The Canada Revenue Agency offers a lot of unique deductions and credits designed just for farmers. If you have to sell livestock due to drought or flooding, you may not have to declare all of that income on your return. Instead, you can defer it.
Purpose of the Deferral
Normally, if you sell livestock, you have to report the sale as income for your farm. This rule isn’t fair if you have to sell your livestock because the land is inhospitable for their survival. As a result, the CRA lets you defer the income until the next year. By that time, the flood or drought is likely over, and you can buy new breeding livestock. Then, you can write off the cost of the new livestock against the income you made from selling your old livestock. This deferral prevents your income from being irregularly high during times of flood or drought.
Long-Term Droughts and Floods
In some cases, drought and flood conditions last for longer than a year. If this happens, the CRA allows you to continue to defer your income from the livestock sale. You don’t have to declare the income until the troublesome conditions are gone.
Calculating the Deferral
The exact amount of income you can defer depends on how the sale affects the size of your herd. If the sale reduces your herd by at least 15%, you can defer 30% of the resulting income. If the sale reduces your herd by 30% or more, you can defer 90% of income. To explain, imagine you have a herd of 100 cattle and you sell 20 of them for $20,000. You have reduced the herd by 20%, which means you can defer 30% of the income. On the tax return for the year of the sale, you must report $14,000 (70% of the sale price) as income. You don’t have to report the remaining $6,000 until the drought or flood conditions are gone.
For the purposes of this income deferral, “breeding livestock” refers to cattle, bison, goats, sheep, deer, and elk. It also refers to horses kept for breeding. To qualify, animals must be over the age of 12 months at the time of sale.
Designated Flood or Drought Areas
To take advantage of the income deferral, your farm must be in a designated flood or drought area. The Minister of Agriculture and Agri-Food Canada makes the ultimate determination on these designations. In most cases, the ministry only designates areas if the forage yields are 50% or less of the long-term average for the year. Most years, the ministry makes initial designations in September, but it doesn’t not finalize the designations until December. That means if you sell off breeding livestock in the middle of the year, you don’t know if you can defer the income until the very end of the year.
Reducing Potential Effects From Droughts and Floods
There is a bit of uncertainty built into this tax deferral, so you may want to take steps that reduce your chances of being affected by a drought. For example, you may want to plan how to secure water for your livestock during a drought, or you may want to use certain cereals that boost hydration. You should also keep an eye on Drought Watch, a governmental organization that maintains information on agroclimate issues and drought levels. If severe weather conditions have depleted your grazing area, you may need to sell some of your livestock. If that happens, make sure to check whether your area is designated as a flood or drought area at the end of the year. If it is designated, remember that you can defer some of your income on your tax return. That helps reduce your tax liability and hopefully keeps your farming business in the black.