Tax deferral an option — but is it your best one?

Experts say you should run the numbers and get expert advice before deciding how much tax to defer

It’s a classic ‘good-news, bad-news’ story.

The bad news is: If you’re a producer reading this in Alberta, chances are you live in one of the vast majority of Alberta municipalities devastated by drought or other inclement weather.

The good news is you may be eligible for the Federal Livestock Tax Deferral, which allows producers of breeding cattle, bison, goats, sheep, deer, elk, and horses to defer taxes on up to 90 per cent of their sales to 2016. Aside from operating a farming business in a prescribed drought region, the only condition is the breeding herd must have been reduced by at least 15 per cent.

But for some producers, there may not be a need to make full use of the program, said Ted Nibourg, business management specialist with Alberta Agriculture and Forestry.

It’s worth working with an accredited professional adviser to discover other tax reduction strategies, such as deducting feed expenses, which can be used in concert with the program, he said.

“With such high hay prices, even if a person sold off 30 per cent of their herd they may have enough offsetting expenses just in feed purchases alone for the remaining 70 per cent,” said Nibourg. “Realistically, you probably don’t have any income at that point — so deferring at 90 per cent would put you in a negative situation. What you want to try to do is at least have enough income to cover your personal deductions.”

Some are concerned about the long-term implications of the program because it’s focused on breeding stock.

“We’re looking at a cow herd in Alberta that’s at 20-, maybe 25-year lows and the government has their deferral of taxes on the sale of breeding stock available,” said Tim Smith, a Coronation-area rancher and chair of Alberta Beef Producers’ cow-calf council.

“That’s not what the industry should be doing. If anything we should be selling the feeder cattle. There should be encouragement the other way.”

How it works

The tax deferral allowed depends on the difference between year-end breeding herd numbers and the opening inventory at the start of the growing season.

For example, if a herd is reduced by at least 15 per cent but less than 30 per cent, producers can defer up to 30 per cent of the net sales amount. Producers who sell off more than 30 per cent of their herd can defer up to 90 per cent of the net sales amount.

Participating producers do not have to defer all their income — they can include any amount they wish in the current income taxation year and defer the balance.

Two calculations determine the deferral amount. The first step is to determine how much the breeding herd decreased — if there was at least a 15 per cent reduction, you can defer part of your income.

The next step is to determine the net sales amount. To do this, take the proceeds from the sale of breeding animals and deduct the cost of breeding animals purchased in the current fiscal period.

Here’s an example. Farmer A sells 42 head of breeding cattle at $2,800 per head for a total of $117,600. He buys five head at $2,000 per head for a total of $10,000. Deducting his purchases from his sales gives him net sales of $107,600. Because he owned 120 head of breeding cattle at the beginning of the growing season and 78 at the close, that 65 per cent reduction in his breeding herd allows a deferral of 90 per cent. Ninety per cent of $107,600 is $96,840, which is the amount he is allowed for deferral.

Normally tax can be deferred for one year, but if the producer’s municipality is declared a prescribed drought region for consecutive years, he or she may defer sales income to the first year in which the area is no longer designated (or the year the farmer dies, or the first year the producer is a non-resident of Canada).

When it helps

The tax deferral program will be helpful to cattle producers in a number of different situations, said Nibourg, and in some cases it may only take the sale of a few extra cows to put them in the 90 per cent deferral range.

“Say you had 100 cows but you only sold 29,” he said. “Realistically, you’re only going to be able to defer 30 per cent of that income. Selling that one extra cow puts you over that threshold.

“You may not need that 90 per cent deferral but the 30 per cent may not be sufficient for you. So you could defer 40 or 50 per cent if you choose.”

Because it can get complicated, it’s important to get expert advice and ensure any tax deferral usage synchs with other government programs such as AgriInvest.

“The deferred income does not become part of a producer’s Allowable Net Sales (ANS),” said Nibourg. “A producer is allowed to contribute one per cent of his or her ANS to their AgriInvest account up to a maximum annual contribution of $15,000.”

Another option for some producers is the Optional Inventory Provision (OIA).

“Typically the OIA is used to bump up income in order to take advantage of personal exemptions. However, where a producer anticipates very high income levels in subsequent years that producer may opt to bump up their income further — pay tax at a lower rate to offset the high rate the future years’ high income would generate.”

However, most producers would likely use the livestock tax deferral before the OIA as the tax deferral potential is greater, he added.

“The OIA would only effectively shelter tax up to the personal exemption level whereas the tax deferral could defer up to 90 per cent of the income from the sale of breeding stock.”

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