“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.

The post Top 12 tax-saving tips for your farm appeared first on Alberta Farmer Express.

For wheat, the tax credit is 31 per cent while for barley, it’s 13 per cent.

The federal program encourages R&D investment by giving claimants tax credits for their expenditures on eligible R&D work.

Eligible producers should use form T2038 (IND) to claim this credit when filing their taxes while farm corporations must use form T2SCH31.

For more information, contact the Canada Revenue Agency or visit canada.ca and search for SR&ED.

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The Scientific Research and Experimental Development (SR&ED) tax credit allows canola growers to claim the credit for the portion of the checkoff paid that was used to fund qualifying research.

“Farmers are funding research into finding solutions to agronomic issues like clubroot, while being able to capture some of that investment back at tax time,” said Mundare farmer John Mayko, chair of Alberta Canola’s research committee.

The tax credit rate for 2019 is 23.69 per cent. So $1,000 in canola checkoffs means $236.90 is the eligible amount to be earned as the tax credit.

For more information, contact the Canada Revenue Agency or your accountant.

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The tax credit rate for Alberta canola producers in 2018 is 17.43 per cent. That means a grower who paid $100 in canola checkoffs would receive a $17.43 tax credit.

The Scientific Research and Experimental Development credit can be used for the 2018 tax year, carried forward up to 10 years to offset federal taxes owing or carried back three years to reduce federal taxes paid in those years.

Individual producers must file a T2038 (IND) while farm corporations must file form T2SCH31.

For more info, go to the Canada Revenue Agency website and search for ‘SR&ED incentives.’

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“That’s the one that scares the hell out of me,” the farm succession expert said at a recent Alberta Canola Powering Your Profits event.

“The rollover allows us to transfer land to the next generation without incurring tax, and I believe that’s going to be changed someday.”

In 1996, the Canada Revenue Agency adjusted the farm rollover rules so that farmers could transfer land to their children without incurring taxes on it as long as they — or someone in their immediate family (such as a spouse or a parent) — farmed the land for more years than they rented it out.

“I could even look up the family chain if I received it from Dad and add his time to my time,” said Good. “I could rent it out today for 42 years on cash rent and still qualify for the rollover.”

And once the child received it, they didn’t actually have to actively farm the land, he added. “You could leave your favourite quarter section to your daughter who’s married to a liberal in Ontario. I don’t know why you would, but you could.”

In June, though, the Canada Revenue Agency came out with a new interpretation of the rules, where only the individual farmer’s ownership period counts — he or she may not be able to combine their time with their parent’s or their spouse’s. During that ownership period, the land would still qualify for the rollover if it is farmed by a family member (a spouse or a child) for longer than it is rented out to a non-family member.

In 99 per cent of the cases, this new interpretation of the rule won’t be a problem, as most farmers farm their own land, said Good.

But in a case where, say, a husband farmed the land for 50 years and gave it to his wife upon his death, and she rented it out, she may no longer qualify for the rollover.

“If you’ve farmed Mabel’s land for the last 25 years as a renter, Mabel may not qualify for the rollover anymore,” said Good.

But even if this won’t cause a problem on the majority of farms, Good believes farmers should be proactive about talking to their lawyers about it now so they don’t get caught by it in the future.

“Your lawyer will say, ‘Don’t do a thing. The rollover rules will let you transfer all your wealth when you die, so don’t touch this until you’re dead.’ That’s called a chicken will — where we don’t do anything,” said Good.

“But my job is to take the will you want to have happen 25 years from now and try to enact some of it today.”

Life estates and remainderman interests

One of the ways farmers can do that is by transferring some of their land to their farming child while they’re still alive.

“It’s not a question of never transferring our land to our children,” said Good. “Otherwise we’d sell it all tomorrow. At a million bucks a quarter, what the hell are we doing here?

“But it’s a matter of when. We’re not worried about giving our land away. We’re worried about the three Ds — death, divorce, and debt. That’s what makes us nervous.”

Even so, if a farmer who has 10 quarters walks into Good’s office and tells him their 45-year-old child doesn’t own any land, he gets “grumpy.”

“What have we taught our sons and daughters is the most important thing in life? Owning land, but we won’t give it to them. It’s pretty frustrating.”

So Good has come up with a strategy that will allow farmers to transfer land to their farming child, while retaining some control and without burning up their capital gains exemption.

“If I sell my land to them for what they can afford to pay for it, it’s not much,” said Good.

“In Red Deer, it’s 40 per cent of fair market value divided by 20 years at no interest. That’s the number — it’s two times cash rent. That’s all they can afford to pay.”

In the past, parents might sell a quarter section at fair market value to their child, claim the capital gains deduction, and then not call the money in. Good describes that as: “I’ve burnt my exemption up, with no benefit.”

Instead, farmers should consider creating a life estate for themselves and a remainderman interest for their farming children, which allows the parents to keep control of and make income off the land even though the children own it.

“It allows the younger generation to do estate planning, but doesn’t take away what you guys want as parents, which is income and control,” said Good.

“I believe it’s a really neat mechanism for me to move ownership because I’m worried about the rollover rules, but still control the land.”

In property law, a remainderman is someone who is entitled to inherit property upon the termination of the owner’s life estate, which is the ownership of a piece of land until a person’s death. This effectively creates co-ownership of the land, where the life estate holder holds the right of access to the land and can draw income from it.

They do that not by charging rent for the land (which is taxable), but rather by selling the remainderman interest to their child over a period of time interest free, and then taking that money as a return of capital on a remainderman interest (which is tax free).

The remainderman actually owns the land and is granted access to it by the life estate holder. Upon the life estate holder’s death, the life estate expires. The remainderman simply needs to provide the death certificate to the land titles office, and the life estate holder is taken off the land title.

This gives the parents control and income during their lifetime, gives the child ownership of some land, and allows planning to be done now before any changes come to the tax rules.

“It’s a great idea tax-wise, but it’s even more important to see the next generation owning something,” said Good.

But it’s not for every quarter, he added.

“This is bare land I’m talking about, not home quarters,” said Good. “But I want you to look at it for maybe one or two quarters if you want to do some of this land transfer but still control the land.

“It’s very complicated, so talk to your lawyers about this. It’s powerful stuff.”

The post New rollover rule for farms could flatten some succession plans appeared first on Alberta Farmer Express.

“We have situations in various parts of Canada where provincial governments, in British Columbia in particular, are denying farmer status to people who are in the business of breeding equines including mules, donkeys, and horses,” said Bill desBarres, chair of the Horse Welfare Alliance of Canada. “If they lose farmer status, they lose deductions from some property taxes and some other considerations.”

The issue could have a big impact on the horse-breeding industry, said desBarres, a retired horse breeder from Medicine Hat.

“This is an ongoing thing and we’ve been studying it for some time. It’s time for equine people to step up to the plate, stop complaining, and do something about it.”

Unlike other livestock sectors, the equine industry is not ‘zero rated’ for GST, which means the tax must be charged when horses or other equines are sold.

“The cattle people get all the deductions in the world, relatively speaking, and we don’t,” said desBarres. “We want to be treated as a member of the livestock industry.”

There are more than a million equine animals in Canada, with a third of them in Alberta.

“At this moment, there are problems in British Columbia with regards to the status of horses being used by municipal districts in a disadvantageous manner,” said desBarres. “If it happens in B.C., when is it going to happen in Alberta?”

His organization is calling for a clear designation of equine as livestock both for tax reasons and to ensure that provincial or municipal rules specific to the humane treatment and welfare of livestock also apply to horses, donkeys, and mules.

The horsemeat sector should also be treated the same as other parts of the meat industry, said desBarres.

“Canada is a very large exporter of horsemeat, which brings a lot of money to our economy,” he said. “The producers of that are not subject to the same treatment by Canada Revenue Agency and provincial and municipal governments with respect to production costs and deductibility.”

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Farmers can learn more about the SR&ED program by visiting the Canada Revenue Agency website.

Credits are also available for producers who paid checkoffs for wheat (21 per cent of the checkoff is eligible), canola (14.32 per cent), pulses (check albertapulse.com) and oats (11.8 per cent).

The post Checkoff tax credits available for farmers appeared first on Alberta Farmer Express.

For accountants Ryan Stevenson and Dean Gallimore, it’s the thought of farmers getting whacked with a tax bill they could easily avoid.

“One of the best things about farming is that farming companies can transfer from one generation to the next without incurring tax liability,” Stevenson, who works for KPMG in Lethbridge, told FarmTech attendees.

“With farms you can actually roll that farming company down to the next generation. As long as you stay onside with the rules, it can go on from generation to generation. It’s a really great tax tool that you have available to you.”

Farm companies can also sell shares of their company and use their capital gains exemption on it, Stevenson said, adding more farmers are using this option, especially with corporately held land.

But if you’re not careful, you can easily run afoul of Revenue Canada tax rules, which require that at least 90 per cent of a company’s assets be deemed farm assets in order to qualify for this tax break. Holdings such as investment accounts or other enterprises that do not pertain to farming are “bad assets” in this regard, said Stevenson.

“That could leave you with a significant tax bill,” he said, “If you tried to sell the shares, those assets would be no good, and you could lose your exemption on the sale.”

Farmers should be closely monitoring non-farm assets in a farm corporation or family farm partnership to ensure they “don’t fall offside.”

It’s certainly something you want to watch out for,” said Stevenson. “If you fall offside at the wrong time for one day and someone passes away, you can get hit with a significant tax bill.”

Regularly go over your balance sheet, talk to your accountant, and remember that it can get tricky when it comes to things such as the value of an asset, said Gallimore, who has specialized in farm taxes over his three-decade-plus career.

The 90 per cent rule is based on fair market value of the assets in the company.

“It’s not a net calculation,” he said. “The test is based on the value of the asset not the net of the debt.”

Unwritten agreements

Another potential pitfall is farm partnerships.

“Oftentimes we see individuals farming in a farm partnership with no formal agreement in place that outlines the terms of the partnership,” said Stevenson.

That’s fine in the sense that a formal partnership agreement is not required by law, but it “can become a problem if someone dies at a bad time,” he said.

If, for example, income is constantly deferred until February every year and the partner passes in March, then upon the partner’s death, all the income needs to be reported for the current year. Most farmers have very little expenses early in the year, so the surviving partner could be stuck with a significant tax bill.

“One of the easiest ways to avoid that situation from happening is to have a formal agreement in place saying the partnership continues after death,” he said.

The document doesn’t need to be lengthy or complicated, Gallimore added.

“A one-page document saying ‘This partnership does not dissolve on the death of a partner.’ That would avoid this significant risk.”

The cash basis rule

Individuals can have a similar problem.

“As individuals, we have a December 31 year-end,” said Gallimore. “So most individual farmers load up on expenses in the fall — pre-buying fertilizer, buying cattle to put in the feedlot, and deferring most of their cheques until January.”

But again, if the farmer dies early in the year, there are no expenses to offset all that deferred income.

“If (a farmer) passes, what have you got? You’ve got income,” said Gallimore, adding the tax hit could be as high as 48 per cent in Alberta.

Farmers in this situation should think about offsetting their income, he said. For example, if the farmer had a large sum of money in the bank account and used it to purchase cattle, those animals could go to a beneficiary without tax implications.

“With a little bit of proper planning, it is possible to avoid a tax situation,” said Gallimore.

But he cautioned against taking a do-it-yourself approach to tax planning.

Tax laws are very complex and new federal rules are making it more so, he said, so get advice from a qualified professional who knows the relevant details of your personal circumstances.

And then act on that advice, he said.

“Those are some of the things that keep me up at night, as I know of a few clients who would fall directly into these situations.”

The post Are you keeping your accountant awake at night? appeared first on Alberta Farmer Express.

But if you devote the majority of your time to farming by investing in buildings, machinery, and inventories to run the operation, you’re likely the owner of a farming business (although farming income does not include money earned from working as an employee on a farm).

For more information on farming, including the types of farming income and deductions and tax credits available to farmers, go to cra.gc.ca/farming.

Generally, farmers can deduct any reasonable current expense incurred to earn farming income, including interest on loans and losses, and the cost of fertilizer, feed, veterinary fees, and materials to pack and ship goods. Other expenses that may be eligible include machinery rental, electricity, insurance, and motor vehicle expenses. And if you decide to farm out some of your accounting duties, you can also deduct the fees you paid to your accountant.

If you had a farm loss for the year, you may be able to deduct up to the full amount of your loss. A farm loss can be carried back from the current year to any of the previous three years or carried forward up to 20 years. For more information on farm losses and how to calculate and apply them, see Chapter 6 of Guide T4003, Farming Income (available at cra.gc.ca/farming).

Eligible farmers who dispose of breeding livestock in a tax year because of drought or flood can exclude a portion of the sale proceeds from their incomes until the following tax year, under the Livestock Tax Deferral Provision. The rule also extends to bees and all types of horses that are over 12 months of age that are kept for breeding.

Do you hire seasonal farm workers? If you hire a qualified Red Seal trade apprentice, such as an agricultural equipment technician, you may be able to claim your employee’s salary as an expense. You may also be able to claim the apprenticeship job creation tax credit. This non-refundable investment tax credit is equal to 10 per cent of the apprentice’s salary or wages (to a maximum of $2,000 per year for each eligible apprentice). For more information on the Apprenticeship Job Creation Tax Credit, go to cra.gc.ca/smallbusiness and select investment tax credit.

If you are caught evading taxes, you may face fines, penalties, or even jail time. However, if you made an error or omission, you can correct the mistake through the Voluntary Disclosures Program. If you make a valid disclosure before you become aware of any compliance action taken against you by the Canada Revenue Agency, you may only have to pay the taxes owing plus interest. For more info, go to cra.gc.ca/voluntarydisclosures.

You need to keep complete records of your business-related expenses to support your claims. To learn more, go to cra.gc.ca/records.

The deadline to file most Canadian income tax and benefit returns for 2015 is April 30. However, since this date is a Saturday, returns and payments will be considered to be made on time if received or postmarked by midnight on May 2. Self-employed individuals and their spouses or common-law partners have until June 15, to file their income tax and benefit returns, but any balance owing is still due no later than May 2.

The post The lowdown on tax filing for farmers appeared first on Alberta Farmer Express.

For the 2015 tax year, 20 per cent of the checkoff is eligible for the federal Scientific Research and Experimental Development tax incentive program. The tax credit percentage is based on the dollar amount the commission has invested in R&D that meets the criteria laid out by the Canada Revenue Agency.

Individuals should use form T2038 (IND) to claim this credit when filing their taxes and farm corporations must use form T2SCH31.

For more information, call the Canada Revenue Agency or go to cra-arc.gc.ca (search for SR&ED). Tax credits are also available for checkoffs paid to Alberta Canola Producers (11.88 per cent), Alberta Barley (17 per cent), Alberta Pulse Growers (18.5 per cent), Alberta Oat Growers (t.b.a.), and the Western Grains Research Foundation (t.b.a.).

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