27 June 2011 Internal T.I. 2011-0403761I7 - Growing Forward

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: 1. Whether breeding and raising of worms to produce worm castings is farming. 2. Whether peat harvesting and the mixing of worm castings and lime with peat moss to make compost is farming.

Position: 1. In this case, yes. 2. It depends.

Reasons: 1. Position previously taken in 2001-010649 2. The harvesting of peat and the manufacturing and processing of compost, by themselves, are not generally considered to be farming activities. However, income from certain activities that, by themselves would be considered non-farming activities, could be income from a farming business if such activities are incidental to a taxpayer's farming operations and do not constitute a separate business.

XXXXXXXXXX
				2011-040376
				Tim Fitzgerald, CGA

June 27, 2011

Dear XXXXXXXXXX

RE: Growing Forward Program - Farming

This is in reply to your correspondence of April 19, 2011, concerning whether certain activities are considered "farming" for income tax purposes.

On the website of the Department of Natural Resources of the Province of Newfoundland and Labrador can be found the Growing Forward in Newfoundland and Labrador Program Guide ("Program Guide") that provides information about the Growing Forward Program. The Program Guide states:

"Growing Forward is a national agriculture framework to coordinate agriculture policy across all provinces and territories. Federal, provincial, and territorial governments are delivering $1.3 billion for farm families over five years. Growing Forward in Newfoundland and Labrador will provide $29.58 million to the agriculture and agrifoods industry to promote commercialization, innovation and profitability. The funding is cost-shared 60/40 between the federal and provincial governments."

The Program Guide sets out eligibility requirements for funding under the Growing Forward program for, amongst others, existing producers and processors, new entrants, and returning farmers. The eligibility requirements rely in part on whether the applicant is involved in farming. For existing producers and processors, and returning farmers, reference is made to gross farm sales as reported to the Canada Revenue Agency ("CRA"). For example, with regard to existing producers and processors, for an applicant to be eligible, amongst other things, the applicant:

• "Must have a minimum of $15,000 in annual gross farm sales as reported to the Canada Revenue Agency (or in the case of a processor, a minimum of $15,000 in the sale of processed provincially produced agricultural products) within the three years prior to application date; or
• In the case of an incorporated entity that has ownership in an agribusiness, the agribusiness must have a minimum of $15,000 in annual gross farm sales. (Explanation note: the owner does not have to have $15,000 in farm sales, but the agribusiness which they own must have the sales.)"

In terms of eligibility for new entrants, the Program Guide indicates that the applicant:

• "Must have less than $15,000 in annual gross farm sales as reported to the Canada Revenue Agency."

For your purposes, you would like to know whether certain activities carried on by two private corporations, Aco and Bco, as outlined below would be considered farming for purposes of the Income Tax Act ("Act").

1. Two corporations, Aco and Bco carry on separate business operations on the same property (the "Property"), which we presume is owned by Aco because of the nature of its operations as described below.

2. For several years, Aco has been operating a sod growing business on the Property.

3. Bco has acquired 1,000,000 worms, the species of which is commonly known as "red wiggler". The worms are being bred and raised by Bco in captivity in a building located on the Property. The worms produce several thousands of pounds of worm castings (excreta) per month. Each month Bco collects the worm castings from the worm bins. The worm castings are primarily sold to Aco and the balance are sold to the public at large.

4. In addition to its sod growing operation, Aco also harvests peat from a peat bog situated on the Property. We understand that peat harvesting generally requires the following steps: the scooping of earth out of the bog; the drying of the earth; and the screening of the earth

5. After the screening process, the harvested peat is mixed by Aco with the worm castings purchased from Bco and some lime and then the resulting compost material is bagged as fertile compost soil mix primarily for sale to the public at large. However, some portion of this compost material is applied directly by Aco onto its fields in connection with its own sod growing activities.

You asked two questions. Firstly, you would like to know whether for purposes of the Act, we would consider Bco's worming operation to be farming. Secondly, you would like to know whether Aco's peat harvesting and compost-mixing activities would be considered farming for purposes of the Act.

Our Comments

Although we cannot provide information concerning a specific taxpayer, we offer the following general comments as it relates to farming which we hope may be of assistance to you for your purposes.

It is a question of fact whether at any particular time a taxpayer is carrying on a farming business.

The definition of "farming" is found in subsection 248(1) of the Act. For purposes of the Act, "farming" includes tillage of soil, livestock raising or exhibiting, maintaining horses for racing, the raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees but does not include an office or employment under a person engaged in the business of farming. However, this list is not considered exhaustive.

The Farming Income Guide - T4003 published by the CRA lists other activities that may be considered farming, such as tree farming, cultivating crops in water or hydroponics, Christmas tree growing, operating a wild game reserve, operating a chicken hatchery, operating a feedlot. In certain circumstances, farming would also include raising fish, market gardening, operating a nursery or greenhouse, operating a maple sugar bush (includes maple sap transformation into maple products if this activity is considered incidental to the basic activities of a maple sugar bush, such as the extraction and collection of maple sap.).

Farming involves all aspects of commercial production of crop, including natural growth, but does not include the processing of goods. For example, the development of basic food product involving the growing process and natural biological changes in a business for profit (e.g., planting, growing and harvesting tomatoes) can generally be considered farming, but the mere processing of artificially manufactured foods (e.g., the making of tomato sauce or tomato paste) is generally not.

Where a taxpayer carries on a farming operation together with some other non-farming operation, it is a question of fact dependent upon the specific circumstances, whether or not the farming and non-farming operations will be considered one business or separate businesses. Generally such a determination will depend upon the degree of interconnection, interlacing or interdependence of the farming and non-farming activities and the extent of the unity embracing the operations. More information can be found in Interpretation Bulletin IT-206R, Separate Businesses.

The CRA will generally consider income from certain activities that by themselves would be non-farming activities to be from a farming business if the non-farming activities are incidental to the taxpayer's farming operations and the income generated by these non-farming activities is not material in relation to the taxpayer's other farming revenue. The adjective "incidental" implies a subordinate relationship or having "a minor role in relation to" something else. Factors that may be relevant in the determination of whether a particular non-farming activity is incidental to a farming operation would include the income generated and the capital and/or labour invested in each activity.

Regarding Bco's and Aco's operations we offer the comments below.

Bco's worming operations involve the raising and breeding of red-wiggler worms (living organisms) that through the natural biological process of digestion produce worm castings that Bco sells.

In and of itself, simply buying worms for resale and/or picking and packing worms for shipment would not generally be considered farming activity. In contrast, the breeding and raising of worms under controlled conditions for profit can be considered farming provided the activities undertaken in relation thereto are substantial and extensive.

Aco's operations involve two main types of activities:

• peat harvesting and compost mixing (hereinafter for simplicity referred to as "peat operation")
• sod growing

Whether and to what extent Aco's income is considered to be from farming would depend on whether Aco's operations consist of one business or two separate businesses (i.e., peat operation business and sod growing business). Whether or not Aco is carrying on more than one business is a determination of fact to be resolved by a review of its operations taking into account the comments we made above. This determination is basically an audit matter.

If one were to assume that Aco is carrying on two separate businesses (i.e., the peat operation business and the sod growing business), then, in our view, only the sod growing operations would be regarded as a faming business. Since the tillage of soil includes the growing of crops, the growing of sod for profit by Aco would be considered farming activity for purposes of the Act.

In this two businesses scenario, in our view, the business consisting of peat harvesting from a peat bog or deposit of peat, the mixing of worm castings and lime with peat moss to make a fertile compost mix, and the bagging of such product for sale to the public would not generally be considered to be farming.

On the other hand, if one were to assume that Aco is carrying on only one business, it is a question of fact, generally to be resolved through audit, whether that business would be farming or non-farming. Factors to be considered in this determination would include invested capital, labour, and the value contributed by the various functions to the value of the end product sold to customers.

In this regard, if the amount of income from the peat operation were found to be incidental to the income derived from the sod growing operation, the said amount would also be considered farming income, as previously discussed.

We trust that our general comments are of some assistance.

Yours truly,

Sandy Parnanzone
Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Division