23 October 2001 Internal T.I. 2001-0096877 - LOSSES FROM FARMING ACTIVITIES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1 - Must the expected profit from a tree farm materialise within a taxpayer's life expectancy. 2 - If there is a reasonable expectation of profit will the loss restrictions apply in a particular fact situation?

3 - A clarification of "source of income" used in IT-322R.

4 - What should be considered in determining whether or not there is a reasonable expectation of profit in a particular situation?

Position:

1 - Yes

2 - Likely would.

3 - General discussion on tax cases.

4 - General discussion.

Reasons:

1 - See Agency's position in paragraph 7(g) of IT-373R2 and document #9919195.

2 - See the Federal Court of Appeal decision in The Queen v. Andrew Donnelly, 97 DTC 5499.

3 - The bulletin was mainly based on the Supreme Court decision in Moldowan v. The Queen, 77 DTC 5213.

4 - Question of fact.

		October 23, 2001

	North Bay Tax Services Office	HEADQUARTERS
	Guy Rocheleau	Jacques E. Grisé
		957-2059

2001-009687

Losses from Farming Activities

This is in reply to your e-mail of August 14, 2001, concerning various matters relating to losses from farming activities.

Since the determination of a "reasonable expectation of profit" and the application of section 31 of the Income Tax Act (the Act) is based on the facts of a particular case, we do not intend to comment specifically or arrive at a conclusion on any of the audits you referred to in the above e-mail or any previous e-mail. However, we will provide you with general comments on the matters that you have raised.

Generally, whether a taxpayer may deduct a loss from the operation of a woodlot, in whole or in part, will depend on whether the taxpayer operates the woodlot with a reasonable expectation of profit. Paragraphs 5 to 7 of Interpretation Bulletin IT-373R2, Woodlots, discuss the concept of "reasonable expectation of profit" in relation to woodlots. One of the factors to be considered, as set out in paragraph 7(g) of the bulletin, is the historical record of annual revenue and profits or losses relevant to the operation of the woodlot, and the growth of the gross revenue and profits over time. The last sentence of that paragraph reads as follows:

"The reasonable expectation of profit test may recognize that it takes time to create a marketable product; however, it is the woodlot business itself, whether the business is operated as a sole proprietorship, a corporation, a partnership or a trust, which must be expected to generate a profit for the taxpayer."

Where a woodlot's marketable product can only be created at the end of a time period that is beyond the life expectancy of a taxpayer, the woodlot business itself cannot be expected to generate a profit for the taxpayer. It seems that the above factor would be a crucial factor in determining a reasonable expectation of profit of a taxpayer under such circumstances.

Where a woodlot that is operated with a reasonable expectation of profit is a farming business, section 31 of the Act may apply to restrict a farm loss suffered in a particular year. As stated in paragraph 25 of IT-373R2, in determining the chief source of income, the Courts have considered, in relation to the other sources of income, three criteria, that is, time commitment, capital commitment and expectancy of significant profitability. The two cases cited in the bulletin's paragraph, namely, The Queen v. Raymond Morrissey, 89 DTC 5080, and William Moldowan v. The Queen, 77 DTC 5213, were also the basis for the discussion on section 31 of the Act in Interpretation Bulletin IT-322R, Farm Losses. However, the Federal Court of Appeal decision in The Queen v. Andrew Donnelly, 97 DTC 5499, provides an excellent analysis of the three criteria mentioned above and, in particular, the importance of the criteria "expectancy of significant profitability".

As stated in paragraph 2 of IT-322R, "in order for a farming activity to be considered a source of income, it must be a business carried on with a reasonable expectation of profit." The quoted passage is taken almost verbatim from the Moldowan decision cited above. Paragraph 5 of the bulletin goes on to state, in part, the following:

"The fact that a taxpayer, in a given taxation year or for years before and after, had or appeared to have no reasonable expectation of profit is one of the facts to be considered in determining whether or not the taxpayer was in the business of farming in that year. However, it is not conclusive evidence in itself that the taxpayer was not engaged in the business of farming and other facts may support the conclusion that he or she was in fact engaged in the business of farming."

Once it has been determined, on the facts, that a particular activity is not a business and thus is not a source of income, the disposition of property relating to the activity, such as animals, could give rise to a capital disposition resulting in a capital gain or loss. However, there may be situations where a determination is made at a particular time that there is no business and that changes are made after that particular time to render the activity a business. In such a case, the profits from the latter activity would be taxable as ordinary business income.

We hope our comments are helpful.

John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate

cc Mr. Bill MacGregor

Agriculture Industry Specialist
London TSO

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