Woodlot owners: what you need to know about preparing for personal income tax season

All woodlot owners, whether they choose to treat their forest as recreational property, a business, or a farm operation, have many options in front of them to optimize their tax strategy. A simple change in approach can make a big difference in cash flow, profitability, and overall taxation.

The reality is the same for woodlot owners as for all business owners or entrepreneurs: navigating the overlapping regulations for personal and business tax can be tricky. Thus, planning for tax season is key.

Here are a few principles to keep in mind, as well as tips to make your personal tax season as painless and successful as possible.

How and when to file

The normal filing deadline in personal tax season is April 30. But if you’re filing as a farmer, then you and your spouse may file on or before June 15, 2022. However, any taxes owing are due April 30; so you may want to make an installment payment earlier to minimize interest if there will be taxes owing. Remember that if you intend to treat your operation as a farm, you must file using the CRA farm schedule (Form T2042) rather than the form used by non-farming businesses (Form T2125).

By spending some time organizing your paperwork, you’ll save yourself time at tax season if filing yourself, or you’ll save money if you’re going through a tax preparer.

Also, consider whether you want to file on a cash or accrual basis. Cash accounting records financial information when cash is exchanged. Accrual accounting, however, records financial information when a transaction occurs, even if the cash has not changed hands yet. There are pros and cons to each approach.

It’s important to be consistent. If you filed on a cash basis in the past, then file on a cash basis going forward.

Expenses, income, and assets

Knowing what you can claim during tax season, and understanding whether your expenses and assets qualify as personal or business, is crucial. If you’re ever unsure where an item fits, make a note to ask your accountant.

Below are some common examples of expenses to consider claiming:

1. Ontario Woodlot Association (OWA) annual dues
2. Managed Forest Tax Incentive Plan (MFTIP) preparation fees
3. Insurance (relating to the woodlot)
4. Property taxes (relating to the woodlot)
5. Fees associated with cutting timber (transportation / tree marking, etc.)
6. Vehicle expenses relating to woodlot management
7. Purchase of any nursery stock planted and costs to plant such as labour

If you have registered for the goods and services tax (GST) or harmonized sales tax (HST), get the GST/HST filing done now to get the refund on any GST/HST paid on expenses. Note that if you are filing a GST/HST return and getting the GST/HST back, then the GST/HST is not an expense, and it should be separated in your records. Deduct only the expense portion on your income tax return.

Capital assets — including ATVs, tractors, and other vehicles — are not an expense in the year they are purchased, but depreciation expense can be deducted over several years. If you provide the cost information, your accountant can set this up so a portion is deducted automatically every year.

Lastly, don’t forget to include the following as income when filing:

1. Firewood
2. Rental of property for recreational uses
3. Sale of timber periodically

Why file at all?

The tax benefits of owning and operating a woodlot are only available if you go through the filing process. Those benefits include the ability to:

1. Deduct losses against other income
2. Carry losses forward to when you have income
3. Establish that you are a farmer
   • Future capital gains election ($1 Million)
   • Tax free transfer to future generation
4. Qualify for other farm related programs

While the incentives to file are significant, the process can be burdensome and complex. Having the right advisor at your side means utilizing all the opportunities available, maximizing your return while minimizing risk. MNP’s tax team is positioned to provide top-tier advisory services for woodlot operations both big and small.

Contact us

Rick Wismer, CPA, CA, CAFA, PAg, LPA
Regional Agricultural, Food and Beverage Niche Lead
905.225.1302
[email protected]