22 November 2004 External T.I. 2004-0086271E5 - Farming Activity

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: Is the Company carrying on a farming activity? Can the Company report income on a cash basis under subsection 28(1) of the Income Tax Act?

Position: Question of Fact.

Reasons: Where a taxpayer has the right to inspect land and make suggestions for the betterment of the crop, this activity alone may not constitute farming. The taxpayer must make an appreciable contribution to the growth and maturity of the crop and must be actively engaged in the management and/or day to day activities of the farming business.

2004-008627

XXXXXXXXXX Luisa A. Majerus, C.A.

(613) 957-2138
November 22, 2004

Dear XXXXXXXXXX:

Re : Farming Activity

This is in reply to your letter of May 18, 2004, requesting our opinion as to whether the activities carried on by XXXXXXXXXX (the "Company") can be included in the definition of "farming" under subsection 248(1) of the Income Tax Act (the "Act"). Specifically, the Company wishes to report the activities of the division that owns and supervises the growth of the seed stock on a cash basis pursuant to subsection 28(1) of the Act.

It is our understanding that the Company's main business is supplying and distributing forage and turf seed to Canadian farmers. The Company obtains a significant amount of its seed inventory through seed production agreements with local growers. The growers own the land, plant the seed stock, and harvest the seed. These growers are paid when the seed is delivered to the Company. The Company is permitted the right to enter upon the land on which the crop is being grown to inspect the fields and make suggestions for the betterment of the crop.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

For purposes of the Act, the word "farming" is given a wide definition by subsection 248(1) of the Act. It includes tillage of the soil, the raising or exhibiting of livestock, the maintenance of horses for racing, the raising of poultry, the keeping of bees, fur farming, dairy farming and fruit growing. As indicated in IT-433R, Farming or Fishing -Use of Cash Method, this definition is not exclusive. A copy of IT-433R can be found on our website at http://www.cra-arc.gc.ca/menu/APAP_I-e.html. The Canadian Oxford dictionary ("Oxford") defines a "farm" as an area of land, and the buildings on it, used for growing crops, rearing animals etc. A "farmer" is defined in Oxford to be a person who farms land or rears certain animals.

Generally, it is a question of fact whether the activities of a taxpayer can be considered to be "farming" for the purposes of that definition in subsection 248(1) of the Act. The Canadian tax courts have also addressed this issue. In the case of De Cloet Ltd. v Minister of National Revenue (89 DTC 207) the taxpayer manufactured tobacco-drying kilns that it leased to farmers who used the kilns to dry and cure harvested tobacco on the farm sites. The Tax Court of Canada Judge sided with the Minister disallowing the taxpayer's deduction for capital cost allowance as a Class 29 asset since the kilns were used in a farming operation rather than a manufacturing operation. The Minister's reassessment of the kilns as being in Class 8 was the correct treatment. The Judge noted, "Agricultural farming involves the whole aspect of commercial production of any crop or plant which has economic value".

In Moauro v MNR (92 DTC 1071), the taxpayer devoted considerable attention to his horse racing operation in addition to operating a vegetable farm. To each activity he brought years of experience and knowledge. Moauro worked up to eighty hours per week on farm cultivating, planting, harvesting, marketing, packing and delivering the vegetable crop. In addition, he devoted up to 20 hours per week buying and selling horses, assisting the trainers and racing his stock of standard bred horses.

In Runstedler v Minister of National Revenue (92 DTC 2395) the taxpayer sold seed crop. The tax court Judge noted the following,

With respect to the seed business, it could be argued that Mr. And Mrs. Runstedler were grain dealers and that they were not farming. If all that Mr. Runstedler did was to provide seeds and fertilizer and contract to purchase the farmer's crops, I would agree with that argument. However, Mr. Runstedler did a great deal more than that. His uncontroverted evidence was that he helped put in the crops. As well, he oversaw the growing and also helped in harvesting the crops, all of this before any cleaning and grading was done. It my opinion, this also constitutes farming.

In the Runstedler and Moauro cases, the court determined that the taxpayers were indeed farming since they made an appreciable contribution to the growth and maturity of the crop or animal. In addition, in the De Cloet case the assets used on the farm in the commercial production of the tobacco crop were treated as assets used in a farming business for capital cost allowance purposes.

Accordingly, where a taxpayer has the right to inspect land and make suggestions for the betterment of the crop, this activity alone may not constitute farming. As noted in paragraph 27 of IT-268R4, Inter Vivos Transfer of Farm Property to Child, a taxpayer that is actively engaged on a regular and continuous business is more likely to be in the farming business versus a taxpayer whose activities are infrequent or frequent but at irregular intervals. The requirement is 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 copy of IT-268R4 can be found on our website at http://www.cra-arc.gc.ca/menu/APAP_I-e.html.

A copy of our letter has been sent to XXXXXXXXXX of the Canada Revenue Agency. Should you require further information with respect to this matter, please contact them directly.

We trust this information is helpful.

Yours truly,

John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch