Farm income taxes in Canada: The basics explained (+ FAQs)

Last updated: Jun. 21, 2025 

Tax season hits different when you’re a farmer.

You’re not just dealing with regular business deductions and deadlines. You’ve got seasonal income that swings wildly, inventory that walks around and eats, and CRA rules that seem designed for everything except agriculture.

Maybe you run 10,000 acres of grain. Maybe you’ve got a small market garden and a few head of cattle. Either way, farm taxes come with their own playbook — and if you don’t know the rules, you’re leaving money on the table.

Here’s what we’re covering:

• How farm taxes actually work in Canada (spoiler: they’re nothing like regular business taxes)
• What counts as farming income, what you can deduct, and the critical difference between full-time, part-time, and hobby farms
• Plus, we’ll walk through exactly how to file your returns without missing crucial deductions

You’ll also get five year-end tax strategies that could save you thousands. These aren’t generic small business tips — they’re built specifically for the realities of farming operations in Canada. Everything here comes from our team’s decades of experience helping Canadian farmers navigate tax season.

Ready? Let’s dig in.

What makes farm taxes unique vs regular business taxes?

Farming income follows special tax rules under the Income Tax Act. Unlike most businesses, farmers can elect to use the cash method of accounting instead of accrual, giving more flexibility to manage income and expenses year to year.

Farmers get access to unique deductions like soil conservation costs and mandatory inventory adjustments that other businesses can’t claim. Farm businesses may also qualify for the Lifetime Capital Gains Exemption and transition-related tax benefits unavailable to general businesses.

Full-time vs part-time vs hobby farms

Not all farms are created equal in the eyes of the CRA. How you’re classified — full-time, part-time, or hobby — affects everything from what you can deduct to how losses get treated.

The distinction isn’t just about size or income. It’s about intent, profit expectations, and how much of your livelihood depends on farming. Get classified wrong? You could miss out on thousands in deductions or face unexpected tax bills.

What’s considered farming income according to the CRA?

The Canada Revenue Agency is clear on what’s classified as farming income. When it’s time to prepare and file your taxes, farming income is considered any money that’s earned from the following activities:

• Tilling soil
• Raising poultry
• Maintaining racehorses
• Dairy farming
• Raising and/or showing livestock
• Fruit farming
• Beekeeping
• Raising fish
• Operating a feedlot
• Aquaculture
• Performing other related activities

What is a hobby farm according to the CRA?

A hobby farm is a farm-like operation not conducted with a reasonable expectation of profit.

If the CRA determines that your activities are more personal or recreational in nature, your income may be reclassified, and expenses may not be deductible. Any farming-related losses aren’t considered deductible at all. Direct expenses can only be claimed against income earned from the farm activities up to—but not exceeding—the income declared.

To avoid this classification, farmers should demonstrate business intent through farm plans, financial records, and consistent activity aimed at generating income. The difference often hinges on intent, scale, and how closely the operation resembles a business versus a personal pastime.

CRA allowable farm expenses for each type of farm

Now that you understand some important aspects of hobby farm regulations, let’s take a closer look at some tax breaks that are available to those who operate a full-time farm, part-time farm, or hobby farm.

Full-time farm tax deductions in Canada

Someone who relies on farming for a majority of their income is considered a full-time farmer. Full-time farmers can treat their farming operations like any other business. This means they can claim home expenses as long as they’re used for business purposes. This includes:

• Mortgage and/or rent
• Property taxes
• Utility costs
• Maintenance costs
• Capital cost allowance
• Telephone bills
• Home insurance

Full-time farmers can also deduct all their farm business expenses, from office supplies such as postage stamps or paper to livestock purchases, seeds, feed, fertilizer, pesticide, crop insurance, machinery, machinery rentals, and interest on loans.

In addition to the abovementioned tax deductions, full-time Canadian farms can report any losses that occurred during a given year. This doesn’t just include losses incurred from the farming operation—it may also include losses related to other businesses or part-time jobs you may have.

The best part? For full-time Canadian farmers, losses can be deducted from their income from all sources and carried back three years or carried forward up to 20 years.

When applying farm losses to previous years, the deducted amount cannot exceed the farm’s net income—rather, losses can only reduce it to zero.

Part-time farm tax deductions in Canada

A farm is considered a part-time operation if there’s a reasonable expectation of profit. However, the operator’s main source of income cannot come from farming activities.

Like a full-time farmer, a part-time farmer can claim deductions for home office expenses and farming business expenses. Unlike full-time farmers, part-time farmers can only deduct a certain portion of these expenses.

Additionally, part-time farmers can only claim a portion of any farm losses. The maximum amount part-time farmers can claim in a given year is $17,500. These losses can be carried back three years or forward 20 years, and they can only be deducted against farming income.

Hobby farm tax deductions in Canada

Your agribusiness is considered a hobby farm if farming operations are run for personal reasons and not as a business. A hobby farm isn’t expected to be profitable, and any farming-related losses aren’t considered deductible.

Direct expenses are claimed against any income earned from the farm activities up to—but not exceeding—the income declared.

If you wish to eventually earn a livable income from your farm, it’s important to avoid being classified as a hobby farm by the Canada Revenue Agency.

How to file farm taxes in Canada

Filing taxes as a farmer is often more complex than other types of businesses. You’re dealing with specialized deductions, unique accounting methods, and CRA forms most people never see.

This section walks through the key steps to follow so you can file correctly and claim every deduction you’re entitled to.

Step 1: Choose your accounting method

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.

Method #1: Cash basis accounting

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.

Method #2: Accural basis accounting

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.

Step 2: Track income and expenses year-round

Most farmers wait until tax season to dig through receipts, then pay the price.

Poor recordkeeping is one of the most common reasons farmers miss out on tax savings. You need organized records of sales, receipts, fuel, seed, livestock purchases, and equipment maintenance throughout the year. This helps identify eligible deductions and supports your claims if the CRA comes knocking.

Don’t forget to include any subsidies you received — AgriStability, AgriInvest, and similar programs count as income. Use a dedicated farm accounting system or work with a tax specialist (like FBC) who understands how to track farming-specific entries properly.

The payoff? When tax season rolls around, you’ll have everything ready instead of scrambling through shoeboxes of receipts.

Step 3: Fill out the right tax forms

If you’re a sole proprietor, you’ll complete Form T2042 (Statement of Farming Activities) and submit it with your personal income tax return (T1). This form is designed specifically for farm operations — it knows about things like livestock inventory and crop insurance that regular business forms don’t handle.

Incorporated farms follow different rules. You’re filing a T2 corporate return with schedules related to farm income and expenses. The forms are more complex, but they also unlock more planning opportunities.

You’ll also need GST/HST returns if your revenue hits the threshold, and make sure to include any Capital Cost Allowance (CCA) claims for depreciable equipment and property. Miss these deductions? You’re leaving money on the table.

Step 4: Understand the deadlines

If you’re self-employed and earning farm income, your tax return is due June 15. But any balance owing must still be paid by April 30. Miss that payment deadline? Interest starts piling up, even if your return isn’t technically late.

Corporations must file their T2 corporate return within six months of their fiscal year-end. A farm corporation with a December 31, 2025 year-end needs to file by June 30, 2026. Tax payments are due two months after the fiscal year-end, or three months if you qualify as a Canadian-Controlled Private Corporation (CCPC) claiming the small business deduction.

Missing any of these deadlines triggers penalties and interest charges. That’s why many farmers file early, espeically when they’re expecting a refund. This also helps avoid the spring rush when tax prepation specialists tend to get swamped.

Step 5: Work with a farm tax specialist like FBC

Filing taxes for a farm isn’t just about plugging numbers into forms. You need industry knowledge, long-term planning, and someone who understands the nuances of the CRA’s rules especially for farmers.

Most accountants handle general business taxes. But farming? That’s a different ball game entirely. You’re dealing with seasonal income, inventory adjustments, programs like AgriStability that regular business accountants rarely see, and more.

On the flip side, FBC’s tax specialists specialize in agriculture.

We know how to navigate farm-specific programs, deductions, and transition planning. Through year-round support and proactive planning, we help farmers reduce risk, optimize for future savings, and stay compliant.

Whether you’re a sole proprietor or incorporated, we tailor tax strategies to fit your unique farm business. Because when it comes to farm taxes, one size definitely doesn’t fit all.

5 year-end tax planning strategies for farmers

Like farming, tax planning is a year-round activity, and the end of the calendar year is the perfect time to implement strategies to maximize tax savings.

Here are some areas worth reviewing before the new year:

1. Review your long-term tax strategy and farm transition plan

If there was ever a year to engage in some long-term tax planning and review your transition plan, this tax year is it.

In 2024, the government introduced inter-related tax changes significantly impacting farm property transfers and transition plans. While media attention was focused on the changes to the capital gains inclusion rate, other changes to the rules around Alternative Minimum Tax (AMT) and Lifetime Capital Gains Exemption (LGCE) were also made. Bill C-59 came into effect in June 2024, updating Intergenerational Business Transition (IBT) rules and opening up more options for your farm’s transition plan. Not to mention the Canada Pension Plan (CPP) enhancement if you have farm employees or draw a salary.

With so many different tax rules at play and interacting with each other, it is highly recommended you seek tax advice before to ensure your long-term tax strategy and farm transition plan are still maximizing your tax savings in this new reality.

2. Evaluate compensation options against CPP enhancement

The way you pay yourself from your farm corporation can have a big impact on your finances. While dividends may seem like a good idea for taxes, they don’t contribute to your Registered Retirement Savings Plan (RRSP) contribution limit or the Canada Pension Plan (CPP). Plus, they won’t protect you if you get hurt or injured.

On the other hand, salaries can increase your CPP benefits, but the CPP enhancement may affect your immediate cash flow.

Talk to a tax expert to make the best choice for your farm and future savings.

3. Maximize tax deductible expenses

You know the old saying: It takes money to make money. So why not take advantage of all the tax deductions or write-offs that apply to running your business?

From supplies to fuel to accounting fees, you can use tax deductions to lower your tax bill if you keep good records and follow the rules.

RELATED Tax Deductions for Canadian Farmers

You may also be eligible for a Capital Cost Allowance (CCA) for larger capital purchases, such as vehicles or equipment. See below for a more detailed explanation.

4. Claim capital cost allowance strategically

Claim Capital Cost Allowance (CCA) deductions to spread the cost over multiple years for long-lasting assets like tools and equipment.

For example, if you purchase a tool worth over $500, these expenses fall under CCA Class 8. This class allows up to 20% of capital cost allowance per year (depreciation expense), which means that if you have a $2,000 expense, you can deduct up to $400 annually in CCA.

You also have a lot of flexibility with CCA and can claim the amount you’d like, from zero to the maximum allowed for the year. The key is to act before the end of the calendar year so you can time your expenses and CCA deductions to your advantage.

5. Take advantage of tax incentives for asset purchases

As of 2024, two tax incentive programs remain when purchasing assets for your farm: the Accelerated Investment Incentive (AII) and the Immediate Expensing Property rules.

While the AII is in its winddown phase (2024-2027), it can still allow you to deduct more of your CCA in the first year you purchase a capital item. Immediate expensing rules allow you to deduct the total cost of qualifying assets in the year they are acquired rather than depreciating them over time, and they are still available to individuals.

Each tax incentive has specific eligibility requirements, so speak to a tax expert about your situation before acting.

29 specific tax deductions for farmers in Canada

There are many tax deduction strategies available to farmers in Canada. From advertising costs to building repairs or maintenance and contract work, here are some of the tax deductions that farmers can claim this year:

1. Advertising

Farmers can deduct expenses spent on online advertising efforts and promotional materials such as business cards and pamphlets.

Sponsoring local sports teams and other branded donations can also be categorized as money spent on advertising as long as the materials include your branding and logo. This strategy offers numerous advantages and can even increase brand awareness.

2. Bad debts

If a client owes you money, but you’re unable to collect it within a year, you may be able to claim it as a deduction.

However, not all bad debt is eligible. The Canada Revenue Agency (CRA) will not let you claim bad debts related to a mortgage or that result from a conditional sales agreement. That’s why it’s imperative to speak with a tax professional to understand the available tax deductions in Canada.

3. Building repairs and maintenance

Costs related to repairs carried out on your business property may be eligible for a tax deduction. This includes repairs made to fences and buildings used for farming. However, this excludes your farmhouse.

4. Electricity

You can deduct expenses for electricity used for your farm properties.

5. Business-use-of-home expenses

You can deduct expenses related to the business use of a workspace in your home. This includes part of your maintenance costs, such as cleaning materials, utilities, and home insurance, and part of your property taxes and mortgage interest.

To claim home office expenses and avoid unwanted scrutiny from the CRA, make sure you’ve correctly calculated the percentage of your home that’s used for your farm business and apply that percentage to the tax deduction.

For example, if you’re living in a 1,000-square-foot house and your workspace is 100 square feet, you’re using 10 percent of your home for business use. That means you can deduct 10 percent of your expenses.

6. Clearing, leveling, and draining land

You can deduct expenses related to the clearing of trees, roots, stones, and brush from your farmland, building an unpaved road, and installing land drainage.

7. Containers and twine

You can claim money spent on materials purchased to package, store, or ship farm produce or product as deductions.

8. Crop insurance, Revenue Protection Program, and stabilization premiums

This includes premiums to participate in programs such as AgriStability, AgriInvest, AgriInsurance, and AgriRecovery.

9. Custom or contract work, including machine rentals

These deductions include costs related to hiring subcontractors or rental equipment used in earning farming income, such as aerators, dozers, plows, and so on.

However, you must make sure that the fees paid for subcontractor work wouldn’t qualify as employee wages. If they do, you may be held responsible for unpaid employment premiums or taxes that are subject to penalties and interest.

10. Delivery, freight, and express

You can deduct costs for delivery and freight related to your farming business.

11. Depreciation expense (capital cost allowance)

If you acquire a depreciable property or asset for your farming business, such as a building, furniture, or equipment, and it’s valued at more than $500, you can deduct its cost over a period of several years. This yearly deduction is called a capital cost allowance (CCA).

However, you must follow certain rules to claim this deduction:

• You cannot deduct its full cost when calculating your net business income during the year you acquired the asset or property. You must deduct it over a period of multiple years.
  • For example, silos are considered a Class 8 property, which allows you to deduct 20 percent for your annual CCA.
  • Tractors, trailers, and trucks are typically considered Class 10 properties, which allows for 30 percent CCA.
• There are different rules and classes depending on the asset, its use, and its value. We recommend talking to a tax professional to determine the optimal application for this deduction.

12. Feed, supplements, straw, bedding, fertilizers, and lime

You can deduct expenses for these items as long as you purchased them for your farming business.

13. Gasoline, diesel fuel, and oil for machinery

You can deduct these expenses as long as you use them with your farming machinery.

14. Heating fuel and clearing fuel

You can deduct expenses related to heating farm buildings.

15. Insurance

You can deduct commercial insurance premiums paid for insurance on farm buildings and qualifying farm equipment. However, you must claim the insurance paid on your motor vehicle under motor vehicle expenses (see below).

16. Interest and bank charges

You can deduct interest you incurred on a loan utilized for your farming business or used to acquire property for your farming business.

You can deduct the fee you pay to reduce the interest rate on your loan along with any penalty a bank charges you to pay off your loan before it’s due.

You can’t deduct the principal of loan or mortgage payments or any money borrowed for personal purposes.

17. Livestock

You can deduct expenses related to purchasing livestock.

18. Machinery expenses

This includes expenses related to the upkeep of your machinery, including repairs, license insurance, gasoline, diesel fuels, and oil.

19. Motor vehicle expenses

If you use a personal motor vehicle to earn farming income, there may be available expenses you can claim. To claim this tax deduction, make sure you keep a record of mileage throughout the year.

20. Office expenses

This includes items such as pens, pencils, paper clips, and stationery. However, you can’t claim calculators, filing cabinets, chairs, or desks, which qualify as capital items.

21. Pesticides

You can deduct the cost of herbicides, insecticides, and fungicides used for your farming business.

22. Professional fees

You can deduct money spent on accounting, bookkeeping, tax preparation, finances, and legal fees.

23. Property taxes

You can claim taxes spent on property used in your farming business as deductions.

24. Repairs, licences, and insurance (machinery)

You can deduct costs incurred on your machinery.

25. Rent (land, buildings, and pasture)

If you rent the land for your farming business, you can deduct the costs.

26. Salaries, wages, and benefits

Costs related to employees’ salaries and benefits may be eligible for tax deductions in Canada.

If you’re self-employed or a sole proprietor, you cannot deduct your own salary or benefits. However, if your business is an incorporated farm business and you pay yourself a salary, you can include it in your tax deductions.

However, you shouldn’t include costs for subcontractor work in this category. They would be considered custom or contract work.

27. Seeds and plants

Costs related to seeds and plants used in your farming business may be eligible for tax deductions.

28. Small tools

If tools used for your farming business cost less than $500, you can deduct their full cost. You can deduct tools that cost more than $500 over a period of years using capital cost allowance.

29. Veterinary fees, medicine, and breeding fees

You may deduct expenses related to medicine for your livestock and veterinary and breeding fees.

Common questions on farm income taxes in Canada

We’ve covered the big picture stuff about farm taxes, but you probably still have some specific questions. The details matter when it comes to filing correctly and getting every deduction you’re entitled to. Here are answers to the most common questions we get from farmers across Canada.

Do farmers pay taxes in Canada?

Yes, farmers must pay income tax on their net farming income just like any other business. However, they may qualify for specific exemptions, deductions, and strategies to reduce their taxable income. Filing and payment deadlines depend on how the farm is structured and whether it’s operated personally or through a corporation.

How do you report farm income on your taxes?

Use Form T2042 to report income and expenses if filing as an individual. Corporations will use different schedules but must still report all farm-related income. Most farmers report using the cash method, but you can elect to use the accrual method. Maintain detailed records to support your reported numbers.

When do farm taxes have to be filed?

Self-employed farmers (including sole proprietors and partnerships) have until June 15, 2026, to file their 2025 income tax return. Any tax owing must still be paid by April 30, 2026 to avoid interest charges. This split deadline means interest starts accruing from May 1 if your balance wasn’t paid by April 30, even if you don’t submit your return until June.

Incorporated farms follow different rules. They must file their T2 corporate return within six months of their fiscal year-end. A farm corporation with a December 31, 2025 year-end needs to file by June 30, 2026. Tax payments are due two months after the fiscal year-end, or three months if you qualify as a Canadian-Controlled Private Corporation (CCPC) claiming the small business deduction.

CRA charges penalties for late filing or payment. The standard penalty is 5% on unpaid tax at the filing deadline, plus 1% per full month the return is late, up to 12 months. Corporate repeat offenders face steeper penalties of 10% plus 2% per month, up to 20 months.

What can you write off on taxes for a farm?

You can deduct a wide range of farm expenses including feed, seed, fertilizers, insurance, utilities, fuel, professional services, and small tools. All expenses must be reasonable and directly related to the farm business.

For depreciable assets over $500 like buildings, furniture, or equipment, you cannot deduct the full cost in the year you acquired them. Instead, you claim capital cost allowance (CCA) and spread the deduction over multiple years.

The CCA percentage depends on the asset class. Silos are Class 8 property, allowing 20% annual deduction. Tractors, trailers, and trucks are Class 10 properties with 30% CCA per year. Different asset classes have different rates based on the asset’s use and value.

How does the lifetime capital gains exemption apply to farms?

As of March 5, 2025, farmers can shelter up to $1.25 million in capital gains through the Lifetime Capital Gains Exemption (LCGE) on qualified farm property. This is an increase from the previous $1 million limit.

Qualified property includes farmland, buildings, quota (like milk or egg production rights), and shares or partnership interests in a family farming business. The property must meet CRA’s 24-month basic holding test and either the 2-year gross income test or 5-year usage test, depending on how the property has been used.

Proper documentation and planning are essential. You must prove the property was actively used in a farming business and that your income met CRA thresholds during the qualifying period. Mistakes can lead to reassessment and loss of tax savings. Most farmers use this exemption during succession planning or when selling part of a family operation. Renting out farmland without meeting CRA’s usage tests can disqualify you from both the LCGE and intergenerational rollover rules.

Download our free farm business tax planning guide

Just as the quality of your seed can affect future yields, the quality of your tax planning affects future tax savings. 

Being strategic about the timing of purchases and losses – especially for big-ticket items like vehicles, machinery and equipment – allows you to take advantage of specific tax rules and incentives. 

Download our year-end tax planning guide for even more tips on creating a tax strategy that maximizes benefits for farmers and producers. 

Want to learn more about creating a tax strategy tailored to the needs of farm families? Click the link below to connect with the FBC team. We would be happy to help!