FOUR COMMON TAX ERRORS THAT WILL COST YOU MONEY
Originally published on March 17, 2011
T his will be my 24th tax season. Things have changed considerably since my early days, most specifically with the wide-spread use of computerized farm recordkeeping, but I continue to see common errors.
For this reason, I thought it might be useful to identify the more common errors, in hopes that farmers might eliminate them in advance of filing their 2010 income tax return.
Not too long ago, a new client was frustrated to discover that $255,000 in capital additions, involving a high clearance sprayer, truck and tractor, were not reported as such on his previous years’ income tax returns.
The tax preparer who had missed these capital additions also sold farm insurance products on the side. My client couldn’t understand how his tax preparer, who did double duty as his insurance agent, could have erred so badly.
“If he told me to insure them, then why wouldn’t he claim them at tax time?” the client asked.
Review your capital cost allowance claim each year
This will ensure that all capital additions and disposals are recorded. It is a simple check at tax time and insures that the full tax benefit is claimed in current and future years.
Pay attention to the AgriInvest program
Under this program, farmers can deposit up to 1.5 percent of their allowable net sales into their AgriInvest accounts and receive a matching contribution.
For a farmer with $250,000 in commodity sales and no seed purchases, this translates into a $3,750 matching contribution.
Farmers can withdraw the matching contribution, as well as their own contribution, anytime by contacting the local financial institution that holds the AgriInvest funds.
I am surprised by the number of new clients who haven’t participated in the AgriInvest program, believing that the application is onerous and not worth their time. Nothing could be further from the truth.
The AgriInvest application has been harmonized with the tax form and farmers are not required to provide additional information.
I have a simple piece of advice for farmers who haven’t participated in AgriInvest and are filing their 2010 income taxes: take the free money.
Kill two birds with one stone and submit the Statement of Farming Activities on the harmonized form (T1163) rather than on the old standby form (T2042).
Watch cash ticket deferrals
Farmers are known for their aversion to income taxes, but for some their propensity to defer cash settlement tickets to future years is excessive.
I recall one farmer who had deferred more than $200,000 of commodity sales, two years forward.
He was frustrated in his circumstances because he was forced to borrow from his bank to buy his December 2010 inputs.
This created a deduction against his high farm income that had been caused by his deferred cash tickets.
He then agreed to repay his borrowings by securing his January 2012 deferred cash tickets.
He said the income tax rules had turned him into a “borrowing junkie,” secretly hoping for a poor year so that he could get one foot off of his deferral treadmill.
Similarly, I’ve had clients who rationalized irrational purchases simply to avoid current year income taxes. These purchases could be a truck, combine, tractor or the best yet, a $25,000 Norwegian Fjord horse by a farmer who didn’t ride and had no identified business use for the horse.
These farmers should hire accountants who can advise them on alternative business structures that would help them minimize their annual tax bill and allow them to expand their businesses and retire sooner.
Poor records cause problems
I recall a farmer from my early years who came to see me with two sets of computerized farm reports: one he did himself and the other his wife did.
They both entered the same data, and he asked me which one I wanted because the net income was different by thousands of dollars. I told him I wanted the one that was the most correct, which in the end turned out to be his wife’s.
On a more recent file, the owner of a company, who initially didn’t believe in the merits of bookkeeping, quickly came on side when it was discovered that he was about to over-remit $62,000 in GST.
Other problems include overstated taxes, understated taxes that lead to future reassessments and penalties, understated farm support payments and management misinformation.
From a tax planning perspective, nothing kills momentum better than the realization that the farm accounting records cannot be relied upon.
With tax season now upon us, farmers must take it upon themselves to be an advocate for their business.
First, take some time to review your income tax return with your tax preparer or accountant. Discuss your existing farm structure and whether it still meets your current goals and objectives.
Then, if your farm bookkeeping is not getting done, consider subcontracting it out or look harder within the farm’s labour pool for someone who can do the job.
Avoiding these common errors will put money in your jeans.