Ontario farm businesses are required to navigate through a number of unique tax situations. From selling crops or livestock to passing the farm down to the next generation, almost every decision made by farmers has some type of tax implication. Farmers pay taxes to all three levels of government (municipal, provincial and federal) and the tax policies that governments enact has implications for farmers. OFA continues to work with all three levels of government, to ensure the government tax policies recognizes the unique structures and needs of farm businesses. The following information will guide you through the major tax policies impacting Ontario farmers, and the changes that OFA continues to advocate for.
OFA continues to push for legislative changes that will improve the transparency of assessment and taxation of Ontario farm properties.
OFA’s standing policy proposes that property tax treatment of value-adding facilities should give special considerations to products grown in Ontario.
OFA recommends that if historically at least 51% of the product is grown and value-added by the same farmer(s) and at least 90% of the product is grown in Ontario, then the facilities should be subject to no more than 25% of the residential property tax rate.
Property Assessment and Taxation
Every four years, the Municipal Property Assessment Corporation (MPAC) updates assessments on all properties for tax purposes, including farm property.
The latest MPAC assessments were conducted in 2016. Municipal tax rates set for 2017, 2018, 2019 and 2020 property taxation years will be applied to the reassessment based on property values as of January 1, 2016. However, any increase in assessed value from January 1, 2012 to January 1, 2016 is to be phased in gradually in equal annual increments over the four years. The phase-in program would apply to residential, farm and managed forest property classifications. Any decrease in assessed value from January 1, 2012 to January 1, 2016 should have been applied immediately at the start of the 2017 taxation year.
Farmers should carefully review their 2017-2020 Property Assessment Notice for two important items. Reviewing your property assessment notice is important to ensure you will be paying the correct taxes for 2018.
OFA continues to push for legislative changes that will improve the transparency of assessment and taxation of Ontario farm properties.
Resolving Assessment Concerns
In general, if property owners feel that the assessed value or tax classification for their property is not accurate, they may file a Request for Reconsideration (RfR) with MPAC. In the case of farm properties, if property owners feel that the tax classification for their property is not accurate, they may file a Request for Reconsideration (RfR) directly with the Ontario Ministry of Agriculture, Food and Rural Affairs. Refer to the Farm Property Class Tax Rate Program Eligibility section below for more information.
By filing an RfR, you are asking for a review of your property’s assessment and/or classification. No fee is charged for this review. For the 2017 taxation year, the deadline to file an RfR was February 8th, 2017. More information on this service is available by contacting MPAC at 1-866-296-6722.
Filing a RfR with MPAC is a mandatory first step of the assessment appeal process. After MPAC has completed their reconsideration process, property tax payers will have the option of filing a notice of complaint with the Assessment Review Board (ARB). The Assessment Review Board (ARB) is an independent tribunal of the Ministry of the Attorney General of the Province of Ontario. For more information, contact the ARB at 1-800-263-3237.
Farm Property Class Tax Rate Program Eligibility
Although MPAC may assess a property as farm, the property is taxed at the residential rate unless it is placed in the farm property class. The Ontario Ministry of Agriculture, Food and Rural Affairs administers the Farm Property Class Tax Rate Program. Eligible farm properties are placed in the farm property class and taxed at the reduced rate. For more information, contact the Ontario Ministry of Agriculture, Food and Rural Affairs at 1-877-424-1300.
Assessment of Farm Properties
In the case of farm properties, only bona fide farm-to-farmer sales are used to establish a farm’s current value assessment.
Components of a Farm’s Current Value Assessment
Farmland is assessed according to its productivity value. Productivity rates are established using a process that determines rates for the best soils and reduced rates for less than optimum soil conditions.
The residence is assessed based off the replacement cost for a new residential structure less depreciation.
If a farm residence is occupied by the person(s) farming the property, a one-acre parcel of land is valued as farmland.
In most cases, if someone other than the person(s) farming the property occupies the residence, it is considered a non-farm residence. In this case, one acre of land is valued as rural residential.
A farm outbuilding is any improvement, other than a residence, that is used for farming operations. Outbuildings are assessed based on their design and classified by their use (e.g., barn, silo, grain bin).
All other buildings not used in the farm operation are assessed based on their design and classified by their use (e.g. garage).
Value Added and Dual Use
MPAC values and classifies properties based on the use of the land and buildings. A farm property could be partitioned by MPAC into multiple property assessment classes when the property is used for more than one use.
Types of Property Classes include
Under Section 44 of O.Reg 282/98 facilities used to conduct value added activities are classified in the commercial or industrial property class but the land underneath these buildings is valued as farm.
Value added activities generally refers to activities that enhance the value of (storable and marketable) farm products, while dual-use activities generally refers to value added activities that do not involve the farm products produced by the farmer.
Impact on Property Tax Bill
Engaging in value added activities can have significant impacts on a farmer’s property tax bill. To fully understand the potential impact value added activities can have on property taxes, consider the following example that demonstrates how the property taxes (using tax rates of a randomly selected rural municipality in Ontario) on a barn can change depending on the use of the barn.
Scenario 1: Farmer Uses Barn for Housing Livestock
In this scenario, the barn is being used directly as part of the farming operation and thus the barn and the land underneath the barn is assessed as a farm and taxed at the farm rate.
|Farm Use||Taxable Assessment||Tax Class||Taxes Owed|
Scenario 2: Farmer Uses Barn for Processing Agricultural products that he or she produced
In this scenario, the barn is being used to process (add value to) an agricultural product produced by the farmer and thus the barn is assessed and taxed at the industrial rate while the land underneath the barn is assessed as farm and taxed at the industrial rate.
|Value Added Use||Taxable Assessment||Tax Class||Taxes Owed|
Scenario 3: Farmer Uses Barn for Processing Agricultural Products that He or She Purchased From another Farmer
In this scenario, the barn is being used to process an agricultural product that was not produced from the lands on which the barn is located and thus both the barn and the land underneath the barn are assessed and taxed at the industrial rate.
|Dual Use||Taxable Assessment||Tax Class||Taxes Owed|
As the above example illustrates, the tax implications of engaging in value added activities is significant, and should be considered as part of any business plan when considering potential expansion plans. Value added activities such as on farm processing and retailing provides farmers with a potential avenue to increase and diversify their income streams. If the Ontario agri-food sector is to meet the Premier’s challenge the Ontario government must enact tax policy that will encourage, rather than discourage, on farm value added activities which will increase farm revenue, leading to further investment and job creation by Ontario farmers.
Ontario Land Transfer Tax
Effective March 28, 2003, the provincial government announced that farmland transfers between farming family members would be exempt from land transfer tax.
Although it was proposed in the 2003 Ontario Budget to “provide relief for all farmers”, it became evident afterwards that amendments to Regulation 697 did not effectively address transfers to and from family farm corporations. Therefore additional measures were proposed in the 2008 Ontario Budget: “To provide relief for all farmers, regulatory amendments will be proposed to expand the exemption to include transfers of farmland from family farm corporations to individual family members.”
However, Ministry of Finance officials have taken the position that the current wording of the regulation denies the land transfer tax exemption in situations where a family farm corporation was established prior to the farmland transfer because a family farm corporation is not an individual.
Consistent with the purpose and intent of this exemption, OFA continues to ask that the current ambiguous wording of regulation 697 be amended to clarify and specifically ensure farm families who established family farm corporations prior to the farmland transfer will benefit from this exemption as they pass down ownership of the family farm to the next generation.
OFA is disappointed that in 2016, the Ontario Ministry of Finance implemented increases in the Land Transfer Tax. The value of transfers of farm property over $400,000 will now be taxed at 2% rather than 1.5% and the value of transfers of farm property over $2 million will now be taxed at 2.5% rather than 2%. This will add significant tax costs to farmers who wish to expand their operations and to beginning farmers looking to acquire land. This comes at a time when farm assessments and property taxes are at historic highs.
OFA recommends farmers contact OMAFRA’s Farm Property Class Tax Rate Program at 1-877-424-1300 after any land title change on farmland to ensure the farmland’s property tax status remains correct.
OFA has been advocating for the elimination of the land transfer tax on within-family farm sales.
Lifetime Capital Gains Exemption
In 2015, the federal government proposed to increase the Lifetime Capital Gains Exemption (LGCE) to $1,000,000 from $800,000. This new limit will apply to the dispositions of qualified farm property made on or after April 21, 2015. The $1,000,000 limit will not be adjusted until inflation has caught up from the $813,000 limit in 2014, at which time it will be reopened for review.
Alternative Minimum Tax
Exactly as the name suggestions, Alternative Minimum Tax (AMT) is an alternative method to calculate your total taxes payable. Often applicable when you have claimed a preferential tax deduction like capital gain exemption or other tax credits such as the dividend tax credit.
Each tax year, your tax payable is calculated using two methods; the standard method, in which tax exemptions and tax credits can reduce your tax payable and then a second calculation is done where you do not receive these exemptions or credits, which increases net income, but it is taxed at a lower rate.
The difference between the first method of calculating tax and the second is the AMT. When you trigger AMT, it is possible to recover the full amount of AMT by subtracting the AMT from your tax payable over the next 7 years. In this regard AMT might be thought of as a pre- payment of future tax
However, if over the next 7 years your tax payable is less than the AMT, you lose the opportunity to recover the full amount and you fall into a tax trap.
This is common with farmers who are entering retirement, and use their Lifetime Capital Gains Exemption (LCGE) when selling off qualified farm property, triggering AMT and then not having enough income over the first 7 years of their retirement to reclaim the full AMT.
How to Calculate Alternative Minimum Tax
Step 1: Calculate tax using the standard method applying any deductions, exemptions and tax credits available.
Step 2: Add back any deductions, and tax credits not available for AMT
Step 3: add 60% of untaxed half of capital gains (if applicable)
Step 4: Deduct the Dividend gross up (if applicable)
Step 5: Deduct the $40,000 basic minimum tax exemption
Step 6: Calculate federal tax at 15 per cent of taxable income.
Step 7 Deduct any eligible personal credits such as the basic credits, credits for dependents, old age, disability, EI premiums, tuition, medical and charitable expenses.
Example of AMT
Farmer “A” decides to sell the farm for $1.1 million. Farmer “A” originally purchased the land many years ago for $100,000. This leaves Farmer “A” with a capital gain of $1 million which he uses his $1 million Lifetime Capital Gain Exemption (LCGE) to eliminate any tax payable.
For the second calculation of his income, Farmer “A” must add back in 60% of the taxable portion of the capital gain, which is $300,000 ($1,000,000 x 0.5 x 0.6). Once the $40,000 basic exemption is applied, the remaining $260,000 is taxed at 15% for a total of $39,000 in AMT. Farmer “A” must pay the full $39,000 in taxes but can use deduct this amount from his future tax payable over the next 7 years. If he does not have enough taxable income to fully claim back the AMT over that 7-year period, Farmer “A” can never reclaim the full AMT.
It is extremely important for farmers who will be realizing a large capital gain or large amount of dividends to work with their tax advisor on how to best plan for the reality of AMT.
The eligibility requirements for qualified property vary depending on how long the seller has owned the land. If a farmer has owned the land since before June 17th 1987, there are two simple eligibility criteria:
- The property be used principally in the business of farming at the time of sale or
- If it is not being used in farming at the time of sale then it must have been used for farming for at least five years in the past
If a farmer purchased that land after June 17th 1987, then there are more strict eligibility criteria:
- For any two years, a qualified user (the current owner or the parents, grandparents, great grandparents, or children or grandchildren), must have been actively engaged in farming and
- Earned more gross revenue from that farming business than from all other sources of income
To ensure you qualify for the Lifetime Capital Gains Exemption, consult with your accountant.
Restricted Farm Losses
In 2013, the federal government proposed to increase the annual maximum deduction used in the calculation for Restricted Farm Losses from $8,750 to $17,500 for taxation years that end after March 20, 2013. This means that if your net farm loss is $32,500 or more and you are subject to the Restricted Farm Losses provisions, you will now be able to deduct $17,500 ($2,500 plus 50% of the next $30,000 in losses) from your other income. If your net farm loss is less than $32,500, the amount that you will be able to deduct from your other income is the lesser of:
- Your net farm loss for the year or
- 2,500 plus 50% x (your net farm loss minus $2,500)
Note that restricted farm losses will apply in cases where a taxpayer’s chief source of income for a year is neither farming nor a combination of farming and some other source of income. In other words, restricted farm loss rules will apply unless all other sources of income are subordinate to farming income. Any remaining farm losses can be applied against farming income earned in other taxation years, and can be carried back three years and carried forward a maximum of 20 years.
Example: Joe incurs a $20,000 loss from his farming business in 2015. Joe has off farm income that exceeds his farming income. The loss Joe can deduct against his other sources of income is $11,250 ($2,500 + (50% x ($20,000- $2,500))
The Canadian Federation of Agriculture has stated its disappointment with the changes to the Restricted Farm Loss provisions proposed in the 2013 Federal Budget. The CFA has suggested a greater increase in the annual maximum deduction was needed and applying these provisions to more farmers is undesirable.
Small Business Tax Rate
In the fall of 2017, the federal government announced a reduction in the federal tax rate for incorporated small businesses from 10.5% to 10% in 2018 and 9% in 2019. This was followed by the Ontario government announcing a reduction in the provincial tax rate from 4.5% to 3.5% effective 2018.
The combined federal and provincial tax rate for eligible small business corporations will be as follows:
- 15% in 2017
- 13.5% effective January 1, 2018
- 12.5% effective January 1, 2019
The small business tax rate will benefit small to moderate farming operations in Ontario. The small business tax rate applies to Ontario farm operations with $500,000 or less in farm income. The reductions in the small business tax rate will allow smaller farm operations to reinvest in their farming operations.
Sales Tax (HST, RST, Fuel)
Harmonized Sales Tax (HST)
On July 1, 2010, the Ontario Retail Sales Tax (RST) was replaced by the Harmonized Sales Tax (HST). The provincial portion of the HST is eight per cent and the federal portion is five per cent, for a combined HST rate of 13 per cent.
The Canada Revenue Agency administers the HST.
Like other businesses, farm businesses, with a HST registration must charge, collect, and remit HST on sales of taxable goods and services. HST registrants must also file HST returns on a regular basis. Some goods and services are exempt from HST, others are zero-rated, i.e. taxable at a rate of zero.
The Canada Revenue Agency has a questionnaire to help businesses determine if they must or should register for HST.
Ontario Retail Sales Tax (RST)
Although the Ontario government harmonized the provincial sales taxes with the federal goods and services taxes in most cases, the Ontario Retail Sales Tax continues to apply to:
- Taxable insurance premiums and
- Private sales of specified vehiclesfrom a person who is not a GST/HST registrant
Insurance premiums on livestock and agricultural property are conditionally-exempt from Ontario Retail Sales Tax when the purchaser is entitled to an exemption and provides a valid Purchase Exemption Certificate or a valid identity card such as the OFA Membership Card.
The following insurance premiums are conditionally exempt from Ontario Retail Sales Tax:
- Contracts of insurance on agricultural property include farm buildings, structures, equipment and livestock normally located on the farm. To qualify for the exemption from RST, the property must be owned or leased to a person actively engaged in the business of farming and the property must be located on the farm as farm property.
- Contracts of insurance for all-terrain vehicles used by farmers for agricultural use.
- Contracts of insurance for bloodstock or livestock purchased by a person engaged in the business of farming, to insure livestock against loss through death, sickness, accident or theft of the animal.
An Application for Refund of Retail Sales Tax (RST) on Insurance or Benefit Plan Premiums paid within the last four years can be submitted to Ontario Ministry of Finance.
Diesel Fuel Tax
Diesel fuel used in on-road, plated vehicles is subject to three taxes:
- Federal Excise tax (4.0 cents per litre)
- Provincial Fuel tax (14.3 cents per litre)
- HST at (13 percent)
The Provincial Fuel tax and the Federal Excise tax are fixed-rate taxes. They do not vary with the price of diesel, while HST is calculated based on the price of the diesel.
In Ontario farmers are permitted to purchase and use “coloured diesel” in their unplated farm equipment. Coloured diesel is exempt from the 14.3 cents per litre Provincial Fuel tax. Farmers are also eligible for a rebate of HST paid on fuel used to operate unplated farm equipment. The 4 cents per litre of Federal Excise Tax is applied to all diesel fuel, on-road and off-road.
The potential savings of coloured diesel are best illustrated with an example:
Diesel Fuel Prices & Taxes
|Unplated farm equipment||On-road use in plated vehicles|
|Assumed pretax price of diesel||81 cents/litre||81 cents/litre|
|Provincial Fuel tax||–||14.3 cents/litre|
|Federal Excise tax||4 cents/litre||4 cents/litre|
|Subtotal||85 cents/litre||99.3 cents/litre|
|Add 13% HST||11.05 cents/litre||12.9 cents/litre|
|Subtract HST rebate||11.05 cents/litre||–|
|NET TOTAL||85 cents/litre||112.2 cents/litre|
- Taxable goods – https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-gst/charge-gst-hst.html
- Exempt goods – https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-gst/charge-gst-hst.html
- Zero rated goods – https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-gst/charge-gst-hst.html
- Excise fuel tax – http://www.nrcan.gc.ca/energy/fuel-prices/18885
- Ag insurance premiums – https://www.fin.gov.on.ca/en/tax/rst/insurancebenefitplans.html
- Identity card – https://www.fin.gov.on.ca/en/tax/rst/insurancebenefitplans.html
Scientific Research and Experimental Development (SR&ED) Tax Credit Program
The SR&ED program provides tax credits to individuals and corporations that fund research and development. Under current legislation, the SR&ED program is difficult to access for farm commodity groups. Although individual farmers can apply for the tax credit on research check-off dollars, no mechanism exists to allow farm commodity organizations to directly claim the credit on behalf of members.