Farming and tax: income, losses and passing on the farm

If you farm on your own or in a farm partnership, your farm profit or loss goes on your personal return, like other self-employment income. Farmers also get rules of their own: a choice of accounting method, inventory adjustments, limits on losses when farming isn’t your main living, and ways to pass farm property to your children without paying tax right away.

What counts as farming

Farming income includes income from tilling soil, raising livestock, dairy, poultry and fur farming, growing fruit, trees or Christmas trees, beekeeping, hydroponics, and running a feedlot or chicken hatchery. Fish farming, market gardening, nurseries, greenhouses and maple sugar bushes can count too, depending on the circumstances. Raising or breeding animals to sell as pets isn’t farming: it’s an ordinary business, reported on Form T2125. Farming income generally doesn’t include pay for working as an employee in a farming business, or income from trapping or sharecropping.

Reporting farm income

Report your farm income and expenses on Form T2042, Statement of Farming Activities, and file it with your return. If you take part in the AgriStability and AgriInvest programs, don’t use Form T2042: use the program guide for your province instead, Guide RC4060 in Alberta, Ontario, Saskatchewan and Prince Edward Island or Guide RC4408 elsewhere, which includes the statement you file (Form T1163 or T1273). Participants in Quebec use the regular guide for their return and contact La Financière agricole du Québec about the programs. Partners in a farm partnership that files a partnership information return report their share from their T5013 slip.

You generally have a December 31 year-end. Your return is due June 15, but any balance owing is due April 30; see our deadlines guide.

Cash or accrual

Unlike most self-employed people, farmers can choose between two methods:

• Cash method: report income when you receive it and deduct expenses when you pay them. You don’t count inventory, apart from the adjustments below.
• Accrual method: report income when you earn it and deduct expenses when you incur them, and count and value your inventory (livestock, crops, feed, fertilizer, supplies) at each year-end.

The cash method covers only your farming: you must use accrual for any separate business and for your GST/HST or QST reporting, and keep separate records for each method. You can switch from accrual to cash by filing on the cash method with a statement of the adjustments. Switching from cash to accrual needs permission: write to your tax services office, explaining why, before your return is due.

Inventory adjustments on the cash method

• Mandatory inventory adjustment (MIA). If you have a net farm loss and still hold inventory you bought and paid for at year-end, you must add back the lesser of your loss and the value of that purchased inventory, which reduces the loss.
• Optional inventory adjustment (OIA). You can choose to add up to the fair market value of all your year-end inventory, purchased or not, minus any MIA.

Whatever you add one year, you deduct as an expense the next. Guide T4002 has the valuation charts.

Farm losses

How much of a farm loss you can deduct depends on how central farming is to your living, which can change, so review it each year.

• Fully deductible. If farming is your main source of income, you can deduct the whole loss from other income. The CRA looks at things like your gross and net income, capital invested, cash flow, personal involvement, the farm’s ability to make a profit, and your plans to develop it.
• Restricted. If you farm as a business, intending to make a profit, but farming is neither your main source of income nor your main source alongside a smaller side-line job or business, only part of the loss is deductible: the lesser of your loss and $2,500 plus half of the loss above $2,500, up to $17,500 a year. The rest is a restricted farm loss.
• Not deductible. If you don’t run the farm as a business, none of the loss is deductible. The same applies if the farm’s size and scope make a profit impossible now or in the near future: the CRA treats it as a personal farm, and its expenses as personal expenses.

A farm loss can be carried back 3 years or forward 20 against any income; a restricted farm loss can too, but only against net farming income. When you sell farmland, the part of your unused restricted farm losses that came from property taxes and interest on money borrowed to buy the land can be added to its adjusted cost base, reducing your capital gain to as low as zero (but not creating or increasing a capital loss). Your restricted farm loss balance goes down by the same amount.

Passing the farm to your children

You can transfer Canadian farm property to your child during your lifetime and postpone the tax on the capital gain and any recapture of capital cost allowance until your child sells it. Your child must be resident in Canada just before the transfer, and the property (farmland, or depreciable property such as buildings) must have been used mainly in a farming business in Canada in which you, your spouse or common-law partner, or any of your children were actively engaged on a regular and ongoing basis. “Child” includes an adopted child, your spouse’s or common-law partner’s child, a grandchild or great-grandchild, and your child’s spouse or common-law partner.

You can set the transfer price anywhere between the property’s adjusted cost base (undepreciated capital cost, for depreciable property) and its fair market value. Transferring at that cost postpones all the tax: your child is treated as having paid that amount and reports the postponed gain and recapture when they sell. Shares of a family farm corporation and interests in a family farm partnership can qualify too, if all or substantially all (generally 90% or more) of the fair market value of the corporation’s or partnership’s property is property used mainly in farming.

A similar tax-free transfer is available when a parent dies, generally if the child was resident in Canada just before the death and the property is transferred to them within 36 months after it (the CRA may allow longer in some cases); see our wills and estates guide. Transferring qualified shares to a corporation controlled by your children has its own rules; see Form T2066, Election for Immediate or Gradual Intergenerational Business Transfer.

Selling qualified farm property

A gain on qualified farm or fishing property may qualify for the capital gains deduction. That property includes real property such as farmland and buildings, shares of a family farm corporation, interests in a family farm partnership, and quotas such as milk and egg quotas. Land, buildings and quotas generally have to have been owned throughout the 24 months before the sale by you, your spouse or common-law partner, your children or parents, or a family farm partnership, and meet a farming-use test.

For 2025, the CRA’s farming guide says that, under proposed changes, the lifetime capital gains exemption for qualifying property is $1,250,000, with indexation resuming in 2026. The CRA’s indexation table lists $1,275,000 for 2026. You calculate the deduction on Form T657; our guide to the lifetime capital gains exemption explains how the limit works.

GST/HST, instalments and EI

• GST/HST. Many farm products are zero-rated, including fruits and vegetables, grain and hay sold in quantities larger than consumers usually buy, and livestock raised for food. Others, such as contract work like tilling or harvesting for another farmer, sod, firewood and horses, are taxable. Many farm purchases are zero-rated too, including qualifying farm tractors and other listed farm equipment. Zero-rated sales count toward the small supplier test; see our GST/HST registration guide.
• Instalments. If your main source of income is self-employment income from farming or fishing, you have one instalment date a year, December 31; see our instalments guide.
• EI. If you meet Service Canada’s eligibility criteria, you may be able to register to pay EI premiums for yourself.

What to do

• Choose cash or accrual, and keep separate records for each method you use.
• Keep grain cash purchase tickets and marketing board cheque stubs with your records, generally for six years.
• If you have a farm loss, check each year whether it’s fully deductible or restricted, and track restricted losses to use against future farm income.
• Before transferring farm property or shares to a child, confirm they qualify and choose the transfer price deliberately.