The end of the year means that it will soon be time to file taxes for 2007, and producers should be aware of some strategies if they file on a cash basis. Strategies that producers can use include deferring income, purchasing inventory or increasing their deductible expenses.

“On the deferred sale side, when it comes to the cattle industry, selling cattle at year-end through an auction mart and asking for the auction mart to defer their cheque until the new year is one strategy that many producers use,” says Merle Good, provincial tax specialist with Alberta Agriculture and Food, Olds. “There is some concern, however, that if an audit is done, Revenue Canada will not accept the deferral. Because the producer has had constructive receipt and the auction mart could have paid, and the producer asked for the deferral, Revenue Canada may not support the producer’s position.”

In the grain industry, the top tax strategy is actually one that many accountants are not aware of. If a farmer got a cash advance and delivered grain before the end of the year, then some of that grain could be applied to the advance. If, however, the farmer asked for a deferred cash purchase ticket, the entire ticket could be deferred.

“For example,” explains Good, “if a farmer took a $50,000 cash advance and then delivered $20,000 worth of grain and the elevator took $18,000 of that as required to be repaid against the advance and $2,000 was the amount of the ticket, under the Revenue Canada interpretation since the farmer asked for a deferred ticket, the total $20,000 amount wouldn’t be reported until 2008. This is a strategy that many accountants don’t understand.”

On the other side of the ledger is the purchase of inventory or paying expenses. Instead of paying for fuel, fertilizer and chemicals, it could be beneficial for farmers to look at paying a salary to their children.

“Many people don’t realize the amount of time and effort that children work on the farm,” says Good. “If the salary can be justified, a child in Alberta can earn up to $15,436 without paying any Alberta personal income tax (federal tax starts at $8,929) – the level of personal exemption. In today’s labour market, our children’s time after school and during summer holidays is worth a lot of money. That strategy should be looked at first as it means that the money stays on the family farm.”

Another strategy that is a little more difficult, and one that Revenue Canada has made some changes to, involves a husband and wife partnership situation where one of the partners works off the farm. Previously, if the partnership was registered, one of the partners could be paid a salary and potentially create a farm loss in the partnership. Revenue Canada, just last year, eliminated that strategy. It is no longer allowed to create a farm loss through payments of a salary to either partner.

“If all else fails and the individual taxable income is more than the farmer is willing to pay tax on, RRSP contributions can still be made until the end of February,” says Good. “This year’s maximum RRSP contribution is $19,000 or 18 per cent of earned income, which ever is greater.

“Farmers who have a taxable income concern at the end of each year should look at forming an operating company, where they transfer their inventory, cattle and machinery into a corporation, but leave the land out. The new corporate tax rates are really very attractive, where the active business income rate for small businesses within Alberta up to $400,000 is now 16.12 per cent effective April 1, 2007.”

Tax Management Strategies for Farmers is a publication available through Alberta Agriculture and Food. The publication was designed for producers who are looking for ways to help save tax dollars. It includes information that will help farmers examine the effect taxation has on the operation of their farm businesses, and help them take advantage of tax tips. The publication price is $10 plus GST and can be ordered on-line. The publication can also be ordered by calling the Publication Office toll-free at 1-800-292-5697.

Contact: Merle Good 403-556-4237

From the Oct 29, 2007 Issue of Agri-News