Farm businesses are required to navigate through several unique tax situations. From selling crops or livestock to passing the farm down to the next generation, almost every decision made by farmers has some type of tax implication. Farmers pay taxes to all three levels of government including municipal, provincial, and federal.
To make the most of tax planning, it is essential to identify what type of farming operation you are running and how much of your time is spent on farming activities. In general, there are three categories of farming: full-time, part-time or hobby.
For full time farmers, farming is their main source of income, whereas part-time and hobby farmers earn their primary income by working off-farm. The key difference between part-time and hobby farming is that there must be a reasonable expectation of profit to classify as a part-time farm.
Whether you plan to continue off-farm employment or decide to enter and grow a farming business where you hope to move to full-time in the future, it is important to seek professional tax advice and determine ideal tax strategies from an accountant on an ongoing basis.
Here are three top questions to ask an accountant about your part-time farm:
1. What can I do to minimize my tax liability?
Connect with your accountant regularly especially before year-end to ensure records are kept-up to date. An accountant will be able to do tax estimates to see the position of your farm operation and figure out what is the best tax strategy.
For farmers who use the cash basis of accounting for income tax purposes, meeting in the fall provides a chance to discuss pre-buying inputs.
2. Am I subject to a restricted farm loss?
Do not be afraid to openly communicate to your accountant about the time spent farming, as well as your goals and objectives. This can help your accountant explain your eligibility for farm losses now and in the future.
Part-time farmers are entitled to a restricted farm loss where only a portion of total farm losses can be deductible against other income. The maximum farm loss deduction amount that part-time farmers can claim is $17,500.
3. When is it time to change my farm’s cooperate structure?
This question is essential to ask at least once a year especially if you are looking to expand in the future. There are pros and cons to farm incorporation but depending on how much farm income is being generated, it could lower tax rates. Discuss with your accountant when and how to take the next step to partnership or incorporation.
Bottom line – not all farmers can make the same deductions. It is advisable to seek professional advice to determine the ideal tax strategy for you and your farm operation.