How to report farming income?

You may find yourself immersed in the management of an agricultural or piscatory enterprise, or possibly, you're actively participating in both. In the event that you are overseeing both an agricultural and piscatorial venture, your aggregate earnings encompass proceeds engendered from the undertakings enumerated below.

What is farming income?

What constitutes agricultural earnings, you might wonder? It encompasses revenue originating from undertakings like tilling land, rearing livestock, tending to thoroughbreds, and participating in various agricultural pursuits. In addition, beyond the revenue generated by dairies, orchards, and arboreal farms, it is imperative to disclose revenue stemming from apiculture and wildlife preserves.

Under certain circumstances, revenue from aquaculture, the operation of botanical nurseries, or the stewardship of sugar maple groves may also qualify as agricultural earnings. Furthermore, if you receive financial aid pertaining to agricultural pursuits, you may have an obligation to declare these sums as income, provided they are substantiated in your AGR-1 statement.

Farming income

Farming income in Canada includes the following –

• Soil tilling
• Livestock raising or showing
• Racehorse maintenance
• Poultry raising
• Dairy farming
• Fur farming
• Tree farming
• Fruit growing
• Beekeeping
• Cultivating crops in water or hydroponics
• Christmas tree growing
• Operating a chicken hatchery
• Operating a feedlot

In certain circumstances, you may also earn farming income from –

• Raising fish
• Market gardening
• Operating a nursery or greenhouse
• Operating a maple sugar bush (includes the activity of maple sap transformation into maple products if this activity is considered incidental to the basic activities of a maple sugar bush, such as the extraction and the collection of maple sap, which are farming activities)

The raising or breeding of animals, fish, insects or any other living thing to be sold as pets is not a farming activity.

Self-employed or small-business farmers

Farming income can be somewhat unique in the way it is reported for tax purposes. Farmers often have the option to report their income in a manner similar to self-employed individuals or small business owners. This is achieved through the utilization of Form T2042, a tax form specifically designed for detailing the specifics of farming income and the corresponding expenses incurred during the tax year.

In numerous instances, individuals engaged in farming often report their income in a manner similar to that of self-employed individuals or small business proprietors. This is accomplished by utilizing Form T2042, where they provide a comprehensive breakdown of their farming income and associated expenses.

However, it's crucial to be aware that if you are partaking in the AgriStability or AgriInvest programs, you should refrain from completing Form T2042 unless you are a resident of Quebec.

AgriStability and AgriInvest Participants in Canada

AgriStability and AgriInvest are two important agricultural support programs in Canada designed to help farmers manage risks and stabilize their income. Here's an overview of these programs and what it means to be a participant.

1. AgriStability

• Purpose: AgriStability is a federal and provincial program aimed at helping farmers cope with significant income declines caused by factors beyond their control, such as poor crop yields, market volatility, or adverse weather conditions.
• Participation: Farmers who wish to participate in AgriStability must apply to the program and pay an annual fee.
• Benefits: Participants can receive financial assistance if their farming income drops below a certain threshold, helping them cover essential costs and maintain their agricultural operations.
• Program Administration: AgriStability is administered jointly by the federal government and provincial or territorial governments. Eligibility criteria and program specifics can vary by province or territory.

2. AgriInvest

• Purpose: AgriInvest is another federal and provincial program that allows farmers to set money aside in an account, with matching contributions from the government, to help them manage income shortfalls due to small declines in income or to make strategic investments in their farms.
• Participation: Farmers can participate in AgriInvest without needing to apply or pay a fee. They are automatically enrolled if they file a tax return with farming income.
• Benefits: Participants can make deposits into their AgriInvest accounts, and the government matches these deposits up to a certain limit. Farmers can withdraw funds from their accounts when they face income shortfalls or need to invest in their operations.
• Program Administration: Like AgriStability, AgriInvest is administered collaboratively by the federal and provincial or territorial governments. The specific details and contribution limits can vary by region.

Key Points for Participants –

• Farmers who want to benefit from these programs must ensure they meet the eligibility criteria and understand the program rules specific to their province or territory.
• Participation in these programs can provide financial support during difficult years and help farmers make strategic investments in their farms.
• While these programs are generally available to farmers across Canada, the exact rules and contribution limits may differ based on regional considerations and government policies.
• If you participate inAgriStability or AgriInvest programs, you must file form T1163 or T1273.
• If you live in Prince Edward Island, Ontario, Saskatchewan or Alberta, file form T1163.
• If you live in the rest of Canada aside from Quebec, file form T1273.

For the most up-to-date and region-specific information on AgriStability and AgriInvest, farmers should contact their local agricultural authorities, visit official government websites, or consult with agricultural associations. These programs are subject to change and adaptation based on the evolving needs of the agricultural sector.

Much like the T2042 form, these supplementary forms also demand that you provide details about your income and expenses related to farming. However, what distinguishes these forms is the presence of an authorization document. This authorization grants permission to the Canada Revenue Agency (CRA) to share your information with agricultural support programs, enabling them to evaluate your qualifications for their aid.

If you are engaged in multiple farming enterprises, it is crucial to fill out either the T1164 or T1274 forms, and you should complete a distinct form for each separate farm you are involved with. This ensures that the specific financial details for each of your farming operations are properly documented and shared with relevant support programs, if needed.

Partnership farms

When you run your farm in partnership with someone, you typically handle your tax filings as if you were self-employed individuals. These partnerships can be formalized through either written or verbal agreements, and they offer you the flexibility to divide the responsibilities and financial aspects of the farming business in a manner that suits both of you. To ensure proper tax reporting, you and your partner should report your income and losses based on the agreed-upon allocation.

For instance, if you opt to evenly divide the farming business, each of you should report 50 percent of the farming income and losses using Form T2042. It's important to remember to fill out the section that identifies other partners on that form as well. It's worth noting that the Canada Revenue Agency (CRA) doesn't require farming partnerships to submit a T5013, which is the Partnership Information Return. However, it's essential to be aware that if your farming partnership involves a trust or a corporation, you are obligated to file the T5013 as per CRA regulations. This form ensures that the CRA has a complete understanding of the financial structure and operations of such partnerships.

What if you are employed as a farmer?

If you are working as an employee on a farm, it's important to understand that the income you earn in this capacity should not be categorized as farming income. Rather, you should anticipate receiving a T4 slip from your employer at the conclusion of the fiscal year. This T4 slip reflects the income you earned as an employee and should be included in your federal income tax return, which is typically filed using the T1 form.

In essence, this means that your earnings from working on the farm are considered regular employment income and should be treated as such for tax reporting purposes. You'll need to report this income on your T1 tax return, just like any other salary or wage income, to ensure that you fulfill your tax obligations accurately and in accordance with the law. Please note that as an employee, you are not eligible to deduct farming expenses. However, you may be able to claim specific allowable employee expenses, such as travel costs, eligible motor vehicle expenses, and supplies, provided they are necessary for your employment and not reimbursed by your employer.

If you're working for a farmer as an independent contractor, there are some important considerations regarding income reporting and tax responsibilities. In this scenario, the farmer should provide you with a T4A slip at the close of the tax year. This slip documents the income you earned as an independent contractor. As an independent contractor, you have distinct financial responsibilities –

• Income Reporting: It is your responsibility to report your income accurately. This means declaring the earnings listed on the T4A slip when you file your income tax return.
• Canada Pension Plan (CPP) Contributions and Payroll Taxes: Unlike regular employees, independent contractors are not subject to automatic CPP deductions or other payroll taxes. Instead, you are responsible for calculating and remitting your own CPP contributions and handling any other applicable payroll taxes. This involves making periodic contributions to the CPP and managing your tax obligations.
• Expenses: As an independent contractor, you have the opportunity to claim business expenses related to your work, which can potentially lower your taxable income. This is in contrast to employees who typically have more limited expense claims.

In both of these situations, whether you're an employee or an independent contractor working on a farm, you do not need to submit any special forms specifically for reporting farming income. Instead, you report your income according to your employment status (T4 for employees, T4A for independent contractors) and follow the general tax regulations and guidelines applicable to your situation.