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Optional Inventory Adjustment (OIA)

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 if not used 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 also consider using this feature to bring your income to the top of the low tax bracket (approximately $40,000) 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 14%. 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 this 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.