2022-0935631E5 Taxation and Reporting of OFCAF Farming Payments

Principal Issues: 1. Whether payments made to farmers under the Agricultural Climate Solutions - On-Farm Climate Action Fund Program (“OFCAF Program”) are taxable. 2. Whether payments under the OFCAF Program are considered “farm support payments” within the meaning of subsection 234(2) of the Income Tax Regulations (“Regulations”) such that payers are required to file an information return (AGR-1) in respect of such assistance pursuant to subsection 234(1) of the Regulations.

Position: Yes to both questions.

Reasons: 1. The payments to farmers under the OFCAF Program would have to be reported by the recipients either as income, pursuant to section 9 of the Income Tax Act (“Act”), paragraph 12(1)(x) of the Act or as a reduction of expenses or other costs, depending on the circumstances. 2. The payments under the OFCAF Program are considered “farm support payments” within the meaning assigned by subsection 234(2) of the Regulations since they are received in respect of a recipients farming business. Therefore, the payer has a requirement to file an information return (AGR-1) to report these payments.

Author: Foggia, Christina
Section: 9(1), 12(1)(x), 13(7.1), 28(1), 53(2)(k) of the Income Tax Act; 234(1) and 234(2) of the Income Tax Regulations

XXXXXXXXXX                                                            Christina Foggia, CPA, CA
                                                                                    2022-093563

June 2, 2022

Dear XXXXXXXXXX:

Re: Taxation and reporting of OFCAF farming payments

This is in reply to your email dated May 5, 2022, wherein you requested our views on the tax treatment of financial assistance paid to farmers under the Agriculture Climate Solutions – On-Farm Climate Action Fund Program (the “OFCAF Program”).

We have also reviewed whether the payer (a delivery organization that is funded and approved by Agriculture and Agri-Food Canada) is required to file a prescribed information return (AGR-1 slips and AGR-1 summary return).

The OFCAF Program is an initiative that was introduced to provide financial support to help farmers tackle climate change. (footnote 1)   The purpose of the OFCAF Program is to support farmers in adopting beneficial management practices (“BMPs”) that store carbon and reduce greenhouse gases in the areas of nitrogen management, cover cropping, and rotational grazing practices. Outreach, education, and training activities that support BMPs are also covered under the program. Furthermore, eligible recipients under the OFCAF Program include farm operators that carry on a farming business. (footnote 2)

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (“Act”).

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

1. Taxation of Payments

The income tax treatment of government assistance is based on specific rules in the Act. Interpretation Bulletin IT-273R2, Government Assistance – General Comments (“IT‑273R2”) (footnote 3) discusses the tax treatment of inducements and other forms of government assistance received by a taxpayer in the course of earning income from a business or property.

When government assistance is received in the course of earning income from a business or property, the application of well-accepted business principles for the purpose of calculating profit (or loss) under section 9 commonly require that the cost of the asset or the amount of the expense to which the assistance relates be reduced accordingly. Alternatively, where the government assistance is not related to an expense or asset, these principles require that the amount will generally be included in the recipients business or property income. If such well-accepted business principles do not apply, there are specific provisions in the Act that require the recipient to include the government assistance in business or property income [e.g. paragraph 12(1)(x)], or where appropriate, reduce the capital cost of the property to which to the assistance relates [e.g. subsection 13(7.1) for depreciable capital property or paragraph 53(2)(k) for non-depreciable capital property].

Paragraph 12(1)(x) provides, inter alia, that government assistance received in respect of an outlay or expense by a taxpayer, in a taxation year, in the course of earning income from a business must be included in income to the extent that the amount was not otherwise included in income (such as pursuant to section 9) or did not reduce the amount of an outlay or expense under subsection 12(2.2).

If a taxpayer has made an election pursuant to subsection 28(1) to use the cash method to compute their income from a farming business, the farmer will be required to include the government assistance in income when received.

Based on the description of the OFCAF Program you provided, we understand that eligible recipients under this program are engaged in the business of farming. Further, costs associated with a variety of activities may qualify for funding under the program, including: costs related to BMP adoption (in the three areas identified above), costs for the purchase of equipment, costs for the use of agronomic services, and costs associated with group training, education, and on-farm demonstrations of BMPs. Accordingly, in our view, assistance payments received by farmers pursuant to the OFCAF Program are generally required to be included in computing the recipient’s income from farming pursuant to section 9, or section 28 if applicable. Moreover, as mentioned above, depending on the circumstances to which the payment relates, the payment may reduce the cost of an asset where the assistance is received in respect of depreciable or non-depreciable property.

2. Reporting Requirements

Part II of the Income Tax Regulations (the “Regulations”) imposes an obligation on persons who make certain payments to file information returns. These provisions can apply to a wide variety of payments, including certain forms of government assistance. Whether payers under the OFCAF Program are obligated to issue tax forms in respect of payments made to farmers rests substantially upon the determination of whether such payments are included in any of the provisions listed in Part II of the Regulations.

Pursuant to subsection 234(1) of the Regulations (included in Part II), every government, municipality or municipal or other public body or producer organization or association that makes a payment of an amount that is a “farm support payment” to a person or partnership is required to make an information return in prescribed form (the “AGR-1”) in respect of the amount.

A farm support payment is defined in subsection 234(2) of the Regulations to include:

(a) a payment that is computed with respect to an area of farm land;

(b) a payment that is made in respect of a unit of farm commodity grown or disposed of or a farm animal raised or disposed of; and

(c) a rebate of, or compensation for, all or a portion of

(i) a cost or capital cost incurred in respect of farming, or,

(ii) unsowed or unplanted land or crops, or destroyed crops, farm animals or other farm output.

It is our view that the inclusion of the wording “rebates or compensation for, all or a portion of, a cost or capital cost incurred in respect of farming” in the definition of “farm support payments” generally results in the characterization as a “farm support payment” of most forms of government assistance payable to persons carrying on a “farming” business.

Based on the information provided, we understand that payments received under the OFCAF Program are generally a rebate of, or compensation for, all or a portion of a cost or capital cost incurred in respect of the recipient’s farming business. Moreover, in certain cases, payments received (or a portion thereof) are amounts computed with respect to an area of farm land (i.e., per acre payments for cover cropping). Accordingly, it is our view that amounts paid to farmers under the OFCAF program, would be a “farm support payment” described in subsection 234(2) of the Regulations. Consequently, the payer would be required to file with the Canada Revenue Agency an AGR-1 Summary, Return of Farm-Support Payment and a separate AGR-1, Statement of Farm-Support Payments slip (electronically where applicable) for each recipient whose total amount of farm support payment paid by the payer for the particular year equals or exceeds $100. You may wish to refer to section 205.1 and section 209 of the Regulations, which respectively set out the applicable electronic filing and distribution requirements.

For additional information on filing information returns, such as the AGR-1, electronically, please refer to Filing Information Returns Electronically (T4/T5 and other types of returns) – What you should know before. (footnote 4)

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo CPA, CMA
Acting Manager
Business and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The fund was announced in the 2021 Federal Budget and is part of the Government of Canada’s Agricultural Climate Solutions initiative.

2 Ultimate recipients include farm operators as per provincial and territorial requirements to participate in the Canadian Agricultural Partnership or similar programs.

3 https://www.canada.ca/content/...

4 https://www.canada.ca/en/reven...

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