Every farmer wants to pay less in taxes, but it can be hard to know where to find those savings.
“How do you feel confident you’re paying the least amount of tax possible? It’s tough,” said Carman Praski, business development representative at Farm Business Consultants.
At the recent Ag in Motion virtual conference, Praski offered his Top 12 tips for reducing taxes.
First, decide if cash or accrual accounting will work best for your operation.
Recording income and expenses only when the cash is received or paid is pretty simple, he said.
“It’s easy to determine when a transaction has occurred, and you can track how much cash you have at any given time,” he said. “And since transactions aren’t recorded until cash is received or paid, your income isn’t taxed until it’s in the bank.”
But if a lot comes in one year — say if you’re forced to sell inventory — then your tax bill can soar.
Accrual accounting (recording income and expenses even if no money has changed hands) gives you a better picture of them during a set time frame — but tracking cash flow is vital.
“You definitely want to talk to a tax professional to find out if cash or accrual accounting is best for your farm operation,” said Praski.
Second, keep good records — and not just because you’re required to do so by law.
“Your best defence against an audit is good records,” said Praski.
“If you don’t maintain good records and are audited by Canada Revenue Agency, you could be charged with fines and other penalties.”
Keeping good records means saving sales invoices, bank deposit slips, receipts, contracts, cash purchase tickets, cheque stubs — basically anything that will support your expense claim on your tax forms.
“If you don’t have receipts, keep in mind that CRA could disallow all or some of your claims,” he said, adding that records should be kept for at least six years, ideally in a digital format so they don’t get lost or faded with time.
“It’s a good idea to spend 30 minutes every month to categorize your receipts. Take them out of your shoebox, your glove compartment, your wallet — wherever they might be hiding — and organize them to keep them manageable throughout the year.”
Next, explore all available tax deductions.
“Farm owners and ag producers often miss claiming legitimate farm business expenses,” he said.
The list is a long one: building and land maintenance, power and property tax bills, and rent; machinery expenses like fuel, oil, repairs, licences, and insurance; inputs such as feed supplements, bedding, fertilizer, seed, and pesticides; and professional expenses like bank, insurance, legal, and accounting fees.
Mileage is another expense that should be tracked — No. 4 on Praski’s list.
“If you want to claim vehicles expenses, you need to keep track of your mileage with a mileage log,” he said, adding there are apps for that.
“You’ll need to note each business trip, the destination, the reason for the trip, and the distance travelled by your vehicle throughout the entire year. If you don’t, CRA may disallow your expenses.”
Next, use the livestock tax deferral provision if you can.
“If you were affected by drought or flooding, for example, and forced to sell part of your breeding herd, the livestock tax deferral provision lets you defer a portion of your sales to the following year,” he said.
If you’ve reduced your breeding herd by at least 15 per cent but no more than 30 per cent, you can defer 30 per cent of your income from net sales. If it’s more than 30 per cent, you can defer 90 per cent of your income from net sales.
“All amounts deferred under this program may be carried forward until your region is no longer designated a drought or excess moisture area.”
No. 6 is to take advantage of deferred cash grain tickets.
“The deferred cash purchase ticket lets you report your income in the year after the grain is delivered,” said Praski. “This is a great way to reduce how much you’re getting taxed in the current year.”
Opening a tax-free savings account will also save you in taxes. The current TFSA contribution limit is $6,000, but unused amounts carry forward. And while contributions aren’t tax deductible, any investment income earned in a TFSA is tax free.
Contributing to a registered retirement savings plan — Praski’s eighth tip — is tax deductible, however.
“You do receive immediate tax relief and tax sheltered growth, and you won’t be taxed on the money until you withdraw it,” he said.
“So you should contribute to an RRSP when you have a high income and then withdraw from it when you’re retired since you’ll likely have a lower income.”
While you’re at it, open a spousal RRSP as well to even out the tax load in retirement. (But don’t go over your personal contribution limit and since money in a spousal RRSP stays in the spouse’s name, “make sure you have a good relationship.”)
In the 10th spot is timing capital gains and losses.
“Let’s say you sold farmland or farm property early in the tax year and incurred a capital gain. You could choose to recognize capital losses toward the end of the year to offset that capital gain.”
If your farm property meets certain conditions, you might also want to look at your lifetime capital gains exemption. “The lifetime capital gains exemption could spare you from paying taxes on some or all of your capital gains. It’s best to talk to a tax professional to find out if you qualify for that capital gains exemption.”
Next, develop a risk management plan and explore risk management programs like AgriStability and AgriInvest.
“It’s good to look at things over the years, such as cash flow planning, profit margin opportunities with your production, controlling expenses, and even using insurance strategies as well, to help with your farm operation,” he said.
And finally, consider incorporation.
“There are many advantages, but also some disadvantages,” he said.
Incorporating limits your liability, extends the life of your farm business beyond your death, reduces your corporate tax rate (assuming your taxable income is below $500,000), and allows you to “choose the most tax-efficient way to pay yourself.”
However, it means extra expenses and more paperwork, and closing down a corporation can be more of a headache.
And again, consult with an accountant or adviser before making the call.
That’s good advice any time you’re trying to save money on your taxes, Praski said.
“Why not get a second opinion on your financial health to make sure you’re getting all the tax credits you’re entitled to?” he said.