Business | Fall 2008
Losses: to claim or not to claim.
By Joy Gregory
Business strategy first. Tax avoidance second
Buoyed by strong commodity prices earlier this year, and relatively good growing conditions, the 2008 tax season puts a lot of prairie grain and oilseed growers on the horns of a taxing dilemma.
While farm cash receipts and net farm income are up, so is farmer stress about paying taxes, says Merle Good, a provincial tax specialist with Alberta Agriculture and Rural Development. Good, who travels Alberta and parts of Saskatchewan teaching tax professionals how tax legislation impacts farm businesses, says much of that stress is rooted in a misunderstanding of what’s really at stake.
“There is a historic focus on what farmers can do to avoid paying this year’s tax and not enough of a focus on how this kind of thinking may compromise their tax decisions next year and the year after that,” says Good.
Losses: A tax primer
To help his farm clients manage tax-related business decisions, one chartered accountant recommends they have their income and expense statements ready before they meet with him in November. This data, including information on what they plan to buy before December 31, gives them a chance to look at real numbers before they get down to the brass tacks of managing their tax liability, says Ron Friesen, a chartered accountant and agricultural tax specialist with Meyers Norris Penny in Saskatoon.
When it’s time to talk tax liability, the focus is on losses — and not all losses are the same, adds Friesen.
A capital loss results from the sale of a capital asset, including land, stocks and bonds. Here, Friesen says, farmers should keep two things in mind. First, “capital losses don’t ever expire, so there’s no panic to use them. And second, they can be used only against capital gains, so they’re pretty restricted.”
Non-capital losses are more complicated and include unused losses from an office, employment, property or business (including a farm.) They also include unused allowable business investment losses.
There are three categories of non-capital loss related to farming. The straight farm loss impacts you if you’re a full-time farmer. These losses can be used against any source of income. The second type is a restricted farm loss. It comes into play when a farmer has off-farm income. Here, you are restricted in the amount of loss you can claim in any given year and the carry-forward balance can be used only against farm income. A third category is really for hobby farmers, so doesn’t really apply to commercial operations, explains Friesen.
The allowable business investment loss (ABIL) falls under the capital loss category, but is taxed similarly to non-capital losses and is complicated because there are future implications. In sum, “you’re not allowed to claim an ABIL if you’ve used capital gains exemptions in the past, unless you’ve backfilled the amount of that exemption,” explains Friesen. “If you claim the ABIL first, then in the future, when you want to access your capital gains exemption unit, you have to have a claim that is larger than your previous ABIL claim.”
What if you don’t know if you have a loss? That’s not uncommon, especially if you’ve switched accountants. To check on past losses, Friesen recommends clients contact the Canada Revenue Agency (CRA) and ask for a multi-year data form. It shows all types of loss available as carry-forwards and identifies previous capital gains exemptions utilized and ABILs claimed.
Farm businesses set up as corporations don’t use the same multi-year data form, but they can also contact the CRA for up-to-date information on claiming loss carryovers.
Farm business owners must also be aware of changes to carry-forward and back rules, says Friesen. Capital losses can be carried back three years and forward indefinitely. Non-capital losses can be carried back three years and forward 20 years.
Carry-forwards are complicated and leave a lasting impression on your farm books, adds Friesen. A producer with a loss carry-forward of $10,000 who realizes $30,000 in income in 2008 might see short term benefits to claiming that non-capital loss. But if he projects a $50,000 income in 2009, he may want to defer claiming that loss in 2008 so he can avoid a higher tax rate in 2009.
That example underscores the value of using professional tax accountants for more than compliance matters, like tax returns and financial statements, says Good. Farmers are notorious for asking how much tax they have to pay, he adds. Maybe farmers should ask how much money they made, and how that money can be best managed in terms of tax liability. FF
