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Sorting out what is taxable and what isn't, when and if you should incorporate, and at what stage you need to hire a tax professional, can be as daunting as navigating a tractor down a muddy, steep, narrow row on a rainy day.
We went out to find some answers to some of the more frequently asked questions when it comes to fruit, grapes, and wine. Peter MacIntosh and Michael Doherty are partners at White Kennedy LLP Chartered Accountants in Penticton. They both love it here, and have a soft spot for those in the agriculture and farming industry.
"There's a transition from historical tree fruit agriculture to vineyards that brings a lot of winery clients to our door," said MacIntosh. "We get them set up and structured correctly. We still have a lot of orchardist clients as well."
MacIntosh has seen first hand the shift and has some good advise for his clients. "There are really three phases to a winery business: production, distribution and sales. You need to pay attention to all three in order to be successful."
Agriculture Tax - Zero rated
"There are a specific set of rules that are part of the income tax act that relate to agriculture," said MacIntosh. "There is a distinct difference between agriculture and running a winery. A winery is very much like other business in respect to the income tax act. Farmers have certain flexibility built into how they report for tax purposes."
MacIntosh adds, "On the agriculture side, one thing as a tax planner, I tell my clients they need to proper structure. In agriculture, a person may personally own the property and they have a corporation that owns the building on it, for example a winery building, and that needs to be structured correctly for tax purposes. If it isn't you could be creating a taxable income because the property has been improved by putting a building on it that is owned by a separate company."
Farming/agricultural products are zero-rated and that means the GST rate is at zero percent. Basically, as a farmer, all the GST you pay towards your farming business, can be recovered.
Wineries - Two Sets of Books
"When you have your own vineyard and you sell wine, you need two sets of books." advised Doherty. "For the agricultural part you can report your farming revenue on a cash basis, which means that when you spend money it is a deduction and when you receive money it's part of your income. There's more flexibility for planning your expenditures on a cash flow basis and managing your tax liability on a cash basis when you are a farmer."
"Then you switch over to the normal business rules for wineries and value added products that are sold at fruit stands or farmers market," explained Doherty. "When you sell or invoice, it is revenue and you pay tax on that. On an accrual basis, you get to recognize the expense when you are invoiced for it. It doesn't matter when you get paid or when you pay your bills, it is accountable from the moment the invoice is received or given."
When you put a building on your farm to create wine or value added products, a new set of rules kicks in. "You need a fact pattern that creates a lease arrangement between your corporation and yourself as landowner," advises MacIntosh. "The lease must be worded correctly to solve the issue of improvement to personally owned property by leasing a component of the land to a company."
When to Incorporate
You always want to consider incorporating as you are selling a product to a true consumer. "For wineries, they may want to mitigate operational risk by incorporating right away," said Doherty. "If you incorporate it is potentially cheaper to pay back debt inside a company, as opposed to using personal after tax dollars."
When it comes to farms, Doherty advises to wait until there is a significant level of taxable income and gives this example. "Inside a company the tax rate for the first $500,000 taxable income is approximately 13% so you have 87 cents left over to extinguish debt. At the highest personal tax brackets your tax rate is 44%, so you'd only have 56 cents left over on the dollar to pay back your debt."
Incorporation is based on a number of factors such as operational risk and consumer liability. "If your company is going to earn money and you are pulling it out to live on, there is really no need to incorporate." explained Doherty. "However if you are reinvesting the money within the business, you should consider incorporation to save tax dollars. A company has to file a corporate income tax return, which is beyond the ability of your average bookkeeper so you need an accountant working for you. It's best to just come and talk to us to get the answer that is specific to your situation."
Tax and Timing
When you are just starting out with a new vineyard or orchard you are probably not going to show a profit in the first few years, because it takes a few years for your crops to come in.
"It is good to be unincorporated and operate as a proprietorship or a partnership in the first few years especially if you have other income as you can deduct your farm losses from that income," explained Doherty.
You probably won't look at incorporating a farm for at least three years unless there are non-tax, legal reasons for doing it. "You may as well use your losses against other income rather than have them trapped inside a corporation," said Doherty. "A loss can be carried back up to three years and deducted against your income in those particular years. So if you were working full time before you started farming, you can recover some of the tax you paid three, two and one year ago. If that wasn't the case, you can also carry your losses forward for up to 20 years."
GST and PST
BC has just returned to GST and PST from the HST. It's important to know what you charge for which products. "As you do value added things, like turning grapes into wine, they are worth more and are sold for more," said Doherty. "You charge GST on the sale of the wine. Monies collected through sales are offset by input tax credits for equipment, utilities, operating supplies etc."
Then there is PST. "As a rule," explained Doherty, "farmers are generally exempt from PST when it comes to equipment, whereas wineries are not. There are new tax laws in effect for 2013 for PST and it's best to come with your questions as each situation is unique."
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