If your farm business uses the cash method of accounting, this is the time of year to use extra care when tracking income and expenses.
You might be able to improve your overall tax position by deferring income until the next fiscal period while bringing certain expenses forward into this fiscal year.
But can you defer income from the sale of cattle?
Income derived from the direct sale of cattle from one individual to another can usually be deferred if the transaction is paid by a cheque post-dated to the next fiscal year. This deferral relies on the rule that the post-dated cheque will go into income at whichever is earlier, the date the cheque is payable or the date the cheque is negotiated.
Or, you could structure the sale by taking a promissory note as evidence of a debt payable over a number of years, thereby spreading the income over that period.
The situation is different, though, if you sell cattle through a third party such as an auctioneer or auction mart.
Most auctioneers and auction marts are covered under provincial laws and regulations. Although there are differences in law from province to province, the result is much the same. The auction dealer is considered to be an agent working on behalf of the seller-farmer.
As a practical matter, some auctioneers may delay payment to the seller until the buyer’s cheque has cleared. In other cases, the farmer may ask the auctioneer for a cheque that is post-dated to a later fiscal period.
Regardless, such delays do not allow the seller to postpone reporting the income to a later period.
That is because the auctioneer and auction mart are either holding or deemed to be holding the funds in trust for the seller. The funds actually belong to the selling farmer whether or not he has received them.
Once the livestock is declared sold by the auction mart, even if the mart delays payment or pays by post-dated cheque, the seller is obligated to take the funds into current income. This has been the Canada Revenue Agency’s (CRA) administrative position since 1993 based on published interpretation rulings.
Even in provinces where the law does not specifically state that a trust exists between the auctioneer and the selling farmer, the auctioneer is the implied agent of the farmer. At the time of sale, the funds are understood to belong to the farmer and not the auctioneer.
Technically speaking, CRA’s interpretation of the situation would allow the selling farmer to claim the sale date as the one on a post-dated cheque issued from the purchaser to the auction mart, unless the auction mart pays the seller at an earlier date.
However, it’s not common business practice for auction marts to accept post-dated cheques from buyers.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at firstname.lastname@example.org or call 800-860-7011.