Glacier FarmMedia – With deadlines looming, there are a few things farmers should be aware of as they prepare their taxes.
For farms that run as corporations, Dec. 31, 2023, was the last day for the temporary immediate expensing option.
The immediate expensing incentive was a temporary program that first came into effect for the 2022 calendar year and allowed corporations to write off capital expenses of up to $1.5 million immediately rather than claim the depreciation over time. The following year, the program was expanded to include sole proprietorships and partnerships owned by sole proprietors, and it will remain an option for those businesses until the end of 2024.
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“If you bought a tractor, you could write off the whole tractor,” said Edith Frison, a business adviser with MNP’s taxation service in Brandon. “Typically, that would go into a CCA pool, and you’d have to depreciate it over the life of the tractor.”
Frison said that it’s not always the best idea in terms of tax planning, but it is a tool available to farmers that can sometimes prove useful.
“So if somebody did come in now and said, ‘hey, I have a million dollars worth of income,’ then one of the things we might say back to them is OK, what did you buy last year, and if they bought a tractor, typically, we could write off the whole value of that tractor all in one year.”
Frison also pointed to the Return of Fuel Charge Proceeds to Farmers Tax Credit as another important opportunity to maximize tax savings. Self-employed farmers or individuals who are members of a partnership operating a farming business may be eligible to have a portion of the carbon levy they paid returned to them. For 2023, the tax credit is $1.86 for every $1,000 of eligible farming expenses in Manitoba.
While Frison said that most farmers are aware of the program, she said it doesn’t hurt to remind farmers about the income smoothing provision in the Income Tax Act.
“Farmers that report on a cash basis can use optional inventory for income smoothing,” she said. Essentially, that means farmers can add existing inventory to the income they report for tax purposes.
“So if you have grain in the bin or you have animals in the field, it’s like you take extra income this year, and then you get it as an expense the next year. That’s called optional inventory,” explained Frison.
She said that most farmers, when they’ve had a tax loss, will apply enough optional inventory to bring them to break-even because they still won’t pay any tax on it.
“Then they have an expense to use for next year.”
Frison said she often sees farmers making the same mistakes year in and year out. At the top of that list is not taking the advice of a tax professional before making important financial decisions.
This could mean selling a piece of equipment, a dairy farmer selling their quota or any number of things. There may be tax implications that arise from these decisions that the farmer is unaware of.
Another common and related issue is that farmers often misunderstand how the capital gains exemption works.
“Everybody in Canada gets a $1 million capital gains exemption, but it can only be used on certain assets,” she explained. “In farming, there are lots of assets where you can use the capital gains exemption, but farmers tend to think they can use it for absolutely anything. That’s not true. There are very specific rules around when and how it can be used and what assets are eligible.”
Frison pointed out that when doing taxes for a complex entity, like a farm, the most important thing is planning. So, she was a little resistant to offering up last-minute pointers for farmers looking to prepare their tax returns in the first place.
“Farmers report on a cash basis, so at the end of December, they have the opportunity to go out and buy inputs to use against that income,” she said. “Which is why I say planning is important.
Of course, that option is not available to farmers now, but she said it’s a good practice to think about in the future.
