February 10, 2023

Farmers: Follow These Simple Things And Save on Your Tax Bill

Written by McCay Duff LLP
An image of a family farm in the Ottawa valley

It is not easy being a farmer. Your business is vulnerable to weather, trade conflicts, changing market conditions, fuel cost, and more. A hurricane or a drought can leave you penniless in a season. The Canada Revenue Agency (CRA) offers farmers special tax considerations. But lack of awareness of how to claim these tax benefits leave many farmers with a huge tax bill. 

Some Relevant Tips Farmers Can Use to Save Taxes 

A farmer, like other business owners, should plan strategies for both the short and long term. It shouldn’t happen that you land up footing a hefty fine in the future as you wanted to save a few bucks today on accounting fees. 

This article will discuss a few good accounting and bookkeeping habits that can bring short- and long-term tax savings. 

Farmers Can Take Advantage of Cash Accounting 

The CRA gives farmers special treatment, allowing them to use cash accounting. Other businesses are required to use accrual accounting. It is preferred you take this benefit because in cash accounting, you report your earnings only when you get paid. In accrual accounting, you report earnings when you deliver the product and not when you get paid. 

For instance, John has a dairy farm. He delivered 100 litres of milk to his client in December 2021. But he got paid for it in April 2022, the next accounting year. In cash accounting, he will report the earnings and pay tax on them in 2022, whereas in accrual accounting, he will report earnings and pay tax in 2021. 

Cash accounting is simple, as you pay taxes when you have the money. 

Use Available Tax Deductions And Support Them With Proper Records

The CRA allows farmers to deduct expenses they incur to earn the revenue to arrive at the table income. The list of business expenses is long. Some expenses are, 

  • Building and land maintenance – Utility bills, property tax, rent
  • Machinery expenses – fuel, oil, repairs, licences, and insurance
  • Farming inputs – feed supplements, bedding, fertilizer, seed, and pesticides 
  • Professional expenses – bank, insurance, legal, and accounting fees.
  • Non-cash expense – a depreciation of equipment 

Many other expenses are not listed above, but you can deduct them from your earnings. However, you need to back your expense claim with proper records like sales invoices, receipts, bank deposit slips, agreements, and bills. 

Even if no one tells you, take 30 minutes to collect all those receipts in your car dashboard or office drawer, punch them, categorize them and keep them safe. You might want to take a photo of those receipts to avoid risking the ink fading or damaging the physical copy. You should ideally keep records for at least six years. It may look tedious in the short term, but it can save you a hefty penalty in the long run. 

These receipts are your best defence if you face a CRA audit. Any expense you claimed but cannot support with documentation would be considered income and incur a penalty plus tax. 

Farmers Can Save Tax by Timing Capital Gains and Losses 

Farming is a risky business. You incur capital losses from a weather change or infestation. You can time these capital losses with your capital gains to save taxes. If you sold a piece of land for a capital gain, you can recognize capital losses and offset the gains to avoid a hefty tax bill. 

The CRA also offers a lifetime capital gains exemption (LCGE) to farmers on qualified farms or fishing properties. For 2022, LCGE is $913,630. If John sells his dairy farm for a gain of $800,000, he need not pay any capital gains tax. But a farmer can use this benefit only once in a lifetime. A professional accountant could guide you on tax-efficient ways to sell your land. 

Should Farmers Consider Incorporating Their Business? 

Incorporating a business has many perks, like the small business deduction (SBD) of $500,000. In this deduction, the farmer pays a lower federal tax rate of 9% until its active business profits reach $500,000 and 15% after that. However, there are several prerequisites to qualify for the SBD deduction. 

Incorporating your business only to get SBD may be a short-term decision. You have to evaluate the long-term consequences of incorporation, like huge expenses and a lot of paperwork. And closing down a corporation is more tedious than closing down an unincorporated business. 

Without consulting a professional accountant, do not make significant decisions like incorporating or selling your land. They can give you a complete picture of the benefits and consequences and guide you on optimum solutions. 

Contact McCay Duff LLP in Ottawa To Save Taxes 

A professional accountant can help you report your accounts accurately and guide you on what financial option is best for your business. At McCay Duff LLP, our tax experts can help you make business decisions in a tax-efficient manner. In addition, we can provide you with accounting and bookkeeping services. To learn more about how McCay Duff LLP can help you with your tax filings, contact us online or by telephone at 613-236-2367.