Ferme Lunick Inc. v. Agence du revenu du Québec, 2020 QCCQ 1703

The taxpayer operated a 1500-acre farm with four employees that produced potatoes, grains, market garden and dairy products, as well as a 10+-employee processing operation housed in four buildings on the farm, that purchased, sorted, washed and bagged potatoes before their sale. The two operations were accounted for separately so that, for example, the farm recorded sales of potatoes to the processing operation. Whether various equipment purchased for use in the processing operation qualified for a tax credit for purchases of Class 29 property used in manufacturing or processing turned on whether an exclusion, from what otherwise would qualify as manufacturing or processing, for the carrying on of a farming or fishing business, applied.

In confirming the ARQ position that this exclusion applied, Forlini JCQ stated (at paras. 80, 82-83, TaxInterpretations translation):

[T]here is interdependence between the Agricultural Activities and the Manufacturing and Processing Activities of Ferme Lunick. Indeed, the former depends to a very large extent on the latter for its economic survival. It sells its entire potato crop, while the processing side buys more than 90% of its raw products from the agricultural division. …

The Agricultural Activities are not carried on independently of the Manufacturing and Processing Activities given Lunick Farm's strategy of vertical integration.

Moreover, the Manufacturing and Processing Activities are not simply incidental or ancillary to the Agricultural Activities. To the contrary, the two spheres of activity are closely linked and economically interdependent. Both activities are carried out at a single location. Each of Ferme Lunick's two "divisions" contributes closely to the success of the other. The Processing Division is by far the largest customer of the Agriculture Division, while the Processing Division owes its existence to the fact that this activity is more profitable than potato farming and bulk sales.

Forlini JCQ concluded (at para. 85) “that Lunick Farm carries on a single farming business.”

The taxpayer operated a four-employee 1500-acre farm that produced potatoes, grains, market garden and dairy products, as well as a 10+-employee processing operation housed in four buildings on the farm, that purchased, sorted, washed and bagged potatoes before their sale. Whether various equipment purchased for use in the processing operation qualified for a tax credit for purchases of Class 29 property used in manufacturing or processing turned on whether an exclusion, from what otherwise would qualify as manufacturing or processing, for the carrying on of a farming or fishing business, applied.

Forlini JCQ confirmed the ARQ position that this exclusion applied given that this was a “vertically integrated” business in which the farming operation “sold” all of its potato production to the processing operation, carried on at the same location, and the processing operation acquired 90% of its purchases from the farming operation. The facts that there was separate accounting for the two divisions, and that each division had a substantial scale of operations, rather than being merely ancillary to the other, did not carry the day. Forlini JCQ concluded (at para. 85, TaxInterpretations translation) “that Lunick Farm carries on a single farming business.”