Last updated September 17, 2020.
When you’re busy with the harvest, or preparing for the upcoming season, taxes are probably the last thing on your mind. Why worry about taxes now?
But tax planning shouldn’t be left until the last minute.
Proper tax planning is a year-round process. By planning now, you can take advantage of strategies to lower your tax bill in advance of the filing deadline - while there’s still time.
The strategies in year-end tax planning involve:
1. Deferring income and taxable capital gains until the next tax year.
2. Bringing anticipated tax-deductible expenses and capital losses into the current tax year.
We outline five methods you can use in year-end tax planning to help reduce your tax bill.
1. Is cash or accrual accounting better for your farm business?
It's important to think about cash vs. accrual accounting for your farm. In cash accounting you record a sale or expense only when the cash is received or paid. Inventory is not included in the calculation of income.
The benefits of cash accounting are:
- It’s simple to maintain
- It’s easy to determine when a transaction has occurred
- You can track how much cash you have at any given time
- Since transactions aren’t recorded until cash is received or paid, your income isn’t taxed until it’s in the bank
The downside is when you are forced to sell inventories, cash accounting could leave you with unusually high taxable income.
With accrual accounting you record income and expenses when a sale or purchase is made, even if the money hasn't changed hands yet.
The benefits of accrual accounting are that you get a better picture of income and expenses in a set period of time, but the downside is that without proper tracking of your cash flow, it can seem like you’re more profitable than you think.
You could have more tax to pay if you recorded a transaction as part of your income in December 2019 but you didn’t receive payment until January 2020.
Talk to a tax professional to find out if cash or accrual accounting is better for you.
2. Livestock tax deferral provision
If you were affected by drought or flooding and forced to sell part of your breeding herd, the Livestock Tax Deferral Provision lets you defer a portion of the sales proceeds to the following year.
To qualify, your breeding herd must have been reduced by at least 15% (but less than 30%) to defer 30% of your income from net sales.
If you had to reduce your breeding herd by more than 30%, you can defer 90% of the proceeds.
The tax deferral applies to sales of breeding herds of grazing livestock in drought or flood regions that are designated by the Canadian government.
You can find the regions for 2019 online.
All amounts deferred under this program may be carried forward until your region is no longer designated a drought or excess moisture area.
3. Deferred cash grain tickets
If you sell grain this fall (it must be wheat, oats, barley, rye, flax, canola or rapeseed) to the operator of a licensed elevator, the operator can issue you a cash purchase ticket or deferred cash purchase ticket.
The deferred cash purchase ticket lets you report your income in the year after the grain is delivered.
This way you reduce how much you’re being taxed in the current year.
4. Claim tax-deductible expenses and capital losses in the current year
If you are a sole proprietor or in a partnership, look at the “Statement of Farming Activities” document you receive with your tax return.
It lists several expenses you can claim on your tax return, some of which include feed, livestock purchases, veterinary fees, machinery expenses, building repairs and maintenance, crop insurance, machine rentals and more.
If you have capital losses (when you dispose of qualified farm property) you could time the triggering of capital gains and capital losses to reduce your overall tax burden.
Try selling during a year when your income is lower to save you money on taxes.
If you only have a capital loss, you can carry it forward to offset future capital gains.
5. Time selling and purchasing of assets
A good way to lower your tax bill is to make use of the capital cost allowance.
High-value items with a long-lasting life in your business (like a tractor or silo) could qualify for a capital cost allowance deduction.
Since they wear out over time, you can deduct their cost over a period of several years.
There are different rates of depreciation depending on the item. For example, a tractor has a 30% depreciation rate. Click here for our guide to capital cost allowance for farmers.
If you have depreciable assets (machinery or equipment) to sell, it may be better to wait until the new fiscal year. The delay lets you claim another year of capital cost allowance (CCA).
Alternatively, if you are in the market for depreciable assets, buy them before your fiscal year-end to increase your CCA claim by half of the annual rate in the year the item is acquired.
Disclaimer: The material above is provided for educational and informational purposes only. Always consult a tax professional like FBC regarding your specific tax situation.