Contents
Last updated: Mar. 23, 2023
Many farm operators put bookkeeping, preparing, and filing taxes near the bottom of their to-do list.
If you earn an income through farming activities though, you need to report it to the Canada Revenue Agency (CRA) on your income tax return; failing to do so could result in penalties.
If your tax return gets reassessed, you’re responsible for the unpaid taxes and you may have to pay a penalty of up to 10% of the unreported income.
That’s why it’s important to understand the different ways Canadian farmers calculate their income.
There are two main methods of accounting used to keep track of farming income: cash and accrual. The difference between them involves the timing of when revenue and expenses are recorded in your accounts.
If you’re a farmer, raise fish, or are a self-employed commission agent, you can report income using either the cash method or accrual method. All other self-employed income must be reported using the accrual method.
Cash Method
With cash basis accounting, you record a sale only when the cash is received.
Expenses are recorded only when you pay the invoice for goods or services purchased.
An advantage of using the cash method is that it allows you to easily track how much cash you have on hand.
A disadvantage is that it gives a limited, day-to-day view of income and expenses leaving you with a potentially skewed view of your business situation. For example: If your income dipped one month and in that same month you also received several past due payments, your records for that month would show that your business is booming, when in fact it is down.
Accrual Method
With accrual basis accounting, income is recorded when it is earned, even if you have not yet been paid.
The same goes for expenses; they are deducted in the year they are incurred, not when they are actually paid.
An advantage of using the accrual method is that it provides you with a highly accurate picture of your finances. You can track trends and understand any upcoming obligations and expenses.
A disadvantage is that without proper tracking of your cash flow (cash in and cash out as received or spent), you may appear to be more profitable on paper than you actually are.
Are you paying too much in taxes?
Every year we save Canadian business owners from overpaying on their taxes. Let’s see if we can save you money too.
Cash vs Accrual Method Summary Chart
Changing your accounting method
Farmers can change which method of income reporting they want to use, but there are different rules depending on the change.
To change from accrual method to cash method:
You can change from using the accrual method to cash at any time, but you must file your return using the cash method and attach a statement that shows the adjustments made in income and expenses because of the change in method.
Be sure to keep a day-to-day record of your receipts and expenses along with duplicate deposit slips, bank statements, cancelled cheques, and receipts.
Going forward, your farm business income and expenses must be calculated using the same method; unless you get permission from the Canada Revenue Agency.
To change from cash method to accrual method:
If you use the cash system and want to use the accrual method, you need to submit a request in writing to your tax services office before your tax return is due. You will explain why you want to change accounting methods and if you have invoices or contracts that would serve as proof of upcoming income, or incurred expenses that you have not yet paid for, you’ll have to add these to your records.
Inventories
Inventories at the end of a fiscal period also need to be considered. There are rules used for calculating the inventory of a farm business which prevents farmers from using inventories to create a loss.
Ensure you work with a tax specialist with an understanding of farm income, inventories, farm business tax, tax preparation, and financial analysis.
[Free Download] Year-End Tax Planning for your Farm
Engaging in tax planning now allows you to get organized and assess what cost-saving actions you can take before tax year-end to lower your future business or corporate taxes next spring.
Consider this toolkit your roadmap to help you get organized, reduce your tax burden, and keep more money in your pocket. In here you’ll find some of the most successful year-end tax planning strategies we employ for our tax Members who farm or own agribusinesses.
Want to learn more?
With more than 70 years of Canadian tax experience, we offer unlimited corporate tax preparation help, support and tax advice for one flat fee. Our tax experts will run the numbers to create a custom T2 corporate tax return that helps minimize headaches and maximize your tax savings.
Leave your unique tax situation to us. We’ll get you every dollar you deserve. Book online or call us at 1-800-265-1002.
