Prepaid Expenses

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 Farmers on a cash basis commonly pre-pay expenses for the next farm year to reduce their current-year farm income. There are some restrictions of a current-year deduction of prepaid expenses in the Income Tax Act.
The Act provides the following. Payments, other than for inventory, that reduce the cash-basis income of a farming business for a year do not include prepaid expenses relating to a taxation year for the business two or more taxation years after the year of payment.

The change also allows a deduction for such a payment paid in a preceding year. This is limited where the payment was not deductible in another taxation year but would relate to the year in question if it were not for the use of the cash method (i.e. get deduction when the payment is no longer a prepaid expense).

Tips and Traps

  • The legislation catches situations such as last-month payments and down payments on leases. See the example under the Machinery section.
  • Another example of this change would limit prepaid interest expenses in the same way.
Prepaid Feed
In a technical interpretation regarding the purchase of feed prior to year-end to get a tax deduction, two situations were considered:
1. Prior to year-end, a farmer paid for feed that was delivered in the subsequent year; and
2. Prior to year-end, a farmer paid a feed supplier with the amount to be credited against feed purchases made in a subsequent tax year.
The Canada Revenue Agency felt that in situation (1), the payment would be deductible if legal title to the feed passed to the farmer at the time of payment, but in situation (2), no deduction would be allowed since no goods have been acquired.
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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.