The process to start a farm business or converting your hobby farm is lengthy but rewarding in the end. This post documents the process we went through to convert our hobby farm into a fully functioning farm business.
Although much of this information is highly specific to starting a farm in Ontario Canada, it’s worth a read for anyone looking to turn their hobby into a business.
Start a Farm business
What is farming in Canada?
Farming is loosely defined by the Canadian Revenue Agency as “…the raising and harvesting of animals or plants in a controlled environment“. I encourage you to read their article on farming, but for most people it’s going to be a straightforward answer if you’re farming or not. It’s important to note that they explicitly call out that the following activities are not farming (among others):
- raising or exhibiting wild or exotic animals
- raising or breeding of animals, fish, insects, or any other living thing, for use or sale as pets
- providing certain equine services such as horse riding lessons, dressage training, horse boarding, or quarantine service
Basically if you’re growing crops or vegetables and/or raising livestock for a purpose other than pets you’re farming.
Register the Business
The first thing we did was register our business as a partnership through the government of Ontario’s website, we automatically received our federal business number. The business registration is valid for 5 years and you can go back 60 days to claim income and expenses from the date your register. We also choose to register a business name instead of using both of our legal names for simplicity.
Register for HST
The next thing we did was register for an HST account. Although it is totally optional if you generate less than $30,000, registering is the only way you can take advantage of input tax credits. Your accountant can go into more detail regarding input tax credits but basically you recover the HST paid on expenses or purchases used in your business. You will have to charge HST on applicable sales.
The Right Accountant
After that we found a great farm accountant, not just any accountant but one that specializes in farming. They were highly recommended to us by friends, I would definitely reach out to your network and see who is good in your area. I have never filed our own taxes and wasn’t about to start now that we have a business. Our accountant gave us a book of all the expenses we needed to track throughout the year and I’ve been using an app called Expensify to help with this.
We have yet to file our taxes with farm income and I’ll write a follow up post after we do so but want to call out the Restricted Farm Loss. If you are just starting your business is likely to be operating at a loss (it cost you more to run the business than you earned) and you have another source of income. If the farm is not your chief source income you can only claim a portion of your loss and the remainder becomes your restricted farm loss.
Farm Property Class Tax Rate Program
After we had registered our business we wanted to take advantage of the Farm Property Class Tax Rate Program. If you are unfamiliar with this program, as a farmland owner you may be eligible for a reduced rate on your property taxes. Generally you will pay 25% of the residential property tax on anything over 1 acre. Although we only have 3 acres it’s a significant savings we can put back into the business.
This process was frustrating. I cried, more than once. It is not well documented and seems like one big goose chase. You have 3 entities all requiring certain criteria to meet their programs eligibility requirements but each dependent on one another. There is no clear entry point into this process.
Farmland vs. Rural Residential
First our property needed to be classified as farmland by the Municipal Property Assessment Corporation (MPAC). Of course we were classified as rural residential and had to begin the process for reassessment. You will receive a notice from MPAC with your property assessment that will contain a deadline for a Request for Reconsideration (RFR), ours was March and I was trying to do this in August. So we first had to apply for an extension and then we could apply for the RFR.
Once we were approved for the RFR we then had to wait to be contacted by MPAC to do our review. They came out to our farm for an inspection to ensure farming activities were actually taking place. Unfortunately because we did not claim any farming income in the previous tax year and receipts (income & expenses) were not satisfactory, we did not get our property classification changed for the year in which we were applying. However, because the agent could see we were actively working towards claiming farming income for the current tax year he did grant us a change beginning the next calendar year.
I have glossed over how difficult changing our property type was. I resorted to reading the Assessment Act myself and deciphered how they determine what is considered farmland. If you feel the assessment you are receiving is incorrect encourage you to keep pushing. But please, be informed when pushing back. Without data you’re just another opinion.
Once we were approved for the property type change we needed to apply to OMAFRA for the Farm Property Class Tax Rate Program. This is where most folks get confused. Eligibility requirements for this program are as follows:
- property is assessed as farmland by the Municipal Property Assessment Corporation (MPAC)
- the property is being used for a farming business that generates an annual gross income of at least $7,000
- farming business must have a valid Farm Business Registration (FBR) number
Since we had not yet claimed any farming income in the previous tax year we were disqualified by the second bullet. Additionally the only way to get a FBR number is to have generated at least $7,000 income in the previous tax year. At this point I was about to give up. However, OMAFRA offers a start up exemption if you have not yet met the requirement of an annual gross farming income of $7,000. You must clearly demonstrate that the property is being farmed and how the farming business will have an annual gross income of at least $7,000 in future years. It also negates the requirement for the FBR number. So we applied for the start up exemption and were approved!
All of the above steps were completed in 2018, based off 2017 income tax information. We finally got our start up exemption in the middle of December 2018. But because we had generated $7,000 of farming income for 2018 we were eligible and required to apply for our FBR number in January of 2019.
Farm Business Registration Number
To apply for the FBR number we called Agricorp as registration is done over the phone. We need to provide proof of our farming income exceeding $7,000 by August 2019. In addition to the Farm Property Class Tax Rate Program the FBR number grants you access to a variety of government programs, membership in a farm organization (which has their own perks!), and can be used to obtain Farm Plates for your farm vehicle. Finally after we have received our FBR number we will need to notify OMAFRA so we can be switched out of the start up exemption program.
Provincial Premises Registry
The last thing we did was register for the Provincial Premises Registry which is available to all agri-food business owners and operators in Ontario. It allows them to register their premises and receive a Premises Identification Number (Premises ID or PID) and certificate. The PPR is an initiative of OMAFRA and registration is voluntary.
This process has taken us over a year to complete, so if you’re feeling overwhelmed know I was right there with you 12 months ago. My advice is to take it in baby steps, set small goals, and accept you don’t have full control over everything. If you have any questions about the process we went through please comment below and I’ll reply ASAP!
**Note: We completed this process in 2018, please follow the links I have included and do your own research on these programs. This post is not a guide to starting a farm business but a documented account of the process we went through. I am happy to answer questions regarding our experience but you will need to contact the respective group for program specific questions.