With all of the recent tax changes, you are likely wondering what changes apply to you and how they could affect your tax planning in the upcoming year.
Three important changes that may affect your tax planning decisions are accelerated capital cost allowance, tax on split income (TOSI) and passive investment income grinding away your small business deduction.
Accelerated capital cost allowance
Recent changes to the tax depreciation rules include a new accelerated deduction. This incentive increases the deduction available for the year that you buy assets, such as a combine or tractor, to three times what it would have been previously.
For example, if you bought a tractor for $100,000 before Nov. 20, 2018, your deduction would have been $15,000 in the year of purchase.
After Nov 20, under the new rules, the deduction for that same tractor would be $45,000 in the year of purchase. However, you should keep in mind this deduction will be offset by lower deductions in subsequent years. In Year 2 of owning that tractor, your deduction will be $9,000 lower under these new rules.
This incentive will be phased out starting in 2024 and will not be available after 2027.
Paying wages to family
One common misconception with the new TOSI rules is that they prevent you from paying wages to family members. This is not the case.
However, they must still be reasonable. Wages to family members are considered “reasonable” if they are similar to what would be paid to someone at arm’s length. Using time sheets and creating employment contracts can be helpful to show the amounts paid as wages are reasonable.
Passive investment income and the small business deduction
For taxation years that begin after 2018, there are new rules for farm corporations earning passive income over $50,000, such as land rent. Passive income in excess of $50,000 decreases your small business deduction limit, which allows you to pay tax at 11 percent versus 27 percent in 2019.
Every dollar of passive income over $50,000 will decrease your small business deduction limit by $5. By the time you have earned $150,000 in passive income, including the first $50,000, you can no longer claim any small business deduction on your active farm income.
It is important to note that passive income earned in associated corporations is also incorporated into this calculation.
These are just a few of the many changes that could affect your tax planning. Determining the best way to be prepared for these changes can be complex. You should consult with a tax professional to ensure you are proactive in planning for and understanding these changes.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.