How to report farming income to CRA

Why read this:

– You are a full-time farmer whose farm is not incorporated

– You will inherit the non-incorporated family farm

1) Claim income and deduct expenses

a. If you participate in AgriStability or AgriInvest in Alberta, Ontario, Prince Edward Island or Saskatchewan, use CRA’s guide RC4060 to fill out her income tax return. (Those in British Columbia, Manitoba, New Brunswick, Nova Scotia, Newfoundland and Labrador, and Yukon use Guide RC4408.)

• If the farm is located in British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia or the Yukon, complete T1273 Statement A to participate in AgriStability or AgriInvest. If you own more than one farm, also complete T1274 Statement B.
• If the farm is in Alberta, Ontario, Prince Edward Island or Saskatchewan, complete Form T1163 Statement A to participate in AgriStability or AgriInvest. If you own more than one farm, also complete Form T1164 Statement B.
• Complete Form T1175 Farming – Calculation of Capital Cost Allowance.
• Enter gross income from Line 9959 of the T1163 or T1273 on Line 168 of your return, and net income from Line 9946 on Line 141.

TIP: Send the return to CRA’s Winnipeg Tax Centre. It’s the only office that processes these forms.

b. If you don’t participate in AgriStability or AgriInvest, use CRA’s guide T4003 to fill out your return.

• Complete Form T2042, Statement of Farming Activities.

TIP: Use CRA’s quiz on page 18 of guide T4003 to calculate capital costs.

• Enter gross farming income from Line 9659 of the T2042 on Line 168 of your return and net income from Line 9946 on Line 141.

2) Selling the farm

Farmland, farm buildings, shares of farming companies and partnerships qualify for a lifetime capital gains exemption of $800,000 in 2014, or $813,600 in 2015.

• You, your parent or grandparent must have:
  • owned the property for at least two years;
  • continually used the property to farm or fish; and
  • earned more gross income from farming or fishing than other sources.
• Complete Schedule 3 Capital Gains (Or Losses).
  • Optional: If you are being paid over five years, complete Lines C and F of Form T23017 Summary of Reserves on Dispositions of Capital Property.
• Calculate the deduction by completing Form T657, Calculation of Capital Gains Deduction for 2014. The deduction is the least of your:
  • annual gains limit;
  • cumulative gains limit;
  • net taxable capital gains reported in the 2014 from the sale of farm, fishing or small business corporation shares sold after May 1, 2006; or
  • the maximum capital gains deduction available for 2014.
• List the deduction on Line 254 of the return.

3) Intergenerational transfers

You have two options for transferring the farm to a child, grandchild, great-grandchild, or dependant, says Bob Neufeld, partner at Krahn Friesen Neufeld Chartered Accountants in Winnipeg, Man.

a. You could transfer the farm at your own purchase cost. If the farm has since appreciated in value, that gain is deferred to a future sale and you won’t have capital gains to report on your return, says Neufeld.

• Eligible property includes farmland, depreciable property, such as buildings, eligible capital property, or a share of capital stock in the family farm.
• To qualify:
  • you must be a Canadian resident;
  • the property must be in Canada; and
  • the property must be used regularly and on an ongoing basis in a farming business by you, your spouse, common-law partner or children.

b. You could sell the farm to your child for a price between your cost and the market value of the farm in order to incur some capital gain. You could then write off up to $800,000 or $813,600 of that gain, and your child would have a higher cost base should he later sell the farm, says Neufeld.

• See Step Two for details on filling out your return.

4) Filing the return

You have until June 15, 2015 to file your return if:

• you have self-employed farming income, or
• you are the spouse or common-law partner of someone who has self-employed farming income.

WARNING: Any balance owing is still due April 30 of that year.

Sources: Bob Neufeld, CA, partner at Krahn Friesen Neufeld Chartered Accountants in Winnipeg, Ma.; KPMG’s Tax Planning for You and Your Family 2015; CRA spokesperson Philippe Brideau.