The agriculture industry is a significant player in Canada, with 189,874 farms earning over $54 billion in cash each year, according to the Tax Planning for Farmers Website. This industry must constantly adapt to various challenges, including extreme weather events, trade disputes, and changing market conditions, all of which can affect the well-being of farmers and farm. To better understand the state and resilience of the agriculture industry in the face of these challenges, it is essential to gather data.
As a farmer, you face unique tax considerations that require careful short- and long-term planning to reduce the amount of tax you and your family must pay. If you are unsure how to save on taxes, don’t worry. This blog will provide you with the top eight tax-saving tips for your farm.
Tip Number 1: record transactions immediately when cash is paid or received.
One of the top tax-saving tips for farmers is to record transactions when cash is paid or received. This advice comes from Carman Praski, a business development representative at Farm Business Consultants, who emphasizes the importance of having an accurate record of cash on hand. By keeping track of cash flow, farmers can gain a better understanding of their revenue and spending over a specific period. Alternatively, farmers may opt for accrual accounting, which provides a more comprehensive view of financial activity. It’s important to note that farmers won’t be taxed on income until they have received the cash, but it’s still essential to keep track of all cash flow.
Tip number 2: Maintain accurate records.
Maintaining accurate records is crucial if you want to find ways to lower your taxes. According to Carman Praski, a business development representative at Farm Business Consultants, failure to keep good records may result in fines and other penalties if you are audited by the Canada Revenue Agency. Proper record-keeping involves preserving any documentation that can support your expense claims on your tax forms, such as sales invoices, cash deposit slips, reimbursements, agreements, cash purchase tickets, and check slips.
Tip number 3: Use debt to invest and savings to purchase.
A smart way to reduce your debt and taxes is to use borrowed money to invest in your farm. For example, you can take a loan from a bank or a relative to buy equipment, crops, or seeds, which can increase your farm’s productivity and profitability. The Canada Revenue Agency (CRA) does not tax loans used for purchasing items.
On the other hand, it’s recommended to use your savings to make purchases instead of taking on more debt. This way, you can avoid interest payments and reduce your overall debt burden. Use your savings to make smaller purchases or invest in projects that have a shorter return on investment. This strategy can help you improve your cash flow and build your savings over time.
Tip number 4: Timing capital gains and losses
Timing capital gains and losses can help you reduce your tax burden. One strategy is to look at your lifetime capital gains or profits and find a capital exemption. For instance, instead of recording the sale of your land or machine as a profit, you can record it as a loss to save on tax deductibility. It’s recommended to seek the advice of a professional to better understand this strategy.
Carman Praski, business development representative at Farm Business Consultants, advises farmers to consider long-term planning strategies such as cash flow planning, profit margin opportunities with production, expense management, and insurance strategies to improve their farm operation.
Tip number 5: Custom or Contract Work
One effective way to lower your taxes is by engaging in custom or contract work. This involves renting equipment or hiring individuals to produce output for your farm business. This strategy can increase your farm’s output and profits. Rental products can be an easy and efficient way to invest in your farm.
Tip number 6: Insurance
One way to save on taxes for your farm is by deducting the cost of your business insurance premiums. This applies to insurance coverage for farm structures and some agricultural machinery. Additionally, you can also deduct insurance payments from your motor vehicle costs, as well as other expenses such as interest and bank charges, livestock, machinery, office expenses, pesticides, and professional fees. By doing so, you can effectively reduce your taxable income and ultimately save money on taxes.
Tip number 7 is about bad debts.
A bad debt is an unpaid loan or balance that a business considers uncollectible. If you are unable to recover the money owed to you by a customer within a year, you may be eligible to claim it as a bad debt, according to the Canada Revenue Agency (CRA). However, not all defaulted debts qualify for this claim. The CRA does not allow bad debts resulting from a conditional sales agreement or mortgage obligations to be claimed. It is recommended to seek advice from an expert for more information on bad debts.
The final tip for saving taxes on your farm is related to depreciation.
Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life, in order to account for the decline in value over time. If you purchase a structure, furniture, equipment, machine, or vehicle that is valued at more than $500, then you must write off the cost over several years. However, there are certain conditions that must be met.
Firstly, you need to subtract the cost of the property or asset you have bought over a few years. Secondly, if the property or asset is classified as class 8, which includes items such as buildings and machinery, you can deduct 20% of the cost as a Capital Cost Allowance (CCA). For class 10 assets such as vehicles, tractors, and trailers, you can deduct 30% of the cost as a CCA. It’s important to keep these rules in mind and consult with an expert if you have any questions.
According to the Tax Planning for Farmers Website, there are over 189,874 farms in Canada with yearly cash earnings of more than $54 billion. Retaining accurate records is crucial if you want to find ways to reduce your taxes. This article has presented the top eight tax-saving tips for your farm. These include borrowing money to invest and saving money to purchase, as well as utilizing rental products to invest in your farm. Additionally, you can deduct the cost of your business insurance premiums for coverage on farm structures, machinery, and some agricultural equipment. The concept of “bad debt” refers to any loan or outstanding balance that a business considers uncollectible. If you can’t recover money owed to you by a customer within a year, you may be able to claim it. These eight tips offer farmers effective ways to save on taxes.