Accounting for agriculture & farming.

Questions worth getting ahead of

• Choosing between the cash and accrual method
• Understanding when a farm loss is restricted
• Sorting zero-rated sales from taxable farm supplies
• Using the right farm statement for your program
• Planning the sale of qualified farm property

Choose and document your income reporting method

The CRA says farm income can be reported using either the cash method or the accrual method, and the choice affects when income and expenses count. Under accrual, the value of inventories such as livestock, crops, feed and fertilizer is part of the calculation. A farmer or partner gives the CRA a statement of farming activities, Form T2042, with a separate form for each business. Farmers in AgriStability and AgriInvest use the program form for their province instead. Before you change methods, talk it through with an accountant, since a switch has consequences and may require CRA steps.

Understand how a farm loss is treated

Whether a farm loss can offset other income depends on how important farming is to your income. The CRA’s guide says that if farming was neither your main source of income nor your main source together with a subordinate source, the deductible amount is limited. In that case, a net loss of $32,500 or more allows $17,500 against other income. Below $32,500, the deduction is the lesser of the loss and $2,500 plus 50% of the loss above $2,500. The rest is a restricted farm loss. Keep clear records of hours, income sources and each year’s result.

Sort zero-rated sales from taxable farm supplies

Most farm products are zero-rated for GST/HST, which means you charge 0% and can generally still claim input tax credits on related expenses. The CRA lists common examples such as fruits and vegetables, cattle, hogs, poultry and bees raised for food, and grains in larger quantities. Other items are taxable, including bedding plants, sod, cut flowers, living trees, firewood and horses. Contract work such as harvesting for another farmer is taxable too. A mixed operation needs a product list that shows the status of each sale. Ask your accountant to confirm each line before you register.

Prepare early for the sale of qualified farm property

The CRA says a capital gains deduction may be available on gains from qualified farm or fishing property, and that quotas such as milk and egg quotas are part of what it considers. The lifetime exemption limit has been the subject of recent changes, so confirm the current figure on canada.ca before relying on any number you have heard. Whether a particular parcel, quota or share qualifies depends on ownership and use conditions. Gather purchase records, a history of how each property was used, and a list of who owns what well before any sale or transfer.

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