Sometimes it seems as if the Canadian tax code was designed deliberately to confuse — with its many boutique tax credits that have been created and axed multiple times over the past few years. How’s a person to keep up?
Still, that’s mere child’s play when compared to figuring out some of the newer tax rules that affect the way farm businesses manage their returns, including the tax on split income (TOSI), capital cost allowances and investment income limits and much, much more.
Rob Strilchuk, a partner with MNP’s tax and agricultural services, says you’re not alone if you find these rules confusing. Even he finds this stuff confusing and he’s a CPA. Strilchuk is also a farmer, working in partnership with his two brothers on the family’s 115-year-old farm near Round Hill, AB. “As soon as I’ve finished the tax season,I go seed,” he says.
That dual role — farmer and tax planner — means Strilchuk truly understands what farmers are grappling with when it comes to preparing tax returns and, as the 2018 tax deadline looms, has some thoughts about what you should keep in mind.
TOSI changes things — a lot
“We often see the family farm structured in such a way that everyone in the family makes some money,” says Strilchuk.
“Like kids in post-secondary school — they used to call it the ‘farmer RESP’ where you’d just roll some family farm corporation shares to the kids so they’d have an income when the shares were bought back. We don’t have that way to split income anymore.”
It’s a tricky situation now since some family members who work off-farm or go to school also work part-time or seasonally on the farm, and there are ways to structure your business so that income paid to working family members is based on their contribution, and not subject to TOSI.
Having said that, TOSI rules differ for people aged 18 to 24 and those who are 25 and over, so Strilchuk warns that you need to firmly “dot the i’s and cross the t’s” if you’re planning to sprinkle income to family
members. “The age category from 18 to 24, and dividends paid to people who don’t work on the farm, will be scrutinized more.”
Accelerated depreciation can bite you
The new Accelerated Investment Incentive (AII) announced in December has a lot of farmers excited since it allows you to write off 45 per cent of the cost of equipment purchases in the first year — tripling the previous 15 per cent limit. Makes you want to go out and buy a new tractor, right?
Before you rush out to the dealer, maybe have an honest think about what your business actually needs. If it is that tractor, great. But if you’re just after the write off, you could be hamstringing yourself. “What a lot of people don’t realize is buying a new piece of equipment ties up their capital — they still have to pay for it,” says Strilchuk.
So if you have other important demands on your capital, perhaps new iron isn’t the best way to go, despite the longing you feel deep inside.
“You have to be in a financial position to do it,” he says, adding that the AII is a great tool if you have a spike in income and you want somewhere to spend the cash and reduce your immediate tax burden.
You set the tone on investment income. The 2018 tax year is your chance to set your benchmark for 2019’s passive investment income limit for your farm company. This gets back to rule changes around passive investment within corporations first floated in the summer of 2017, subsequently revised, and now applicable to 2019 fiscal periods and forward.
“We know your company may have some investment income every year and $50,000 is the maximum allowable limit before there’s an impact on your annual $500,000 small business deduction,” says Strilchuk. “But your limit is based on the prior year’s investment and 2018 is going to determine the limit you have for 2019.”
Don’t be too aggressive, but don’t be cavalier, either
Sometimes, it’s the little things when it comes to managing your tax bill. “Some people are very aggressive with expenses like writing off expensive vehicles when they’re not used 100 per cent for farm business,” says Strilchuk. There are GST and tax concerns with things like that — and it exposes them to risk.”
By the same token, he has seen many instances when farmers write off items that could be capitalized, like GPS equipment (because hey, it’s out of date already), or overlooking business-related expenses that can be fully deducted (leases, for example), but then not claiming back the GST.
“Say you’re renting three large grain bins for three years and that costs you $75,000 over that period,” says Strilchuk. “You can claim back the $3,750 in GST on the lease payments, which is significant and often missed.”
Low interest rates are still interest rates
Not directly related to your tax bill but just as important to cash flow and income are interest rates, which, while still historically low, are rising. “If you’re looking at taking on new debt or refinancing debt, that has to come into play,” says Strilchuk.
“Interest rates are one per cent higher than they were a year and a half ago, and may be another one per cent higher by this time next year,” he says. “That’s a 50 per cent increase in the overall interest rate in a two and- a-half year period.”
For those who brush it off thinking interest rates are still cheap, Strilchuk has an analogy for you. “If you pull up to the pumps today and diesel is $1 per litre, and next year it’s $1.80 a litre, you’d notice that kind of increase on your wallet. It’s the same with interest. Better take note of how much debt you’re trying to service because the banks are noticing,” he says.
“Interest can become a very large part of debt servicing very quickly with how much farmers have borrowed for land and machinery.”
Consider professional help
There’s nothing wrong with using accounting software to get your taxes done on your own, but keep in mind that tax rules for farms are complex and highly specific.
The Livestock Tax Deferral provision, for example, applies only to breeding stock and is county or municipality specific. Does the software know if you’re in such a county?
“I don’t want to make light of how costly professional fees are,” says Strilchuk. “But if you think you’re saving fees, you’re also exposing yourself to risk, or missing opportunities.”