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This article was originally published in Grapes to Wine
Farming is risky business. Weather is becoming more unpredictable each year it seems, and Canada’s grape growing regions are no exception. For this reason, most producers purchase some form of crop insurance coverage to help mitigate this uncertainty.
But there are other factors beyond a grape growers control which can affect their bottom line – grape prices, labour costs and input costs to name a few. Fortunately, the Federal and provincial governments have implemented a suite of risk management programs under the current Growing Forward 2 (GF2) policy framework which extends until 2018. In addition to crop insurance coverage provided through AgriInsurance, there are also the AgriInvest, AgriStability and AgriRecovery programs designed to mitigate small, moderate and severe drops in income respectively.
Unfortunately, when Agriculture and Agri-Food Canada renewed the Growing Forward program in 2013, the benefits available under AgriInvest and AgriStability were watered down somewhat. Yet there are significant benefits available. If you are growing grapes and not participating in these programs, you are potentially leaving money on the table and ignoring a low cost form of insurance for your vineyard. Rather than get in to the details of how these risk management programs work in this article, I want to address a major barrier participation by estate wineries in these programs, and how this barrier can be overcome.
By definition, a land-based or estate winery is one where the owners grow grapes in their own vineyards and go on to produce and sell wine made from those grapes. There’s no question that this process involves farming. The problem arises in how the business activity is reported for tax purposes.
Most estate winery owners view their operations as a single business and that is the way they report for tax purposes. We see time and time again with our new winery clients that they have been reporting their entire winery operations as regular business operations, not a combination of farming and non-farming businesses.
Here’s the problem. The most important prerequisite for participation in these government farm income programs is that you must be farming. The indication that you are farming is that you are reporting income from farming on your tax return. So if you have been reporting everything as non-farming business income, you are out of luck before you even get started.
But there’s a relatively simple solution. Even if you structure combines your vineyard and winemaking activities in a single corporation, you can still segregate and report your vineyard revenues and expenses as farming income for tax purposes. This simple change in reporting can unlock the door to potentially lucrative government farm income program protection.
For most wineries we have worked with, it is pretty easy to identify the vineyard expenses. There may be a little work involved in allocating costs such as labour between cellar and vineyard. Most wineries will include these costs with their other wine production costs when determining the cost of their wine inventory. Instead, we look at the tonnage of grapes produced and used in production and determine a value for that grape production using the current market value of the grapes. This amount becomes the farming revenue. It’s important that you be able to support the prices you used to value your production in case this is reviewed by the farm income program administration. If you sell some of your grapes to a third party, this would be good evidence for valuing the same type of grapes you use in your own production.
Now you have a number for farm revenue and you have identified your related farm expenses. Corporations use a coding system called the General Index of Financial Information (GIFI) when reporting their financial information to CRA. There are special GIFI codes for farming revenues and expenses. Using these codes when filing your company’s tax return will ensure these revenues and expenses are considered farming revenues and expenses for tax purposes. You now have a basis for participating in government farm income programs.
Now, let’s look briefly at the programs themselves. The AgriInvest program allows producers to contribute up to 1% of their annual net sales to a special savings account at their bank and receive a matching government contribution. Withdrawals can be made at any time, although the idea is to save funds and withdraw them in years when income is down. Tax on the government contribution as well as interest earned is deferred until the funds are withdrawn. Now 1% may not seem like much, but participation in this program is very simple. The producer simply files their annual farming revenues and expenses on a specialized form within their tax return (form T1273 for individuals) and indicates that they wish to participate in the AgriInvest program. There should be very little incremental cost for tax preparation.
The AgriStability program is designed to assist farmers who experience a sudden and severe (greater than 30%) drop in their historical profit margins due to circumstances beyond their control. The AgriStability program has a reputation for being confusing and costly to participate in from the standpoint of professional fees. But the truth is, in the case of vineyards, the application process is not all that complex. This is because the grape crop is typically sold by year end and there is little, if any, carry over of inventory, receivables or prepayments from one year to the next. You should view AgriStability as inexpensive insurance that will cover you for a much broader range of risks than crop insurance will.
Finally, AgriRecovery is a pool of government funds set aside to assist industry segments that are hit by severe broad-based circumstances and disaster circumstances. Widespread disease affecting grapevines in a geographic area might be an example. Typically, these types of ad-hoc assistance programs “piggyback” off of financial information already submitted under other programs, so if you have not been reporting farm income, you could be facing an uphill battle if you ever need to request assistance under an AgriRecovery-assisted program.
It’s clear that as an estate winery owner, you are also a farmer, even if you don’t always think of your business that way. By ensuring you are reporting your vineyard activities as farming income for tax purposes, you can clear the way to participation in valuable government risk management programs. Failing to do so means you could be leaving benefits on the table and exposing your winery to more risk than is necessary.
Geoff McIntyre, CPA, CA advises the B.C. Wine Industry. To find out what Geoff can do for you, contact him at 250.763.8919 or [email protected].
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