27 February 1997 External T.I. 9621075 - farming and non-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 Department.

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

NISA Administration
P.O. Box 6100
Winnipeg, Manitoba 962107
R3C 3A4 A.M. Brake

Attention: Charlene Parks

February 27, 1997

Dear Sirs:

Re: Farming and Non-Farming Activities

This is in reply to your letter of June 7, 1996 asking for clarification of certain information contained in our letter of October 13, 1995.

Our letter stated that the Department will generally consider certain non-farming activities to be part of the farming operation where:

(i) the taxpayer carries on a bona fide farming operation;

(ii) the activities are related to the taxpayer's other farming activities;

(iii) the activities are undertaken on a small scale; and

(iv) the income generated by these activities is incidental to the taxpayer's other farming revenue.

Our letter also stated that should the taxpayer's involvement in "non-farming" activities go beyond the above guidelines, the Department would consider these activities to be a separate business from that of the farming operation.

You have asked us to clarify:

(1) what elements are considered in the determination of activities being related;

(2) to define and illustrate, through examples, what is meant by a "small scale" activity and "incidental" income; and

(3) when deciding whether non-farming income is incidental in relation to the farming operation, whether the determination is based on gross income or gross profit generated, net income calculated, or another income-based calculation.

You also asked whether maintaining a plant in a greenhouse for two days would constitute farming.

Our Comments

The underlined words should be interpreted within the context in which they are used in relation to the taxpayer's primary business of farming. You might also ask the question whether the related activity produces income from another business. For example, blown trees on the farmland that are cut into firewood and sold would likely be a related activity and produce income that would be related and incidental to the farming operation. (The sale of manure would likely be treated the same.) The sale of firewood cut from blown trees would likely be taken to be on a small scale but if the farmer were to buy trees and produce and sell firewood to the extent that it would be considered to be a separate business, it would no longer be considered on a small scale.

The amount of income is not necessarily the criterion to be used when determining whether the non-farming income is incidental to the farming business. Consideration would also need to be given to other factors such as the number of transactions, the resources used or time involved, and the intensity of the activity, i.e., is the farmer merely interested in cleaning up the blown trees and gaining a few dollars or is he accelerating the activity to the extent, that one would think that he is out to carry on a separate firewood business.

As noted in our previous letter of October 13, 1995, when a taxpayer is carrying on a farming operation together with some other business operation, it is a question of fact dependent upon all the circumstances of the case as to whether the farming operation can be considered a separate business. There are no hard and fast rules in determining a) whether the income is incidental to the farming operation, or b) that a particular activity constitutes the carrying on of another business. We are unable, therefore, to provide further guidance in this regard. However, we are providing you with a copy of our Interpretation Bulletin IT-206R, the subject of which is "Separate Businesses".

With regard to maintaining plants in a greenhouse for two days, it would be hard to envisage any appreciable contribution to the growth and maturity of the plant if it were only held for two days. Such an operation would likely be one of storage under conditions required by a plant in transit from the location where it was grown to the green house location, where it is appropriately stored for two days before it is shipped to its destination. If this were the only quasi farm-related activity of the owner that had any resemblance to farming, it would likely not be farming. However, if his primary business was farming, this could be a related farming activity.

We apologize for the delay in replying and that we could not have been more informative. You may wish to contact the Department of Agriculture and Agri-Food Canada for additional information on what constitutes farming.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

??