Year End Deferrals

 
 
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 Deferred Cash Grain Tickets | Using Deferred Cash Grain Tickets to "Pay" For Expenses |
Advances Under the Advance Payments for Crops Act or Prairie Grain Advance Payments Act | Deferred Cash Grain Tickets in Conjunction with a Grain Advance | Prepaid Supplies |
Deferred Livestock Sales Through a Public Auction Mart | Deferred Agricultural Commodity Sales | Inventory


Businesses are generally required to follow the “accrual method” of accounting for income. The accrual method requires an adjustment to net income for sales in the year even though cash may not have been received, and expenses incurred but not paid for.
Farmers have an alternate method for accounting for income; the “cash method.” The cash method means the cash received rather than the sales will be reported as income, and only cash payments that have been made will be deducted as expenses. Farmers can use either the cash or accrual methods for calculating income.
Generally, the cash method provides a certain amount of deferral of income and may result in lower tax payable. Accrual farm records or accrual adjustments to cash records provide more financial information about the farm business.
Once the cash method is chosen, the farmer is required to use that method for all future years unless granted permission to change by the Canada Revenue Agency.

Tips and Traps

Deferred Cash Grain Tickets
  • The use of the "deferred cash grain ticket" is a means by which crop inventories can be sold in one year but not taxed until the subsequent year at the discretion of the farmer who reports on the cash basis.
  • When grain is delivered to a licensed public elevator or process elevator, a storage ticket, cash purchase ticket or a deferred purchase ticket may be issued. If a storage ticket is issued, no sale has taken place; therefore, income has not been received at that time. If a cash ticket is received, the sale has taken place, and the farmer is considered to have received payment at that time regardless of when the ticket is presented for payment. If a deferred cash purchase ticket is issued, and the ticket provides for a payment date after the end of the fiscal year in which the grain is delivered, the income for the ticket may also be reported in the following fiscal period
Using Deferred Cash Grain Tickets to "Pay" For Expenses
In a technical interpretation dated September 16, 1996, the Canada Revenue Agency commented on a situation where a farmer transfers a deferred cash grain ticket (DCGT) to a supplier, and the supplier accepts the DCGT as a payment on a purchase.
The Canada Revenue Agency’s view was that even though the farmer has a "constructive receipt" on transferring the DCGT to the supplier, Subsection 76(4) still allows the deferral of the income under the DCGT. In this manner, the farmer could deduct the expense in the current year that was paid for by the DCGT and yet not report the income under the DCGT until the following year (as if the farmer had simply maintained the DCGT).

Advances Under the Advance Payments for Crops Act or Prairie Grain Advance Payments Act Cash advances received are not taxable receipts and are treated as loans. The sale of grain to repay the advance should be reported in farm income at the gross amount before the reduction for the repayment of the advance.

Deferred Cash Grain Tickets in Conjunction with a Grain Advance
  • Consider a situation where a farmer takes out a qualifying advance and subsequently delivers grain prior to his or her fiscal year end. If the farmer then receives a deferred cash grain ticket subject to a deduction to repay the advance, the question arises about which fiscal period the part of the sale regarding the advance must be reported.
  • The Canada Revenue Agency has clarified its position by stating that providing the deferred grain ticket meets the requirements of the Interpretation Bulletin 184R and the entire proceeds of the sale are deferred until the deferred cash ticket is negotiable. The primary requirement presently is that no interest shall be paid to the holder of the deferred cash ticket
  • For example, a $50,000 advance is taken. Twenty-thousand dollars worth of grain is delivered with $18,000 being deducted and applied against the advance. The remaining $2,000 is deferred until the next fiscal period. For tax purposes, the entire $20,000 (the value of the deferred grain ticket) will be reported in the following year.
Prepaid Supplies
A farmer may make a payment on account at one of his suppliers and leave this payment as a credit towards purchases to be made in the subsequent year. A credit payment on an account does not qualify as an expense in the Canada Revenue Agency view. Therefore, for a payment to be considered a deductible expense in the year made, actual supplies should be purchased.

Deferred Livestock Sales Through a Public Auction Mart
In a technical interpretation dated September 16, 1996, the Canada Revenue Agency commented on the sale of livestock through a public auction mart where a farmer asks the auction mart not to pay him or her until the farmer's subsequent taxation year. The Canada Revenue Agency Revenue's view was that since an auction mart acts as an agent for the farmer in selling the livestock, the farmer is paid on the date the purchaser pays the auction mart, even if the auction mart holds the funds for a time before paying the farmer.

Deferred Agricultural Commodity Sales
It is relatively common for farmers who report income on the cash basis to request income from the sale of various commodities to be deferred to their next fiscal period by way of a post-dated cheque. In addition to the adverse security position taken by the farmer, the Canada Revenue Agency has indicated verbally that it has concerns with such transactions when the purchaser was clearly in the position to pay for the products, and therefore they may require the payment to be included in income at date of sale.

Inventory
  • Cash expenses can be increased by making purchases of inventory resulting in a subsequent reduction of farm income. Farming losses, however, cannot be created through the same purchase because of the Mandatory Inventory Adjustment (MIA) rules. See the discussion in the Farm Losses section.
  • Be cautious of an increasing tax deferral over several years. Consider the example where a farmer has adopted the strategy of purchasing inventory to bring income to nil each year. Assuming a profit before the purchase is earned each year, the farmer is simply pushing the income forward to the future. At the time the farmer wants to get out of the business, a significant deferral may have accumulated, and a significant tax liability may be incurred. Think about adopting a strategy where at least the low rate of tax is paid each year to smooth the tax liability over several years.
  • A farmer may use an optional inventory election to include in income any amount up to the fair market value of all inventory on hand at the end of a given year. The amount will then be deductible in the following year. Consider this strategy where the current year income is low, and anticipated income for the next year based on inventory at the end of the year is higher. The election will enable the farmer to access the maximum lower rate of tax over two years

 
 
 
 
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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Nicole Halvorson.
This information published to the web on July 28, 2014.