Most producers consider growing food to be a noble venture. But unless you can prove that your farm has the potential to produce the largest portion of your gross income, expect questions from the Canada Revenue Agency (CRA). If CRA considers farming your prime occupation, you can deduct all your farm business expenses, including interest on loans. However, if they decide you’re a part-time farmer, you can only deduct a portion; those who are hobby farmers can’t deduct any farm expenses at all.
“Since the Income Tax Act doesn’t define what a full-time, part-time or hobby farmer is, the courts have tended to turn to definitions from Webster’s,” says Gerard Fitzpatrick, a chartered accountant with Fitzpatrick and Company in Charlottetown, P.E.I. “They define a hobby as a pursuit outside one’s regular occupation that is engaged in especially for relaxation. A business is defined as a commercial venture undertaken with an expectation of profit.”
Part-time farmers also qualify for many tax advantages. They do their accounting on a cash basis, they qualify for investment tax credits in Atlantic Canada and the lifetime capital gains exemption, and they can roll the farm over to their children tax-free.
Part-time farmers can deduct only the first $2,500 of their farm expenses and 50 per cent of the next $12,500, to a maximum of $8,750 a year. Losses can be carried back three years, or forward 20 years, but they can only be deducted against farming income.
Being classified as a full-time farmer and deducting all your farm-related expenses is the best scenario. According to Fitzpatrick, producers can prove to CRA that they are full-time farmers a number of ways. However, the main criteria is whether or not your gross farm income is greater than your off-farm income. While this might not be the case every year, you should have a written business plan in place that shows you reasonably expect the farm to provide the bulk of your income at some point.
“Size is not necessarily a determining factor,” Fitzpatrick says. “Some small operations are very profitable. There are grey areas, so the more supportive material you have to prove your case the better. They are interested in how much time you devote to your farm operation and how much of your own money you have invested in it. I can’t emphasize enough how important it is to have a written long-term business plan in place. It shows you thought the process out.”
Part-time farming classification offers tax breaks
Being classified as a part-time farmer by the Canada Revenue Agency restricts the amount of farm expenses you can deduct on your income tax return, but at least it allows them. Being eligible for tax credits and the lifetime capital gains exemption are also significant benefits. According to chartered accountant Gerard Fitzpatrick, having a part-time farming status means that while your farm isn’t your major source of income, CRA still recognizes it as a legitimate business enterprise.
“So you have, in CRA’s eyes, met the test that there is a reasonable expectation of profit down the road,” Fitzpatrick says. It shows that while you don’t expect your farm to be your chief source of income, you still expect to make money at it.
The part-time category is not ideal from a business perspective, but it is better than nothing at all. It benefits those operators who aren’t full-time producers or hobby farmers. The Income Tax Act doesn’t allow any other business venture to have this intermediate category. Others are judged only by whether they are profitable or not.
Proving you are eligible for part-time status isn’t a well-marked path. There have been court cases to determine if having a few cows or horses on a piece of property is enough to qualify. Fitzpatrick says not to expect that CRA will accept your farming operation as a business on your word alone. “You may lose money in the initial stages or later on because of circumstances beyond your control. But if you’ve operated for five years and have never shown a profit, you can be pretty near guaranteed you’re going to have a visit from CRA. If you can show them a written business plan that outlines how you plan to be profitable in the future, you’re probably going to be all right.”
Avoid the hobby-farm classification with reasonable expectation of profit
Hobby farmers are not allowed to claim any farm expenses as income tax deductions. That’s why it’s important to avoid having the Canada Revenue Agency classify you that way if you ever intend to make a living from your farm.
According to Gerard Fitzpatrick, a chartered accountant in Charlottetown, P.E.I., expectation of profit is the key factor that CRA looks at when deciding if someone should be classified as hobby, part-time or full-time farmer. If you don’t have an expectation of profit, you have a hobby – not a business.
“No one goes into business with the intention of losing money,” Fitzpatrick says.