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Farming and Capital Gains


The Income Tax Act allows farming businesses to compute income using the cash basis method. The cash basis method calculates income from the farming business by including all amounts received in the year and deducting all amounts paid in the year. Income is considered earned when it is received and expenses are considered incurred when they are paid. There is no requirement to match expenses of a particular period with the resulting income. Farmers will often purchase inputs (fertilizer, chemicals, etc.) before the end of the taxation year to reduce income and taxes payable.

If a taxable capital gain is realized on the sale of property (land), the farmer may be tempted to purchase inputs to reduce the income resulting from the taxable capital gain. It is important to understand that the Income Tax Act calculates the income from the farming business separate from the income from taxable capital gains. This means that purchasing inputs will only reduce the income from the farming business and not the income from the taxable capital gain. Thus, purchasing inputs will not obtain the intended result.

If the farmer was to purchase inputs in the amount required to reduce the taxable capital gain, the actual result will be a loss from farming and no reduction to the income from the taxable capital gain. Since the loss from farming was the result of purchased inputs, the Income Tax Act will require the farming to include a mandatory inventory adjustment in income to eliminate the loss. The end result will be no different than if the inputs were never purchased.

The cash basis method of computing income can be a complex area. An MNP Tax Advisor can assist in any questions you may have regarding this intricate area of the Income Tax Act.