Tax minimization is OK, but don’t step on a land mine

We’ve been advising you for months now to talk to your tax and financial advisers to figure out your tax liabilities before the end of the year to minimize tax obligations.

Many of you might be vulnerable following a year with so many curveballs including COVID-19, the residual fallout affecting the economy, fluctuating markets and international tariff barriers skewing normal trading patterns. Then you also have the massive fluctuation in financial investment markets, which may have left your investment portfolios seriously damaged.

Canada Revenue Agency acknowledges that you have the right to minimize your tax load as long as you follow the rules and regulations of the tax code. And there are several strategies that are efficient. We have presented them before.

We still recommend you seek that help, because it is even more important than usual this year.

There are several tax-minimizing strategies that are acceptable to CRA, but one might lead you into a financial trap.

That major trap, while appealing, might be a land mine. It is deferring income to the next year.

Here are several reasons why:

  • If farm profits grow to the point where the farm moves to a partnership or a corporation, the deferred income would have to be taken into income without any expenses to be able to change structures.
  • Passing away without any pre-buys that would occur later in the year will cause the deferred income to be on your final tax return and create a large tax bill for your estate,
  • Incorporation for estate planning would again create a large personal debt.
  • Having to borrow for pre-buys will create large interest expense versus no interest income from deferring income,
  • The cycle of deferring income always seems to spiral upward year after year in value to reduce current year income year over year, creating an almost impossible problem to get out of without paying up to 50 percent in taxes.
  • You may max out your credit obtaining potential and not be able to offset the deferred income with pre-buying or you may not have enough credit to assist you in an emergency.
  • The pre-buying may not increase enough year over year because you cannot use enough inputs in the year (pre-bought) to offset the deferred income.
  • On this topic, please understand the only items that can be deferred are crops, and any other type of farm income does not qualify.

Before you engage in this strategy, please consult a professional tax or financial adviser. The fallout could be significant.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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