Tax Tips for Southwestern Ontario’s Agriculture Producers
Tax Tips for Southwestern Ontario’s Agriculture Producers
As tax filing for 2022 approaches, agricultural producers should keep in mind these key points to minimize surprises and ease their tax burden — now and in the near future.
Optimizing your farm operation’s tax strategy for 2022/2023 can lead to improvements in profitability and cash flow and allow you to reduce your overall tax burden. Planning is very important to navigate the various rules for both personal and business tax if you want to avoid surprises and optimize results. The following are key tips for southwestern Ontario’s agricultural producers as we enter tax season:
Understand the benefits of filing your taxes
Filing taxes can feel like a headache, but there are benefits. For farmers, filing gives you the ability to:
- Establish that you are a farmer, which may support your eligibility for the capital gains exemption ($1 million) and tax-free transfer to the next generation
- Qualify for farm-related income, stabilization, disaster, and grant programs
Know how and when to file
The normal filing deadline for personal tax is April 30, but both farming spouses may file on or before June 15, 2023. The taxes owing will still be due on April 30 so you may want to make an installment payment to minimize interest. File using the CRA farm schedule (Form T2042 or T1163).
Consider whether you want to file on a cash or accrual basis. Cash accounting records financial information when cash is exchanged while accrual accounting records it when a transaction occurs, even if the cash has not yet changed hands. Consistency is important, however, so if you filed on a cash basis in the past, then file on a cash basis going forward.
Get up to date
If you are like most farmers and you follow the cash-basis method, it is important to pay all bills before December 31 if you’re planning to claim expenses to reduce your 2022 income. If your farm has received a feed or fuel bill for products or services received in 2022, you won’t be able to claim those expenses until you have paid the bill.
Claim capital cost allowance
Did you make a capital purchase in 2022? If the purchase is still on your farm and available for use, you can claim an accelerated capital cost allowance (CCA) and/or immediate expensing when filing your return.
You cannot claim CCA against a piece of equipment that has been ordered but not received. If your capital item is a building, such as a new hay shed or heifer barn, you can only claim the cost of lumber or materials for the structure if it is built and you can use it. For example, a hay shed must be able to hold and shelter hay, a heifer barn must be ready to house cattle, and grain bins must be ready to receive grain.
Immediate expensing is available for capital assets bought and available for use in the year. The most notable exceptions to the immediate expensing are buildings/ structures, quota, and any asset purchases from related persons. The annual cap on immediate expensing is $1,500,000, which must be shared by a group of associated companies as well as eligible persons and partnerships, similar to the rules related to sharing the small business deduction limit.
If the immediate expensing cap is reached, or additions were not eligible for immediate expensing, accelerated CCA provides a greater deduction in the first year than would have been allowed historically. The accelerated CCA for equipment that is self-propelled, such as a tractor, is 45 percent in the first year. For machinery that isn’t self-propelled, the allowance is 30 percent in the first year. The allowance for buildings or structures, such as hay sheds, barns, or grain bins, is 15 percent in the first year.
Ease your tax burden
If you are a farm operator who is considering a sale of assets or inventory in the near future, such as over the next two to five years, talk to your advisor about strategies that can help ease the tax burden.
Farms do not have to claim all expenses in the year incurred; these deductions can be deferred until a later date. For example, if you’re planning to downsize and will be selling quota in three years, it might be helpful to defer claiming some current expenses to the year of sale in order to reduce income to stay in a lower tax bracket that year.
Planning ahead is always the best strategy and it is important to talk to your advisor about the tax management options available.
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