While each of us is unique in any number of ways, as taxpayers, we have much more in common than that which distinguishes us. Even so, those earning a living from the land or sea face very different challenges than do other occupations.
The distinctive nature of farming and fishing is acknowledged through a variety of targeted tax rules. These range from assisting farmers and fishers in their year-to-year operations through to facilitating continuity of their operations down generations. Here are the key measures.
How and when to report income
The fiscal period for reporting income is usually 12 months. For employees and self-employed individuals, the general tax rule is that the fiscal period is the calendar year, though a farmer or fisher may apply to have a non-calendar year-end.
Farmers and fishers are also entitled to choose between accrual or cash accounting. Under accrual accounting (the general rule), income is reported when earned and expenses when incurred. Comparatively, cash accounting reports when amounts are respectively received or paid. Farmers and fishers may move from accrual to cash accounting simply by filing their next tax return in the new manner. However, permission to return to the accrual basis is required from the local tax-services office.
Farming losses
If someone has a farming or fishing loss in a year, it may be carried back up to three years or carried forward up to 20 years. As such farm losses may be taken against any other income, this has been an area of much contention between so-called hobby farmers and the Canada Revenue Agency (CRA) over the years.
Just because someone lives on a farm does not make that person a farmer. If the farm was not run as a business, the person cannot deduct any farm-related losses. Where the farm activity was run as a business but was not a main income source, part of the loss may be deductible under the “restricted farm loss” formula. The details are beyond the scope of this article, but the topic is covered in CRA Guide T4003, Farming Income.
Succession and capital gains
Farming and fishing are capital-intensive businesses, many being at the heart of communities dependent upon their continuity. Absent there being laws to recognize this condition, those operations, their expertise and the communities themselves may be at risk. Capital gains rules have been modified in a number of ways to accommodate.
Lifetime capital gains exemption (LCGE)
Likely the most commonly known capital rule for farmers and fishers is the LCGE on qualified farm or fishing property (QFFP). Its value was raised from $813,600 to $1 million in 2015. It is shared with the LCGE on small business shares (i.e., the maximum is $1 million in total). The latter continues to be annually indexed from that 2015 value, and once it exceeds $1 million, the two will index in lockstep once again.
QFFP covers capital property used and owned by the taxpayer, spouse or common-law partner, including
- real property, such as land and buildings;
- shares of the capital stock of a family-farm or fishing corporation;
- interest in a family-farm or fishing partnership; or
- eligible capital property, such as milk and egg quotas.
Transfer to a child
When farming or fishing property is transferred to a child, the transferor may postpone tax on any taxable capital gain and any recapture of capital cost allowance until the child sells the property. To qualify, the child must be resident in Canada, and the property itself must be in Canada and have been actively engaged in farming or fishing activity on a regular and ongoing basis before the transfer.
The transferee may be one’s child or that of a spouse or common-law partner, and further includes
- a natural or adopted child;
- a grandchild or great-grandchild;
- a child’s spouse or common-law partner; or
- another person who is wholly dependent on the transferor for support and who is, or was immediately before the age of 19, in that person’s custody and control.
Extended reserve claim
The general rule for recognizing capital gains is that they are recognized in the year of disposition. If payment is deferred, the taxpayer may elect to recognize the gain across as many as five years, being the year of closing plus four years.
For disposition of a family farm, a fishing property or small business corporation shares to a child (using the same extended definition outlined above for transfers), the reserve period may be as long as 10 years.
CRA guides
Beginning in 2017, CRA Guide T4004, Fishing Income, will no longer be published. It will be replaced by Guide T4003, Farming and Fishing Income. The T4003 will include tax information for both farmers and fishers. [Postnote – As of 2018, guide T4003, Fishing and Farming Income, is no longer published. Instead, use guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.]