a farm partnership.

The ITA will allow you to re-allocate your farming profits to each partner provided that it is “reasonable” given the reality of the circumstances.  With so many spouses working off the farm, it is reasonable to allocate more of the farming profits to the farming partner who is on the farm “full-time”.  If the farming partnership generated a loss then it would be reasonable to allocate less of the farming loss to the partner who was on the farm “full-time”.

In closing while I hate generalizations, I am prepared to make one ”every non-incorporated farmer in Western Canada should be farming in a partnership”. 


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 or website 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.