Is a Crop Sharing Agreement Farming?
As we are about to start the Most Wonderful Time of the Year for accountants (aka tax season), we thought we would address a question that we often get from individuals who own farmland: Is a crop sharing agreement considered farming?
Before we answer that question let us first provide a definition of what is considered a farming activity. Although farming can take on many different forms, the general definition is as follows:
Farming is the raising and harvesting of animals or plants in a controlled environment. The activity of farming would generally involve the whole aspect of commercial production of any crop/plant or animal that has economic value.
Farming is defined in subsection 248(1) to include:
- Tillage of the soil (in other words, plowing, sowing, and raising crops)
- Raising or exhibiting livestock
- Maintaining horses for racing
- Raising poultry
- Fur farming
- Dairy farming
- Fruit growing
- Bee keeping
In addition to the activities described in the definition of farming in subsection 248(1), farming can also include:
- Engaging in an aquaculture operation
- Operating a woodlot
- Planting, growing and harvesting Christmas trees
- Operating a nursery or greenhouse
- Growing tobacco or medicinal marijuana, but not the manufacturing or processing associated with these crops
- Operating a chick hatchery
- Operating a maple sugar bush, which may include extracting and collecting maple sap
- Cultivating crops in water and hydroponics.
Whether activities constitute farming in any particular case is a question of fact to be determined based on the specific activities undertaken by a taxpayer.*
In addition to the above, to be considered a farming activity the individual (or entity like a partnership or corporation) must be significantly involved in the management of the farming activity and bare the risks involved with farming.
This being said, where a landlord engages in an agreement where his/her land is provided to another individual (i.e. tenant) for the exclusive use of a farming production and where the tenant is making all the day-to-day decisions of what is being produced and receives all the benefits of his/her work and bares the risks associated with the activity, the landlord will be considered engaged in a renting operation. Regardless of the method of compensation received as part of this agreement, be it in the form of a cash payment or a share of the crop, it will be considered as rental income for the landlord and a rental expense for the tenant. In other words, a crop share agreement is a rental activity.
If you happen to be a landlord engaged in the above-described agreement note that you are not considered to be engaged in a farming operation and therefore would need to report your income (and subsequent related expenses) as a rental activity. Albeit a rental operation can claim expenses, usually what is considered reasonable and related to earning rental revenue is a much shorter list that what would be considered an allowable farming expense.
However, there are many landlord/tenant relationships that may not be so clear-cut as a cash or crop share rent agreement. So note that it may not be such a straightforward answer as to whether you, as a landlord, are considered in the business of farming. One such agreement that we often come across or that is put into place when the landlord wishes to continue as a farming operator is what we refer to as a custom farming agreement. In short, this agreement, properly set up, maintains the farming activity at the landlord level. These types of agreements are more complex but can also come with certain tax benefits, such as being able to claim reasonable farming expenses or ensuring the land meets the requirements of Qualified Farm Property for the use of the Lifetime Capital Gains Exemption or the rollover provisions for the transfer of land to children (see previous newsletter articles that address these items).
As mentioned above, the question of being engaged in a farming operation is a question of fact. Those facts are not always clear or straightforward. Therefore, if you have any questions as to whether you are engaged in a farming activity compared to a rental activity or if you want to ensure that any agreement that you are party to can meet the requirements of farming activity, don’t hesitate to contact our Ag Team who would be happy to go over your situation to provide clarity.
* excerpt from Income Tax Folio S4-F11-C1, Meaning of Farming and Farming Business