Ready for tax season? 4 tips to make filing and prepping easier
Tax season comes once a year – but getting the best results for your business often requires year-long preparation.
What should you consider before year-end? Three financial experts offer their perspectives and suggestions:
1. Visit your financial advisor
Meeting advisors early — and often — helps manage year-end sales, particularly since farmers are allowed to report income on a cash basis, says Chris Annis of Allied Associates in London, Ont. True for individuals and corporations, he finds meeting clients before year-end, and interim checkups, allows him to effectively summarize year-to-date numbers, make projections and set targets.
“For corporations, managing remuneration to shareholders with dividends, wages, or a mix of both is completed.”
Tax rules change regularly and are complex, making it a challenge for busy farmers to stay on top.
When doing tax reviews with clients before the calendar year-end, Kelvin Shultz of Wheatland Accounting Services primarily considers the possible need to defer and pre-buy, and family salaries and overall management of the tax brackets farmers are in.
“Whether it’s reasonable to keep them in a low bracket, or, as they move up, trying to keep them within a reasonable taxation range,” Shultz says. “If they get beyond that, then we start looking at incorporation.”
Meanwhile, Kimberly Shipley, an agricultural business advisor with MNP, points out tax rules change regularly and are complex, making it a challenge for busy farmers to stay on top. As a result, farmers should meet with their tax advisors to help them navigate the system and make the best choices for their operations.
2. Defer or pay in advance?
How much tax you pay is affected by pre-buying materials such as fertilizer and other assets for the subsequent tax year, or conversely, deferring costs in the current one. Annis says tax strategies include paying wages to spouses and children to reflect their labour contributions and retirement saving plan contributions.
“Our targets are often linked to the different tax brackets to manage personal income tax and CPP contributions, or for pensioners, qualifying for the Guaranteed Income Supplement or avoiding repayment of the Old Age Security,” Annis says.
Schultz adds it’s that it’s important to know how often pre-buying and deferring are used as a tax-savings tactic. When done several years in a row, it becomes hard to manage and challenging to keep farmer income in a reasonable tax bracket. In those cases, incorporation may be the best path.
3. Check farm business structure
Checking qualified farm status before tax season can also greatly benefit businesses. Shipley says qualified farm status gives access to the capital gains exemption and inter-generational farm transfers on a deferred basis.
Farmers and ranchers should therefore verify whether their assets qualify. Custom farm operations, for example, don’t qualify since the custom work is not considered farming.
“As well, large cash or investment balances are not considered farming assets. Changes to the organization’s structure may need to be made to ensure the qualified farm status for tax purposes is maintained,” Shipley says.
4. Navigating the future
Year-end is also a time to think about the future – partly, how taxes can be managed to help achieve wider business goals, not just short-term cost savings.
“Don’t let the tax tail wag the business dog,” Shipley says, citing examples such as purchasing additional assets to save on tax, even though the asset in question is not a necessity.
“Buying a tractor you don’t need or want to save tax doesn’t make sense. Does saving tax now fit with your long-term plan, or does it make sense to pay some tax now and avoid having it catch up with you?”
Other tax planning pitfalls to watch out for:
- Forgetting the value of the initial write-off when it comes time to sell an asset, such as livestock.
- Not accounting for tax costs when withdrawing from a Retirement Savings Plan, whether to seize a business opportunity or some other reason.
- Preferring shorter-term tax savings despite planning to sell the farm business.
Article by: Richard Kamchen