Principal Issues: In a situation where an individual retires, receiving many types of pension income, whether subsection 31(1) would apply if he incurs losses with respect to his farming activities.
Position: General comments provided. Devoting more time to the farming activities because of his retirement is not sufficient to conclude that the losses from the farming activities are deductible or are not subject to subsection 31(1).
Reasons: Question of fact. Previous positions.
Ordre des CPA du Québec - Roundtable on personal taxation
January 21, 2016 Conference
Question 7 - Liability rules on restricted farm losses
An individual carries on a farming business for many years but farming is not his main source of income.
His main source of income is from employment of 35 hours per week.
The individual decides to retire and leave this job.
From the time of retirement, most of the individual's time is spent on operating the farm.
During a taxation year, the individual will receive non-farming income. These revenues will consist of income from the Quebec Pension Plan, old age security, a registered pension plan and registered retirement savings plan (retirement income).
You wish to know if it is possible to consider that the restricted farm loss rules will not apply to the individual respecting any farming loss sustained during a taxation year.
CRA Response
Before determining whether the rules on restricted farm losses apply in respect of a loss sustained by an individual in respect of farming activities in a given situation, it is necessary to determine whether this farming activity constitutes a source of income. If this were not the case, the individual would not be entitled to deduct any loss.
According to the approach of the Supreme Court in Stewart v The Queen (2002 DTC 6969) and The Queen v. Walls (2002 DTC 6960), where the nature of the taxpayer's business includes elements indicating a personal activity, it must then be determined whether the business is carried on in a sufficiently commercial manner. If so, the losses that can be related to these activities will be considered as a source of income.
As indicated in the CRA publication, Income Tax Technical News No. 30, to determine if farming activities are carried out in a commercial manner, the CRA takes account of the following factors:
- Amount of capital invested in the farming infrastructure and machinery;
- Taxpayer's background and experience in farming;
- Time spent on farming;
- Capability of the operation to show a profit;
- The taxpayer's operational plan or intended course of action with respect to the farm;
- The gross revenue and income or losses generated by the farm in the past;
- The scale and manner in which the farm is operated as compared to other commercial farming operations in the area.
In the current situation, assuming that the individual's farming activities constitute a source of income from a farming business, the individual suffering a loss from that business should consider whether the rules restricting farming losses in section 31 of the Act apply to the loss.
Since the individual is not in the business of manufacturing or processing agricultural products, the rules on restricted farm losses will apply if the individual's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income that is a subordinate source of income for the individual. In the case of a combination of farming and some other source of income, the Department of Finance specified in subsection 31(1) of the Act that the other source must be a secondary source of income in the case of taxation years ending after March 20, 2013. According to the Technical Notes of the Department of Finance, the purpose of the amendment to subsection 31(1) of the Act was to codify the interpretation that the Supreme Court of Canada accorded to this provision in Moldowan v. The Queen, [1978] 1 SCR 480. Specifically, the amendment clarifies that the deduction by a taxpayer of farming losses is limited to the amount provided in subsection 31(1) of the Act if the taxpayer's chief source of income is neither farming nor a combination of farming and a subordinate source of income. This amendment changes the interpretation that the Supreme Court of Canada gave to section 31 in The Queen v. Craig, 2012 SCC 43.
As stated in paragraph 3 of Interpretation Bulletin IT-322R (Archived), Farm Losses, to determine whether a taxpayer's chief source of income is farming or a combination of farming and some other source that is a subordinate source of income, account must be taken of gross income, net income, capital investment, cash flow, personal involvement and all other factors.
Furthermore, before the introduction of the above-mentioned legislative changes (which were applicable to taxation years ending after March 20, 2013), the Supreme Court of Canada stated in the Craig decision respecting the criterion of a combination of farming and another source of income, that the factors to be considered in the context of the combination question were the capital invested in the farm and in the second source of income, the income earned from each of the two sources, the time devoted to the two sources of income and the ordinary mode of life of the taxpayer, the taxpayer's farming experience and the taxpayer's intentions and expectations. The Supreme Court of Canada also indicated that the approach should remain flexible and recognized that some factors may not have importance.
Although a decision in a case similar to that of Craig could differ due to the legislative changes to subsection 31(1), the comments of the Supreme Court of Canada on the considerations mentioned in previous paragraphs could still be relevant. These comments also are consistent with those in paragraph 3 of Interpretation Bulletin IT-322R.
In the situation presented, all relevant factors should be considered in determining whether a farm loss sustained by the individual would be subject to the restricted farm loss rules. To reach a conclusion in this regard in the situation presented, it is not necessarily sufficient to consider only the time devoted to farming.
Sylvie Labarre
(613) 670-9014
January 21, 2016
2016-062513