T2042 for farming: cash method, the MIA and a $17,500 loss cap

Who files T2042, and who files an AgriStability statement instead?

Form T2042 is for farmers who are sole proprietors and for members of farming partnerships, and as of October 2026 the latest version the CRA has posted is the 2025 form canada.ca. File a separate form for each farming business, and file it with the T1 canada.ca. The instructions now live in Guide T4002, which covers business, professional, commission, farming and fishing income in one guide.

The CRA says a participant in AgriStability and AgriInvest doesn't use Form T2042 at all and files one of the four program statements canada.ca. Which guide applies depends on the province: Alberta, Ontario, Saskatchewan and PEI participants use Guide RC4060, the rest of Canada outside Quebec uses the harmonized Guide RC4408, and Quebec participants stay on Guide T4002 canada.ca.

Farming covers soil tilling, livestock raising or showing, poultry, dairy, beekeeping and feedlots, and in some cases fish farming, market gardening, greenhouses and maple sugar bushes. Wages from a farm employer, trapping, sharecropping and raising animals to sell as pets are not farming income canada.ca. Pet breeding goes on Form T2125 instead.

How do the MIA and OIA work on a cash method return?

A farmer can elect the cash method under subsection 28(1): income when received, expenses when paid, and no inventory, with two exceptions laws-lois.justice.gc.ca. Those exceptions are the mandatory inventory adjustment (MIA) on line 9942 and the optional inventory adjustment (OIA) on line 9941 canada.ca. The cash method is for the farming income only: your client still uses the accrual method for any separate business and for GST/HST.

Purchased inventory is valued at the lower of cash cost and fair market value, item by item. Specified animals are the exception: horses, plus cattle registered under the Animal Pedigree Act if your client elects. They can be valued anywhere from 70% of cash cost up to full cost canada.ca. Unlike the MIA, the OIA counts all inventory, including raised grain and standing crops, not just what your client bought. Use the CRA's four MIA charts and keep them in the file canada.ca.

Worked example. Your client farms on the cash method with a December 31 year end and shows a $40,000 loss on line 9899. At year end they still own feeder cattle bought for $30,000 that are now worth $27,000, and $8,000 of unapplied fertilizer worth what they paid. Raised grain in the bin brings total inventory to a fair market value of $95,000.

Why take an OIA when the MIA already left a loss? A nil or small positive result lets your client use personal credits that would otherwise be wasted, and a bigger OIA can smooth income into a year with lower brackets. The cost is a matching expense in the next year, so the OIA moves income, it never removes it.

How much of a farm loss can your client deduct?

If farming is your client's chief source of income, or their chief source in combination with a subordinate source such as sideline employment, the whole farm loss is deductible against other income. It carries back 3 years and forward 20 canada.ca. The same carryover is on the non capital loss page.

If neither is true, section 31 restricts the loss. Your client deducts $2,500 plus half of the loss above $2,500, capped at $17,500, and the rest becomes a restricted farm loss laws-lois.justice.gc.ca. The CRA applies the $17,500 cap to tax years ending after March 20, 2013, so it reaches its maximum at a net farm loss of $32,500 canada.ca.

A restricted farm loss also carries back 3 years and forward 20, but it can only be deducted against net farming income in those years, never against other income. Put the deductible part on line 14100 and note "RFL" or "Section 31" to the left of line 14099 so the CRA sees why the figure differs from Form T2042 canada.ca. Review the chief source test every year, because a loss can be restricted in one year and fully deductible in the next.

Which CCA class does farm equipment go in?

CCA goes on line 9936 of Form T2042, from the CCA areas on the form canada.ca. Land and living things, including trees and animals, get no CCA, so split the price of a farm between land and buildings before you add anything to a class canada.ca. Land goes in Area F, and milk or egg quota bought in the year goes in Area H as Class 14.1 property.

The class list comes from the CRA's farm CCA table in Guide T4002 canada.ca. The half year rule and the accelerated investment incentive apply to farm assets the same way they apply to any business. If your client still uses property that was in the farm business before 1972, fill in the Part XVII section of Form T2042 canada.ca.

Can the LCGE shelter a gain on farmland or quota?

Yes, if it's qualified farm or fishing property: real property, Class 14.1 property such as milk and egg quota, shares of a family farm or fishing corporation, and interests in a family farm or fishing partnership canada.ca. For 2026 the lifetime limit is $1,275,000 canada.ca, a $637,500 deduction, shared with QSBC shares. See lifetime capital gains exemption 2026 for the year table, CNIL and AMT.

Report the sale on Schedule 3 under "Qualified farm or fishing property" canada.ca. Two gotchas on a farm sale. Unused restricted farm losses can reduce the gain on the land, but only the property taxes and loan interest that went into those losses, and never enough to create a capital loss. And if the farm includes the house, split proceeds and cost between the principal residence and the farm, or elect under subparagraph 40(2)(c)(ii) canada.ca.

A transfer of farmland or farm depreciable property to a child resident in Canada can roll over at any amount between cost (UCC for depreciable property) and FMV canada.ca. Electing above cost lets your client use the exemption on the transfer. On a sale to a child for a note, the capital gains reserve stretches to ten years.