Is the sale of farm equipment taxable income in Canada?

The Canada Revenue Agency’s guide T4002 says that if you claim capital cost allowance (CCA) and later dispose of the property, you may have to add an amount to your income as a recapture of CCA. Alternatively, you may be able to deduct an additional amount as a terminal loss. So the sale is not simply income or not income. It depends on how the equipment was treated for CCA, which is the federal tax rule covered here.

When a sale creates recapture

Under section 13(1) of the Income Tax Act, if at the end of a taxation year the listed additions to a prescribed class exceed the listed deductions, the excess is included in income. This is subject to exceptions in section 13. The CRA says that a negative amount in column 7 of the CCA schedule is a recapture, entered on line 9600 for farming income. The calculation is in Area A of Form T2042.

When a sale creates a terminal loss

The CRA says that if the column 7 amount is positive and you no longer own any property in that class, you may have a terminal loss. Subsection 20(16) of the Act provides the deduction, and subsection 20(16.1) lists cases where it does not apply. Check both before counting on one.

Gains, replacement equipment and reporting

If you sell for more than it cost, the CRA says you will have a capital gain and possibly a recapture. The CRA says that in some cases you can defer recognizing either; among other conditions, you must acquire the replacement property within the specified time limits, and you (or a person related to you) must use it for the same or a similar purpose. Report the business part of the sale proceeds on line 9926. Inventory is a separate matter: under the cash method, the CRA says not to include inventory when you calculate income.

If the equipment sells with the farm

If the equipment sells as part of a wider farm sale, ask an accountant how the CCA rules above apply to it. For the whole picture, see selling a farm business in Canada. An accountant can work through Area A of Form T2042 for your situation.