Setting Up a New Farm Site

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 A farmer just getting into the business of farming or relocating a farm site may be faced with many decisions in setting up a new farm site. Various expenses are incurred to get the operation up and running. These start-up costs are often treated differently for tax purposes.

Replacement Property
In a situation where a farmer has disposed of a farm and is setting up a new farm site, the disposition could have resulted in capital gains or recaptured capital cost allowance.
The Income Tax Act provides special provisions to defer tax where a voluntary disposition of a business property occurs. The tax rules allow a tax deferred rollover of certain business assets if they are replaced by similar business assets before the end of the taxation year immediately following the year of disposal. See the previous section on Relocation of Farming Operations.

Tips and Traps

  • The Canada Revenue Agency at one point had taken the position that these rules were not available in situations where farm size increased but more recently they have not taken that position.
  • Property purchased prior to the sale of the former business property will qualify as replacement property. No two-year restriction applies but the purchase must, in fact, be a replacement property.
Utility Connection
The Income Tax Act provides for the deduction of amounts paid by a taxpayer for making a service connection to his place of business when computing income from that business. Certain conditions must be met so that a deduction may be claimed under this provision:
1. The service connection must be for the supply of electricity, gas, telephone service, water or sewers supplied by the payee;
2. The supply must be by means of wires, pipes or conduits;
3. The service connection must be to the taxpayer’s place of business and not solely to a residence;
4. The deduction can only be claimed if the amount is paid to a person who deals at arm’s length with the taxpayer; and
5. Such an amount will not be deductible in a taxation year unless it is paid in that year, regardless of when liability for the amount was incurred.

Tips and Traps
  • Payments made for service connections for the development of the property for sale are not deductible.
  • The deduction only applies if a taxpayer does not own or will not own the property (i.e. wires, pipes, conduits) used in making the service connection. Title to the connection property sometimes vests in the taxpayer if it is within the boundaries of his property. If this is the case, a deduction is not permitted but will normally qualify for capital cost allowance.
  • Sometimes, the cost of a service connection does not qualify for a current year deduction or as an addition to capital property or inventory. Where this happens, the cost will qualify as an eligible capital expenditure if it is an outlay or expense made or incurred for the purpose of gaining or producing income from a business.
Road Construction
  • Construction costs for a paved road to a new farm site are a capital cost added to Class 17. To be able to make a road, it may be necessary to clear or level the surface of the land on which that depreciable property is to be built. The cost of clearing or leveling will ordinarily be accepted as part of the depreciable cost of the property built on the land, rather than as part of the cost of the land itself.
  • The costs of an unpaved road are generally deductible expenses in the year they are incurred.
Farmers Clearing and Leveling Land or Laying Tile Drainage
Taxpayers (owner or tenant) may pay amounts for clearing or leveling land or laying tile drainage for the purpose of carrying on the business of farming. Clearing or leveling land for this purpose includes brushing and breaking land, (ie: clearing the land of brush, trees, roots, stones etc. and the initial ploughing) so the land can be put into productive use.
You are not required to deduct all the costs of such improvements in the year they are incurred and paid. You may deduct any part and carry-forward the remaining unclaimed part to any other year at your discretion.

Purchase of Assets
New buildings and equipment purchased for the new farm site are capital assets that will be added to Capital Cost Allowance (CCA) classes. In the year a depreciable asset is acquired, the CCA that can be claimed on the asset is limited to one-half the regular CCA.
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For more information about the content of this document, contact Joel Bokenfohr.
This information published to the web on July 28, 2014.