Removing the deferred cash ticket system won’t just hit farmers at tax time — it could also affect the entire supply chain, interrupting the flow of grain to international markets.
“If they take this deferred cash ticket system away, you’re going to have farmers refusing to move grain when we need it to move,” said Stuart Person, director of primary producer agriculture at accounting and business advisory firm MNP.
“You’re going to have railroads sitting idle. You’re going to have grain terminals sitting empty. All because selling at certain times might not work for farmers because of tax implications.”
Right now, deferred cash tickets are used to help producers “smooth their income out,” said Person.
“With any farm business — it doesn’t matter if it’s livestock or grain — the income fluctuations can be significant from year to year due to a number of factors,” he said.
If, for instance, a farmer has a bumper crop one year and sells it that same year, he or she will have a significant spike in income — and “generally, the higher your income, the higher the rate of tax you pay.” But the deferred cash ticket system allows farmers to take a portion of the money and defer the rest until next year.
But Ottawa is considering scrapping the cash ticket deferral system — a move that would seriously impact Prairie producers, say Alberta’s wheat, barley, pulse, and canola commissions as well as other farm groups.
The commissions asked MNP to review the situation and its analysis supports their claim.
The majority of farmers aren’t trying to avoid paying taxes, but just want to “smooth their income out and make sure they’re paying tax at a reasonable rate like everybody else,” said Person.
And the federal government has overlooked a major benefit of the tax break — it bolsters the year-round flow of grain, he added. If the system is abolished, farmers may choose to sit on their grain for another year to avoid paying more in taxes.
“It will screw up our logistics royally if they do this, and it will cost everybody money,” said Person.
“It will cost farmers money because they’ll lose opportunities to sell. It will cost the grain companies money because they won’t have any grain to move. And it will cost the railroads money because they will be under pressure to move a whole bunch of grain all at once, which they generally fail at.
“That’s a massive problem. We’ll lose market share if that happens.”
Big tax hit
The tax implications for the average farmer can’t be ignored, added Person.
“If your income is nice and smooth — like you’d see with a non-farm — you’d pay taxes at a rate of 12.5 per cent every year,” he said.
But a farm that has the same average and net taxable income over five years as a non-farm business would likely see a wide variance in their income from year to year.
“Farms are way more likely to experience these large fluctuations in income than a corner store or a gas station or an accounting firm, which generally have more steady streams of income,” said Person. “By jumping around like that, what ends up happening is the high tax rate of 27 per cent kicks in, in certain years.”
As a result, a non-farm business will pay far less in taxes over a five-year period, even if their five-year net and average incomes are exactly the same as an incorporated farm business.
It’s even worse for unincorporated farms.
“The swings in taxation are much more dramatic for people who are unincorporated than the incorporated ones, especially if you get into higher incomes.”
That’s why the cash ticket deferral system is so critical, said Person.
“The cash deferral system allows them to move income out of the high years and put it into the lower years, which smooths the income out and effectively makes that farm pay the exact same amount of tax as a non-farm did, which is how it should be,” he said. “That’s treating those two businesses the same.”
A retirement hit, too
Producers would also be penalized in their retirement years.
“Self-employed people who run a business — like farmers — are eligible to contribute to the Canada Pension Plan (CPP). But there are thresholds to what you can contribute each year,” said Person.
And in years where the farm doesn’t show any income, the farmer can’t put any money into the CPP program.
“The same business with the same net five-year income and the same average five-year income would contribute more,” said Person. “The farmer is actually being penalized by the fact that he has a high income one year and next to no income in another.
“He’s going to get a smaller CPP cheque than his neighbour who ran a logging business.”
Income smoothing through the deferred cash ticket system means “the farmer can maximize his Canada Pension Plan contributions every year and get the same benefit that everybody else gets.”
Whether the federal government will move forward with its plan to scrap the system is still up in the air (a consultation process is currently underway) but regardless, farmers should start thinking about the impact on their operations if cash ticket deferrals are abolished.
“Whether it’s your accountant or your business adviser, sit down and have a conversation about how this might impact your farm and how you can plan for it,” said Person.
“If they do put this through, it’s going to have some significant impacts, and some planning will be required to deal with it.”