Farming structure important consideration for new farmers

Understanding the distinct classifications of farming structures is essential for producers, particularly new producers, to navigate their tax obligations effectively and optimize their financial planning. Photo: File

Originally published April 30, 2025 on Western Producer, By Colin Miller

For those starting out as new farmers or branching out from the family farm, determining a structure with which to farm is an important consideration.

Farming structures can be categorized into the following distinct classifications for tax purposes:

• farming proprietorship
• farming partnership
• farming corporation
• farming joint venture
• farming trust

Understanding these classifications is essential for farmers to navigate their tax obligations effectively and optimize their financial planning.

We will not be dealing with farming joint ventures and trusts in this article because they have some special nuisances and technicalities that we will outline separately in the next article.

Outlined below is an overview of the other, more basic and common structures, to determine which may be suitable to your operation.

Farming proprietorship

A farming proprietorship is operated by an individual farmer. This type of operation is easy to set up and involves the cultivation of crops, raising livestock or other agricultural activities conducted on a farm.

The income generated from a farming business is reported on the farmer’s personal income tax return using forms T1163, AgriStability & AgriInvest Programs Information and Statement of Farming Activities, or T2042, Statement of Farming Activities, for those not enrolled in AgriStability or AgriInvest.

Farmers can deduct various expenses directly related to their farming activities along with capital cost allowance (CCA) on depreciable assets such as machinery, buildings and vehicles used in the farming operation.

It is essential for farmers to maintain accurate records of all income and expenses related to the operations to ensure compliance with tax regulations, such a GST reporting and personal tax filings, and to maximize deductions.

Farming partnership

A farming partnership is an arrangement where two or more individuals or entities combine resources to operate a farming business together, sharing the profits and losses.

Partnerships are often formed to pool expertise, share risks and enhance the efficiency of farming operations.

The income from a farming partnership is reported on the T1163 or T2042 for individuals or form T5013, Statement of Partnership Income, for partnerships involving corporations or individuals that meet certain criteria. Each partner then reports their share of the income or loss on their personal tax return or corporate tax return.

Partners can deduct their proportionate share of the farming expenses and claim CCA on their share of depreciable assets.

It’s crucial for partnerships to establish clear agreements outlining the roles, responsibilities and profit-sharing arrangements to avoid disputes and ensure smooth operation.

Farming corporation

A farming corporation is a separate legal entity formed to conduct farming operations.

Incorporating a farming business can provide several advantages, including limited liability protection, potential tax benefits and easier access to capital.

The income generated by a farming corporation is reported on the corporate income tax return using Form T2, Corporation Income Tax Return.

Corporations can deduct business expenses and claim CCA on depreciable assets similar to a farming business or partnership.

Additionally, corporations may benefit from the small business deduction, which lowers the corporate tax rate on the first $500,000 to $600,000 of active business income, depending on the province.

Incorporation also allows for more flexible estate planning and succession options because shares of the corporation can be transferred to family members or other parties.

It is important for farmers to consult with tax professionals and legal advisers to determine if incorporating their farming operation is the right choice for their specific circumstances.

Understanding these basic types of farming structures and their respective tax implications is crucial for farmers to make informed decisions about their business.

Each type offers distinct advantages and challenges, and the best choice depends on factors such as the size of the operation, financial goals and long-term plans.

Farmers should seek professional advice to ensure they comply with CRA regulations and optimize their tax strategies.