Transition
Toolkit

A corporation is a distinct legal entity, meaning it can do anything a person can, such as conduct business, buy, own and sell assets, hold debt, file tax returns, rent land and enter into contracts. However, a corporation does not have a finite lifespan, which opens up the possibility of continuity over multiple generations.

A farmer wanting to pass on their land to a non-relative could incorporate as a means to transition. This would usually mean turning a partnership or sole proprietorship into a corporation. A corporation can own the farm business, equipment, infrastructure, the land, or any combination of the above, depending on what’s best for the individuals involved. 

Incorporation can provide a clearly defined timeline and mechanism for gradually transitioning ownership and management of a farm business to the entering farmer. For example, say the current farmer, George, has been operating a market garden as a sole proprietor for the last 20 years. To transition their farm business to an entering farmer, George will incorporate the farm business with the advice of an accountant and assistance of a lawyer. In the new structure, the farm corporation owns the business, and some infrastructure, such as a delivery truck and greenhouses. The business has been valued at $100,000. If the entering farmer, Lisa, bought into the company with savings of $20,000, she would then have a one-fifth stake in the corporation. As Lisa continues to work on the farm, she could take her earnings from the farm and put that back into the business, and over the course of two to three years become a 50% owner of the business, and eventually 100% owner as George completes his transition out of the farm business. That would give Lisa a controlling share in the company. Meanwhile, the corporation could be leasing the land and other infrastructure at an agreed upon rate from George, who still owns the land. This gives George income for retirement. 

The intention to transition ownership of the land may or not be present. If an eventual purchase of the land by the entering farmer is not feasible, the farmer-landholder may decide that the corporation will inherit the land once they die, depending on the financial needs of the landholder’s family. However, because the landholder will be deemed to have sold the land at market value at the time of their death, consideration must be given to the ability to fund the estate’s resulting tax liability. 

If a landholder’s family wants to continue to be involved in the farm, they could retain a stake by holding minority shares, or serving on a board of directors. Dividends from the business could potentially provide the current farmer’s heirs a financial benefit. Similarly, if the heirs are to be the landholders in the future, lease payments could provide a financial benefit. If the intention is for the entering farmer to eventually own the farm business but not the land, a registered lease can provide the farm business with the security and stability needed to justify the entering farmer’s time and investment.

Regardless of how the incorporation model is applied, a shareholder agreement is necessary. A detailed agreement outlining timelines, exit strategies, and financial considerations will ensure that the intentions of both parties can be effectively put into practice.

• What is a share? An indivisible unit of capital, expressing the ownership relationship between company and shareholder. A share is an easily quantifiable unit and makes for a very clear structure in ownership that can change over the course of the transition process: as the new farmer obtains more shares, they will have more control over how the business runs.
• What is a dividend? The portion of profit a shareholder receives from ownership of shares.

Considerations for Incorporation:

• When – and whether – to incorporate is a common question. There are many factors to consider:
• There is no magical numerical revenue threshold for incorporating, but a good benchmark may be looking at how much you’re earning and how much you need to live on. If your business is earning $100,000 and you only need $60,000 to live on, being incorporated would enable you to leave $40,000 in the corporation, and pay reduced income tax on that amount overall.
• An accountant can help you figure out if there are good business and financial reasons to incorporate, or if this step should be put off until it becomes advantageous. 
• Limiting liability is often considered a sufficient reason to incorporate.
• Certain farm grants, loans and programs require incorporation.
• It’s important to have the trade name registered to the corporation, which costs an extra $50.

Taxes and Corporations:

• The corporate tax rate may be lower than personal income tax rates. For example, a B.C. corporation with a small business deduction currently pays corporate tax at 11% on farming income, which may be lower than the tax rate of an individual earning the same amount of farming income.
• There are unique tax benefits that farm operators may qualify for over their lifetime. It is not wise to merge the business of farming with other non-farming business in one corporation, as that will disqualify the corporation from accessing certain tax benefits only available to Family Farm Corporations.
• When farming is not the primary source of income for the operator, there are restrictions in place on the use of farm losses against non-farm income. 
• If a property is currently personally owned, it is possible to transfer it to a company in a manner that does not result in current income tax. Additional planning and tax elections are required. However, once owned by a corporation, the property cannot come out of the company on a tax-deferred basis.
• Whether a property or shares of a corporation qualify for the capital gains exemption is an “all or nothing” test and can be difficult to apply in practical scenarios. A partial exemption is not available – the asset either qualifies or does not.
• The qualification for some of these tax provisions can become really complex really quickly, and some of it will be time based. (For example, should you farm the property, only to then rent it out later to an arm’s-length party). 

Owning Land as a Corporation:

• If a corporation purchases land, the land can be bought using funds that have been taxed at the corporate level, meaning less pre-tax income needs to be earned to pay for the property. 
• Property Transfer Tax must be paid every time that the ownership of property changes. It is quite common to put the land inside a corporation to ensure that should the farm/farm property be sold in the future; the shares can be sold without having to also incur Property Transfer Tax. 
• The downside of having a company own the land is that this would require an additional step to ensure that the owner’s principal residence exemption is still available when the farm property is sold in the future. Tax planning is necessary to ensure that the ability to claim the principal residence exemption is maintained. 
• If the residence is owned by the corporation, the shareholders need to pay fair market value rent to the company to avoid a taxable benefit.
• Land owned by a corporation must be leased to a related person or corporation that is using the land principally in a farming business in order to qualify for the Capital Gains exemption. If leased to another corporation, all or substantially all of the value of the corporation’s assets must relate to assets used in a farming business. 
• If the land is owned by a corporation, it is the shares of the corporation that may qualify for Capital Gains exemptions, not the land itself. In other words, the shares need to be sold to utilize the Capital Gains exemption.

JOINT VENTURES

A joint venture is an agreement between two parties to work together towards common goals without legally entering into a business partnership, or merging operations. It allows individuals to combine resources but retain ownership of their respective businesses. Each party makes a contribution to the venture, which may include labour, investment, and depreciation, and shares a percentage of revenue and expenses based on their percentage contribution.

A joint venture is different from a partnership in that each individual party files taxes separately. A joint venture agreement should be individualized to meet the needs of both parties and allow collaboration and sharing of resources while retaining independence.

There are different types of joint ventures. An income joint venture may be a suitable type of interim solution for transition planning. In this type of joint venture, all expenses and revenue run through one bank account. Revenue is allocated to each member, according to their decisions around labour, roles and responsibilities. Infrastructure and equipment can be owned separately or together, but repairs, maintenance and operating costs are typically paid by the joint venture. 

In a transition scenario, one party may have considerably more invested in equipment and land, but may contribute less and less labour as time goes on. Over time, the entering farmer may have more opportunity to pay for new equipment and other capital contributions.

Considerations for Forming a Joint Venture:

• Agree on values, goals and business strategy. Aligning the big picture vision is important and foundational for the rest of the process. For example, perhaps your agreed-upon value equation is to be a financially sustainable farm, a good employer and to maintain strong ecological stewardship practices. Define the terms. 
• Agree on roles and responsibilities. If you have Standard Operating Procedures (SOPs), they will be very handy here! Work towards developing lists of common tasks and discuss who will do which tasks.
• Determine allocation of revenue and expenses based on agreed upon terms, e.g. 30% / 60% or based on hours with an agreed upon value. 
• Determine when profits will be distributed.
• Designate on ‘Operator’ for the legal pieces, e.g. GST number.

Sweat equity means that someone involved in the farm business is being paid below market rate in anticipation of a future return on their labour. Essentially, rather than investing money into the farm business, they are investing their time, energy, and “sweat.” The value of the farm business, and also the land, may be preserved or increased as a result (at least partially) of this person’s contribution. 

Sweat equity often comes up in farm transition planning, especially when discussing the contributions of the entering farmer. Sweat equity can be a pathway to ownership for entering farmers who may not have the capital needed to purchase the farm and land outright, by trading unpaid labour for an ownership stake in the land and/or farm business. 

DEVELOPING A SWEAT EQUITY AGREEMENT

Calculating sweat equity is complex and requires clarity, documentation, and discussion of expectations for both the entering farmer, current farmer, and any off-farm family heirs well before the transitioning process occurs. 

Clear communication is key so that both parties understand the value of the entering farmer’s labour and how that will be compensated in the long-term. Having something in writing ensures that the sweat equity agreement is realized long-term, and protects against conflicts, failed businesses and broken relationships. 

• Current farmers: have a clear understanding of your vision, and the financial needs of both your heirs and yourself before entering into a sweat equity agreement with an entering farmer.If there are off-farm children, what are their expectations around inheritance and returns from the farm? What have they already received as compensation for the sweat equity put into the farm during their youth (e.g. support with university, down-payment on housing, vehicles, etc.)?
• Entering farmers: have a clear understanding of the value of your labour, your financial needs short- and long-term, and the level of risk you can handle. There is inherent risk for the entering farmer; as with any investment, there is a chance that you won’t see a return on your ‘sweaty’ investment. On the other hand, investing labour now may enable you to gain hard equity later.

For sweat equity to work, all parties must have a clear understanding of the farm’s financial state. A good question to ask is: where would the farm be without the entering farmer’s unpaid labour? To understand the full value of the entering farmer’s contributions, it is essential to put a dollar amount on the value of the land and farm business at the start of a sweat equity agreement, and again at a later date, in order to evaluate the growth in value resulting from the entering farmer’s contributions.

While sweat equity can be a way for entering farmers to build an ownership stake in a farm business over time, it can also hide the fact that a farm is not as profitable as needed to support the entering farmer. If the farm’s value decreases instead of increasing, the entering farmer’s return on the sweat equity investment may be zero. Some transition plans opt to avoid sweat equity altogether by employing the entering farmer at market rate. Assuming the farm is profitable, being able to pay fair market wage demonstrates that there is capacity to add one or more additional farmers. 

Sweat equity can be used as part of a purchase involving a cash down payment. Take the example of a young couple buying a farm in part with cash and in part with sweat equity. With a sweat equity purchase, the buyer is paying off all, or a portion of, the agreed cost of a property through labour. With start-up costs so high, it may be an essential way  to transfer farms to the next generation.

Considerations for Sweat Equity Agreements: 

• Vesting period: How long does the entering farmer have to work before being compensated? Vesting is a legal term that means to give or earn a right to a present or future payment, asset, or benefit, and your agreement should indicate at what point you can exercise your rights; for example, the entering farmer’s sweat equity may be “vested” when the land changes hands.
• What are the performance criteria and expectations around the contributions to the farm? 
• Nature of the equity: What will the entering farmer receive in return for their sweat equity? Land ownership? Shares of the business?
• How will you assess the value of sweat equity? Based on a dollar value for hours worked, or on the difference in value of the farm business and land from the start of the sweat equity agreement to the vesting? What would you have paid someone of equal skill, ability, passion and commitment for the same work? Schedule conversations on compensation and expectations early on, and check-in regularly; consider hiring a facilitator. 
• Exit strategies: Under what conditions can the agreement be dissolved? What if the entering farmer leaves the farm? Will they get some or all of the return on their sweat equity investment? What additional benefits has the farm provided to the entering farmer and off-farm heirs?
• Develop a framework for the discussion and boundaries so that everyone is comfortable with what is being proposed.
• Engage lawyers, accountants, mediators, families and business consultants in advance.

One way for a current farmer to continue residing on and using their farmland after they have transferred ownership of the land is by holding a life estate. A life estate is a legal agreement that gives a person the right to occupy, use, and deal with land or residence during the lifetime of the particular individual or an estate for the remainder of their lifetime, even if they don’t own the land anymore.  The ownership of a life estate is of limited duration because it ends at the death of the person. The terms vary from case to case and must be carefully discussed and documented in the form of a life estate agreement.

Life estates may be an option not just for current farmers in transition planning, but also potentially for entering farmers. For example, say the land you’re farming is in a trust, and you have a 30-year lease. The current farmer will stop farming soon, but they’d like to live on the land until they die with a life estate agreement. The lease could also include a provision that you, the entering farmer, can have a life estate after your 30-year lease term is up. That way, you can transition the land and farm to a new farmer, and stay living on the land – the cycle continues.

QUESTIONS TO ASK:

• What are the responsibilities of the life tenant?
• Will they be responsible for maintenance or routine property upkeep, e.g. snow removal?
• Will they pay water, utilities or other costs associated with the property?
• Will they be responsible for insuring the home?
• Does the life tenant have the right to rent out the home part-time or full-time?

INSURANCE

Insurance is all about protecting yourself in case the unexpected happens – and in a farm transition, there will be much that is unexpected! There are a variety of ways insurance can fit into your transition plan, from the current farmer’s life insurance providing a financial benefit to their heirs in lieu of other inheritance, or providing both parties with an assurance in the event that one of the parties dies before the transition is complete.

Considerations:

• Who is the beneficiary of the insurance? Life insurance has named beneficiaries and  does not go through the estate probate process upon someone’s death, making it quickly redeemable upon death.
• Who is paying the premiums? The cost of premiums should be weighed against the full financial picture to determine if insurance is an appropriate tool.
• Insurance payouts often go to paying off debts.
• Some loans may require key people to be insured.
• In a corporate structure, shareholder agreements should have provisions for what happens if one of the key shareholders dies or becomes unable to continue in the business, including how the buying and selling of shares will be funded. One way to structure this is through buy-sell insurance, which can fund the purchase of shares upon death.
• Insurance is complex; work with a financial planner and an insurance broker to explore and understand your options.

Many young farmers start new farm businesses, often on leased land, pour their heart and soul into it, and then life shifts. What happens to the budding business? Transition planning isn’t just for seasoned farmers who have been running their farm for decades. 

Even as you’re navigating start-up as an entering farmer, plan to pass on the value of the work you have put into the land and the business. Transitioning a young farm business, especially one operated on shared land, provides continuity for both the landholders and customers, as well as a potential return on investment to the current farmer by way of selling the business or infrastructure.

Considerations:

• When you’re starting up your business, think about what it would look like to eventually pass it on to someone else. 
• Have foundational conversations with the landholder well in advance to lay the groundwork for the idea of your business on the land one day being passed to another farmer.
• Keep good written records and establish Standard Operating Procedures from the get-go. This will not only make any potential transitions easier, it will help you out in your day-to-day by making you more efficient!
• Consider the true value of your farm business. What do your financials say? What are the assets and liabilities of your business? 
• Consider whether the branding/farm name will be transitioned, or just the business assets and customer base.
• Consider the customers as stakeholders and get their support early.

Elana and Maddy harvesting dahlias at one of their urban plots. Photo credit: Ayla Amano

City Beet Farm is an urban farm founded in 2013 by Katie Ralphs and Ruth Warren. They grew the business on leased residential lots in the Mount Pleasant/Riley Park neighbourhood of Vancouver, building relationships with homeowners who were happy to see their lawns converted to food production. They marketed their products through a CSA. 

In 2016, they decided to transition the farm business to pursue other work opportunities and save up to buy land. They set the value according to the annual revenues of the business, and advertised through social media and farm organizations. They found their successors, Elana Evans and Madeleine Clerk, through UBC’s Farm Practicum alumni list. 

The transition was managed informally between the two pairs. They signed a contract, the new farmers paid a deposit with financing from Vancity, and then paid the remainder in increments over the next 10 months. Katie and Ruth provided mentorship over the transitional season through YA’s Business Mentorship Network. They maintained all but a couple landholder relationships over the transition and many of their customers the first season were previous CSA members. 

Since taking over City Beet, Elana and Madeleine grew the business enough to double the amount of land under cultivation and hire two employees in 2020. They operated City Beet until the end of 2020, when they in turn put the business up for sale and transitioned to new owners. As part of the transition, they received support from Young Agrarians to frame the offering, and were referred to a business appraiser who helped them assess the value of the business. New owners Liana and Duncan are looking forward to their first season growing at City Beet!

Roger Woo of Farmhouse Bard at his CSA pickup. Photo credit: Sara Dent

Roger Woo founded The Farmhouse Bard in 2017 in Surrey, B.C. after finding land through the B.C. Land Matching Program. His market garden operation focused on Asian vegetables, and he marketed his produce primarily through a CSA program managed by the Hua Foundation. 

After two seasons on the land, life took him in a new direction as he moved east to be closer to his family and pursue a career in tech. He was keen to transition his leases on neighbouring pieces of land as well as his CSA program to a new farmer, and worked with the B.C. Land Matching Program to identify a good fit. 

The new farmer, Yuko Suda, was going into season two of her farm operation, Brave Child Farms, when she took over Roger’s leases, purchased farm infrastructure from him, and picked up his CSA program. Both landholders were happy to welcome Yuko on to their land and see the farming continue.

Brave Child Farms also specializes in Asian vegetables, with an emphasis on Japanese vegetables. In this case, with the Hua Foundation managing the CSA and recruiting members, having them engaged and in support of the new farmer made the transition much smoother. 

Yuko took on a business partner after her first year on the land to grow her farm business, and the two of them are now wrapping out their first season together and preparing the farm for winter.

This toolkit highlights stories from transitions that have been successful, but there are far more examples of people who have tried, and found that they couldn’t make it work for many reasons – and that’s ok. It’s optimistic to assume that every transition relationship will make it to Stage 6 – Maintaining. 

Sometimes you’ll hit a point where the numbers don’t add up, or you can’t work through a conflict – or, life events such as divorce, family illness or death, or another opportunity might take the current or entering farmer in a different direction. What happens in those situations – what’s the exit strategy? How will you untangle yourselves? 

It’s important to have clear agreements about how parties can go their separate ways if necessary. In other situations, the transition plan ultimately continues, but is significantly changed due to an unexpected scenario.

Running a farm business is not the hardest part of a transition plan. Transitions often collapse due to breakdowns in the relationship, where perceptions about respect, recognition and appreciation (in both directions) are a primarily catalyst. 

Being clear is kind! Both current and entering farmers often get excited about a prospective transition, but do not lay out clear timelines and expectations. This is a big hurdle: people discuss the transition at a high level, years pass, and when it comes time to take actions, such as transferring assets or paying out equity, unexpressed expectations, assumptions and money restrictions can cause the transition to collapse.

QUESTIONS TO ASK:

Here are just a few possibilities to ask yourselves – you’ll have many more “what ifs” of your own to add to this list:

• What if the stock market crashes and the current farmer needs financial assistance urgently? Can they sell any piece of land, or other assets whenever they want? 
• Can the entering farmer leave at any time? Or, if they desire to leave, are they committed to working the land/operation for a period of time to create a plan for them to “divest,” in other words extricate themselves from agreements, farm management, investments, etc.? 
• What if you don’t like how you are communicating with each other? 
• What if the entering farmer wants more independence from the current farmer?  Have you discussed ideas and alternatives for new strategies? How open are both parties to the other’s ideas – and independence? 
• What if someone gets divorced? Married? Has a baby? Gets sick or injured? 

EXIT STRATEGIES

Some transitions may end early, in the visioning stage. You’ve gotten to know each other, looked at the business, and decided it’s not a fit. The advantage to having a clearly articulated vision and understanding your own needs is that it will be more easily apparent if you aren’t on the same page. At the vision stage, it’s easy enough to go your separate ways without yet having invested significant time and money – and hopefully still having formed a lasting friendship.

If you’ve moved further into the transition process and started to implement some of the ideas in Stages 2 and 3, your exit strategies will need to be more detailed. Both parties should consider what it would mean to them if the transition process ended. If the entering farmer has invested time, money, and energy, how are you getting that investment back, so you aren’t leaving empty handed? For current farmers, what does it mean for you to be left without a successor after spending time, money, and energy cultivating someone for the role?

Considerations:

• Notice: How much notice does each party need if the other decides to back out of the transition? Finding a new successor, or new farm opportunity, isn’t easy.
• Finances: How are financial investments being handled? How are both parties going to “cash out” their investments? Can the farm business afford to pay out an entering farmer?
• Roles: Who is responsible for what at this stage in the transition? How will the entering farmer transition roles back to the current farmer, or another successor?
• Timelines: What is the point of no return? Set up “green light moments,” key check-ins to ensure everyone is still on the same page, before signing legal documents or investing in capital infrastructure. These are “make or break” moments where going backwards gets increasingly complex legally and financially.
• Equity: How and when are you transferring equity? In one transition relationship that ultimately didn’t succeed, the current farmers were gradually transferring livestock to the entering farmers, but no land was planned to be transferred for a significant amount of time. When things went south financially and the land was not transferred  to the entering farmers, they had to sell their herd for meat as they had no land access. 

Working alongside the right team of people on your transition journey is fundamental to success. It’s just not possible for one person to know everything that is required. The level of expertise required – legal, financial, technical – spans across disciplines, and different people will come into the transition process at different points. Who are these professionals you’ll need, and how do you find them? 

While some professional relationships (think accountants and lawyers) will span years, others may only last hours, such as a meeting with a technical advisor or insurance broker. Some may simply involve a phone call to a BC Assessment representative with a question. Technical advisory, extension and business support services available to farmers differ across regions.

Most of the private support you’ll require for your team, such as lawyers or financial advisors, work on hourly rates, or potentially contracts. Publicly-funded technical support is sometimes available through a local organization or representative, often free-of-charge or subsidized. Some costs will need to be incurred independently, such as a financial planner, while others, such as a mediator, could be paid jointly by both parties. It’s important to build your team early on in the transition process so you can include the potential costs required to hire professionals into your business plan.

We’ve collected transition professionals across B.C. on the Young Agrarians U-Map – check it out to see transition professionals in your region!

FARM MANAGEMENT DECISION-MAKING FRAMEWORK