Why do farmers hate paying taxes?

Photo credit: Sixteen Grains, Saskatoon, SK

By Craig Macfie

It didn’t take long in my accounting career to learn that farmers don’t like paying income tax.

No one does really, but farmers seem to have a particular disdain for sending money to Ottawa.

I think there are a few reasons for this.

One is cash basis income tax treatment which means farmers can often defer paying income tax. Farmers can benefit from deferring income tax, although I would argue it’s more of a necessity than a benefit.

The only alternative would be taxing the farmer on his or her production inventory before it’s sold, estimating production and a selling price.

Other business owners and professionals are taxed on their receivables, but for farmers, the inventory is often not yet contracted or sold.

There are two main strategies to defer income taxes. One is to pre-buy next year’s input expenses; the other is to defer grain ticket settlements to the next fiscal year. In the 2017 budget the Liberal government considered changes to the Canadian grain ticket income tax deferral rules. I responded to the government consultation that grain ticket deferral doesn’t cost government anything directly and I argued taking it away would only further increase farm support payments.

Fortunately, the rules remained unchanged.

There are two ways to record income taxes on accrual financial statements. One is the taxes payable method which is just as it sounds: simply report income taxes owing as a payable.

The other method is the future income taxes method. This method recognizes the future taxes owing on your unsold inventory and, in some cases, the difference between accounting net book value and tax net book value of assets such as farm machinery.

I prefer the income taxes payable method for its simplicity. I find the future income taxes method only relevant if operations were to wind down next year — which almost never happens.

Another reason farmers don’t like paying taxes is perceived government waste. Farmers work hard for their profits and like everyone, want to see good return for their tax dollars.

Most of my working career I’ve been a T4 income earning employee. Taxes withheld since my first pay cheque never hit my bank account. If you never see the money, it’s harder to envision it as your own.

Then I started my fractional CFO firm where I source and execute the work, pay the bills and have to send a chunk of profit away in taxes. It’s a different mindset when the money physically hits your bank account and then you have to send a large portion away each quarter.  

The same is true for farm business owners who must acquire land and livestock, purchase supplies and inputs and then execute on a farm business plan. Hopefully, weather cooperates and they’re able to squeak out a profit. And then, hopefully, politicians put their taxes paid to good use.

One advantage Canada has over the U.S. is the absence of personal property taxes on farm machinery. (Although significant exemptions exist.) Some states, such as Montana, levy a tax for the value of farm machinery on hand at the end of every year.

Canadian farmers also benefit from a tax-free rollover of farms to the next generation and may it always remain this way. Any introduction of a wealth or estate transfer tax would be as popular as last year’s attempted capital gains tax increase.

So, between start-up years, money-losing years and deferring tax, farmers aren’t used to paying taxes. Many farm accountants tell their clients they should want to pay income taxes, because it means that the farm has been profitable long enough to exhaust the usual tax deferral strategies.

Just remember that farmers will never like it.

Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses. Find out more at springcfo.com

This article originally appeared on country-guide.ca