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5 top income tax tips put to work on the farm

2.5 min read

The April 30 personal income tax filing deadline will be here sooner than you think. But there are steps you can take now to prepare for when that date hits.

Chris MacPhee is a chartered professional accountant, certified agricultural farm advisor and partner at MRSB Group in Prince Edward Island. Here are his five top income tax tips put to work on the farm and get ahead of the curve.

1. Think about incorporating

Producers who aren’t incorporated may want to talk to their accountant to see if it’s time to do so. 

“If the farm makes more money than you need to live on each year, then it might be time to incorporate your business. You’ll start saving tax by leveraging the lower tax rates available to corporations,” MacPhee says. “This strategy can also leave more after-tax dollars in the business, to be reinvested into the farm before any personal tax needs to be paid on it.”

2. Consider buying new

In some parts of the country, if you have the option to buy equipment new instead of used, it can help you access the government’s 10% investment tax credit on new farm equipment purchased during the year. “Used equipment does not qualify for the credit,” MacPhee says.

3. Choose a year end

When you file an income tax return can depend on what kind of farm you operate. For example, the fiscal year for individuals and sole proprietors is always December 31, as required for personal income tax reporting.

Alternatively, farm corporations have the flexibility to choose an off-calendar year end, which usually falls at the end of the business cycle when farming activities slow down.

“As accountants, we recommend choosing an off-calendar year end,” MacPhee says. “This can provide valuable flexibility for tax planning, as the shareholders may choose to take more remuneration out of the company after Dec. 31, which falls into the next tax year for personal income taxes.”

4. Plan for next year

MacPhee recommends creating a cash budget ahead of time to ensure you can cover the costs of the upcoming season.

It’s also good to stay in contact with your lender about financing and cash flow.

"It’s easier to finance a planned shortfall early than remedy a cash-crunch situation when it’s busy,” MacPhee says.

5. Identify your corporate structure

Also, speak to an accountant to ensure your farm is in the best corporate structure. An early conversation can help minimize the tax burden when the farm is sold or passed to the next generation. 

“Transition planning is important. And the sooner you think about it, the more tax you can potentially save,” MacPhee says. “Using a family trust in the corporate structure can provide significant tax savings and protect against large capital gains triggered upon sale. Especially when the farm owns many acres which have appreciated over time.”

Bottom line

Tax season is almost here, and there are steps you can take to prepare, such as considering incorporation, choosing a year end, meeting with accountants and lenders and planning for next year.

Article by: Trudy Kelly Forsythe

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