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For cash basis farmers, the farmer normally recognizes income when cash is received. To defer the recognition of income and the payment of tax, it is a common to have certain payments deferred until the following fiscal period. This may be accomplished by selling the inventory in the next fiscal period. Another common approach is to sell inventory in the fall under payment terms that cash payment will not be demanded (or delivered) until the following fiscal year.
However, the rules are not straightforward for livestock sales. There is some confusion in the industry as to whether livestock sales sold through an auction mart can be deferred through post dated cheques or other arrangements.
Normally the sale of cattle through an auction mart would take place as follows. The farmer ships the cattle to the auction facility and the auction mart holds the cattle on the farmer’s behalf. The cattle are sold by the auction mart and the purchaser will pay the auction mart for this purchase. The Auction Mart will in turn pay the farmer the proceeds received from the sale of the cattle net the auctioneer’s fee. In some situations, the farmer may ask the auction mart to post date the cheques paid to them to until the next fiscal period. The farmer’s intention of course is to defer the income until the next fiscal year by delaying the cash payment.
The Canada Revenue Agency (“CRA”) has provided interpretations on whether a post dated cheque received from the auctioneer is an acceptable way to defer income recognition. It is CRA’s general view that a licensed auction mart is considered to be an agent of the seller. As an agent of the seller, the ownership of the cattle and ultimately the funds received by the agent (i.e. auctioneer) remains the property of the seller.
A licensed auction mart is usually governed by provincial law and in most provinces, any proceeds received on sale of cattle must be held in trust for the benefit of the seller or is deemed by provincial law to be the property of the seller. It is CRA’s general view that when the auction mart receives the proceeds from the purchaser, the seller of the cattle is deemed to receive this money on the same date, regardless of when the auction mart actually pays the funds held in trust to the seller.
For example, say the farmer takes his cattle to auction mart in November, 2012. The auction mart sells the cattle in November and the purchaser pays the auctioneer on the sale date. At the direction of the farmer, the auction mart pays the farmer in January, 2013. In this situation, it is CRA’s view that the farmer would recognize the sale of the cattle in November, 2012.
However, if the purchaser did not to pay the auctioneer until January, 2013, then the seller would not have to recognize the income until the auctioneer received the money.
If you are planning to sell cattle and wish to defer the recognition of income to a subsequent taxation year, be careful of this income recognition trap, as unanticipated income may be accompanied with a significant tax liability. Please consult with your local MNP tax advisor to discuss the options best suited to your specific situation.
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