Most farm operators probably put bookkeeping, preparing, and filing taxes near the bottom of their to-do list.
If you make money from farming though, you need to report that income to the Canada Revenue Agency; failing to do so could result in stiff penalties.
If your tax return gets reassessed, you’re responsible for unpaid taxes and will be hit with a 10% penalty on the income you failed to report.
That’s why it’s important to understand the different ways Canadian farmers calculate their income. And to ensure you use tax professionals with an intimate understanding of farm income, farm business tax, tax preparation, and financial analysis.
Below are farm business tax tips on the different ways Canadian farmers report their farm income.
If you’re a farmer, raise fish, or are a self-employed commission agent, you can report income using either the cash method or accrual method. All other self-employed income must be reported using the accrual method.
Under the accrual method, farm operators report income in the year it is earned or accrued. This happens regardless of when the money is received. The same goes for expenses; they are deducted in the year they are incurred, not when they are actually paid.
For example, if you sell one tonne of wheat for $275 or $135/hundredweight of cattle, if you use the accrual method of accounting, the Canada Revenue Agency considers the funds to be income when you agree to the sale.
If you’re a farmer who uses the cash method of accounting, you report the income in the year that you receive it. You also deduct any expenses in the fiscal period you pay them. If you are selling cattle, wheat, or any other commodity using the cash method, you do not have to report the income until you receive it.
Change in Method
Farmers can change which method of income reporting they want to use, but there are different rules depending on the change.
You can change from using the accrual method to cash whenever you like. You just need to make adjustments between the two methods on your income tax return. Going forward, your farm business income and expenses must be calculated using the same method; unless you get permission from the Canada Revenue Agency.
If you use the cash system and want to use the accrual method, you need to ask for the change in writing, explain why you want to change accounting methods in the letter, and submit the request to your nearest tax centre.
Inventories at the end of a fiscal period also need to be considered. There are rules used for calculating the inventory of a farm business which prevents farmers from using inventories to create a loss.
FBC – Helping Canadian Farm Operators Minimize Their Tax Burden
If you’re a farm operator, you can calculate your income using either the cash method or accrual method. The farm business tax professionals at FBC can show you the benefits and potential drawbacks of each.
FBC has worked exclusively with Canadian farm operators, small business owners, independent contractors, and entrepreneurs since 1952. Since then we have provided our clients with uniquely tailored tax services that help them find ways to minimize their tax burden and maximize their deductions.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.