7 September 2006 External T.I. 2006-0197741E5 - restricted farm loss

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether any losses from a blueberry farm operation would be treated as restricted farm losses

Position: General comments provided

Reasons: Question of fact

							2006-019774
XXXXXXXXXX 						G. Moore
(613) 957-9232
September 7, 2006

Dear XXXXXXXXXX:

Re: Restricted Farm Loss

This is in response to your letter of July 11, 2006 inquiring about whether any losses incurred from your blueberry farm operation would be treated as restricted farm losses.

As we understand it, you and your wife began operating a blueberry farm on a full-time basis in 2006. Both of you are working on the farm full time. You are in the process of planting 7 acres of blueberry bushes and have incurred costs to date. You expect substantial net farming income after 4 years of operation as the blueberry plants will be mature and producing at full capacity. You and your wife are in receipt of pension income. You are asking whether any losses incurred in the future by you and your wife in running the blueberry farm will be treated for income tax purposes as restricted farm losses.

Our Comments

The Income Tax Act (the "Act") provides that, where a taxpayer's chief source of income is farming or a combination of farming and some other source of income, a loss from a farming business is deductible in the same manner and to the same extent as a loss from any other business. Where, on the other hand, the taxpayer's chief source of income is neither farming nor a combination of farming and some other source of income, the amount of the loss from a farming business which would otherwise be deductible is restricted by the provisions of section 31 of the Act.

The rules in section 31 of the Act require distinguishing between farming as a chief source of income and farming as a sideline business. These rules also require ascertaining that the activity is not a personal hobby (i.e., not a business for tax purposes). The limits on the deduction of losses apply generally when farming is not a chief source of income, when compared to other sources of income. As noted in paragraph 27 of Interpretation Bulletin IT-268R4, Inter Vivos Transfer of Farm Property to Child, a taxpayer that is actively engaged on a regular and continuous basis in farming is more likely to have the farming business as a chief source of income versus a taxpayer whose farming activities are infrequent or frequent but at irregular intervals. Whether a person is actively engaged on a regular and continuous basis in farming is a question of fact. However, this requirement is generally considered to have been met when the person is "actively engaged" in the management and/or day-to-day activities of the farming business.

A farming activity is considered to be a source of income if it is a business. Paragraph 4 of IT-322R, Farm Losses, contains comments regarding the criteria that must be considered in determining whether or not a farming operation is a business. These comments were developed based on jurisprudence, which is discussed below.

The Canadian courts have addressed the issue of whether the activity of farming is a hobby or a chief source of income. We refer you to the following cases which deal with the activity of farming: Moldowan v. The Queen (77 DTC 5213), Kroeker v. The Queen (2002 DTC 7436), and The Queen v. Donnelly (97 DTC 5499).

In Moldowan, the taxpayer was engaged in training, boarding and racing horses for himself and others. The Supreme Court found that "the distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability, both actual and potential."

In Donnelly, the taxpayer became involved in the horse thoroughbred industry. The Court found that:

"In summary, the cumulative factors of capital committed, time spent and profitability will determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. These guiding principles flow from the following decisions: Moldowan (supra); Timpson (R.) v. M.N.R., [1993] 2 CTC 55 (F.C.A.); Poirier (B.) Estate v. Canada, [1992] 2 CTC 9 (F.C.A.); Connell (J.P.) v. M.N.R., [1992] 1 CTC 182 (F.C.A.); Roney (C.H.) v. M.N.R., [1991] 1 CTC 280 (F.C.A.); Morrissey v. Canada, [1989] 2 F.C. 418 (C.A.); Gordon (R.T.) v. The Queen, [1986] 2 CTC 280 (F.C.T.D.); Mott (P.S.) v. M.N.R., [1988] 2 CTC 127 (F.C.T.D.); and Mohl (G.) v. Canada,, [1989] 1 CTC 425 (F.C.T.D.)."

In Kroeker, the taxpayer was employed as a controller. It was a condition of her employment with her employer, a farm equipment manufacturer, that she be given both flexibility and time off whenever the farm operations required it, particularly during calving season, harvest time and whenever dealings with the farm's lenders and suppliers were necessary. Even when she was working off the farm, the time she spent on the farm was substantial. The farming partnership had no profit from 1991 until 1997 inclusive. In 1998, it had its first net income. The Court found that the taxpayer's capital, time and labour were focused on the farm and her chief source of income for the taxation years in question was a "combination of farming and some other source of income". The Court, relying on the comments of the Supreme Court of Canada in the Moldowan case concerning the application of subsection 13(1), the predecessor of subsection 31(1), stated:

"In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

The reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5, 000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of "chief source" to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs."

In conclusion, in order to determine whether losses from a farming operation should be considered losses from a farming business or losses from a hobby and whether a farming business is a taxpayer's chief source of income or a sideline business, it is necessary to evaluate each situation based on the facts of the particular case in light of the guidelines noted in the jurisprudence above. Accordingly, we are not in a position to express an opinion on the status that your blueberry farm operation will have in the future.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch