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When is Farming Not Farming?

27/10/2011


It’s very common around the Okanagan Valley (and elsewhere, I’m sure) for farm owners to enter in to an arrangement to have somebody else assist in farming their property. This arrangement might entail anything from hiring an employee or contractor to assist with the farm work to the full lease of the property which will be farmed by the tenant. For both landowner and tenant, it is important to understand the nature of your agreement and how it will be viewed by the government for various purposes.

Income tax

The Canada Revenue Agency (CRA) sets out its position on sharecropping in its Interpretation Bulletin (IT-433R). They define sharecropping as “an arrangement where a taxpayer or landlord receives from a tenant a share of crop in lieu of rent”. However, the Bulletin also says that where the sharecropper is actually an employee of the landowner and receives a share of the crop as payment for service, the landowner still could be viewed as in the business of farming. Presumably the key here is that the landowner still maintains a level of involvement in the day-to-day management of the farm and is responsible for payment of expenses. Otherwise, the Bulletin is clear, the crop share received by the landowner in a sharecropping arrangement is considered to be rental income and not income from farming, and therefore should be reported as such on the landowner’s tax return.

GST/HST

To complicate matters, CRA refines its definition of sharecropping when it comes to GST/HST as follows:

“Sharecropping is a system of agricultural production in which farmland is supplied by way of lease, licence, or similar arrangement to a tenant who farms the land, in return for a portion of the crops grown on the property.“

GST/HST Policy Statement P-253

If the use of the land is supplied in exchange for a share of the crop, then the supply of the land is considered “zero-rated”. This means the landowner does not have to charge GST/HST but would still be eligible to claim a refund of the GST/HST paid on expenses in relation to the income earned on the land.

However, if the payment for the use of the land is not a share of the crop, but rather a fixed cash amount, then the supply of the land to the tenant is subject to GST/HST.
AgriStability/AgriInvest

For purposes of eligibility for the AgriStability and AgriInvest Programs, there is no distinction between cash rent or a share of the crop received by a landowner. In either case, the income will be considered non-eligible rental income under Program Guidelines. However, if the arrangement constitutes a true proportional sharing of crop income and related allowable expenses then it may be considered eligible for these Programs.

To summarize:


Income Tax
GST/HST
AgriStability/AgriInvest
Landowner receives fixed cash rent for use of land Rental income to landowner Supply of land is subject to GST/HST Not eligible
Tenant does farming; landowner receives a share of the crop proceeds Rental income to landowner Supply of land is zero-rated and not subject to GST/HST Not eligible unless a true joint venture arrangement with proportionate sharing of revenue & expenses
Farmer provides farm services in exchange for a share of the crop; landowner makes farming decisions Likely farming income for landowner; custom work income to the farmer Services provided by farmer are subject to GST/HST Likely eligible for landowner; not eligible for farmer

As you can see from the final example, a written agreement outlining the terms, conditions and responsibilities of each party is important if you want to be able to defend your filing position. It appears that if you own the land, remain involved in the day-to-day decision making and remain exposed to a risk of profit or loss, you can build a case for farm income treatment for tax purposes and eligibility for AgriStability and AgriInvest.

Geoff McIntyre, CA, is the Food & Ag Processing Leader for MNP’s Okanagan Region. To find out what Geoff can do for you, contact him at 250.763.8919 or [email protected]