Although the GST/HST has been with us since 1990, questions still seem to arise regarding what farming-related items are taxable or zero-rated. As a general rule, farmers typically do not charge GST/HST on their sales but do pay GST/HST on their regular purchases. However, there are several exceptions to this rule.
For GST/HST purposes, “taxable” means subject to GST/HST at the prevailing provincial rate, which varies between 5 to 15 per cent (depending on the province). “Zero-rated” means subject to GST/HST at zero per cent.
Zero-rated farm equipment
In recognition of potential cash flow issues, the CRA allows certain farming equipment to be considered zero-rated for GST/HST purposes.
Zero-rated equipment must be used for farming and must also meet certain design criteria or specifications concerning size, capacity and/or power. Where the criteria or specifications are not met, the equipment is subject to GST/HST. The CRA has specific rules concerning what qualifies as zero-rated. For example, a tractor must have a rating of at least 60 PTO horsepower to be eligible for zero-rated status, regardless of whether it is used for farming or not.
In addition, if the original equipment is altered to the extent that it is no longer designed for farm use, it will be subject to GST/HST (e.g. a farm tractor modified to be used for snow grooming).
When zero-rated farm equipment is sold together with any other normally taxable accessories or equipment, all the items will be considered zero-rated provided they are attached to or installed on the zero-rated farm equipment at the time of sale and form part of the unit. When taxable accessories are not sold together with zero-rated farm equipment, they will not be treated as part of the zero-rated equipment and will be subject to GST/HST.
GST/HST must be charged when zero-rated farm equipment is rented or leased. However, when a lease of otherwise zero-rated equipment contains an option to purchase at the end of the lease period, the buyout portion of the payment would normally be zero-rated.
More information on zero-rated farm equipment can be found here.
Non-zero-rated commodity sales
Many farmers assume that GST/HST is never collectible on the commodities they sell. In fact, the CRA indicates that many farm commodities are subject to GST/HST.
GST/HST generally is collectible on sales of livestock not used for human consumption, including commodities such as horses, dogs, cats, mink and other fur-bearing animals. Some animals, such as rabbits, can either be raised for meat or as pets. If raised for meat, the commodity is zero-rated, while the sale of pets is taxable.
The treatment of hay, silage and fodder crop sales depends on the use and quantity sold. For a sale to be zero-rated, the quantity sold must be more than one large bale or its equivalent. The CRA defines one large bale as 750 kg. On top of the quantity sold, the CRA also indicates that hay, silage or fodder crop sold must be used to feed livestock or poultry for human consumption. The sale of hay for horse production would, therefore, be subject to GST/HST regardless of the quantity sold.
The treatment of seed sales also depends on the use and quantity sold. Small seeds in packages exceeding 125 grams, and large seeds, such as peas and beans sold in quantities greater than five kilograms, are zero-rated. The seeds must be for growing crops suitable for human consumption or feed for farm livestock or poultry. Therefore, certain kinds of turf grass seeds, for example, would not qualify as zero-rated.
Fertilizer qualifies as zero-rated if the amount supplied is in bulk quantities of at least 25 kg, where the total amount supplied is 500 kg or more.
The CRA provides an extensive list of other taxable commodities, including contract work, artificial insemination, cut flowers, sod, processed wool, maple sugar candy and gravel. In addition, GST/HST memorandum 44 provides detailed information on the tax status of agriculture supplies as they relate to GST/HST.
GST/HST on residential and commercial rentals
It is common for farmers to own residential properties on which they collect rental income. According to the CRA, and as most farmers are aware, GST/HST should not be charged on residential rental income. However, many farmers overlook the rule that they should not claim GST/HST input tax credits on expenses related to those properties, such as capital improvements, repairs and maintenance, hydro, telephone and heat. If they do claim such credits, they could incur substantial penalties and interest in an audit situation.
GST/HST is collectible on commercial rent, including land and equipment rentals. However, income that is received from sharecropped land is not subject to GST/HST.
Those who have recently built a new home or had an extensive renovation or addition may qualify for the GST/HST New Housing Rebate. This program provides a rebate on part of the GST, or the federal part of the HST, paid on the construction or purchase of most newly constructed or substantially renovated houses used as primary places of residence. Only homes with a market value of less than $450,000 qualify for the federal rebate. However, homes with any fair market value may qualify for a provincial rebate depending on the province of residence. The rebate is available for both individually owned homes and residential rental property owned by individuals or corporations.
To qualify as a “substantial renovation,” major changes must have been made to the house. Generally, 90 per cent or more of the interior of an existing house must have been removed and replaced to qualify as a substantial renovation. An addition must at least double the size of the livable areas of the existing house to qualify. As part of the application process, homeowners must retain and itemize all invoices for the project.
Farming can be a complex area of tax planning. Our team of farming experts at Baker Tilly is dedicated to ensuring our farmers have the most up-to-date information and tax data needed to operate their farms efficiently and effectively. Contact your advisor for more information.
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