6 Tips for Filing Farming Taxes in Canada

Farming partnerships in Canada must navigate a complex landscape of tax filings and forms, particularly when managing income, expenses, and inventory adjustments. Agricultural Financial Services Corporation (AFSC) requires specific reporting, and farmers must ensure accurate compliance with Schedule A requirements and Form T1273 or T1274. This post will outline the key components of farming tax filings and provide clarity on important aspects like commodity income, allowable expenses, and inventory adjustments.

Understanding the AFSC Schedule A and Relevant Forms

Farmers are required to report their income and expenses through Form T1273 for their primary farming operation. If there are multiple farming operations, additional reporting using Form T1274 is necessary. AFSC Schedule A aligns with these forms and focuses on income from commodity sales, program payments, and allowable expenses.

Commodity and Program Payments

• Commodity Income: Includes all agricultural commodities produced as part of a farming business (e.g., crops, livestock).
• Exceptions: Some commodities do not qualify as farming income for AgriStability or AgriInvest, including:
• Aquaculture
• Trees/seedlings sold for reforestation
• Etc.
• Program Payments: Review the designated Program Payment Code Lists A and B to report program-based income accurately.

2. Key Income Sources

Livestock Income and Insurance Payments

• Livestock sales as part of commodity income using the appropriate livestock code.
• Any insurance payments received for livestock loss should also be reported in the commodity sales column.

Other Farming Income

• Agricultural contract work (custom feeding, incidental contract work).
• Patronage dividends.
• Incidental interest earned on farm-related business accounts.

Allowable and Non-Allowable Expenses

Accurate classification of expenses is essential for minimizing errors in tax filings. The method of accounting (cash or accrual) impacts how and when expenses are reported.

Allowable Expenses

Expenses must directly relate to producing commodities, such as:

• Containers and twine
• Fertilizers and soil supplements
• Etc.

Tip: Farmers using the cash basis of accounting should report actual commodity purchases for the year (not COGS – cost of goods sold), while those on the accrual method must track inventory changes.

Non-Allowable Expenses

These expenses are excluded because they do not directly relate to producing commodities:

• Machinery repairs, leases, or licenses
• Advertising and promotion
• Office expenses, legal and accounting fees
• Etc.

Farmers must also exclude any insurance proceeds received to pay for repairs.

Inventory Adjustments: Optional vs. Mandatory

Farmers using the cash method of accounting need to understand inventory adjustments, particularly the Optional Inventory Adjustment (OIA) and the Mandatory Inventory Adjustment (MIA).

Optional Inventory Adjustment (OIA)

• Allows farmers to include up to the Fair Market Value (FMV) of their ending inventory as income.
• Deduct this amount from income in the following fiscal year.
• Inventory includes everything on hand at year-end, not just purchased items.

Mandatory Inventory Adjustment (MIA)

• Required when all of the following conditions are met:
1. Cash accounting method is used.
2. Net loss occurs before adjustments.
3. Inventory purchased is still on hand at year-end.
• Valuation Rules for Purchased Inventory:

• Use the lesser of cash cost or FMV.
• For specified animals (e.g., sheep), value at:
• Cash cost,
• 70% of cash cost, or
• Any amount in between.

Farmers should ensure they track inventory separately:

• Custom feed items are not inventory and should be expensed.
• Distinguish between purchased inventory and breeding inventory.

Business-Use-of-Home Expenses

Farmers who work from home can claim a portion of home expenses, provided they relate to business use. However, only long-distance calls for the farming business are deductible, not the basic monthly telephone rate.

6. Tips for AFSC Compliance

• Use the commodity list and Program Payment Codes (A and B) to categorize income.
• Separate operating expenses from non-allowable costs to avoid audit issues.
• Keep meticulous records of:
• Purchased inventory vs. breeding inventory.
• Business-specific expenses like fuel, freight, and electricity.
• Custom feed expenses categorized under allowable expenses.

Summary

Farming partnerships in Canada face unique challenges in tax compliance and reporting under AFSC guidelines. Understanding the distinctions between allowable and non-allowable expenses, managing inventory adjustments, and accurately completing Schedule A and Forms T1273/T1274 are critical for effective tax filings.

By keeping detailed records, separating personal and business expenses, and utilizing the proper commodity and program codes, farmers can confidently navigate tax season while optimizing their reporting for AgriStability and AgriInvest programs.

Need Help With Your Farming Taxes? As tax advisors we are specializing in farming partnerships, we provide expert guidance to ensure you meet AFSC requirements and minimize tax liabilities. Contact us today to simplify your tax filings and gain peace of mind.