The Canadian Income Tax Act contains a number of advantageous rules for farmers across Canada, such as the ability to use a cash basis to report income, more flexibility in succession planning and a higher lifetime capital gain exemption Farming, as defined in subsection 248(1) of the Income Tax Act, “includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming”.
Certain activities carried on by a farmer or farming corporation may not qualify as “farming” and would, therefore, be ineligible for some of the tax advantages noted above. Through court cases and Technical Interpretations issued by the Canada Revenue Agency (“CRA”), it is generally accepted that farming does not include the manufacturing or processing of agricultural products unless such activities are incidental to the farming activity. In the grape and wine industry, for example, the growing of the grapes would clearly be considered a farming activity. However, the wine making process does not appear to meet the farming definition – it could be considered manufacturing and processing (“M&P”) of agricultural products. It should be noted that M&P also has its own unique set of tax benefits such as a lower corporate tax rate and accelerated write offs for M&P equipment.
The question then arises as to whether an activity is incidental to the farming activity. This will always be a question of fact. In the Tinhorn Creek Vineyards case (2005 TCC 693) the company wanted to use the cash basis method to report income and the CRA disallowed this method on the basis the company was not “farming”. The company had 160 acres of vineyards and a winery utilizing 1.5 acres on a total parcel of 175 acres. The winery (started after the land was purchased) had a building and equipment, along with an inventory of wine in barrels. The company successfully argued that the wine-making business was an integral part of the farming activity. This included the argument that the value of the capital assets used for growing the grapes (including the land) was substantially higher than the value of the assets used in the winemaking operation. Another determining factor in the case was that Tinhorn Creek was an estate winery which could only use the grapes grown on their vineyards. Therefore, the profits of the winery were directly tied to the success of the harvest. Although. Tinhorn Creek won this case and was allowed to use the cash basis method to report income; it is easy to see that if some of the circumstances were different, the case could have been decided differently.
Therefore, it is important to structure your operations in a way that clearly supports your desired tax filing position. If the vineyard and the winery operations should be differentiated to maximize the tax benefits, perhaps different entities should be used: one for farming and one for M&P. Circumstances should be reviewed to ensure that individuals and corporations are utilized appropriately to maximize potential tax savings and support programs that may be available. Professional advice should be obtained to assist you in making these decisions.
Article written by: Jodi Lycett, CPA, CA
Article originally published in Crush Magazine.