BEFORE YOU CELEBRATE THE NEW YEAR, REVIEW TAX PLANS
Originally published on December 7, 2000
Farmers and ranchers have for years deferred income and pre-bought inputs to defer tax to the subsequent year.
But this year's decision to defer income will yield an additional benefit beyond the usual one-year deferral of tax.
Tax rates are falling in 2001, and income deferred into next year will, in most cases, be taxed at a lower rate.
In Saskatchewan on Jan. 1, 2001, three surtaxes will be eliminated, the flat tax, the debt reduction surtax and the high income surtax.
What do these falling tax rates mean to you and your farm?
We are telling clients that this year's tax planning will usually produce favourable results. To illustrate the effects of these changing rates we have compiled three scenario tables.
Table 1 shows expected tax reductions for a single Saskatchewan taxpayer with no children. Given the varying levels of income we can make some general observations.
If you are a young, single farmer with $10,000 in taxable income, then you should consider deferring about $2,500 worth of income into 2001. A net income of $7,500 will use your personal credits and enable you to eliminate that year's personal income tax. The income deferred into 2001 will be taxed at a lower rate than in 2000.
If you are a single farmer with a taxable income at the middle rates but you are getting married in 2001, then look closely at the portion of the chart covering married people. If your wife will not be working off the farm, then deferring income into 2001 may work to your advantage.
If you are a single farmer with no plans for matrimony, the benefits of tax reform will come your way, but not to the same extent as those married with children.
The middle portion of the tax break chart in Table 1 shows the tax reductions expected for a married Saskatchewan taxpayer with one income and two kids. This part of the table illustrates that the family will benefit from lower tax rates in 2001.
The negative taxes for 2000 and 2001 are the Saskatchewan Sales Tax credits, which are payments to lower- and middle-income families.
Let's look at taxable incomes up to $20,000. The savings here are slightly more than 38 percent. If you are in this group than income deferral should generate value.
Let's a assume that you have $35,000 in taxable income in 2000. Because of lower commodity prices, you might expect to see your taxable income drop to $20,000 in 2001. Given these circumstances, then a $15,000 deferral will generate tax savings of $657.
This can be seen in Table 2 above.
Table 3 shows how the tax savings are calculated. Remember, this is one isolated example. All tax dynamics change when one or two variables differ.
Before implementing 2000 deferral strategies, be sure you and the Canada Customs and Revenue Agency agree on what you can defer.
Subsection 76 (5) of the Income Tax Act provides a list of commodities that can be deferred to a subsequent year. This list specifies wheat, oats, barley, rye, flaxseed and canola. Note that lentils and chickpeas aren't on this list.
For livestock producers there is really no legitimate means of deferring proceeds from cattle sales. Revenue Canada has stated that livestock proceeds will be included into the income of the seller at the date when the auction mart receives payment from its purchaser. If you are in the cattle business this is not worth the risk.
Another way to defer income is by using your Registered Retirement Savings Plan contribution room. One strategy might be to make a contribution on March 1, 2001 and withdraw the investment the next day.
The result is a deduction for the 2000 tax year and income (the withdrawal is counted as income) in 2001. The drawbacks are that you have to pay withholding tax and you use up RRSP deduction room. It may not be beneficial in all situations. Each person's circumstance is unique. Discuss applications with your accountant.
Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan. The opinions expressed in this column are for information only.