Co-ownership Agreements and Horse Syndications by Catherine Willson, B.A., Ll.B. Willson Lewis LLP • www.willsonlewis.com Photos by Dave Landry If you want to race a Quarter Horse, why not do it with friends? The purchase, training, and racing of a good quality Quarter horse can be expensive. It is advantageous to share the cost among a few friends and you can all share the fun. • Multiple ownership can take many forms from a Catherine Willson, B.A., Ll.B. simple contract between two friends for the purchase of a horse, to limited partnerships, corporations, trusts, joint ventures, and a variety of other vehicles. Each has its own special rules and the choice of vehicles should be carefully considered before any money is expended on the venture. Co-ownership Agreements At its simplest level, a multiple ownership agreement could be a co-ownership agreement between two or more friends to purchase a horse, train it, race it, and eventually with luck, sell the horse at a profit. Each of the friends may contribute a portion of the purchase price. One may contribute the training and horse expertise in lieu of funds towards the purchase. Whatever the arrangement, there are some basic points that should be observed to make the venture a successful one: • Put the agreement in writing. This should be done immediately on the purchase of the horse. There is no sense making up the rules after the arguments have started. • The agreement should specifically indicate what each owner is expected to contribute. It should indicate who will pay for the upkeep of the horse, training, racing, and all the other details inherent in training and racing quarter horses. • The agreement should contain a "dispute resolution" clause, ie. if the owners cannot agree on an issue, there should be some mechanism to break the stalemate. As an • • example, if one owner is contributing the horse expertise, that owner could be given the final say on issues dealing with the health and training of the horse. As another example, a trusted advisor or mediator could be chosen by the owners to mediate the dispute or decide the issue. Make sure the agreement contains an escape clause. If one owner wants out, there should be a buy out clause allowing the other owners to purchase that partner's share of the horse at an agreed price. The agreement should also make clear the events that will trigger a sale of the horse. Many disagreements arise because one owner wants the horse sold and the others do not. As the value of a horse can fluctuate wildly due to injury or success, the timing of a sale is very important. Discuss the transaction with a financial planner. The co-owners of a horse have an undivided percentage interest in the animal. If the owners are participating in the venture to make a profit, there are tax planning issues that should be considered to allow for a maximum return on the investment. When drafting the agreement, look ahead, plan for foreseeable events or problems, and where possible, have the agreement reviewed by a lawyer with experience in this area. The cliche, "An ounce of prevention is worth a pound of cure," applies as much in law as it does in medicine. Get INVESTED. Get INVOLVED. No matter how simple or small the purchase, I cannot stress enough the importance of putting down some basic guidelines for the relationship between the co-owners on paper. Without this, a disagreement between co-owners regarding the maintenance or sale of the horse may quickly deteriorate and the resulting dispute could harm the position of all parties involved as well as end friendships, increase cost and precipitate court action. Corporations The corporation is another vehicle used to purchase higher quality expensive horses or to undertake more serious horse ventures. It is a creature created by law and has special properties that make its use beneficial. Legally, a corporation is treated like a person. It can own property, buy and sell, and must submit regular tax returns. The debts of the corporation are its own. Creditors must claim against the corporation for monies owing to them by the corporation. Creditors cannot go behind the corporation to claim against the people who control it (with some limited exceptions). This characteristic of limited liability makes the corporation a popular choice for money making ventures, especially where the risks are high and the investors want to protect their other assets from possible claims by creditors. Family Fun Day at Ajax Downs A corporation is treated differently than an individual from an income tax perspective. Income earned by a corporation is taxed at the corporate level which is lower than the tax on most individuals. Shareholders have the option of removing money from the corporation in the form of dividends which are taxable at a special rate, or leaving profits in the corporation for use in other money making enterprises. Another benefit to the corporation is its longevity. Companies never die if properly maintained. If the horse venture is to be a longterm investment such as the set up of a breeding or racing stable, it makes sense to use a vehicle that will continue to exist as the various partners in the venture pass away. A disadvantage caused by the separate nature of a corporation is that, for income tax purposes, the income earned by a corporation cannot be sheltered by losses incurred by the shareholders personally. Similarly, the losses incurred by the corporation cannot be flowed through to the shareholders and offset against other income earned by the shareholders. Income tax considerations such as these have led to the use of other vehicles for syndications such as the limited partnership. Partnerships Partnerships, including limited partnerships, usually consist of a number of investors that come together to perform a specific business venture. When two or more people carry on a business together with a view to making a profit, they have formed a partnership. Each partner has some degree of personal involvement and control. Each partner is entitled to a share of the profits and is liable for a share of any loss. There are two main advantages to using a partnership, the first being its ease of formation and dissolution. It is recommended that the names and addresses of the partners and the name under which trade is carried on be registered with the appropriate government agency. Filing fees are low. Dissolution of the partnership takes place when one partner gives notice of dissolution or, where the partnership has been created for a fixed term, at the end of the fixed term. The second advantage is its flexible management structure. The relationship between the partners is contractual. The partners can draw up an agreement between themselves dealing with the management of the partnership, distribution of profits, liabilities, and anything else they feel is important. As such, the partnership can be organized to accommodate a variety of business arrangements. Syndications are a form of partnership. Income and loss flow through the partnership to the individual partners and are shared between the partners equally or in accordance with their partnership agreement. The income or loss must be included in the partners' personal annual tax filings. Photos by Kelly Counsell Racehorse Ownership Seminars Join us for Brunch on Sundays at Ajax Downs September 12th and October 17th Learn about the benefits of getting invested as a breeder and/or racehorse owner in the Quarter Horse racing industry. Network with industry professionals and learn about the different types of ownership from special guest speaker Catherine Willson of Willson Lewis LLP. Willson Lewis LLP is an industry member of the Ontario Equestrian Federation and a member of the international Equine & Animal Lawyers Association. Catherine is a legal representative for the Horse Racing Alliance of Canada. She has given conferences across Canada on equine law for Equine Canada, the Ontario Equestrian Federation, and the Jockey Club of Canada. She advises on contracts, syndicates, litigation, disputes, and tax issues related to horses. Attention Trainers and Breeders! Take this opportunity to direct potential new customers to one of these seminars. Reservations are required. To attend a Racehorse Ownership Seminar you must reserve your seat through the Ontario Quarter Horse Racing Industry Development Program by contacting Sandy Anthony at 416-213-0520 or email [email protected]. Partnerships - continued from page 2... Every partner is jointly and severally liable with the other partners for all debts and obligations of the partnership incurred while a partner. Further, partners are jointly and severally liable in respect of any wrongful acts or omissions by any partner acting for the partnership and for the misapplication of any money or property received for, or in the custody of, the partnership. To be "severally liable" means that a partner can be sued independently for the whole amount of the loss. That partner would then have to go after the other partners to recover whatever contribution they were supposed to make under the partnership agreement. To protect yourself from this situation, maintain an active role in the partnership. If you sit back and trust others to run the business, you may end up paying when the creditors come knocking. A limited partnership consists of one or more partners who act as general partners and many more partners who act as limited partners. A limited partner is only liable for the debts of a limited partnership to the extent of the monies provided by that limited partner to the partnership. A limited partner must not take a controlling interest in the partnership. Horse Syndications There is no magic to the term "horse syndication". It refers to a transaction that can take the legal form of a corporation, partnership, or other vehicle. Key to the concept is that it involves investors coming together to perform a particular venture, whether it be the purchase of a race horse, stallion, or horse operation, with a view to making a profit on the investment. It is a business. In most syndications, the role of the investors is relatively passive. There may be one managing partner or experienced horse person that takes the role of management and control of the horse operation. The reasons vary why people enter into these syndications. Often it provides a mechanism whereby people who could not afford to participate in the horse business may do so. Often, there is some tax advantage to participation in a syndicate. Multiple co-ownerships, in any form, make available to many of us the joy of owning and watching a good horse perform and succeed. There are also the perks of ownership such as passes to the clubhouse or box seats, entry into the training areas or stables, and of course, hobnobbing with the rich and horsey. It also helps the sport to succeed - the more quality horses introduced into the sport in Canada, the better the action. With care and if Revenue Canada cooperates, we should see more of these cooperative efforts in Canada in the future. Catherine Willson is a partner at Willson Lewis LLP in Toronto (www.willsonlewis.com). This information deals with complex matters and may not apply to particular facts and circumstances. The information reflects laws and practices that are subject to change. For these reasons, this information should not be relied on as a substitute for specialized professional advice in connection with any particular matter. QUARTER HORSE RACING AT FORT ERIE Three Full Day Race Cards of Quarter Horse Racing: • More than $650,000 available in purses for Quarter Horse races Two Days of Mixed Race Cards Throroughbred and Quarter Horse Racing: • Up to $200,000 in added money for stakes races and feature races Saturday, October 23rd and 24th • All Ontario Quarter Horses starting at Fort Erie (Ontario Quarter Horses with one-or-more starts in Ontario in 2009 and 2010) are eligible for a Transportation Subsidy • Open races at Fort Erie eligible for QHRIDP Ontario Bred and Ontario Sired Purse Bonuses • Eligible horses racing at Fort Erie earn QHRIDP Breeders Awards, Stallion Awards and Breeder/Stallion Stakes Bonuses • Discount hotel rates for Horsemen at Fort Erie Holiday Inn • Stabling available at Fort Erie Saturday, October 2nd, 9th and 16th Heads Up!... A Horsemen's Information Session is scheduled for end-of-August (in Ajax) to present details on race conditions, bonuses and incentives, and race entry details. Television Pilot to Reach Potential 3.5 Million Viewers The Full Quarter... The Ontario Quarter Horse Racing Industry Development Program (QHRIDP) is funding the production of a four-episode television pilot, The Full Quarter, to capture the imagination of a potential 3.5 million CTV viewers in the GTA and Golden Horseshoe regions of Ontario. Four episodes of The Full Quarter will air on CTV on Saturday mornings at 11:30 a.m. beginning August 14th. The program will showcase Quarter Horse racing in Ontario, with additional feature highlights focusing on Quarter Horse athletes in rodeo, barrel racing and other sports. Goals and objectives of the Ontario Quarter Horse Racing Industry Development Program include attracting new investment from sponsors and horse owners and introducing potential new owners to the sport. This program is moving into new areas to raise awareness of the Quarter Horse racing industry in Ontario," said Wendy Hoogeveen, Director at the Ontario Racing Commission which oversees the Quarter Horse Program. "The theme fits with the Program's objective of attracting investment and new audience, as well as promoting life after racing for ex-racehorses. This is a pilot project and the outcome will be carefully assessed to determine that it has met the goals and objectives of The Program. Developed and administered by the Ontario Racing Commission in cooperation with industry stakeholders, the Ontario Quarter Horse Racing Industry Development Program is designed to be an economic driver for rural Ontario. For more information on the Ontario Quarter Horse Racing Industry Development Program and Ontario's Horse Improvement Programs visit: www.ontarioracingcommission.ca WannaBet Team Sells Superpacks Like Hotcakes! Tuesday, August 3rd, marked the first of a series of six visits to Ajax Downs from the WannaBet Team. Their goal is to engage customers coming through the front door and to get them interested in wagering on live racing. To make it easier for customers, the Team assembles and sells a series of pre-selected bets for six races called the Superpack. Customers receive their pre-selected wagering vouchers in an envelope that includes a brochure with tips on how to wager on Quarter Horse racing. During the first visit to Ajax Downs, the WannaBet Team was faced with a flurry of sales and curious slot customers from the time they set up at the track. Guest Speaker - Peter Gross Handicapping Brunches The Quarter Horse Program hosted two Handicapping Brunches at Ajax Downs, June 27th and July 13th, featuring guest speaker and broadcast personality Peter Gross. Over 20 guests were in attendance at both events. The Handicapping Brunches provide a very cost effective way to educate new customers on handicapping and wagering, effectively turning them into repeat customers for live Quarter Horse racing, and introducing them to the potential of racehorse ownership. Quarter Horse Program at Guelph's Premier Outdoor Equine Expo The Quarter Horse Program was an exhibitor at the first Outdoor Equine Expo in Guelph June 4th-7th. There was an impressive turnout of industry exhibitors, and the final day of the event was geared specifically for the racing industry. Speakers representing the Quarter Horse racing industry included QROOI President Bob Broadstock and VP of Corporate Affairs at Ajax Downs, Nick Coukos. Program representatives spoke to attendees about the racing program, the breeding program and the industry support programs and ran a daily draw, collecting contact information for persons interested in racehorse ownership. The Team runs contests and draws for prizes between each race to generate excitement and get new players committed to horse racing. One of the prizes is a race presentation in the Winner's Circle. WannaBet Dates at Ajax Downs: • • • Tuesday, August 3rd Sunday, August 15th Tuesday, August 31st • • • Sunday, September 12th Tuesday, September 21st Sunday, October 17th Information Links: www.ontarioracingcommission.ca www.qrooi.com www.ajaxdowns.com
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