Farm Credit Canada (FCC) advances the business of agriculture by connecting producers with leading farm management experts through free Agriculture Knowledge Exchange workshops and seminars.
As a Saskatchewan farmer and chartered accountant, Lance Stockbrugger has been working with agriculture producers for the past 19 years and delivering free FCC tax seminars for more than 10.
“Canadian agriculture is filled with professional, forward-thinking, business-savvy people,” he says. “They love what they do and see rewards, but occasionally face questions that keep them awake at night, especially during tax time.”
Although tax time for most producers is busiest from February to April, tax planning is a year-round exercise since decisions made throughout the year can impact the farm operation’s bottom line. To help producers make better financial decisions, Stockbrugger shares his independent advice on three of the most common tax-related questions.*
What income splitting opportunities are available to reduce my taxable income?
Paying wages to your family members who work on the farm is the simplest way to minimize taxes, as it spreads the income over other tax returns. However, wages need to be reasonable and reflect actual duties and job responsibilities. Start paying your children wages as soon as they can start adding value to your business, Stockbrugger advises.
Establishing a partnership can also allow income from the business to be split with family members, reducing the overall taxes. Percentages are based on each partner’s contribution to the farm operation by way of capital and labour/management.
If a farm operation is incorporated, family members can own shares and collect dividends. For greater flexibility, a discretionary family trust can be set up to make annual dividend payments to eligible beneficiaries.
When does it make tax sense to incorporate?
Stockbrugger says a rule of thumb when considering incorporation is determining if your operation’s average annual net income is more than $89,000 using accrual accounting. Accrual accounting is different from cash basis accounting, which is typically used for tax filing by farmers. With accrual accounting, transactions are counted when they happen, regardless of when the payment is actually received. With cash basis accounting, income is earned when the payment is actually received and expenses are deducted when they’re actually paid.
“Farmers can use deferrals of sales and pre-buys of inputs to reduce their taxable income, but you need to figure out on an annual accrual basis your income and corresponding expenses,” he says. “This will give you a good indication of the profitability of your operation to help to determine if incorporation should be considered.”
Incorporating has many benefits: it provides a larger tax bracket with a significantly lower tax rate on active business income, it limits liability to corporate assets and there’s no need for taking additional financial business risk by pre-buying or deferring income for tax purposes. However, there are disadvantages: an initial cost for incorporating, ongoing costs associated with the higher degree of financial reporting, consideration needs to be taken to address the eventual wind-down of the corporation and certain tax rollovers can be lost for assets owned by the corporation.
What should I consider when deciding to lease or buy equipment?
Cash flow is the most important consideration when deciding to buy or lease farm equipment, according to Stockbrugger.
He says leasing equipment can be less strain on your cash flow and is a good strategy for keeping vital equipment current, under warranty and supported by the equipment dealer.
“If you have a high-use piece of equipment that is critical to your daily farm operation, leasing might be the best option to keeping it current at the lowest cost,” Stockbrugger says.
If you are planning to keep certain pieces of equipment on your farm for extended periods of time and potentially build equity in the equipment, then you should consider buying certain assets as opposed to leasing them. As well, in most cases, if you want a faster tax write-off of an asset, purchasing it will result in a quicker tax deduction.
“You can’t avoid taxes, but try to implement planning strategies that can minimize your annual taxes without taking unnecessary business risks,” he says.
For more advice from leading farm management experts, FCC Agriculture Knowledge Exchange events are offered throughout the year across Canada. For dates and information on events in your province, go to http://www.fcc.ca\exchange.
FCC AgExpert Analyst accounting software makes tax planning easier. Designed specifically for farmers, AgExpert Analyst makes it easy to enter income and expenses, track inventory and capital assets, complete reports and prepare financial statements.
*FCC does not provide tax advice and producers are encouraged to consult their own tax, accounting and legal advisors before making any significant tax-related decisions.
FCC is Canada’s leading agriculture lender, with a healthy portfolio of more than $26 billion and 20 consecutive years of portfolio growth. FCC is strong and stable – committed to serving the industry through all cycles, and to being socially and environmentally responsible. FCC provides financing, insurance, software, learning programs and other business services to producers, agribusinesses and agri-food operations. Employees understand agriculture and are committed to the success of customers and the industry. With FCC in the market, producers benefit, agriculture benefits, rural Canada benefits and so do all Canadians. For more information, visit http://www.fcc.ca. Follow Farm Credit Canada on Facebook, LinkedIn and Twitter @FCCagriculture.
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