Farming is a very unique business that comes with a large number of tax laws that relate only to farmers. There are a lot of tax management strategies for farmers to take advantage of; overlooking one could easily cost you tens of thousands of dollars.
Below are some Canadian farm tax tips to help maximize your income and minimize your tax burden.
Eventually, you might want to retire and sell the farm; whether that takes place in the next 5 years or 25 years, it’s important to meet with tax professionals that specialize in working with farmers.
Working with farm tax experts ensures you're working with someone who can navigate Canada’s complex farming tax laws and can help your operation minimize its taxes.
It’s doubly important if you’re thinking of selling that land in the near term. Hopefully, the sale of the farm will generate a significant amount of capital, enough to help you enjoy a long and happy retirement.
A tax specialist that works exclusively with farm operators can show you how to shelter taxes and reduce the amount you need to pay.
If your succession plan involves selling the farm to the next generation of farmers in your family to fund your retirement, capital gains exemptions will be important.
When it comes to your future, it’s important to discuss any eventual land sales with your tax professional.
Managing Farm Losses
No matter what kind of farm you operate, you are only allowed to write off losses for tax purposes if there is a reasonable expectation the business will generate a profit.
In Canada, there are 3 different categories of farms you can operate; the chief difference is the extent to which you can deduct losses related to farming activities.
If your main source of income is farming, you’re a full-time farmer. This means you can treat your farm like any other business.
You can claim losses against other income for tax purposes if you suffer a loss in any given year.
If you do not expect to generate a profit from your farming, the Canada Revenue Agency refers to you as a hobby farmer.
Hobby farmers cannot deduct any losses from their farm activity.
Part-Time Farmer or Restricted Farming Losses
Farmers who have a reasonable expectation of profit, but whose main source of income does not come from farming or a combination of farming and another source of income, can claim a portion of any farm losses. Suffice it to say, it’s better to be a part-time farmer than a hobby farmer.
The tax breaks for part-time farmers is not as good as being a full-time farmer, but it’s infinitely better than being classified as a hobby farmer by the Canada Revenue Agency.
The goal of tax management for Canadian farmers is to ensure that taxable income either occurs or is reported in the year it will be most lightly taxed.
Most businesses follow an “accrual method” of accounting for income.
This means adjusting net income for sales made in the tax year even though the cash may not have been received. The same goes for any incurred expenses that have not been paid for.
But, there is an alternative method for accounting income if you’re a Canadian farmer. It’s called the “cash method.”
The cash method means cash received, not the actual sales, are reported as income. Only cash payments that have been made can be deducted as expenses.
Commodity Marketing Plans
If you sell livestock or grain, your farming operations might benefit from a marketing plan. Farmers who do not have a plan in place could be forced to sell for lower prices.
If you have difficulty managing your cash flow, it might make sense to hire tax professionals to help plan effective marketing.
A marketing plan allows you to set your selling prices rather than taking the going price for the commodity on the day you decide to sell. This has the added benefit of helping predict your income and leveling out your earnings.
Keep in mind, you need to monitor your commodity marketing plan and readjust it to ensure it is based on current economic conditions.
Government grants and subsidies can be either included as income in the year they are received or can be used to reduce the cost of purchased assets.
Farmers operating in a region designated for the year as a “Drought Region” can receive special relief if they were forced to sell a significant portion of their breeding herd.
For example, the Income Tax Act allows farmers to defer paying tax on the sale of the herd as a result of drought. The list of regions affected is designated each September.
AgriStability is a margin-based program that provides farmers with support when they experience larger income losses.
Farmers pay an annual fee to be part of this program and any income received from AgriStability needs to be declared as business income for tax purposes.
AgriInvest helps farmers protect their farm operation against small losses. The program is actually a savings account that gets matched by government contributions.
Each year, farmers can deposit up to 100% of their allowable net sales, of which the first 1% is matched by the government.
You can withdraw money at any time you want to. Your contributions to AgriInvest are not tax deductible. Any funds matched by the government will be taxed when the money is withdrawn.
FBC, Helping Canadians Reduce Their Tax Burden
Farming is difficult. So too are tax management strategies. When it comes to preparing taxes, one person you need in your corner is a tax professional who understands the farming industry. That’s why it’s imperative to speak with the farm tax experts at FBC.
FBC has worked exclusively with farm operators, small business owners, and independent contractors since 1952. For more than 65 years, we have helped tens of thousands of clients from coast-to-coast prepare and file their taxes.
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.