Tropical sandy beaches. Swim-up bars. Limbo dancing all night long. Snap your fingers and a cold beer appears. It’s a dream vacation and it’s free every winter Ñ if you earn enough travel points.
With those compelling images in mind, it’s easy for farmers to justify putting a few jugs of chemical and maybe a barrel of hydraulic oil on the credit card. The ads make it clear that more purchases on plastic mean more travel points and more free fun in the sun. But how free is free?
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According to Roland Monette, it really can be as much of a good deal as it appears, but only if the credit card balance is always paid off within 30 days.
“You’re not necessarily paying more for your farm inputs if you use the credit card wisely,” said the Eastend, Sask., tax accountant.
“It’s good management if you can pay no interest on a 30-day line of credit plus get Air Miles or build up cash value. … But you have to make sure you can pay it off in 30 days. You can’t get into the rut of getting behind.”
Monette said producers sometimes find themselves in a tax situation where they need to pay off certain debts before the end of the year, so they use plastic as a short-term line of credit.
“The bill is paid on the books for tax purposes, but in actual fact, the producer is now carrying the same debt on a credit card. Just make sure you have a way to pay it off in 30 days.”
While full payment in 30 days might be ideal, it’s not always realistic. However, making that monthly payment on time is critical, says tax accountant Allyn Tastad of Hounjet Tastad in Saskatoon.
“If you miss even one payment, they’ll hike up your interest rate pretty fast. Any guys I know who are using credit cards for farm inputs always keep a close eye on those payments. They’ll stop the tractor in the field and go into town to check that the payment is made on time.”
Crop in the ground
While the winter holiday may be appealing, there are other factors driving the more frequent use of credit cards for farm purchases.
“The problem we’re seeing in agriculture today is that banks are not as willing to finance farm inputs,” Tastad said.
Financing is being pushed down to local suppliers, he said, but those businesses can only carry so much debt.
This, in turn, puts more pressure on the farmer to find new sources of credit for inputs. A farmer may find himself in a situation where the credit card is the only alternative.
“There are more and more situations where the bank won’t provide the money a farmer needs to get a crop in the ground. The old adage is that you do whatever you need to do to get that crop in. Beg, borrow or steal. And let’s face it, farmers are ingenious at finding ways to get those inputs.
“If you go to Vegas, you’ve got to get yourself up to the table to roll the dice. It’s the same in farming. If you don’t have your inputs in place in the spring, then you know already that you don’t even have a glimmer of a chance of getting a crop.”
Quick credit approval
Barry Smith, national director of agriculture for the Canadian Imperial Bank of Commerce, agrees that if plastic is used for farm inputs, the payments should be kept current.
Smith said farmers are using credit cards more because it’s quick, convenient and easier to use than going to the bank in some situations.
“Here’s why. The credit card is a credit-scored product based on your personal credit history. It’s not tied to your farm or your farm plan. If you have been diligent in making car payments, credit card payments and other personal loan payments, then you can very quickly qualify for a significant credit card maximum. Maybe enough to cover most of your spring inputs.”
The credit card is convenient because approval is not linked to farm history, drought, BSE, summer frosts, wet springs, grasshoppers or any other farm-related factor.
But while it gives a person extra financial flexibility, that comes with a higher price tag.
“The interest rate will probably be higher than for a line of credit from the bank, but that’s the price a person pays for the convenience.”
Asked if the banks have become stricter in approving lines of credit, Smith said it may appear that way, but in fact the criteria have not changed. He said bankers still use the same formula, but the numbers going into the formula have been deteriorating for some operations.
“If a specific farm has been hit with a series of three or four bad years, there’s no doubt it will be more difficult for that operation to borrow for inputs. There may be individual circumstances where a credit card is the only way to get a crop into the ground.”
There may be other one-time-only situations when the credit card is the only option, said Gord Campbell of Meyers Norris Penny in Brandon.
“If you’ve got a broken combine in the field and your local dealer doesn’t have the part on the shelf, you’ve got yourself an emergency,” said Campbell.
“You might end up finding that part 100 or 200 miles (160 to 320 kilometres) from home, but they won’t put it on the bus or let you drive out to pick it up without payment. You might have an excellent credit rating in your home community, but you want that part now and they want their money now. Basically, you use the credit card in place of a cheque.”
Tax trips
There is another concern with using credit cards to earn trip points. They might be taxable.
“What I’ve heard a lot of guys tell me is ‘we’re getting a credit card to build up Air Miles.’ I don’t want to know that,” one source said.
“If they’ve earned a trip to the Bahamas on a credit card they’ve used for farm expenses, that’s really a (taxable) benefit. Therefore Revenue Canada could attack that as income because it came off of business purchases.
“If you (buy) a chemical and you get a chemical rebate, then it should be applied against the farm expense, not for personal reasons.”
Another specialist disagreed.
“Revenue Canada has bigger fish
to fry than going after farmers for
these … benefits.”
