Financial Planning and Federal Farm Income Taxes
You can only really get a handle on your taxes and potential farm tax deductions when you understand what qualifies as farming and farming income.
For example, if you raise farm animals for yourself or have a plot to grow your own food, you’re considered a hobby farmer and cannot deduct any expenses or losses.
If you devote a large portion of your time to farming and invest in machinery, inventory, and buildings to run the operation, you’re considered a full-time or part-time farmer and can lay claim to a number of tax deductions.
But there’s a catch: The Income Tax Act doesn’t clearly define what a full-time or part-time farm is.
The generally accepted definition of part-time farming means the property isn’t your primary source of income, though the Canada Revenue Agency (CRA) still recognizes it as a legitimate business.
Because farming is a business, you can deduct the usual business expenses from your business income, including home expenses, if you used it for business reasons.
You can also claim deductions associated with regular day-to-day business operations; this can include everything from the cost of fertilizer, veterinary expenses, breeding, feed, utilities, machinery, and fence repairs.
What Qualifies as Farming Income?
According to the CRA, farming income comes from revenue generated from:
- Tilling Soil
- Raising Livestock
- Maintaining Racehorses
Additionally, any income that comes from dairy, fruit, and farm trees also needs to be declared as income, as does money generated from beekeeping and wild game reserves.
The CRA says you also need to report any trades or bartering as income.
If you have an egg farm and give some eggs to your neighbour in exchange for apples from their fruit farm, you’re expected to report those apples as income.
If you’re a full-time farmer, there is no limit on the amount of losses you can deduct on your taxes. These losses can be deducted from your income and carried back 3 years and forward up to 20 years.
If you’re a part-time farmer, the maximum you can claim in any one year is $17,500. As with full-time farming, losses can be carried back 3 years, or forward 20 years, but they can only be deducted against farming income.
Capital Gains Exemptions
Full-time farmers can help reduce their tax burden by taking advantage of capital gains exemptions.
If you own a farm, an interest in a family farm partnership, or shares in a family farm corporation, you may be eligible to claim a $1 million lifetime capital gains exemption when the property sells.
Qualified farm property consists of:
- Real or immovable property (property or buildings), not machinery, or equipment that was used in the farming business
- Shares of the capital stock of a family farm corporation
- Interest in a family farm partnership
- Eligible capital property or personal trust
FBC—Canada’s Farm & Small Business Tax Specialists
Any income you earn from farming, as defined by the Federal Government, needs to be reported to the CRA. Failing to do so will result in penalties. On top of that, the CRA could hit you with a 10% penalty on any amount you forget to report.
That’s why it’s imperative to stay on top of your record keeping and file your taxes on time. It also helps to have an exhaustive understating of Canada’s agricultural tax laws. Unfortunately, that means spending a lot of time navigating Canadian tax laws which are both long and confusing.
When it comes to financial planning and tax consulting, FBC has been helping Canadian farmers and small business owners from coast-to-coast get their taxes done right for over 60 years.
We’re not just here to help you during tax season though. We help you every step of the way. For more information on how FBC tax specialists can help your agricultural or small business with its accounting, income tax preparation, financial planning, and advisory services, call us today at 1-800-265-1002 or submit an online form and a FBC tax specialist will contact you at your earliest convenience.
Can’t make it into our offices? No problem. We’re happy to meet you at your home or office.