Investing time in planning AgriInvest withdrawals can save taxes and help farmers build their cash flow and retirement funds for the future. But it’s a management opportunity that too many account holders leave on the table, according to a national accounting firm.
Canadian farmers have money sitting in AgriInvest accounts that earn next to nothing in interest, says BDO partner Don Simpson. The collective total was $2.27 to $2.37 billion in 2020 and deposits are earning about one per cent interest, less than the rate of inflation.
Why it matters: Farmers should talk to their accountants about planning AgriInvest withdrawals. A proactive management approach can save taxes and build business and retirement funds.
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“Farmers need to be talking to their advisors about how they can best benefit from their assets,” Simpson says. “The taxation of AgriInvest is one of the things that people aren’t paying enough attention to.”
Since withdrawals from the government matched funds and the interest earned on deposits are taxable, some farmers may be leery about accessing this cash, so they treat it as a rainy-day fund.
With a proactive approach, however, Simpson says there are many ways to make the money work better for them.
He notes that those who report a small annual profit or loss using cash basis accounting can withdraw AgriInvest funds with little or no tax cost. Using this money to buy inputs for next year would represent both income and an offsetting expense, meaning no net taxable income would be generated.
“Since costs have gone up in recent years, we are seeing more farmers using short-term debt to buy inputs,” says Simpson. “If you would otherwise be paying four to six per cent interest to the bank, it makes sense to give up the one per cent interest earned on the AgriInvest deposit to lower interest costs and have more working value in the farm.”
From an investment perspective, he advises farmers who are not using a corporation for their farm to draw the AgriInvest taxable income and make an RRSP contribution that directly offsets the amount.
Farmers with corporations can also draw funds and deposit them into a safe investment account inside that corporation. The after-tax value will compound faster than the value accumulating in the AgriInvest account.
“Taxation is not a once-a-year exercise, so we always have to look at the big picture,” says Simpson. “Proper planning to pay a reasonable amount of tax on a recurring basis over a lifetime will result in significant savings compared to unplanned transactional events.”
AgriInvest accounts have a maximum balance limit based on the most recent three years of allowable net sales. If farm production declines, the farmer may be forced to withdraw funds and end up with an unmanaged tax cost.
Closing an account during a year with significant income from liquidating other assets could also result in an unfavourable tax position.
AgriInvest is a producer-government savings account designed to help farmers manage small income declines. Account holders can deposit up to 100 per cent of allowable net farm sales each year and receive a matching contribution on one per cent of allowable net sales from Agriculture and Agri-Food Canada.
