Originally posted April 8, 2022.
Last week I wrapped up the second half of my conversation with Farm Credit Canada which largely focused on resources and financial planning advice for those looking to start a commercial farm. So much of that conversation was focused on understanding your own finances so that you know when and where to invest in your farm for the greatest return on your efforts. This week I'll be continuing that financial conversation but talking about our finances over the past year and our plans for 2022 as well as some helpful links for those trying to sort out their tax situation on a new farm.
Guiding Themes for our Perspectives on Money
So I've been sort of dreaming of this post since I started actively recording every single transaction Tyler or I have made since moving to Nova Scotia. As you probably remember, a huge part of our motivation to move here was to aspire to a debt free lifestyle (including no house mortgage) that would give us more freedom in our day to day life. Naturally, we won't be able to achieve this immediately without making some life-altering changes to our quality of life. So enters (DIY) financial planning.
I went out with a couple of friends recently and our conversation turned to the concept of different forms of capital. Jess, our resident permaculture expert, reminded me of the permaculture theory on 8 forms of capital: Financial, material, living, social, intellectual, experiential, spiritual, and cultural. If you aren't familiar with these terms, I would definitely suggest you spend some time reading about them as it might broaden your definition. As that link above suggests, freedom from the pursuit of financial capital (i.e. money) is a powerful form of liberation.
This liberation comes in the form of stress relief, as you don't have financial obligations that greatly outweigh your income. It comes in the form of time, as you don't have to be working outside of the home to make money to fill basic necessities like food, shelter and water. It comes in the form of security, as you reliably take care for yourself and your loved ones to meet those basic needs. And I don't think this goal is too fringe to be worth considering, since the debt to income ration in Canada has jumped another 10% since I left university five years ago (and I thought it was astounding back then!). I pulled this quote directly from the Financial Post last year:
"Mortgage debt rose $44 billion in the fourth quarter, and has climbed $300 billion from just before the pandemic, RBC said. At the same time, the end of government pandemic benefits has pushed disposable income lower. That’s translated into a record debt-to-income ratio of 186.2 per cent in the fourth quarter, Statistics Canada data show, meaning Canadians owe $1.86 for every dollar of disposable income."
So yeah, we don't want to be in that group if we can help it. Clearly the way most Canadians handle money is to put themselves in this situation because frankly, it is what everyone is doing. I don't put much onus on the typical person for falling prey to this situation because it is really hard to resist the constant pressures to spend and the cost of living certainly outpaces the stagnant wages we have had for decades. We certainly have a society that is pretty tight lipped about personal finance so you rarely hear about the internal struggle happening over at the Jones'. I was only lucky enough to have a frank conversation with a girlfriend wiser than I was a few years ago who started me down this path and I am forever grateful for that mentorship.
So without further ado, here are the basic themes that flow throughout most of our farm planning conversations:
An Introduction to Personal Spending
If you don't know how much money you spend on a monthly basis, you can't make effort to reduce your unnecessary spending in a way that will stick. I have been tracking every expense that comes through my bank account for the past three years and I can tell you, it made a huge difference in my perspective towards money to review those transactions. I personally liked using an app called Emma (I don't get anything for saying this, I did the free trial on a few apps and I liked this one even though it cost $20 a year. But hey, if you aren't paying for it you are the product not the customer right?). Emma syncs nicely with your bank account and allows you to enter in your budget and sends you neat little reminders when you are going to go over. It also gives you a little video run down at the end of the month to show where you were successful and where you could use some improvement. I would review my transactions in the morning with my breakfast coffee on the couch before heading to work.
This year, since Tyler and I were doing this endeavor together, I set up an account in my accounting software for our business. I set up custom accounts for our personal withdrawals for things like groceries, personal insurance, cell phones, etc etc. And then we tracked EVERY. SINGLE. PAPER. RECEIPT. Tyler is a champ for remembering to grab all of them, he has diligently kept them all by putting them in the glovebox of whatever vehicle he is in so I can grab them all at a convenient date.
There is a great FREE software for small businesses called Waveapps that should help a new businesses learn about tracking income and expenses without much cost upfront.
Yes, it was a lot of work, but this is what used to be called balancing the cheque book. This is an exercise in discipline and I will probably do it forever. In the meantime, I get to share some really interesting takeaways on that personal spending as an educational piece:
We spent 68% less on living expenses (utilities and rent) in Nova Scotia compared to Ontario.
Overall, we felt like we didn't sacrifice too much of our quality of life yet our personal spending is very low. This afforded us to invest more in our farm.
Areas for Improvement
Investments - A Necessary Expense
It took me a long time to come around to investing in stocks and bonds but I have begrudgingly decided that it is worthwhile. I have about 15% trust in the long term viability of the financial system, but if it does work then the security it provides will be worthwhile in retirement. And, if the system collapses by then like it did back in the 1920s, it won't matter if I have the money stashed under my mattress or dissolved in some stocks, it'll likely be pretty worthless either way.
Tyler and I both have self-directed RRSPs that we invest in using a self-directed trading platform called Questrade. It's fairly straight forward and I have found my overall experience to be very good. Our investment strategy is fairly simple, invest 20% of our take home income into the RRSP and purchase proven dividend paying stocks across industries. If you are interested in this mumbo jumbo, you can learn a lot by joining a great Facebook group called Canadian Dividend Investing on Facebook that my brother recommended to me. We roll over our tax return into our TFSAs and purchase pretty similar stocks as our RRSPs.
Our retirement goal is to be set up on our farm so we can live a simple yet active lifestyle mostly gardening, paddling, fishing, and generally puttering. Our modest contributions to our retirement savings plan should be enough for us to live our lifestyle in comfort while retiring at the age of 55-60.
Off Farm Versus Farm Revenue
As Angie mentioned, most new farms require what is called "Off-Farm Revenue" to keep the business rolling. For us, most of our income in our first year was Off-Farm income. Surprisingly, between butchering pigs, some small contract work and selling at the farmer's market last year, we made a fair chunk of change for qualifying farm income, already reaching 11%!
Since we have a farm and since we plan on building our farm with the intention of it eventually being a profitable business, we can reap the taxable benefits of investing into our farm as early as this year. As you know, your Off-Farm Income (regular paycheck) is taxed at the source (you never see that money), and in Nova Scotia that is roughly 9% provincially and 15% federally for a total deduction of 24%. Hold this thought, we will come back to it.
The regular farm Income we received is recorded on using a Statement of Farming Activities, we claim the full capital cost of building our barn this year as well as all the expenses for fuel, supplies and tools as it relates to developing our property. Those receipts we kept so fastidiously organized really came in handy at this point. Of course, our investment in our farm far outweighed the income we received from it, so we are able to declare a farm loss. This is where the real benefit of the off farm income comes in handy, as we can use the loss from the farm to lower the tax obligation we had from our Off-Farm Income and receive a larger refund. This is called a Restricted Farm Loss and you can read more about it on the CRA's website here.
For my bookkeeping business, this must be recorded separately in a Statement of Business/Professional Activities as it is not a farming activity.
The Merits of Voluntarily Remitting HST
Back when we originally purchased our property, we decided to voluntarily remit HST even though we were below the threshold of $30,000 of revenue per year. Heck, we didn't know if we would make ANY revenue last year.
So why did we join? It's simple: ITCs
ITC's are Input Tax Credits, or a fancy term for the retail/sales tax you pay on everything. When we put our offer in our property, we got a fun surprise that we would have to pay HST on the purchase of the land because it was owned as a commercial Christmas tree lot. So there went a few thousand dollars that we would not have received back had we not registered to voluntarily remit HST. By signing up as a voluntary HST remitter, I committed myself to do this extra paperwork to keep all the receipts for every expense on the farm, but it was worthwhile because we received nearly $5,000.00 in return.
Anyone, especially farmers, making substantial improvements or constructing buildings for business use should seriously consider signing themselves up as a remitter so that they can take advantage of a refund for every expense.
Here is some general information on becoming a HST registrant/remitter from the CRA.
Looking forward to 2022So after dressing down 2021, we were pretty happy with our financial decisions over the last year. Our day-to-day comforts are not much different, yet we have made a huge leap forward by securing our own land mortgage free and moving to it.
In retrospect, our vehicles were the biggest downfall of my planning because I did not take them into consideration and we had a few LARGE bills that were unexpected. Fortunately, it is easy to see how we will save in 2022 as I am working from home this year. Maintaining one vehicle will be more affordable on insurance, gas and repairs. Once we are down to one vehicle, I will be purchasing an e-bike so I can visit my friends who are just slightly out of comfortable cycling distance or run to do small errands and/or meetings in Bridgewater. This is good for our wallet and good for the environment, so its definitely a win-win.
I am working dedicatedly on building my own bookkeeping business, bringing in clients so that I can continue to grow the revenue we can make on our property. We are exploring selling brush this winter to a larger farm nearby as it requires little to no input costs other than our time. Since our focus this year financially was to stabilize ourselves, we are focusing our animal production on things that will either replace expenses we know we will have (like egg production through chickens) and breeding our goats for meat, cheese and soap production next year. These are minor expenses with returns that will save us on our grocery bill and help us to experiment building farm infrastructure with the smallest investment possible.
The final project for us is creating our farm business plan. I have a year's worth of information to start with and I would like to use the data from 2022 to plan for the growth of our operations in 2023.
So what do you think? Do you track your finances like we do? I love financial tips and tricks, especially anything to do with keeping things frugal so please share your thoughts. If you are overwhelmed at the thought of going this hardcore but you see the value in it, remember I am already three years into my financial literacy journey and I am a bookkeeper, which means I think about these things daily. The best thing you can do for yourself is to make a pact with yourself to start learning and take it one step at a time. Plus I am always here to offer support or more resources if you need them.