The practice of deferring cash purchase tickets on grain deliveries has a lot of support among producers, but it’s often not the best tool for producers.
The federal government opened a can of worms in its recent budget by asking for feedback on grain cheque deferrals and whether the allowance should be terminated. The time period for the consultation is short with the government asking for responses by May 24.
The Alberta Wheat Commission was quick to respond and has done the entire grain industry a favour by flagging the issue. The AWC is no doubt capturing the majority view of producers who see grain ticket deferrals as an important tax management tool.
But not all of the farmer support stands up to scrutiny.
For a farm that’s not incorporated, deferring grain tickets is seen as a way to level out income and avoid high marginal tax rates.
If you need most of a farm’s income to pay living expenses, there’s not much use in having a farm corporation. You’d be pulling all of the farm’s income into personal income, and the much lower tax rate within the corporation wouldn’t be a benefit.
But if you’re consistently deferring grain tickets to the following year, there must be income not needed for personal use. Maybe the farm would save a lot of taxes and not have to worry about deferrals if it was incorporated.
Yes, the accounting fees are much higher for incorporated farms, but the savings can be substantial even for moderately sized farms.
If you aren’t incorporated and you haven’t recently had this discussion with your accountant, don’t let old biases cloud your judgment.
In Saskatchewan, an incorporated farm is taxed at the small business flat rate of 12.5 percent on up to $500,000 income. For active income above $500,000, the rate is 27 percent.
Many argue that incorporated farms also need grain cheque deferrals so they can level out income and keep as much as possible under the $500,00 threshold.
Not so, according to my farm accountant, who says: “If the income earned is over $500,000, they are able to pay out an eligible dividend (from their General Rate Income Pool, GRIP) which is taxed lower than a regular dividend.”
Your GRIP balance reflects the taxable income that has not benefited from the small business threshold.
“In short, income earned and distributed as an eligible dividend will pay the same tax as income earned in the SBT and distributed as a regular dividend. This is why companies no longer pay bonus salaries to get below the $500,000,” he said.
Using that rationale, there would seem to be little reason for incorporated farms to use grain cheque deferrals. The one exception would be grain sales made near the end of the fiscal year where a short deferral would mean deferring the tax for a year.
Even for non-incorporated farmers, deferrals are often a false benefit. Cheques are deferred into the next year on the premise that income might be lower. Instead, the high income “problem” is compounded, leading to more deferrals. Eventually the taxman catches up with you.
It should also be noted that producer payment protection through the Canadian Grain Commission doesn’t cover deferred cheques.
No doubt cheque deferrals are a useful tool for some producers in some circumstances, but it isn’t always the right financial tool to maximize your after tax income.