Section 6 – Businesses
For tax purposes, farming includes tillage of the soil, live stock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person operating a farming enterprise.
Farming can also include other activities such as forestry operations, the operation of a hunting reserve, as well as an artificial incubation business, which includes the purchasing and incubating of eggs and the sale of chicks. Under certain specific circumstances, farming includes fish breeding, market gardening, the operation of nurseries and greenhouses, aquaculture and hydroponic culture.
To be able to benefit from the specific farming rules, farming operations have to be of a business nature. The following are some of the criteria for determining whether a farming operation is a business rather than a hobby:
- The extent of the activity in relation to businesses of a similar nature and size in the same locality, in particular the area used for farming;
- The time devoted to farming compared to the time devoted to a job or other means of earning income;
- The financial commitments for future expansion in light of the taxpayer’s resources;
- The taxpayer’s entitlement to some sort of provincial farm assistance, providing the assistance requires the recipient to carry on a farm business, or whether it is simply assumed this is the case.
A farm business that only generates a small amount of gross revenue over a number of years might be indicative of a hobby rather than a business. However, it has to be remembered that this could be the situation during the initial years of operation or during certain periods where there are special circumstances such as prolonged droughts, frost periods or floods.
Do not hesitate to consult a tax specialist to help you with the complex farm business rules.
Raising of Racehorses
The raising and maintaining of horses for racing is considered a farm business to the extent the taxpayer can demonstrate it is not a hobby. Moreover, services such as animal training and boarding are not usually considered of a farming nature, unless they are considered accessories for such a business.
Sharecropping (rent in kind) is an agreement whereby a landowner receives part of the harvest from the tenant as rent. The portion of the harvest received under a sharecropping agreement is leasing income and not farming income.
Christmas Tree Producers
Persons who plant, maintain and harvest conifers in order to sell them during the Christmas season and persons who purchase land on which trees have been planted for this purpose are deemed to carry on a farm business.
Payments received by farmers in consideration for the right granted to other farmers to use their marketing quotas (e.g. eggs, milk, fowl) are considered as income from a farm business.
Sale of Sand, Gravel and Top Soil
The proceeds from the sale of sand, gravel and top soil, or similar materials taken from the land of a farmer who carries on an active farm business are considered income from a farm business.
Forestry Plantation and Woodlots
Taxpayers who do not saw or cut down any trees and who reforest land with the intention of letting the trees grow until they have matured, i.e. from 40 to 60 years or longer, are considered to carry on a farm business. With the exception of income from occasional cuttings to make clearings, no income can be earned from this operation until the trees have matured. In the meantime, the taxpayer has to pay the periodic costs, i.e. property taxes, planting, fertilizing and cutting clearings. If the facts indicate that reforestation was carried out on a systematic basis and is managed like a business in accordance with sound forestry practices and provides hope for profits when the trees have matured, the loss created by these costs can be deducted as a farm loss, subject to the restricted rules discussed hereinafter.
If a woodlot operation is carried on jointly with a farm business, the two together are considered a farm business if the taxpayer elects to report the income from them on a cash basis.
Methods of Reporting Income
Taxpayers who carry on a farm business can calculate their income using either the accrual or cash method.
The accrual method is based on generally accepted accounting principles, which means that revenues should be recorded in the year they are earned, regardless of when the cash is received. Similarly, expenses are deducted in the year they are incurred, not when they are actually paid. Inventories at the end of the fiscal year also have to be taken into account.
Under the cash method, revenues and expenses should be recorded when they are received or paid. The taxpayer is not required to take into account amounts receivable or payable or to include inventories in determining income with the exception of a farmer’s mandatory or optional inventory adjustments.
Change in Method
Farmers may switch from the accrual method to the cash method simply by filing an income tax return using the cash method. Business income must continue to be calculated using the same method in subsequent years, unless permission is obtained from the tax authorities to do otherwise.
There are rules for calculating the inventories of a farm business, which prevent taxpayers from using inventories to create a loss.
In Quebec, for the purposes of income tax and the individual contribution to the HSF, a temporary mechanism makes it possible to average a portion of the income generated by non-retail sales of timber produced in a private forest for a period not exceeding seven years This mechanism applies to a certified forest producer (or a member of a qualified corporation) for taxation years ending after March 17, 2016, but before January 1, 2021.
There are two types of deductible farming losses:
|Farm loss||Restricted farm loss|
|Loss from carrying on a farm business which constitutes a principal source of
the taxpayer’s income.9
|Loss incurred in a farm business that does not constitute the principal
source of income for the taxpayer.
|Deductible from all sources of a taxpayer’s income.||Only a portion of a restricted farm loss is deductible from all other sources
of the taxpayer’s income. Any excess can only be deducted from farming income.
|May be carried back three years and forward twenty years.|
9 Or, if the taxpayer’s main source of income is a combination of agriculture and another income source subordinate to agriculture.
Restricted Farm Loss
The amount of the loss deductible against other sources of income for the year is equal to the lesser of:
- The farm loss for the year;
- $2,500 + (50% × [farm loss – $2,500]);
Example: Frank, for whom ostrich raising is not his principal source of income, incurs a $12,000 loss from the business in a taxation year. The loss he can deduct against other sources of income will be equal to $7,250, i.e. $2,500 + (50% × [$12,000 – $2,500]). The balance of $4,750 can only be deducted against farming income earned by Frank in future years.
Investment Tax Credit – Federal
A person who carries on a farm business10 in the Atlantic provinces and the Gaspé Peninsula up to the western edge of Kamouraska (La Pocatière) can claim an investment tax credit equal to 10% of the cost of acquiring buildings, machinery and rolling stock (other than rolling stock used on roads).
10 This credit is also available for enterprises in the following sectors: fishing, logging, manufacturing and processing, storing grain, harvesting peat, and certain energy production and conservation sectors.
Donation of Agricultural Products – Quebec and Ontario
See Section II.
Transfer of Farm and Fishing Property
There are specific rules to encourage the transfer of farm or fishing property or businesses.
Capital Gains Deduction
Subject to certain conditions, individuals can take advantage of the capital gains deduction (see Section VII) of $1M with respect to the capital gain on the sale of a qualified farm or fishing property such as:
- A building used in carrying on a farm or fishing business;
- A share of the capital stock of a family farm or fishing corporation;
- An interest in a family farm or fishing partnership;
- A property included in class 14.1 used in carrying on a farm or fishing business (or a combination of these activities) such as a quota or fishing permit.
To be able to take advantage of the deduction, the individual, his/her spouse, child, grandchild, father or mother has to have actively participated in carrying on the business, which means a certain level of activity, but not necessarily full time.
In addition to the rules with respect to the capital gains deduction, there is a deferral for all, or part of, the income tax arising on the sale of a farm or fishing property (or a combination of these activities) to a child, grandchild and great-grandchild. In these circumstances, it is possible to elect proceeds of disposition for the property that are between the tax cost and the FMV. However, if a parent gives a qualified property to a child, grandchild or great-grandchild or if he/she sells such a property for less than its tax cost, the proceeds of disposition will equal the tax cost.
There are similar rules for the transfer of such property when a taxpayer dies (see Section XI).
An intergenerational tax-deferred rollover for woodlots is provided to the transferor or a family member actively involved in the management of the woodlot to the extent required by a forest management plan that provides for the necessary care to ensure the growth, health, quality and composition of the lot.
When transferring a farm or fishing business, consult a tax specialist to maximize the tax benefits available.
Capital Gains Reserve
In general, individuals who realize a capital gain on the sale of a capital property have to include one-half of the gain in income for the year of the sale. If all or part of the proceeds of disposition are payable after the end of the taxation year, a reserve can be deducted. The reserve has to be reasonable and can be claimed no longer than five years (see Section VII). However, if a farm or fishing property is sold to a child, grandchild or great-grandchild, the reserve can be claimed for a maximum of ten years.
This document is up to date as of September 3, 2020 and reflects the status of legislation, including proposed amendments at this date.