8 November 1994 External T.I. 9422755 - FARMING, LOGGING AND TAPPING ACTIVITIES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Various questions on farming, logging and trapping activities.

Position TAKEN:

Routine

Reasons FOR POSITION TAKEN:

Routine

					5-942275
XXXXXXXXXX			A. St-Amour

November 8, 1994

Dear XXXXXXXXXX:

Re: Farming, logging and trapping activities

This is in response to your letter of August 19, 1994 in which you ask several questions relating to your farming, logging and trapping activities. We apologize for the delay in responding to your letter.

Our answers to your questions are as follows:

1)What are the advantages and/or disadvantages to the cash method?

Under the cash method, only amounts that are actually received are included in income as sales, and only amounts that are actually paid in a year are deducted as business expenses. The cash method can thus result in significant deferral of income.

The accrual method, recognized as the accepted method for income determination for tax purposes, is generally used by most businesses other than farming. However, the accrual method has the disadvantage of reflecting in income such non-cash assets as accounts receivable and inventories and thereby increasing the cash requirement for payment of income tax before these assets are realized in cash. While in businesses other than farming part of the disadvantage of reflecting receivables and inventories in income is offset by deductions of trade accounts payable and other accrued liabilities, such liabilities are not sustained in farming operations; consequently the farmer would face the cash requirement for income tax before he received payment for his crops, livestock or other produce.

As indicated in paragraph 2 of Interpretation Bulletin IT-433R, once a taxpayer has filed a return using the cash method, the Act requires that income from the business for each subsequent taxation year be computed in accordance with this method unless the taxpayer receives the concurrence of the Minister to adopt some other method. A request to change from the cash method to some other method should be made to the Director-Taxation of the Vancouver District Office.

For additional information relating to the cash method and the accrual method to report farm income, business income or to change the method, you may refer to the attached Supplementary Income Tax Guides - pages 5 and 6 of the Farming Income for 1993 ("Farming Guide") - pages 4 and 5 of the Business and Professional Income for 1993 ("Business Guide").

The 1994 guides are not available as of this date.

2)Can repayment of a loan for operating capital be deducted as an expense?

As stated on page 11 of the Farming Guide and the Business Guide, interest on money borrowed to earn farm or business income is deductible but not the reimbursement of the money borrowed.

3)Is there an advantage in using fiscal quarters instead of the calendar year?

As indicated on page 17 of the attached brochure Paying Your Income Tax by Instalments (Instalments Brochure), and page 7 of the Farming Guide, farmers are only required to pay an annual instalment. There is no advantage in paying quarterly instalments especially if most of your income is generated in September to December.

Since the income from the trapping and the logging operations on rented land are not considered farming income (see paragraphs 7) and 8) below), you will need to make quarterly instalments relating to these activities, as indicated on page 7 of the Instalments Brochure and page 6 of the Business Guide.

4)How to apply for a payroll deduction number?

Mr. Harm Dhillon of the Vancouver District Office (604-691-4516) will send you a kit which includes basic information to meet your responsibilities relating to source deductions. This kit will include an employer number, Form PD20 - Employer Registration and instructions on how to calculate source deductions for your employees.

5)Can any profit made in 1994 be applied to previous years losses? How far back?

As indicated on page 29 of the Farming Guide, farm losses can be carried back for up to three years and forward up to ten years. These losses can be deducted from income of all sources. For example, farm losses incurred in 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992 or 1993 can be applied to net income in 1994 as long as they were not applied before. The losses for the earliest year has to be applied first.

As indicated on page 30 of the Farming Guide, if farming is not the chief source of income, the farm losses are partly deductible from other income. The amount which may be deducted is limited to $8,750 made up of the first $2,500 and one half of any further loss between $2,500 and $15,000. The amount not deductible referred to as a "restricted farm loss" may be carried back for up to three years and forward up to ten years but the deduction is limited to the amount of the taxpayer's income from farming for that year.

For more details on farm losses and restricted farm losses you may refer to the attached Interpretation Bulletins IT-322R and of Interpretation Bulletin IT-232R2 (paragraphs 21 to 29).

6)Please explain the 10% logging tax.

We cannot provide an interpretation of the logging tax because it is administered by the government of British Columbia. Mr. Dhillon of the Vancouver District Office has indicated that he will obtain a copy of the information from the provincial government and forward it to your attention along with the employer kit mentioned above at paragraph 4).

We wish to point out that the Act provides for a deduction from federal income tax for logging taxes paid to a province. The amount of deduction allowed is the lesser of 2/3 of the logging taxes paid to a province in the year or 6 2/3% of the taxpayer's income for the year derived from logging operations in the province. Information on this tax credit will also be forwarded by Mr. Dhillon.

7)Please send any information regarding Trapping.

As stated in paragraphs 6 and 8 of Interpretation Bulletin IT-322R and IT-433R respectively, trapping is not an activity included in the business of farming. It is our view that farming contemplates the raising and harvesting of various animals in a controlled environment and this would not occur in the case of trapping wild animals.

Since a taxpayer who is engaged in the business of trapping would not be considered to be a farmer, he would report his income using the accrual method of accounting employed generally by businesses. Please refer to page 4 of the Business Guide.

A trap is an instrument of manual operation and manipulation and, accordingly, constitutes a tool. Each trap purchased for a cost under $200 is considered a small tool for tax purposes and will be deductible in the year acquired.

For traps costing over $200 you should refer to chapter 5 of the Business Guide which explains in detail how to determine the amount deductible for the year. In particular, page 29 states that such tools are included in Class 8.

8)Logging operations

The determination of whether a taxpayer carries on the business of farming at any particular time is a question of fact to be resolved after a review of all the circumstances. As stated in paragraph 9(b) of Interpretation IT-433R, although an established woodlot operation is a logging business, where it is combined with a farming business the combined operation will be viewed as a farming business if the taxpayer elects to report such business income under the cash method. These comments apply when the farmer is the owner of the farm woodlot (see IT-373R). In other cases, a taxpayer engaged in the business of logging would not be considered to be a farmer, and will need to report his income using the accrual method of accounting used by businesses.

For equipment used in the logging business, refer to the attached Interpretation Bulletins IT-501 and IT-469R (paragraph 10) which discusses the classification for capital cost allowance purposes. For the determination of the amount deductible for the year refer to chapter 5 of the Business Guide.

For new machinery and equipment that you acquired for the logging business, you may be entitled to an investment tax credit, please refer the chapter 7 of the Business Guide.

The tax treatment of a right or a licence acquired in relation to the logging operations is discussed in Interpretation Bulletin IT-481 (copy attached).

We wish to advise that none of the foregoing comments should be interpreted as implying that your activities are actually farming. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. If you have any other questions or need additional information such as the 1994 income tax guides, you should contact the Vancouver District Office at:

			1166 West Pender Street
			Vancouver, British Columbia
			V6E 3H8

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch