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OPTIONAL
INVENTORY ADJUSTMENT This is a very good averaging tool
that farmers can use to keep their incomes from drastic
fluctuations. OIA is first used in a lower income year to
increase income to a point where the farmer uses up his
non-refundable credits (basic exemption, spousal exemption,
age exemption, tuition credits, disability credits, medical
and donation credits). Most of these non-refundable credits
are lost forever as the unused amount generally cannot be
carried forward. This provision allows any amount up to the
fair market value of inventory on the farm to be added to
income for the year. The amount that is added to income in
year one is deducted in year two. In effect, unsold
inventory can be included in income in one year and deducted
from income in the year it is sold. The process can repeat
from year to year until income is high enough that it would
not be advantageous to use it. You would consider using this feature
to bring your income to the top of the low tax bracket
(approximately $30,000), if you felt that in the next year
your income would be in a higher bracket. Savings in doing
this can be as much as 15%. This also has the effect of
increasing your RRSP limit, and the amount that you can pay
into CPP for the year. Using OIA, is in most instances, of
more value than carrying a loss forward. In order for a loss
to be carried forward, taxable income for the year must be
zero, and results in wasted non-refundable credits. It is
normally advantageous to increase a loss by claiming CCA and
then adding Optional Inventory to income, than it is not to
claim the CCA because of not needing it. A better deduction
is obtained in the year following by claiming CCA and
increasing the OIA amount. Consideration should be given
however to the fact that claiming CCA will likely result in
recaptured CCA at the time when all equipment and buildings
are ultimately sold.
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