Accounting and tax for farmers in Canada

Farm income averaging

Farming income is inherently volatile. A drought year can mean minimal income; a bumper crop year can push income into the highest tax brackets. Farm income averaging is a mechanism in the Income Tax Act that allows farmers to smooth out this volatility and reduce the tax spike in unusually good years.

How income averaging works

Under section 119 of the Income Tax Act, a farmer can elect to average income over multiple years. Specifically, the provision allows income from farming (including proceeds of sale of livestock forced to be sold due to disaster or disease) to be spread back over the current year and the preceding year. The averaging reduces the income in the high year by an amount that is added to the prior year — effectively retroactively adjusting the prior year's income upward and the current year's income downward, then recalculating the tax for both years and paying only the resulting net tax.

The result is that the marginal rate on the averaged income is lower than the top rate you would have paid in the high year. For a farmer who earned $40,000 in year one and $180,000 in year two, averaging would spread the excess over $40,000 back, reducing the year two tax significantly.

Forced disposition of livestock

Section 80.3 of the Income Tax Act provides additional relief when livestock must be sold due to drought, flood, or other prescribed conditions. The farmer can defer the proceeds of the forced sale by including them in income in a later year when it is more favourable — essentially treating the proceeds as if they were received in a year when pastures recover and replacement animals are purchased. CRA publishes lists of regions where section 80.3 conditions apply each year.

AgriInvest and AgriStability

These two programs are part of the federal-provincial Canadian Agricultural Partnership (CAP) framework. Together, they provide income support to farms facing financial challenges.

AgriInvest

AgriInvest functions as a savings account for farmers. Eligible producers can deposit up to 1% of their Allowable Net Sales (ANS) — a measure of their net farming revenue — and receive a matching government contribution. Deposits are tax-deductible when made; withdrawals are included in income when received. The account earns interest that is taxable annually.

The program provides two benefits: a tax deferral (deduct now, pay later when you withdraw) and an emergency reserve (draw on the account in a down year, when your other income is lower). ANS is calculated on the AgriInvest form included in the T1 return.

AgriStability

AgriStability provides payments when a farm's current program year margin (revenue minus eligible expenses) drops more than 30% below the farm's historical reference margin (average of the best three of the past five years). The payment compensates for 70% of the decline below the 30% trigger.

AgriStability applications are administered at the provincial level. The timing of payments and the tax year in which they are included in income matters — a payment received in year three for a year two loss is income in year three. Document your reference margins carefully, as errors in historical data can significantly affect your benefit calculations.

HST for farmers

The agricultural sector has specific HST rules that differ significantly from other industries.

Zero-rated agricultural products

Most agricultural products sold by producers are zero-rated under Schedule VI of the Excise Tax Act — the seller charges 0% HST but can still claim ITCs on inputs. Zero-rated products include: grain, seeds, livestock (except rabbits, pets, and animals for racing), most fruits and vegetables, eggs, milk, and basic animal feeds. This zero-rating applies at the farm gate — when a grain farmer sells wheat to an elevator, no HST is charged.

Farm inputs and zero-rating

Many farm inputs are also zero-rated or reduced-rated. Farm equipment, fertilizers, pesticides, seeds, and feeds used exclusively in farming are zero-rated purchases — no HST paid, no ITC to claim. However, if a farm supply store sells the same fertilizer to a non-farmer, HST may apply. Confirm with your supplier whether your purchase qualifies for zero-rating and keep records to support ITC claims where applicable.

Farmland sales

The HST treatment of farmland sales depends heavily on how the land has been used and who is buying it. Farmland used exclusively in a farming business is generally an exempt supply when sold — no HST. However, if part of the property has been used for non-farming purposes (a gravel pit, a campground rental, a commercial lease), that portion may be taxable. Residential portions of a farm property (the farmhouse) are typically exempt if they have been used as a residence. Mixed-use farmland sales require careful analysis by a CPA and possibly a GST/HST specialist.

Cash vs. accrual accounting for farms

Farmers have a special election under section 28 of the Income Tax Act to report income on a cash basis, unlike most other businesses that must use accrual accounting. The election is made by completing Form T2042 (Statement of Farming Activities) on the cash basis — no separate election form is required.

Cash basis advantages

Cash basis simplifies accounting — you record income when you receive a cheque and expenses when you write one. It also allows significant tax planning through timing. Purchasing next year's seed, fuel, and fertilizer in late fall and deducting them in the current year, while deferring the sale of harvested crops until January, can dramatically reduce income in a high year. This strategy — front-loading expenses, deferring revenue — is called the "prepaid expenses and deferred revenue" strategy and is widely used by grain farmers.

Cash basis limitations

Cash basis can distort true financial performance and create large income swings. Lenders may prefer accrual-basis financial statements. The strategy works until you have a bad year with low revenue and high deferred expenses — income can swing sharply negative. Also, prepaid expenses must be for purchases that are reasonable in the circumstances — paying for three years of inputs in advance to create a loss would be considered abusive.

Lifetime Capital Gains Exemption for farm property

The Lifetime Capital Gains Exemption (LCGE) provides one of the most valuable tax incentives in the Income Tax Act for farm families. As of 2024, the LCGE for qualified farm property is $1,250,000 (indexed for inflation). This means the first $1.25 million of capital gains from selling qualifying farm property is tax-free.

What qualifies as farm property

The LCGE applies to three categories of farm property:

• Shares of a family farm corporation: Shares in a Canadian-controlled private corporation whose principal business throughout a two-year period before the sale was farming, where the shares were owned by the individual or their family during that period.
• Interests in a family farm partnership: Similar requirements to family farm corporation shares.
• Qualified farm or fishing property: Real property (land and buildings) used principally in a farming business. For land and buildings, the usage test requires that in the two years before the sale, the property was used principally in a farming business by you, your spouse, your child, your parent, a corporation in which you held shares, or a partnership in which you held an interest.

Using the LCGE strategically

Farm families can multiply the LCGE across family members if the farm is held through a corporation with shares owned by different family members. Each family member with qualifying shares can claim their own LCGE — a family of four could shelter up to $5 million in capital gains on a sale of a family farm corporation. This is a significant planning opportunity that requires structure established well before a sale. Work with a CPA to set up the structure correctly and ensure the qualifying conditions are met over the required period.

Intergenerational farm transfers

Transferring a farm to the next generation is one of the most tax-complex transactions in Canadian tax law. The goal is to use the LCGE to transfer the farm without triggering large capital gains taxes, while avoiding the anti-avoidance rules that apply to transfers to related persons.

Section 73 rollover

Section 73 of the Income Tax Act allows a parent to transfer farm property (land, buildings, livestock, quota, shares of a family farm corporation) to a child at the parent's adjusted cost base — effectively deferring the capital gain until the child eventually sells the property. No immediate tax is triggered. However, using the section 73 rollover means the parent does not use any LCGE, deferring it to the child's eventual sale.

Selling at fair market value to crystallize LCGE

Alternatively, the parent can sell the farm property to the child at fair market value, using their LCGE to offset the capital gain. The child's cost base is then stepped up to fair market value, reducing future capital gains tax when the child eventually sells. This uses the parent's LCGE but creates a financing challenge — the child must actually pay the fair market value, which is often done through a farm mortgage or vendor take-back financing.

Bill C-208 and intergenerational transfers

Bill C-208 (enacted 2021) and subsequent legislative changes (Bill C-59, 2024) have made it easier to transfer a family corporation to children without triggering surplus stripping rules that previously prevented tax-effective intergenerational transfers of incorporated farms. The rules now permit the transfer to qualify for capital gains treatment (rather than deemed dividend treatment under section 84.1) if certain conditions are met, including that the transferee child operates the business for a minimum period. The rules are detailed and have changed recently — work with a CPA who is current on the 2024 amendments before structuring any farm transfer.

Temporary foreign workers

Agricultural employers rely heavily on seasonal foreign workers through the Seasonal Agricultural Workers Program (SAWP) and the Temporary Foreign Worker Program. Employers have the same payroll obligations for TFWs as for Canadian employees:

• CPP contributions (deduct and remit both employee and employer portions)
• EI premiums (deduct and remit, unless the worker is exempt under their country's bilateral agreement)
• Income tax withholding based on the worker's estimated annual income from all sources
• T4 slips issued by end of February

Workers under the SAWP (primarily Mexico and Caribbean countries) are generally entitled to EI despite the temporary nature of their employment. Accommodation and meals provided to TFWs are taxable benefits that must be valued and included in T4 income — determine fair market value of the accommodation before the season starts and document it.

Employment of TFWs also involves Employment and Social Development Canada (ESDC) requirements beyond tax: labour market impact assessments (LMIAs), worker housing standards, and record-keeping obligations. Non-compliance with ESDC rules can result in loss of the ability to hire TFWs in future seasons.

Frequently asked questions