The best of both worlds by Kevin Keith
May, 2010
Do you enjoy the double life of having a job or running a business, as well as farming in your spare time? If you do, there are some tax issues to consider. If you are incurring losses from farming, one issue to look at is whether you are eligible to claim the farming loss against the rest of your income.
Obviously, claiming your farm loss against other income will reduce taxes. However, what circumstances will allow you to claim your farming loss against your other income? To be eligible you have to be classified as a certain type of farmer.
For tax purposes, there are essentially three farming categories:
1) The full-time farmer - At one extreme are the full-time farmers, for whom farming is a chief source of income. This is treated, from a tax perspective, just like any other business and the loss from the farm can be used to lower other income you earn.
2) The hobby farmer - At the other extreme are people whose farming activity is a personal pursuit. A common example is when you maintain a steady job and farm purely for personal pleasure and not for profit. Any losses incurred under the farm can only be used against your farm revenue and you are not allowed to deduct these against any other income you may have.
3) The restricted farmer - In the middle are the people who undertake farming activities in pursuit of profit, but whose chief source of income is neither farming, nor a combination of farming and some other source of income. An example is when you maintain a steady job but also spend a significant amount of time and have a significant financial commitment in your farm operation. You would normally farm to make a profit and rely on some of the farm income to support you and your family. The losses from your farm operation are allowed to be deducted against other income with some restrictions and are commonly referred to as restricted farm losses.
To be eligible to apply your farming losses against the rest of your income, you have to be classified either as a full-time farmer or a restricted farmer. Your sources of income from the farm will vary from year to year but the main issue in this situation is if you generally are farming to make profit.
For example, Mathew runs a farm with mainly cattle operations. His farming business generally makes a profit. Mathew also works as a full-time police officer. Neither the farm nor his job is more significant than the other for time spent working. During the year Mathew incurs a loss on his cattle operation.
Since Mathew puts in a considerable amount of time into the farm and generally tries to make a profit from the farm, he would be eligible to claim the farm loss against his employment income from his job as a police officer.
The government generally disallows the loss to be claimed against non-farm income, if the farming operation is shown to have not been in pursuit of profit.
For example, Conrad works as a lawyer and also has a family acreage that he inherited 10 years ago. Let's assume that Conrad incurs a $10,000 loss from farming the acreage. The farming loss will likely be disallowed because it would appear that he is not pursuing profit from the business.
If you are considered a restricted farmer, there are some specific rules that come with applying these farm losses against the rest of your income. For example, the maximum amount of the loss you are allowed to claim against the rest of your income is $8,750, which is created when your farm realizes a loss of $15,000 during the year. As a result, losses larger than $15,000 cannot be applied against other income.
Any loss that exceeds the $15,000 maximum amount can be applied against other years' farm income in the 3 years prior to the loss and up to 20 years after the loss was incurred. The only catch is if you are applying the loss against other years' income, it can only be applied against farm income and not against other income sources.
The classification of farmers between the three categories considers many factors. There have been a number of court cases that have helped to establish guidelines for farmers to consider. It is important to review all of the facts in your situation and to ensure you are classifying yourself appropriately. If you farm and are employed, it may be beneficial to seek the advice from a professional to ensure you are taking full advantage of the tax opportunities available.
KPMG Lethbridge
kkeith@kpmg.ca
Kevin Keith would like to thank Derek Conte of KPMG for his assistance with writing this article. |
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