Regulations Amending the Income Tax Regulations (2018 to 2022 Livestock Deferral): SOR/2024-10

Canada Gazette, Part II, Volume 158, Number 4

Registration
SOR/2024-10 February 2, 2024

INCOME TAX ACT

P.C. 2024-78 February 2, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, under section 221footnote a of the Income Tax Act footnote b, makes the annexed Regulations Amending the Income Tax Regulations (2018 to 2022 Livestock Deferral).

Regulations Amending the Income Tax Regulations (2018 to 2022 Livestock Deferral)

Amendment

1 Subsection 7305.01(1) of the Income Tax Regulations footnote 1 is amended by striking out “and” at the end of paragraph (c), by adding “and” at the end of paragraph (d) and by adding the following after paragraph (d):

Application

2 Section 1 applies to the 2018 and subsequent taxation years.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Income Tax Act (the Act) provides a tax deferral in respect of the sale of breeding livestock used in a farming business carried on in a region that has experienced drought or excess moisture conditions as prescribed under the Income Tax Regulations (the Regulations).

Background

In circumstances where drought or excess moisture conditions (i.e. excess rain, sudden melting of snow, river or lake floods, that is to say when water covers land that is normally dry) significantly affect forage yields, farmers may be forced to sell breeding livestock (breeding animals and breeding bees) because of the prohibitive costs of maintaining the livestock in these types of poor conditions.

The income earned from the sale would be required to be included as income in the year of sale and subsequently taxed. If new livestock is purchased in the same year, the cost of the purchase would be deducted from income as an expense. However, in regions where drought or excess moisture conditions exist, the sale and repurchase of livestock do not usually happen in the same year because it is difficult to replenish a herd in such a region. Therefore, having an income inclusion in one year without a corresponding deduction in the same year typically results in a significant tax bill.

The livestock tax deferral provision, pursuant to section 80.3 of the Act, permits farmers who dispose of breeding livestock because of drought or excess moisture conditions existing in a prescribed region in a given year to exclude a portion of the sale proceeds from their taxable income until the following year, or the year following a consecutive series of years where drought or excess moisture conditions persist, as the case may be. In this way, the proceeds of the sale will be available to fund the acquisition of replacement livestock.

To defer income, the breeding herd must have been reduced by at least 15%. Where the breeding herd has been reduced by at least 15%, but less than 30%, 30% of income from net sales can be deferred. Where the herd has been reduced by 30% or more, 90% of income from net sales can be deferred.

The tax deferral targets breeding livestock because its sale is akin to disposing of long-term productive assets. Livestock that qualifies for the deferral includes

The Act defines breeding animals and breeding bees, and provides the formula to calculate the deferral amounts.

Typically, the Minister of Agriculture and Agri-Food compiles a list of regions impacted by drought or excess moisture conditions in the early fall. The list is finalized in December or early in the following calendar year, when finalized forage yield information is available. Such timing can be impacted by additional moisture conditions that need to be considered. The recommended regions for a particular taxation year are proposed to the Minister of Finance at the initial and final stages and, following the concurrence of the Minister of Finance, public announcements are made on the Department of Agriculture and Agri-Food’s website to allow impacted farmers to make decisions with respect to livestock management in a timely manner. Subsequently, the Minister of Finance recommends to the Governor in Council the addition of the regions to the list of prescribed regions in the Regulations.

The current recommendation for addition to the list of prescribed regions in the Regulations has been delayed by a number of factors, in particular, the Government’s prioritization of its response to the COVID-19 pandemic, both in terms of legislation and program development. Notwithstanding, the list of regions has continued to be made public by the Minister of Agriculture and Agri-Food so that taxpayers can arrange their farming operations accordingly.

Objective

To amend the Regulations to designate prescribed regions for the 2018, 2019, 2020, 2021 and 2022 taxation years.

Description

The Regulations Amending the Income Tax Regulations (2018 to 2022 Livestock Deferral) prescribe the drought and excess moisture regions that are eligible for tax relief in the 2018 to 2022 taxation years by listing them in the Regulations. The list of designated regions to be prescribed in respect of each taxation year is published on Agriculture and Agri-Food Canada’s Web page “Livestock Tax Deferral Provision.”

Regulatory development

Consultation

The list of prescribed regions was developed through consultations held by Agriculture and Agri-Food Canada with various parties, including provincial agriculture and municipal affairs departments, municipalities, farm associations, and crop insurers.

Following the public announcements made by Agriculture and Agri-Food Canada on the prescribed regions for 2018 to 2022, no comments or concerns were raised by the public or stakeholders in response to these announcements.

Modern treaty obligations and Indigenous engagement and consultation

These amendments to the Regulations are not expected to impact Indigenous groups or the Government of Canada’s modern treaty obligations.

Instrument choice

Regulatory amendments are required to continue an annual process of ensuring that farmers in certain prescribed regions due to drought or excess moisture conditions are eligible for the livestock tax deferral. No other type of instrument is available under the Act to achieve this objective.

Regulatory analysis

Benefits and costs

These amendments codify previously announced prescribed regions that qualify for the livestock tax deferral that have already been applied in the 2018, 2019, 2020, 2021 and 2022 taxation years.

While the value of deferrals may vary from year to year depending on the severity of the drought or excess moisture conditions and the number of affected regions, they are unlikely to reach or exceed $1 million annually.

These changes are relieving in nature. These amendments benefit farmers located in the designated regions because the tax deferral allows them to defer reporting the income from the sale of the livestock until the moisture levels improve, which removes the immediate obligation for them to pay tax on the income from the sale. They can use the proceeds from the sale to replenish their herd, and the income reported will be offset with the purchase of new livestock.

The benefit of this measure to farmers represents the time value of the deferral of the tax liability associated with the deferred income. Instead of farmers paying tax in the year the livestock is sold, the income is deferred until the taxation year when the region in which the farming business is carried on is no longer a prescribed region. If the farmer purchases replacement livestock in that taxation year, the cost of purchasing the replacement livestock can partially or fully offset the deferred income. The cost to the Government is the time value of the deferral of the tax revenue associated with the deferred income. Instead of taxing the income in the year the livestock is sold, the taxation of the income is normally deferred until the taxation year when the region in which the farming business is carried on is no longer a prescribed region. The cost to the Government and the benefit to farmers are offset and no exchange of goods or services occurs. As such, this is considered a transfer payment within the cost-benefit framework.

Without these amendments, it would be necessary for the Canada Revenue Agency (CRA) to reassess farmers in those regions to deny the tax deferral and add 100% of the amount to the farmer’s income in the year of sale. This is because farmers will have already sold livestock and claimed the deferral in respect of the 2018 to 2022 taxation years in reliance on the announcements made by the Minister of Agriculture and Agri-Food. The administrative cost for farmers and the Government to undertake this could be considerable. Avoiding these outcomes is a primary benefit of this initiative.

This measure has a positive impact on the economy because it provides stability to the livestock farming industry when it is affected by adverse, unpredictable weather conditions.

Small business lens

The Regulations were analyzed in the context of the small business lens, and it was concluded that the Regulations would impact small businesses. The amendments are not expected to impose new administrative or compliance costs on businesses. Rather, as described in the “Benefits and costs” section, these amendments are intended to give farmers, many of whom are small business owners, the option to defer the reporting of income and have greater flexibility to recover from drought conditions.

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in the administrative burden on businesses and no regulatory titles are repealed or introduced.

Regulatory cooperation and alignment

These amendments do not have a regulatory cooperation component.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

Broad-based farming measures do not easily lend themselves to gender-based analysis plus (GBA+) because they can affect a wide variety of stakeholders. It is also difficult to discern how each of the various stakeholders is affected by a given farm tax initiative. Nevertheless, gender impacts are considered for all farm tax measures and assessments undertaken, to the extent that relevant information is available. Based on Statistics Canada’s Table 32-10-0381-01 “Characteristics of farm operators: Age, sex and number of operators on the farm, Census of Agriculture, 2021,” 30% of farm operators that were in Canada in 2021 were female. Therefore, it is estimated that the measure will benefit fewer women farm operators in comparison to men.

Implementation, compliance and enforcement, and service standards

The Act provides the necessary compliance mechanisms for enforcement of the Regulations. These mechanisms allow the Minister of National Revenue and the CRA to assess and reassess tax payable, conduct audits and seize relevant records and documents. The modifications will come into force effective January 1 of the respective taxation year to which they apply and will apply retroactively.

Contact

Katharine Skulski
Tax Legislation Division
Department of Finance
James Michael Flaherty Building
90 Elgin Street
Ottawa, Ontario
K1A 0G5
Telephone: 613‑299‑9608