Is farm income deferral an effective tax management strategy?
That depends on whether your farm business is based on grain or mostly on the hoof. There is a bit of an inequity in the tax system that allows more flexibility in deferring income from grain sales than from livestock sales.
For example, when listed grains (wheat, oats, barley, rye, flax, canola and rapeseed) are delivered to a licensed elevator, the producer has the option of taking a cash purchase ticket or a deferred cash purchase ticket. The latter becomes payable in the fiscal year following the actual delivery year.
This gives the producer the flexibility to push taxable income one year later and reduce tax exposure in the current year. Given the vagaries of farm economies, the ability to balance income over more than one tax period is extremely beneficial to grain farmers.
The federal government, in what appears to be a continuing focus on reining in tax benefits to farmers, floated a balloon in its March 2017 budget that it was reviewing the practice ostensibly because it was contrary to what other taxpayers and farmers could do to defer income.
The federal government has since decided not to proceed with the abolition of the deferred cash purchase ticket option.
That leads us to what livestock producers can or cannot do.
At one point in time it was fairly common for farmers to sell their stock in the next fiscal year or to agree to take payment in that period as well.
Payment of livestock sales through an auction mart were also rigged for payment by post-dated cheques or by other means in the following fiscal year.
However, the Canada Revenue Agency does not view this practice as an acceptable means of deferring income. Regardless of whether the auction agent retains the funds for payment at a later date, CRA considers him to be an agent of the seller, and income held by the agent is deemed to be in the hands of the seller and therefore taxable in the current fiscal year.
Another complication is that the agent must hold the funds in trust for the seller, and under provincial law, this also places the income as received by the seller.
Deferring such income from the sale of livestock can result in significant tax liabilities.
However, there is one provision that allows producers to defer a portion of their livestock sales — if they are forced sell part of their breeding herd due to drought or flooding.
The sales must relate to farms that are located in what is called government prescribed drought or flood regions. A preliminary list of the regions is established by Agriculture Canada and provided to the finance department. The threshold for designating the areas is that forage yields drop to less than 50 percent of the long-term average for a specific area within designated boundaries.
The breeding herd must be reduced by at least 15 to 30 percent to claim a deferral of 30 percent income from net sales. Where the breeding herd has been reduced from 30 to 90 percent, 90 percent of income from net sales may be deferred.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: email@example.com or 800-265-1002.