Cash Basis Accounting
As a farmer you are entitled to report income on a cash basis. This means that sale proceeds from grain, cattle and other inventory items are recognized, for tax purposes, when you receive payment. It also means expenses and inventory purchases (including livestock) are deducted in the year paid.
The cash basis of accounting generally means that most farm operations build natural deferral of tax into many of the assets owned. A growing farm operation results in increasing inventory values that have not been taxed. Machinery & equipment depreciation defers current taxable income until these assets are sold. Appreciation in land values produces future taxable capital gains.
Sale of Assets
When farm assets are sold the taxman is looking to be paid as the multi year deferrals are unwound:
1. Capital Gains Tax on increased land values or shares of a farm company.
2. Tax on Recaptured Depreciation for proceeds received in excess of depreciated value on machinery & equipment.
3. Income Tax on the sale of all grain and cattle inventory.
Frequently Asked Questions
Disclaimer: The information contained herein is for AB residents only and does not constitute an offer to sell or solicit sales in any other Canadian or foreign jurisdictions.