Farmers and cash-basis accounting: be wary of the word “deemed”

The Income Tax Act (ITA) permits farmers to elect to compute their income from a farming business for a taxation year on a cash basis.

In simplified terms, the calculation of income on a cash basis includes all amounts received or deemed to be received minus all amounts paid or deemed to be paid in the taxation year. Understanding what is meant by “cash received” and “cash paid” is usually a relatively simple exercise; for the most part, it means simply looking at a bank statement for a particular period to see what amounts were received and paid.¹

But the ITA also refers to amounts deemed received and amounts deemed paid. These amounts may not show up in the bank statement for a particular period, but nonetheless must be included in the calculation of income for the period in which they are deemed received or paid.

In the context of the Canada Emergency Rent Subsidy (CERS) and the Canada Emergency Wage Subsidy (CEWS), the ITA deems payments from these subsidies to have been received immediately before the end of the qualifying period to which the payments relate. Thus, for example, a CEWS claim for the qualifying period 6, covering the four weeks of August 2, 2020 to August 29, 2020, would be deemed received immediately before August 29, 2020, even if the cash had not yet been received at that point. A farmer who has a December 31, 2020 taxation year-end must include the period 6 CEWS amount (deemed received) into income for that year, even if the cash was not received until after December 31.

Because of the presence of the word “deemed” in the ITA, farmers who elect to compute their income on a cash basis must bring into income the CEWS and CERS claimed (or to be claimed) for any qualifying period that ends within the taxation year, even if the cash is not received within that year.