Tax Planning

[wade]

If you had a personal income tax problem, what would you do? Buy fertilizer (price dropping but usually fall apply for work load reasons), buy cattle (have the feed but BSE,etc.???) to sell in the spring to buy fertilizer, pay the taxes, or????

[timm]

Hi Wade. A bit of background. I am an agricultural accountant and have an interest in a 10,000 acre grain farm.

When you say a "tax" problem, it depends on a few things. Are you in the lowest tax bracket (under $38,000)above $75,000 etc. The level of income will somewhat change the answer.

Typically, inputs are the first choice. In my mind, RRSP's would be before cattle. Although there is nothing wrong with buying some RRSP's as more of a savings, it will tie up cash and only give you a maximum deduction of $26-$44 for every $100 depending on the tax bracket you fall in. Buying cattle can be somewhat more risky in that you may put at risk the purchase cost or investment.

Do you have other income beside farming. You are not able to create a loss with pre-purchased inputs, cattle etc. You are only able to reduce the farming income to nil.

Is this a one time spike in income or has it been constantly growing over a number of years? If it is a spike and the following year does not appear to be similar then, you may choose to find a method to bring down.

How profitable of a year was 2008. What is your future tax liability taking into account inventories, fair value of equipment verses undepreciated cost, amount of debt that you are carrying etc.

Have you been regularily utilizing the lowest tax (at least). We all draw a certain amount of cash during the year to live, make debt repayments etc so it is always in the best interest to make sure you use the lowest tax bracket.

There are a few other points to ask but I will start with that if you are interested in replying

[wade]

Was posting question more for argument sake since have noticed people thinking fert. prices to come down in future but when???? and end of year approaching.

Have RRSP's. Not a big fan of them. Feel I would be better off paying down land, etc.

Not a big fan of only minimum tax bracket also. If you spend the money, you have to pay the tax on it. You can only defer tax so long. Don't get me wrong, I prepay inputs, repairs, etc. to the max and do inventory adjustmenting, etc. but I think you have to pay some tax for personal expenditures, debt retirement and so on.

Anyways, question more posed for discussion for tax spending options other than fert. with price dropping and maybe not all the way before year end.

[wade]

I guess basically I was looking for ideas on how to avoid year end taxes but not lose the cash flow for next years crop.

[dfarms11]

Well I would not put it into fert unless it really tanks by the end of dec. I would only stick it into cattle if they were to tank also and if you have the feed. Seed might be the only thing to prebuy. Doubtfull that will drop too much. If you weren't worried too much about cash flow, I think it would be a great time for RRSP's. They are the greatest buy on anything now. See where UFA has their fuel contracts at. That may also be as good a bet as anything as I am sure fuel will go up again by spring.

I don't understand your comment on "not a big fan on the lower tax bracket"? If you are teettering between tax brackets, you should always try to stay in the lower one. Then in a year you know you will be in a higher one, be as high as you can. Then the next few years you can be back into the lower bracket. Over the long term you should pay less overall tax on the same amount of money. Just my thoughts.

[dfarms11]

What so you think about this? With a recession looming, do you think taxes could end up going higher? Maybe this could be the year to pay the most tax that you can? An accountant or an economist might have a better answer to that.

[wade]

I feel if you are spending over $69,000 on personal expenditures you are getting yourself in a hole if you continually pay tax on only $30,000

[wade]

With your feedback comments I have a better idea of the type of operator you are. I agree with your comment on the low tax bracket idea. I personally feel many operations are getting caught up in the "old mentality" of little or no tax. Obviously this is not you and your approach is similar to mine.

[wade]

The next question I would throw at you would be have you considered a corporation? If you are consistent in your profitability and spending there may be a way to reduce your total tax by utilizing a corporation someday. If your are familiar with a family farm partnership and its benefits before incorporating, it is an excellent way to achieve a permanent tax saving.

If cash preservation is important I know of a few situations where customers have purchased excess inputs and had a portion of the amount refunded a couple months into the new year.

In Sask, we have venture capital funds like Golden Opportunities and Sask Works. For a $5000 max investment you are able to realize a $1700 fed/prov tax credit besides the regular RRSP deduction amount.

If the oil/gas/minerals industry were more stable I would suggest flow through shares.

In the short term, there are really no secrets to reducing income taxes other than what has come about in the various discussions. On the positive side, once you pay the tax on the income that may you have the option to defer the problem goes away.

[wade]

I have found in the last year that many families have situations that qualify for the disability tax credit for either the kids or themselves. In the past, this credit has been normally been applied to those with significant disabilities visable to the eye. More recent revisions to this section allow the credit to be applied to situation of ADHD, diabetes and other disorders that your would not consider a disability.

[wade]

What do people think that the % of probability of taxes going up in the future?

[Hopperbin]

I would say say corporate taxes go down or stay the same to keep jobs in the country.
Personal taxes have no where to go but up.

[Hopperbin]

Having the corporation is very handy.
You can pay yourself an average wage one that you think is OK in the long term. If you are building up the farm and don't need all the wage you give the farm an interest free share holder loan, to be paid back at anytime in the future.
The corporate tax does not increase untill you get above 400,000 profit. For that reason I purchase no inputs for the next years ever and don't defer grain tickets because I am under 400,000 profit. That way I have the option of using extra inputs or defered grain sales in a year I would be over. Purhaps just wishfull thinking but when the grain prices rocketted up this year anything can happen.

[Hopperbin]

Actually there is a small benefit (2-3%) in going to $500,000 in 2008 because of the way the eligible dividend rules are applied and the tax intergration rates when converted to personal. Hopperbin, I would expect that if you are approaching the $400,000 limit that a good accountant would have advised you fully on this small, yet significant advantage.