Many people in agriculture don't understand that taxes are a
sign of prosperity. In an industry that is taught to avoid paying
taxes at all costs, the thought of forking over any money to the
government, even in years of record profits, is hard to
Canadian agriculture tax rules allow farmers to defer cash
profits and calculate taxable income on a cash basis.
This has resulted in many farms being able to avoid paying
Deferrals work, but they create a tax hangover that can be
addressed only in a year of disastrous income.
Counting on a bad year seems ludicrous as a tax strategy, but
history has shown this to be the norm rather than the exception,
which is why it continues as a solid tax strategy today.
A tax partner of mine used to say, back when personal tax rates
were close to 50 percent, that he wished he paid $5 million in
taxes because that meant he earned $10 million.
Taxes are a result of being profitable and should be more widely
seen as a sign of success.
It does not mean you have to be happy about paying them, but it
does mean you are doing something right. A history of paying tax
indicates your farm is profitable and routinely making good
management decisions that result in profit.
Changing the legal structure of your operation to a partnership,
joint venture or company might give you more tools to control taxes
and help your succession plan.
New structures can reduce the taxes that are owed by using
corporate tax rates or allowing for income splitting with the next
Alternatively, restructuring can provide flexibility if your
ultimate goal is to exit the industry.
Gaining access to the multiple capital gains exemptions that are
available to the family farm can also be achieved as an additional
benefit. It requires significant tax planning, so don't try
this on your own.
Don't forget that other benefits, such as increases to your
AgriStability margins, occur as your operation continues to be
profitable because the program is based on your accrual profit.
Accrual profits are usually larger than your cash profits if you
have been taking advantage of deferrals and prepayments of input
expense or purchasing inventory.
Yes, I know you have all heard how the changes to AgriStability
have made it less attractive, but the last couple of years of great
profits in the grain sector have resulted in significant increases
to the five-year margin averages.
For example, the old program's 85 percent coverage was
$850,000 when applied to a margin of $1 million. Today, the
coverage is lower at 70 percent, but the margin is better at $2
million, which yields $1.4 million in coverage.
Beef and hog production has been highly profitable this year.
AgriStability will make sense for producers if that continues for a
couple of years because it is the only safety net available to
protect against a crash.
Remember, AgriStability is a disaster program and you really
never want it to pay out because it means you have had a wreck.
However, that is exactly when you will need the financial
protection it provides. You just might have to wait a while for
So as you curse writing that tax cheque and blame your
accountant for not working hard enough, remember that no one went
broke locking in a profit. As well, make sure you know where profit
shows up on your farm by knowing your true costs of production.
I know, I know: spoken like a true accountant.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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