It’s December! December 31st is the most prevalent year-end for businesses. It’s the default year-end for sole proprietorships and partnerships as well as a common choice for corporations. A key part of business management is knowing your potential tax liability. These rough calculations are exactly that, rough; but they tend to come reasonably close to the actual taxes payable so I’m sharing. This is for educational purposes only, call your accountant if you need assistance.
I am doing this math with a couple of assumptions including:
Your farm business is still using cash basis accounting;
Your accounting records are reconciled to November 30th;
You have a reasonable idea of what your December transactions will be.
Components of Income
Taxable income is made up of several items including your net operating income. For this year your net income should include:
Net income from regular business transactions excluding the sale of capital assets like equipment, land and quota.
If you received the Canada Emergency Business Account (CEBA) and did not declare the $10,000 last year, add that. If you got the additional $20,000 earlier this year, you’ll need to add another $10,000 to your 2021 net income.
Any insurance proceeds, grants, subsidies or other income support payments received during the year for your farm. Insurance proceeds to replace damaged equipment should be listed separately and not included.
Add what you estimate for December.
Taxable Income
Taking the net income from above, you’ll need to make several adjustments:
Deduct your capital cost allowance (CCA), which you can use last year’s number if you bought more assets this year. This is the tax equivalent of amortization. If your net income from above includes amortization, add that back first. Then deduct the CCA. If this is your first year, use 20% of the value of your equipment.
If your net income did not include your lease payments, deduct those.
Deduct last year’s inventory (this is usually found under “optional inventory adjustment” and “mandatory inventory adjustment” on last year’s tax return).
If you withdrew from your AgriInvest account, add the taxable portion of the matching contribution. You can find this in your statement.
Add any interest and penalties you received during the year for failing to file on time back to income. These expenses can not be deducted.
If you sold any equipment or got insurance proceeds higher than what you originally paid for it, take the difference between the original purchase price and the price you received for the equipment and include 50% of the difference.
The resulting number is an estimate of your taxable income. If your inventory stays the same most years, you can ignore that step. However, if your inventory value has changed, add the new value of the inventory to your taxable income calculation after deducting last year’s adjustments.
Final Step
Once you have that taxable income number, you can calculate the estimated tax liability. This will vary depending on province but for Ontario personal taxes if the income is less than $50,000, 24% is a good number to work with. Between $50,000 and $100,000, I would use 34%. If it’s higher than $100,000, I hope you are incorporated. For Quebec, use either 27% or 37%.
Corporations can use essentially the same calculations and use a tax rate of 12.2% for Ontario (unless you made over $500,000, in which case you should be talking to your accountant anyway). If your corporation is in Quebec, the tax rate is 13%.
Take the taxable income number and multiple it by the rate to get a rough estimate of what your taxes owing might be. If you sold land or quota during the year, the above rates are not the same and the calculations are different so it is best to speak with your accountant in that situation.
Comparing the above rates and why a farm should incorporate is beyond the scope of this article today but I will tackle it at some point because there are some fascinating strategies that can be utilized with incorporation.
As always, if you have questions, reach out! Taxes are complicated and this is really a rough approach but it does work and can help you make year-end decisions.