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Deducting farm losses

The Supreme Court of Canada has ruled that farmers with town jobs can deduct all farm losses from their off-farm income

Folks who have town jobs that help them survive money-losing farming operations will have an easier time deducting losses from other income thanks to a case, Canada versus Craig, decided by the Supreme Court of Canada on August 1, 2012.

“The Craig case says that if a taxpayer with two businesses, one of which is farming, then notwithstanding the fact that the non-farm business may be more lucrative than the farm business, provided both businesses have the indicia of real businesses, then the restricted farm loss provisions of the Income Tax Act holding deduction for farm losses to $8,750 per year, would not apply,” says Mark Siegel, tax partner with law firm Gowlings LLP in Ottawa.

Translation: Farm losses will now be deductible from other income provided the farmer invests substantial time, labour and capital to at least try to make a profit on the farm. It’s a 180-degree turn from the former rule that, despite trying to make a living from farming, if something else pays better, farm losses over $8,750 per year are not deductible.

The Craig case

The case pitted the Canada Revenue Agency against John H. Craig, a high profile breeder of race horses. Breeding and racing was not consistently profitable. He lost $222,642 in 2000 and $205,655 in 2001 on the horse operation. He deducted those sums from his total income: $1.2 million in 2000 and $800,000 in 2001. The CRA objected and denied the losses, limiting him to deductions of $8,750 in each year on the basis that horse breeding was not Craig’s chief source of business. It was not intended to make money, the CRA said. They viewed it as a sideline to his main business of being a lawyer.

The CRA had relied on an earlier Supreme Court decision, Moldowan versus the Queen, decided in May 1977, in which only farmers who got the majority of their income from farming could deduct all losses. Moldowan, like Craig, raised horses. But he could not satisfy the test that “the taxpayers must have a profit or a reasonable expectation of profit.” From 1960 to 1972, the horse operation lost money, even as his other income sources — salary and non-farm investments — generated income. The court ruled that the horse business was a hobby that was not intended to make money and limited the deduction of losses.

The Supreme Court, in overruling itself in the former Moldowan decision, decided that if a taxpayer devotes significant time and resources to the farming business, the combination would have to be considered as a whole. That one part of the combined businesses was more profitable than another would not deny a full deduction for farming losses.

Tests for deduction

The Supreme Court decided in the Craig decision that there should be other tests for deducting farm losses. Those tests would include how much capital is invested in farming and the other source of income, the amount of time spent farming and on the other source of income, how much income each produced, and, finally, the taxpayer’s way of life, history in farming and future intentions. It is a far broader and more accessible test of farm loss deductions.

In Mr. Craig’s case, though his business as a lawyer took more time than horse breeding, the court considered that he had a large amount of money invested in stables, was a member of the racing community, and was even a chairman of a board devoted to improving the integrity of racing. The court therefore ruled that horse breeding and racing in combination with the practice of his usual business, law, was the source of his income. The farm loss deduction would not apply in his case, said the court.

“The Craig case means a lot to beginning farmers and new entrants who are looking at agriculture as a viable career option but lack the capital to make the farmers profitable,” says Doug Chorney, President of Keystone Agricultural Producers, an organization based in Winnipeg that represents farming families and 23 commodity groups. “Now, with the Craig case, they can have an off-farm job, say in the oil patch, and make money so that, one day, they can be full time farmers. Moreover, the Craig case can keep family farms going and act as a bridge to the time that a new generation of farmers can come in to restore the profitability of a family farm.” †

About the author

Columnist

Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.

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