Livestock Tax Deferral
Res #: 30-02M
Responses Received: No
Departments: Finance Canada (CCRA)
WHEREAS, due to the severe drought and lack of feed to winter the livestock, producers are being forced into selling most of their quality herd; and
WHEREAS, the resulting income is over and above their normal sales and is subject to taxation; and
WHEREAS, it takes several years to establish a quality herd;
THEREFORE BE IT RESOLVED, that SARM lobby the Federal Government to make changes to the Tax Deferral on the Drought Induced Sales of Breeding Stock Program so that any sale of livestock in designated drought areas, over and above what would be considered normal sales, be eligible for tax deferral for up to five years after a drought and that the policy include all commercial animals.
Response from the Honourable John Manley:
I am replying to your letter of November 19, 2002 to the Honourable Elinor Caplan, Minister of National Revenue. Your letter concerned resolutions regarding the requirements to charge Goods and Services Tax (GST) for pest control officers and the extension of income tax deferrals to drought-induced sales of breeding livestock in drought regions to the sale of all types of livestock.
I have noted your resolution that the federal governement should create a level playing field for all small contractors who derive less than $50,000 per year exclusively from pest control. I would first clarify that the small traders' threshold is for companies and other business persons generating gross annual revenues of less than $30,000. The rationale for setting the small traders' threshold at this level is to strike a balance between two policy objectives.
One of these policy objectives is to limit the administrative and compliance costs by giving persons involved in activities that are part time or small scale in the nature of the option of not becoming registrants and thereby not having to collect the tax. The second policy objective is to maintain equity among competing businesses. The $30,000 limit was selected as a reasonable threshold to maintain a balance between equity and compliance costs. I would add that regardless of the level at which the small traders' threshold is set, there will always be industries in which direct competitors fall on either side of the threshold. The balancing of the above objectives is best met at the existing lower threshold of less than $30,000. For these reasons, the government is not contemplating any changes in this area.
With respect to the existing tax deferral on drought induces sales of breeding livestock in a prescribed drought region, this deferral was implemented after extensive consultations with various farm organizations on the parameters of a drought relief program, including the definition of "breeding animals".
The current drought relief tax deferral is not designed to be an income-averaging mechanism. Rather, the purpose of this measure is to provide farmers with a tax deferral for income arising of drought-induced sales of breeding livestock until the drought is over. In this way, the untaxed portion of proceeds is available to purchase replacement breeding stock in the year subsequent to the drought. In that year, farmers are entitled to claim deductions for the costs of any replacement animals and thereby offset the income inclusion.
The drought deferral measure was deliberately targeted to sales of breeding animals because the sale of breeders is akin to disposing of a long-term productive capital asset. This is not the case with the sale of calves and feeders, which are inventory held for sale by a farmer. Existing mechanisms in the tax law, such as cash-basis accounting and the optional inventory adjustment, allow farmers to manage their annual income inclusion in respect of such inventory. In particular, farmers can use the optional inventory adjustment rules to increase their income to absorb all or a portion of the cost of inventory in a taxation year thereby creating an offsetting deduction in the following taxation year in which income arises from the sale of inventory.
I would also like to assure you that the government has responded to the difficult conditions farmers have been facing in recent years. On June 20, 2002, the federal government announced $5.2 billion in new investments in the sector over the next six years. This recent investment includes funding of $3.4 billion for the implementation of the Agricultural Policy Framework (APF), the federal-provincial-territorial initiative being developed with industry to help the Canadian sector better respond to changing consumer demands and global competition and to better manage the many risks associated with farming.
The announcement also includes $1.8 billion over the next two years as a part of a cost-shared package with provinces to help farmers deal with challenges like drought and to help them bridge to more effective risk management programs. For example, $60 million over four years will be used to invest in prairie water supply expansion. As well, it will be used to assist producers who submit eligible frojects that address long-term water supply issues under the Rural Water Development Program.
I trust my comments have clarified the government's policy on these issues.