AgriInvest: Tax saving strategies for your farm

January 9, 2022 BDO CANADA

What is AgriInvest?

The AgriInvest program is a savings account with matching government contributions administered by Agriculture and Agri-Food Canada (AAFC) and is designed to help farmers manage small income declines and make investments to manage risk. Farmers use the program in different ways, including:

  • Making a deposit and then withdrawing the funds as soon as the government makes a matching contribution,
  • holding their money in the account to grow over time, or
  • dipping into their savings once in a while, using the account as a rainy-day fund.

Taking some time to plan your AgriInvest withdrawals can save taxes and help you build your business and retirement funds for the future.

The Minister of AAFC, Marie-Claude Bibeau, shared a staggering stat: collectively, in 2020 Canadian producers had over $2 billion in their accounts. That's a lot of money sitting in bank accounts, often earning about 1% interest—which is less than the rate of inflation. With a little planning, there are opportunities to make this money work better for you and your farm.

How to make AgriInvest work for your business:

Withdrawing from the government matching funds including the interest earned on deposits are taxable. So, it's important to consider your options when accessing this cash. See some scenarios below:

If, for example, at the end of the year profits are tighter than normal or if you have the ability to report a loss using cash basis accounting, a withdrawal will result in either a small tax cost or no tax cost. In this case, you may want to draw the funds from your AgriInvest account to buy inputs for next year. By doing this, you have both income and an offsetting expense, therefore no net taxable income is generated. If you were to borrow money from the bank to purchase your inputs and pay 4-6% interest to the bank on these funds, it makes sense to give up 1% on the interest earned on the AgriInvest deposit. This simple example saves 3-5% in net costs.

If you're not using a corporation for your farm, you might consider taking the AgriInvest taxable income and making an RRSP contribution that directly offsets the amount. This allows you to set aside the funds in your retirement portfolio to buy investments that are more likely to earn more than the 1% the AgriInvest deposits earn.

The AgriInvest accounts have a maximum account balance limit based on your most recent three years' allowable net sales. So, if your farm declines in production, you may be forced to withdraw taxable funds leading to an unmanaged tax cost. Saving for a rainy day is important, but exceeding the maximum account balance limit or withdrawing a large sum when tax rates are unfavorable can have punitive tax consequences.

Also keep in mind, if you decide to close your account during a year when you have significant income from liquidating inventory or other assets (land or equipment), the taxable amount will be in addition to the tax liability generated from liquidating assets. Taking the time to plan ahead when managing your financial affairs can prevent compounding tax, like in this scenario.

There is tremendous piece of mind in having cash available if needed, but you should use effective tax planning opportunities to let these funds do as intended—help you and your farm prosper when you need it most.

BDO experts are here to help your family and your business thrive. For more information, please contact:

Don Simpson, Partner

The information in this publication is current as of Dec. 20, 2021.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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