Manitoba and Saskatchewan have both felt the wrath of nature last spring. Manitoba estimated that flood damage caused 920,000 acres to remain unseeded but close to 2 million acres were affected if you include seeded acreage lost to water damage. Saskatchewan estimated that 3 million farm acres were flooded.
Although both provincial governments are looking at assistance programs, many farmers point out they never received a penny from similar flood damage in 2011, says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm community. Crop insurance isn’t much help either since it only applies if the producer gets the crop in.
But there is another storm lurking for those producers who have both grain sales and revenue from flood insurance in 2014. In effect, they are doubling up on their taxable revenue. Although this is an extraordinary circumstance it can still hurt the wallet.
The tax impact can be somewhat dampened by accelerating expenses. In the cash-based economy of farming you can buy next year’s seeds now to add offsetting expenses. However, this strategy has its traps as well. Some will argue that accelerating expenses merely transfers the problem to year two when you will have revenue with no expenses. This is not considered a wise tax strategy when you have assets tied up in inventory.
Tax deferral is another strategy but the costs of recognizing these amounts in the final year of business can be substantial. Perhaps a better plan would be to take a longer term view of the problem and focus on permanent tax deductions or deferrals which will benefit the taxpayer in his or her retirement years much like an RRSP does.
For instance, there are tax investment strategies such as flow-through shares which add tax deductions immediately and can lead to capital gains in the future. Flow-through shares are investments in Canadian companies that explore for minerals, oil or gas. Flow-through shares provide approximately a 92% write-off in the purchase price of the shares with deductions for the remaining 8% over the following two to three years for investors via renounced expenses which may be deductible in the year they are spent or over a number of years. This type of investment converts what would have otherwise been potential investment income to future capital gains.
There are other ways to cushion the problem but in any case consultation with your tax specialist or financial advisor would be time well spent and ideally before your tax year-end so you can take action before your taxes are locked in.
Grant Diamond is a tax specialist with FBC, a firm dedicated to providing farmers and small business owners with expert tax services and advice for over 60 years. FBC has branches in BC, AB, SK, MB, ON and NS to serve its 50,000 Members. FBC also provides financial & estate planning. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, email fbc @ fbc.ca or call toll-free 1-800-265-1002.
Accurate as of September 5, 2014