The next big job for many farmers as their grain and calves go to market this fall will be to get their books in order since tax time is just around the corner. There are a few things farmers can do in the next month or two to ensure the best outcome and a few strategies for longterm planning for the future.
Great records go a long way
The first step this fall will be to gather documentation to determine where the farming operation is at, as farms are taxable on a cash basis.
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Taxable income is cash in versus cash out, excluding things like loan payments, equipment purchased, loan proceeds, and so on. While some believe that the income isn’t earned until the cheque is cashed, if the transaction is completed in this fiscal year, the income must be declared this year. However, a common practice is to defer a sale. For example, at the grain elevator farmers can work with the agent to receive payment in the next fiscal year instead of at delivery.
Caution should be taken with payment deferral however. Ron Friesen, Business Advisor, Tax Planning with MNP says, “I would advise farmers to be careful in choosing who these arrangements are made with to ensure the money is paid as planned in the future,” says Friesen. “My advice would be to stick with larger companies and people you know and trust.” As well, it should be noted that livestock sales cannot be deferred in most cases.
Another important thing to remember is to pay the bills. Cash out is a deduction, so make sure all the fertilizer and chemical bills are paid prior to year-end to make the most of those deductions. Credits on account are not deductible, you have to actually purchase product.
There are many opportunities for deductions in farming, as most supplies, tools and inputs needed to run the business should qualify. As well, lease payments on equipment can be used as a tax deduction. “Do your homework on leasing options as the tax deduction amount for a lease payment may not exceed the deductions on a purchase over the long term,” says Friesen.
It goes without saying that the best practice year-round is to keep receipts, inventory, cheques and any other payable and receivable records in order. It will help the meeting with the accountant or tax planner run smoothly. It gives them a clear picture of the tax liability you are about to face and help determine possible tax solutions.
Important impending tax changes to be considered
There have been a few changes to federal tax exemptions this year that should be considered during farm tax planning for fiscal 2016.
The first is a threatened change to the capital gain inclusion rate, which could be increasing. Currently, 50 per cent of capital gains realized personally in excess of an individual’s capital gain exemption are taxable, but this could increase to as much as 67 – 75 per cent with the potential inclusion rate changes. This may impact farms that are set up as companies as well, and could be announced with the budget in spring 2017 or earlier.
This change, if announced, will have a significant impact on anyone that owns farmland, especially if the value of that land has increased by enough to exceed their capital gains exemption amount. “My advice to anyone who is thinking of selling some or all of their land holdings in the next few years is to consider triggering a sale before this inclusion rate change comes into effect,” says Friesen.
As well, changes to taxation on the sale of quota may have serious implications for anyone considering succession planning or a sale in the next three to five years. However, unlike the possible inclusion rate increase, this change is going to happen for sure. It’s about to be passed by the majority Liberal government and will take effect for transactions on or after January 1, 2017. Also, if the inclusion rate is increased on capital gains, this will have a significant impact on the tax owing on the sale of quota.
No exclusions were included in the legislation changes specific to agriculture or quota systems. That means that agricultural business will be paying the larger tax bill for sales occurring in the new year.
“One way to avoid this is to plan ahead and trigger a sale,” says Friesen. “You might even consider a transfer of quota without the money changing hands immediately. If you’re completing a succession plan for instance you may want to complete it in such a manner that you trigger the tax to be charged now instead of next year.
Long-term planning for the future
Incorporation of the farm operation may be an option for those facing significant taxes, as they would then qualify for the small business limit. For example, in Saskatchewan the small business limit tax rate is 12.5 percent. The right time for this will be different for everyone and a tax planner would be an important partner in making that decision.
As well, ensure farmland qualifies for capital gains exemptions. This isn’t an issue for most full-time farmers, but can be an issue for people who may be part-time or absentee farmers where it isn’t their primary source of income. However, planning options may exist to assist them in “qualifying” the farmland and for the exemption.
Don’t go it alone
Some of these tax issues can be daunting and there may be multiple ways to protect personal and farm assets. “Once you have your records in hand and know where you stand, tax planning specialists and accountants will have the information and tools to walk you through your options. My goal is always to maximize the benefit to the farmer and help them get the most from their business,” says Friesen.
