Whether operated as sole proprietor, partnerships, or a corporation, agricultural businesses usually report their taxable income on a “cash basis”. This means that items like inventory, accounts receivable, and accounts payable are ignored for tax reporting purposes. Since revenues and expenses are not recognized until a cheque is received or a bill is paid, a certain amount of short-term tax planning can be accomplished during the last weeks of the fiscal year.
In addition, certain assets on the balance sheet are treated in the tax return as expenses. For example, tile drainage would be an asset treated as an expense. The decision to tile drain a part of the farm in the fall can reduce substantially the income tax to be paid in that year.
Canadian income taxes have a certain number of aspects that are specific to agriculture. Duke CPA Inc has developed extensive experience in this area over the past several decades.
Transferring farm property between generations can be very difficult as there are many interpersonal, financial, and income tax issues that follow with the process. Throughout the years, Duke CPA Inc. has accompanied many farm families as they have gone through this process. The goal is to provide a reasonable standard of living for both the retiring and the upcoming generation, while ensuring that the farm operation can meet its cash commitments.
Income tax planning is an important component of this process. There are two main tax rules that can ease the transfer; the capital gains exemption on the sale of the farm property, and the “rollover” provision that applies to the transfer of farm property between spouses or from parents to their kids.
Many “capital intensive” business operations find that the creation of a corporation is more advantageous. Corporations are taxed at a lower rate than individuals. This means that there are more after-tax dollars remaining for the purchase of expensive capital assets such as machinery, buildings and land. This is the same for the capital payments against long-term debt. Canadian tax laws along with the capital gains exemption mentioned earlier facilitate the transfer of farming assets from and individual or partnership to a corporation.