Some of the farmers Rob Strilchuk works with seem to think that $1 is too much tax to pay.
“I have clients who spend $100 to save $15 in tax,” said the MNP accountant. “I get it. I don’t want cash to go to Revenue Canada for any of my clients, either. But there is a certain amount of tax that it makes sense to pay.”
In an effort to keep their yearly taxes low, farmers often play the “deferral game,” Strilchuk said at Alberta Canola’s Leading Edge Farm Management workshop last month.
That allows them to smooth income from year to year, but sometimes it’s not worth it.
For instance, selling a bumper crop in the year it’s grown means more income and more taxes. Cash deferrals push some income into the next tax year, but then it gets tricky.
“It allows you to manipulate the income to where you want it to be,” said Strilchuk. “If you defer the tax dollars to the future, you have more cash now to pay costs or buy property. It’s a deferral game, but it can catch up to you.”
Farmers can also lower their income (thereby lowering their taxes) by pre-buying next year’s seed, chemicals, and fertilizer, he said. But in some cases, that doesn’t make sense.
“That’s not a great investment, unless it was a great deal to be had strictly for business reasons,” said Strilchuk. “If you did get a deal and it makes sense to buy it now, great. You not only get to deduct it for tax, but it was also a deal. It makes sense for business reasons — not just tax.
“Let’s separate tax from business decisions.”
Farmers struggle with that because they don’t realize “money costs,” he added.
Say, for instance, that a producer has an operating line of credit with an interest rate of 4.4 per cent. If they had the money they deferred, they could pay down that debt, reducing their interest payments often by as much or more than what they would pay in tax.
“People say this to me all the time — ‘Don’t worry about it. I’ve deferred $494,000 into 2019.’ And when I tell them that’s going to cost them a bunch, they say, ‘At least I’m not paying the tax.’”
Deferrals are just another form of financing, he said.
And when producers wrap their mind around that, they need to start thinking about who actually has the use of their money, said Strilchuk.
“The grain company with a deferred cheque has it. If you pre-buy cattle, the feedlot has it. The input supplier has it. If you’ve gone out and bought seed, chemicals, and fertilizer, those guys all have your money.”
And if any of them go out of business, you could be out of luck.
“That would really suck. I mean, you fixed your tax problem, but you lost all that money.”
Some producers argue they get a premium on deferred cheques, but that amount is likely negligible, said Strilchuk, who once was given a $100 premium on a $60,000 deferred cheque.
“That interest rate is not even measurable,” he said. “And if I had an operating line going, how much did I pay in interest while they had the use of my money?”
The cost of capital is different for everyone because different individuals have different rates of return and debt. But ultimately, producers need to find a number that they’re comfortable with paying in taxes and work with their financial advisers to hit that target.
“It’s definitely not zero. Surely to god it makes sense to pay a bit of tax,” said Strilchuk, adding you have to be below $11,000 of personal income if you want to pay zero taxes.
“We don’t have to get down to zero to be better off. In one case, we’re giving the money to the government. In the other, we’re giving the money to the bank.”