Are you one of many farmers delivering grain to an elevator and delaying tax on the sale until the following year? When using grain deferrals there are a number of tips and traps you should consider.
A deferral is when you deliver grain in one year but accept payment for that grain in the following year. This allows you to pay tax in the year the cash is received.
If your farm is in your personal name, this tool is commonly used to stay in a lower tax bracket. If you have a farm corporation, it is used to stay within the small business deduction for a much lower corporate tax rate.
However, there are important traps for you to be aware of to avoid tax issues:
The grain you are selling needs to be listed. Listed grains include wheat, oats, barley, rye, flaxseed, rapeseed and canola. Unfortunately, this means crops such as chickpeas and lentils are not eligible for a deferral.
Also note that other revenue, such as cattle sales or custom work, are not eligible.
The elevator you deliver the grain to must be a licensed elevator (also known as a primary or process elevator). This specification is important. It is common to see cash purchase tickets provided by grain dealers or other farmers that are not eligible for this tax planning.
Ensure you keep the cash purchase tickets for your records in case the tax department requests them. This avoids any tax issues a few years down the road.
Remember that this tax tool does not avoid tax, it just defers it. Be mindful if your deferrals are continuing to grow because this will increase tax exposure at a later date. This also adds risk to your operation and likely costs you additional financing expenses.
With that said, there are some important tips to keep in mind when it comes to your deferrals:
If you find your deferrals continue to grow, you should consider other solutions. It may be time to look at incorporating your farm to use the small business deduction and leave less deferrals at each year end.
If you have deferred too much in the year, resulting in low taxable income, consider using the Optional Inventory Adjustment. This will allow you to increase your income in the current year to the appropriate level and provides a deduction in the following year. One of your goals should be to keep taxable income as smooth and consistent as possible.
You may put more thought into using the new accelerated capital cost allowance (tax depreciation) rates to decrease your taxable income for the year. The deduction is three times higher in the year of purchase then it has been in the past.
For example, if you bought a tractor before year end, you get to expense 45 percent of it in the year of purchase versus 15 percent previously. This provides more motivation to buy depreciable assets before year end.
Every situation is different. Therefore, it is important to discuss these tips and traps with a tax specialist.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.