Practicing good financial habits now may save you money when the Canada Revenue Agency (CRA) comes calling in the spring.
Last year, at Ag in Motion Discovery Plus, Carmen Praski, business development representative for Farm Business Consultants (FBC), offered up his top 12 tax-saving tips for agricultural producers. Some you may already have in practice, while others may be new to you.
Praski’s first tip is to determine if cash or accrual accounting is best for your business. With cash accounting, a record of a sale or an expense is only recorded when the cash is received and inventory is not included in the calculation of income.
“It’s easy to determine when a transaction has occurred, and you can track how much cash you have at any given time,” said Praski. “And since transactions aren’t recorded until cash is received or paid, your income isn’t taxed until it’s in the bank.”
However, if your cash flow increases — if you are forced to sell inventories, for example — you can be left with a high taxable income.
For accrual accounting, a transaction is recorded when it is made even if cash has not been exchanged. This can allow producers to get a clearer picture of their income and expenses, but it can also make an operation seem more profitable than it actually is. Praski suggested consulting with a tax expert to determine which method is best for your business.
Next, Praski recommended keeping accurate records. “If you don’t maintain good records and are audited by Canada Revenue Agency, you could be charged with fines and other penalties,” he cautioned.
The CRA can audit as far back as six years, so financial records — like deposit slips, receipts, contracts and cheque stubs from marketing boards — should be kept for that duration. He also recommends keeping all records in a digital format so they can be easily accessed and read in the future.
Also, being aware of all available deductions can significantly reduce your tax burden. “Farm owners and ag producers often miss claiming legitimate farm business expenses,” he said.
These deductions can include expenses related to maintaining farmland and machinery like property taxes and equipment repairs. Supplies like feed, supplements, bedding and even small tools can also be deducted. Bank, insurance, legal and accounting fees can also snag you a deduction.
Tip number four is to keep detailed records of your mileage. “If you don’t, CRA may disallow your vehicle expenses,” warned Praski. He suggested logging your mileage with pen and paper or using apps like MileCatcher and MileIQ.
Livestock tax deferral provision
Utilizing the livestock tax deferral provision can also help. “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.
To be eligible, your farm must be located in a region designated by the government as affected by drought or excess moisture. Next, your herd must have been reduced by at least 15 per cent and no more than 30 per cent to be eligible for a 30 per cent deferral. If your herd was reduced by more than 30 per cent you are eligible for a 90 per cent deferral.
Praski’s sixth top tip is to take advantage of deferred cash purchase tickets.
“If you sell grain to an operator of a licensed elevator, the operator can issue a cash purchase ticket or deferred cash purchase ticket,” he said. This allows you to report this income in the year following the grain delivery, provided the grain is wheat, oats, barley, rye, flax or canola.
Opening a tax-free savings account (TFSA) can also help come tax time. Contributions to a TFSA are not tax deductible but any amount contributed and any income earned are tax-free.
The 2020 tax contribution limit is $6,000 and any unused contributions from previous years can be carried forward. Contributions to a registered retirement savings plan (RRSP) can also be carried forward year to year but are tax deductible. “You do receive immediate tax relief and tax-sheltered growth, and you won’t be taxed on the money until you withdraw it,” said Praski.
Also, consider opening a spousal RRSP. “If your spouse is earning less than you it will even out your retirement savings,” he said. Just make sure your relationship is solid, added Praski, because the money in a spousal RRSP will remain in your partner’s name if there is a split.
Timing capital gains and losses can also reduce your overall tax burden. “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.”
Praski also recommended speaking to a tax professional about your eligibility for a lifetime capital gains exemption. “The lifetime capital gains exemption could spare you from paying taxes on some or all of your capital gains.”
Next, having a risk management plan protects your operation from unexpected circumstances. Government-run programs such as AgriStability and AgriInvest can ease the impact of production loss, adverse market conditions or increased costs.
Finally, producers may want to consider incorporation. While the process can be costly and involve more paperwork, it has some benefits. Your personal assets are protected from legal action and your business can continue on after your death.
Incorporation also gives you more income control. “You can choose the most tax-efficient way to pay yourself,” said Praski.
Incorporation also makes you eligible for the small business deduction, which can significantly reduce your corporate tax rate, provided your income is less than $500,000.
Whichever tax savings methods you explore, Praski recommended seeking professional advice. “Why not get a second opinion on your financial health to make sure you’re getting all the tax credits you’re entitled to?”