Farmers have changed in the last several decades.
Gone are the days when most of them used their farms as their only source of income.
Many smaller operations are now forced to supplement farming with additional income sources. If you are involved in farming and have additional income generating activities, you need to be cautious when reporting this information to the government.
With unpredictable weather and commodity prices, it is not uncommon to experience losses in a farming operation in any given year. The hope would be to use these losses to your advantage and apply them against income earned from other sources.
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However, the government has specific rules about using farming losses against other sources of income that should be considered on a case by case basis.
There are three classes of taxpayers who farm, and the one that you fall into will determine the availability of losses that can be applied to reduce other income for tax purposes:
- Your main source of income is farming.
In this case you are primarily a farmer, but you may also have other income from a job or rental property. For example, you operate a feedlot and therefore are a full-time farmer, but you also own property that you rent out for additional income.
The key is where the majority of your livelihood comes from. Typically, the government is looking to see if the bulk of your time and resources are spent on the farm.
In this example, you may deduct the full farming loss against your property income because the feedlot takes up most of your resources to operate and the rental income is incidental to owning property.
- Your main source of income is not farming, but you carry on a farming business.
In this case you are not a full-time farmer, but you still farm. The operation must be large enough to carry on as a profitable business and the intent of the operation is to generate income as opposed to providing you with personal enjoyment or benefit.
An example of this class of farmer would be one whom by day has a full-time position as an employee, but who also owns land and on a normal year earns a profit from farming.
If you experience an off year and a farming loss occurs, this loss is deductible in that year against your employment income, but the loss is restricted.
A restricted loss is one in which the full amount of the loss may not be deductible against the employment income. The rest of the loss is carried forward and can be applied against farming income in future years.
There is a specific calculation that determines how much of the loss can be applied against other income.
If you believe your farm losses would be restricted, it would be best to seek the advice of a tax professional to determine how much of the loss can be used.
Significant court cases concerning restricted farm losses have recently ended in taxpayers’ favour. Ensure you discuss this with your tax adviser because you may be able to argue your farm losses should not be restricted.
- Your main source of income is not farming but you partake in farming activities.
In this case you are also not a full-time farmer, but you still carry on certain types of farming activities for which there is no reasonable expectation of profit.
Several factors will be considered when determining if a reasonable expectation of profit exists: whether you are actively pursuing a profit, whether you have appropriate knowledge to operate in a profitable manner or whether you have sufficient resources, such as land, to maintain a profit.
If you are involved in a farming activity for purely personal enjoyment, you may not meet the requirements of operating in a profitable manner.
An example would be the owner of a profitable company who also owns and maintains racehorses. The reasonable expectation of profit may be difficult to prove because this farming activity has high expenses such as race fees, board and training fees, veterinary bills and the cost of the horses.
In this case, the losses and expenses could be disallowed.
It is important to note that these are only examples. You should consider your operations carefully and discuss with a tax professional to ensure you categorize your operations correctly.
