20 April 2012 External T.I. 2012-0438361E5 - Farm Income

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 the activities of breeding high end sport horses and running an equine quarantine facility are considered to generate farming income.

Position: It is a question of fact.

Reasons: The raising or breeding of livestock such as horses would normally be considered as farming under the Act. However, an activity involving the provision of a service such as a quarantine service or dressage training would generally not be considered to be farming unless the service is incidental to an activity that otherwise qualifies as farming and the income generated by the service is not material in relation to the taxpayer’s farming income. Finally it is a question of fact whether a particular activity or activities represent a source of income that is from a business, such as a farming business, or is merely a personal hobby.

XXXXXXXXXX
					2012-043836
					Kathryn McCarthy CA
April 20, 2012

Dear XXXXXXXXXX:

Re: Farming Income

This is in response to your e-mail of February 24, 2012, concerning the above-noted subject and further to our telephone conversation on April 11, 2012 (McCarthy/XXXXXXXXXX).

You indicated that a certain parcel of land you own, comprising less than 10 acres, will be used for certain farm related activities. The main activity to be provided will be a state of the art equine quarantine facility that you expect will generate income in the first year. The quarantine period will vary from a few weeks to a few months, depending on whether the horse is a gelding, mare or stallion. You intend to build a separate barn on the property in order to provide this service and expect to charge approximately $XXXXXXXXXX per day per horse.

The other activity will be the breeding of high end sport horses for dressage. You indicated that you do not expect this activity to generate income in the first year, but that it will be profitable after the first foaling year as you indicate that you have a very good quality mare which you intend to breed.

You also indicate that you plan to devote very little time to your existing XXXXXXXXXX business and most of your time to the above-noted equine activities; however, your spouse will spend most of her time on the XXXXXXXXXX business.

You enquired whether the above activities can be considered as a farming business under the Income Tax Act (“the Act”). You also explained that such a characterization would generate a municipal property tax saving on the particular property.

Our Comments

Pursuant to the definition of “farming” in subsection 248(1) of the Act, farming includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising poultry, fur farming, dairy farming, fruit growing and the keeping of bees. This list is not exhaustive. However, farming does not include an office or employment under a person engaged in the business of farming. Whether or not a particular taxpayer is in the business of farming, or in any business at all, is a question of fact that can only be determined after all the facts relevant to a particular situation are examined.

Based on the above definition, the raising or breeding of livestock such as horses would normally be considered as farming under the Act. However, an activity involving the provision of a service such as a quarantine service or dressage training would generally not be considered to be farming unless the service is incidental to an activity that otherwise qualifies as farming and the income generated by the service is not material in relation to the taxpayer’s farming income. The expression “incidental” is not defined in the Act, but implies a subordinate relationship or “having a minor role in relation to”. Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity. Further, it could be that the provision of a service is a business separate from a farming activity. Please refer to Interpretation Bulletin IT-206R, Separate businesses, on the Canada Revenue Agency website, for more information.

Finally, as noted above, it is a question of fact as to whether a particular activity or activities represent a source of income that is from a business, such as a farming business, or is merely a personal hobby. Where the particular farming activity is considered to be a business but the taxpayer’s chief source of income is not from that business (or a combination of a farming business with some other source) the deductibility of losses from the farming business is restricted under section 31 of the Act. The losses from a farming activity that is considered to be a personal hobby farm are completely disallowed as personal or living expenses under paragraph 18(1)(h) of the Act.

Further information is available in both Interpretation Bulletin IT-322R, Farm Losses, and the T4003, Farming Income guide.

We trust the foregoing comments are of assistance.

Yours truly,

Michael Cooke
Manager
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch