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 losses under various scenarios would be considered restricted farm losses?
Position: Question of fact.
Reasons: See below.
XXXXXXXXXX
2014-053426
K. Robinson
June 18, 2014
Dear XXXXXXXXXX:
Re: Restricted Farm Losses
We are writing in response to your email of June 3, 2014, requesting our views on whether losses incurred under various hypothetical scenarios would be treated as restricted farm losses.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act ("Act") and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, "Advance Income Tax Rulings".
As you are aware, subsection 31(1) of the Act restricts the farming losses deductible by a taxpayer against income from other sources in a taxation year unless the taxpayer's chief source of income for the year is farming or a combination of farming and some other source of income that is a subordinate source of income for the taxpayer. This restriction ensures that taxpayers for whom farming is not the principal occupation are limited in their ability to deduct farm losses from their non-farm income sources. Farming losses are computed in accordance with favourable farm tax rules which could include the cash method of accounting under section 28.
The unrestricted portion of such farm losses is limited to $2,500 plus ½ of the next $12,500 of losses. The remainder of such a loss is defined, for the purposes of the Act, as a "restricted farm loss". A restricted farm loss for a taxation year is deductible under paragraph 111(1)(c) in computing taxable income for the three preceding taxation years or the 20 following taxation years to the extent of the taxpayer's income from farming in those years.
Subsection 31(1) was amended to codify the interpretation of subsection 31(1) set out in the Supreme Court of Canada's decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480. Specifically, the amendment clarified that a taxpayer will be limited to the deduction in respect of farm losses set out in subsection 31(1) if the taxpayer does not look to farming, or to farming and some subordinate source of income, for their livelihood. This amendment replaced the interpretation placed on section 31 by the Supreme Court of Canada in its decision in The Queen v. Craig, 2012 SCC 43, and applies to taxation years that end after March 20, 2013.
Subsection 31(2) was also amended and outlines the circumstances under which the restricted farm loss rules will not apply. In particular, subsection 31(2) provides that the restricted farm loss rules will not apply where the taxpayer's chief source of income is a combination of farming and manufacturing or processing in Canada of goods for sale and all or substantially all of the output from all farming businesses carried on by the taxpayer is used in the manufacturing or processing.
The rules in section 31 require distinguishing between farming as a chief source of income and farming as a sideline business. 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.
Paragraph 3 of Interpretation Bulletin IT-322R, "Farm Losses", provides several factors to assist with the determination of whether a source of income is a taxpayer's chief source of income. Gross income, net income, capital investment, cash flow, personal involvement, and all other factors may be relevant considerations. Due weight must be given to the taxpayer's plans for development of the operation and his activities in implementing the plans.
In conclusion, in order to determine 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. Accordingly, we are not in a position to express an opinion on the various scenarios provided by you.
We trust that these comments will be of assistance.
Yours truly,
Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
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