Principal Issues: [TaxInterpretations translation] Is the operation of a hatchery a farming business for the purposes of section 28 of the Income Tax Act?
Position: Yes.
Reasons: Interpretation of the Income Tax Act; jurisprudence
XXXXXXXXXX 2006-019881
November 16, 2006
Dear Sir,
Subject: Request for technical interpretation: Farming or fishing - Use of Cash Method
This is further to your letter dated July 19, 2006, in which you sought to determine whether the operation of a hatchery can be considered a farming business for the purposes of section 28 of the Income Tax Act (the "Act").
Facts
According to your letter, a taxpayer operates an egg hatchery. Specifically, the taxpayer purchases eggs from various producers and, after an artificial incubation period of 11 days, the eggs are resold by the taxpayer to XXXXXXXXXX companies.
Question
You wish to know whether, in the eyes of the Canada Revenue Agency ("CRA"), the hatchery activity, as described below, constitutes a farming business, thus allowing the taxpayer to take advantage of the cash method of accounting provided for in section 28.
Analysis
Whether a particular activity is carried on in a sufficiently commercial manner to constitute a business for the purposes of the Act is a question of fact that can only be resolved in light of the particular circumstances of each situation. In this case, and for the purposes of our interpretation, we have assumed that the hatchery business - as carried on by your client - constitutes a business.
Consequently, we offer the following comments on whether the activities of a hatchery can be included in the definition of farming in subsection 248(1).
Subsection 248(1) defines the term "farming" as follows:
farming includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;
In Interpretation Bulletin IT-433R, Farming or Fishing - Use of the Cash Method, the CRA adds that the above definition is not exclusive, and it has been decided by the courts that farming also includes the following activities:
- tree farming
- the operation of a wild game reserve
- a mechanical hatching operation
- raising fish
- market gardening
In order to determine whether a particular activity constitutes agriculture, it is necessary to assess the degree of processing of the natural product. In Pollon v. Canada1, Addy J. wrote as follows:
Where the development of the basic food product still involves the growing process and natural biologic changes as opposed to artificially manufactured foods or mere processing, I do not feel that, generally speaking, the activity would be considered by the general public anything other than agricultural in nature and would, therefore, generally be considered as a farming operation.
The CRA confirmed that it was adopting this test in determining farming activity in technical interpretation E9525525. In that interpretation, the CRA added the following:
In summary, farming generally involves the growing of natural elements until their maturity, the harvesting of these elements and their commercialization.
In other words, under the definition of "farming" and in light of the relevant jurisprudence, where the CRA seeks to determine whether a particular activity constitutes farming, it is necessary to assess the final product marketed by the taxpayer. If the taxpayer markets a product that is the result of natural biological growth and change, the CRA will tend to conclude that the activity in question is farming.
Let us take the example of viniculture and wine production. Although viniculture is a farming activity, wine production is a different matter, since the final product is not simply the result of the cultivation of a natural product but the result of the transformation of a natural product into a finished product.
With respect to the activity of a hatchery, the question of whether this activity constitutes farming was debated in Pollon v. Canada, supra. In that decision, Addy J. determined that such activity did constitute farming for the purposes of the Act. Similarly, the CRA has previously determined that the activities of a hatchery constituted farming.2
Thus, assuming that the hatchery activity represents a business for your client, we are of the view that such activity represents a farming business for the purposes of section 28 since, by virtue of the hatchery activity, your client is merely promoting the process of growing fertile eggs.
We hope that the above comments are of assistance.
Best regards,
François D. Bordeleau, LL.B.
Individual, Business and Partnership Section
Income Tax Rulings Directorate
ENDNOTES
1 [1984] F.C.A.. no 35 (F.C. 1st instance)
2 See Technical Interpretations E9525525 and F9317405.