You crave a quieter existence and the joys of hobby farming, but you want to do it without channelling Chevy Chase’s character from Funny Farm, whose attempts to embrace rural life are wrought with one disaster after another.
A shift in gear that gives you time to start work on that novel you’ve always wanted to write, raise some ducks and a cow or two and grow your own veggies. For the capital gains exemption to apply, farming has to be your main source of income for a period of that ownership.So, you’re thinking about throwing in the towel at your city gig and moving to the country for some peace, quiet and fresh air. However, you don’t automatically qualify simply because you classify yourself as a part-time farmer. In contrast, business farmers and part-time farmers can possibly access this exemption and pay little to no tax on the increase in the value of their farmland, even if this increase is significant. If you classify yourself as a hobby farmer and file as a hobby farm throughout the life of your activity, your land will not be considered qualifying farm property and would not be subject to the lifetime capital gains exemption when it comes time to sell. Other income potentialĮven if your farming activity is primarily recreational and results in little income, you should keep in mind the potential for your land to increase in value throughout your period of ownership. If you turn a profit in the future, you will be obligated to pay tax on that income and this will probably be at a higher marginal rate than you are accustomed to because you are adding this to your usual sources of income. If you are classified as a part-time farmer, you will need to demonstrate to the CRA that you have a reasonable expectation of profit. While many of these clients are tempted to use losses that might be incurred from these activities against sources of income to bring down their tax liability, we always make it clear this is only possible if you are classified as a part-time farmer, not a hobby farmer. When working with clients who could be considered hobby farmers, we have an annual discussion about the classification of their farm. Many farmers who have significant income in areas other than farming and a small, non-profitable farm on the side try to deduct their farm losses, but that is only possible if you demonstrate there was a realistic expectation of profit, which does not apply to hobby farms. However, this also means losses related to this activity cannot be applied against other sources of income. If you are accurately classified as a hobby farmer, you do not have to report your farm income on your tax return. You could be generating a little bit of revenue from the sale of a few cows or crop that’s growing on a small parcel of property, but if you’re not actively marketing your activities or looking to turn a profit, the CRA would consider these hobby activities. In most cases, these farmers have significant income outside their farm business and they’re simply farming because it brings them pleasure. It could be that the farmer in question lives on an acreage and has excess land available or perhaps they grew up on a farm and are conducting farming activities for nostalgic purposes. Hobby farming is different from part-time farming in that the farming activities involved are primarily recreational and there is no realistic expectation of profit.
In addition to these two options, there is a third classification that presents a different set of advantages and limitations: hobby farming. In these cases, reporting the farm as a business could be advantageous because the expenses related to the farm might be higher than the income and these losses can be applied against other sources of income, lowering the taxpayer’s liability. Someone who has a farming business on the side with a regular source of income outside the farm would be considered a part-time farmer.
When they compile their tax returns, they report all their farm revenue and have the ability to deduct relevant expenses against any revenue on their tax return. The pros and cons of being classified as a hobby farmerĪ full-time farmer gets into the business of farming with the reasonable expectation of profit.
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