Cash basis: a real election, used on purpose
Section 28 of the Income Tax Act lets a farming business report income when cash arrives and expenses when they are paid, and the election is available whether you farm personally or through a corporation. Used well, it is a timing tool: seed and fertilizer paid for in December deduct this year, while grain delivered under a January contract lands in next year's income. Used passively, it can stack two good crop years into one and burn through brackets that careful timing would have preserved.
Two adjustments police the election. The mandatory inventory adjustment applies when the cash basis produces a loss while purchased inventory sits on hand: you add back the lesser of the loss and the cost of that inventory, so nobody manufactures a loss by filling the shed with paid-for inputs. The optional inventory adjustment runs the other way. It lets you voluntarily add up to the fair market value of inventory to this year's income and deduct the same amount next year, a clean way to use up a low bracket or stop a loss year from wasting personal credits. We run the optional adjustment as a calculation every year, not an afterthought.
Part-time farming and the section 31 fence
Where farming is not your chief source of income, alone or in combination with another source, section 31 caps the farm loss deductible against other income at $2,500 plus half of the next $30,000, a maximum of $17,500 a year. The excess becomes a restricted farm loss, carried forward up to twenty years but deductible only against future farming income.
The line is factual, not declared: time committed, capital invested, and whether the operation runs with a genuine expectation of profit. An off-farm salary does not disqualify you by itself, but it invites the question, and the file should answer it before the CRA asks. For a smaller operation that mostly needs a CPA on call for questions like this, CPA Quick Support at $99 a month covers them between filings.
An HST return that pays the farm back
Farm output is mostly zero-rated while farm inputs mostly carry 13%, which turns the GST/HST return into a recovery mechanism. Registration is worth having from dollar one: the $30,000 small-supplier threshold is a red herring for farms, because staying unregistered simply forfeits the 13% on every input while adding nothing on sales that carry no tax anyway.
| Transaction | HST treatment |
|---|---|
| Grain, oilseeds and other field crops sold off the farm | Zero-rated |
| Livestock raised for human consumption; milk and eggs shipped under quota | Zero-rated |
| Tractors over 60 PTO horsepower, combines and most large field equipment you buy | Zero-rated on purchase |
| Custom fieldwork, trucking or snow clearing billed to others | Taxable at 13% |
| Cash rent on farmland you lease out | Generally taxable at 13%, subject to the small-supplier test |
| Parts, repairs, small equipment, ATVs, building materials | Taxable at 13%, recovered as input tax credits |
Refund returns attract pre-payment verification, which is routine rather than alarming. When the CRA asks for invoices before releasing a refund, CRA Audit & Review Support handles the correspondence so the refund lands instead of stalling for a season.
The returns themselves
An unincorporated farmer reports on form T2042 with the T1, on a calendar year, with farming losses feeding the section 31 analysis above. An incorporated farm files a T2, keeps the cash-basis election if it wants it, and chooses its own fiscal year-end, which is worth choosing deliberately: a year-end set after harvest revenue has landed gives clean cut-offs and puts the busiest accounting work in the quiet season. Corporate Tax Filing covers the T2 and the owner's personal return together, because on a farm the two are never really separate.
Farm-specific relief gets checked every year as a matter of course. Breeding livestock sold because of drought or flood in a federally prescribed region can qualify for the income deferral in section 80.3, and instalment schedules get reset when a poor year means you would otherwise be prepaying tax on a profit that is not coming. None of it is exotic; all of it is missed by preparers who see one farm a year.
