Erratic global weather this summer led to the worst drought in decades in Russia and flooding in Pakistan and China. Closer to home, the Prairies have experienced a cooler than average summer and have also been subject to flooding.
Global and local weather can have a huge impact on you and your bottom line.
Drought or floods can lead to loss of crops and cooler temperatures can mean crop growth is slower, making yields lower.
These factors can affect the price of grain, cattle or other commodities.
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Since the beginning of the year, the general trend has been for an increase in grain and cattle prices.
If you are lucky enough to have inventory available while prices are high, you have the potential of making a reasonable profit. What are the implications of having this income?
It is safe to assume the government wants its piece of the pie. When you make money, you are going to have to pay tax.
Over the past few years, you may have experienced losses. Those losses could have been carried back to prior years’ income, giving you a refund of taxes paid in the past.
If they weren’t used for previous years’ income, the losses could be carried forward and used against the income you earned in the current year and help to reduce the tax.
Another planning strategy that can be used to defer payment of tax in the current year is to buy inventory.
This will affect on the bottom line and reduce income and consequently the tax owed.
But you must be careful with this option because there is a rule that if you create a loss through the purchase of inventory, then you will have to add back the expense until the loss is eliminated.
The good news is in the following year, the amount that was added back will be a deduction, reducing your income earned in the future.
Harsh weather can also generate another type of income: insurance payouts.
For example, if you buy crop insurance and hail wipes out your crop, you could be entitled to hail insurance proceeds.
The proceeds received from insurance are treated as income in the year that they are received and you will have to pay tax on those proceeds.
Depending on the situation, you may be able to get the insurance company to break up the payout over your year end, which will allow you to defer the tax and stabilize your income.
Payouts from risk management programs such as AgriStability are also taxable in the year received.
If you are in an area of energy development, you might be getting seismic and oil payment income.
In rental payments, crop loss and entry fees are treated as any other income. There are other types of payments for damages, right of way and access that have preferential tax treatment.
The latter type of payment is treated as capital income and only one-half of the amount will be taxed.
It is important to keep all these types of income in mind – and let your accountant know – when planning to keep your tax burden to a minimum.
Remember that a little planning can go a long way on your tax bill. You should always consult your professional adviser for assistance in determining the best planning strategy for your situation.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
