Follow these steps to determine your reference margin:

Step 1: Calculate a production margin for each of your previous years (up to five) as follows:

A: Subtract your **Allowable Expenses** from your **Allowable Income**^{Footnote1}

B: If you file to the Canada Revenue Agency (CRA) on the cash basis, you must add the following **change in value**^{Footnote2} calculations to amount you calculated in step 1:

- Change in crop inventory = (ending inventory multiplied by end of year price) minus (starting inventory multiplied by start of year price).
- Change in livestock inventory = (ending inventory multiplied by end of year price) minus (starting inventory multiplied by start of year price). If you have breeding herd, your change in your breeding herd inventory is calculated differently from your market livestock. Change in breeding herd inventory = (ending inventory minus starting inventory) multiplied by end of year price.
- Change in purchased inputs = end of year amount minus start of year amount.
- Change in deferred income and receivables = ending receivables and deferred income minus starting receivables and deferred income.
- Change in accounts payable = starting accounts payable minus ending accounts payable.

The above calculations can result in either a positive or negative value.

**Production margin calculation example:**

Allowable Income

$130,000

− Allowable Expenses

$90,000

+ Change in purchased inputs

$1,000

+ Change in accounts receivable and deferred income

($6,000)

+ Change in accounts payable

$4,500

+ Change in crop inventory

($1,000)

+ Change in livestock inventory

($3,500)

= Production Margin

$35,000

Step 2: Calculate an average of your production margins as follows:

- If you farmed in each of the previous five years, remove the highest and the lowest years, then average the remaining three years.
- If you did not farm in each of the previous 5 years, average the previous 3 years.
- If you did not farm in each of the previous 3 years, average the years you have available.

The average you calculate is your reference margin.

**Reference margin calculation example:**
2013 |
2014 |
2015 |
2016 |
2017 |

$25,000 |
$30,000 |
$20,000 |
$36,000 |
$35,000 |

include |
include |
exclude lowest |
exclude highest |
include |

Reference margin |
$25,000 + $30,000 + $35,000 = $90,000 ÷ 3
= $30,000 |