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: Due to a recent Supreme Court of BC ruling, a number of marijuana growers want to report their income. Are individuals that cultivate medical marijuana in their homes (the "suppliers") to supply to compassion clubs engaged in farming? (Note that compassion clubs are not legal in Canada. They are not part of the federal medical cannabis program, and as such, their suppliers are breaking the law.)
Position: Depends, question of fact.
Reasons: Not enough information provided.
XXXXXXXXXX 2011-039274
S. Kim
(905)721.5199
August 9, 2011
Dear XXXXXXXXXX :
Re: Meaning of "Farming" - Marijuana Growing
This is in response to your letter dated January 12, 2011, inquiring whether marijuana growing falls within the meaning of "farming" as defined in subsection 248(1) of the Income Tax Act (the "Act"). You commented that as a result of the Supreme Court of Canada's refusal to grant leave to appeal the decision of R. v. Beren and Swallow (2009 BCSC 429), a number of individuals licensed to cultivate medical marijuana ("Suppliers") have come forward to file their income tax returns.
Under Controlled Drugs and Substances Act, S.C. 1996, c. 19 (the "CDSA"), marijuana is subject to a criminal prohibition on possession, sale and production. However, courts have exempted the medical use of marijuana based on the Charter of Rights and Freedoms (the "Charter"). Pursuant to the Marijuana Medical Access Regulations, S.O.R./2001-227 (the "MMAR"), a patient holding an Authorization to Possess (ATP) marijuana for medical purposes could obtain it, as one alternative, from another person holding a designated personal production licence (DPL) that was tasked to grow marijuana for the patient. Under the MMAR, one DPL holder can cultivate for only one ATP holder and a DPL holder is not permitted to produce marijuana in common with more than two other DPL holders.
In the Beren case, Mathew Beren was a grower for the Vancouver Island Compassion Club (VICS), a non-profit entity that provided marijuana to several hundred patients. In 2004, the RCMP raided Beren's grow-op and Beren was prosecuted for contravening the CDSA for producing, possessing and controlling marijuana for the purposes of trafficking. Beren's defence was that his prosecution was a breach of his rights of liberty and security of the person under s.7 of the Charter. Eventually, the case was brought up before Justice Koenigsberg of the Supreme Court of B.C. concerning the issue of government control of marijuana used for medical purposes:
"[29] The issues as presented by the defence are that the MMAR are constitutionally defective in two principal area. The first refers to access to the legal protections of the program, which essentially means that physicians act as gatekeepers. The second area is the ability to legally obtain an adequate supply of medicine.
[30] The access issue arises because of the restrictive nature of the regulations and the cumbersome process required to obtain, amend, and renew an ATP. The unwillingness or reluctance of physicians to act as the sole gatekeepers to legal cannabis is a major contributor to the access problem....
[31] The supply issue, as set out by the applicant, arises in large part from the MMAR restrictions on the number of the plants which may be grown by the holder of a personal use production license. The following are examples of those restrictions relied upon by the defence: the prohibition on one DPL providing medical marijuana to more than one person with an ATP; the restriction on the number of producers that can pool resources and produce medical marijuana in one physical location; the government's policy decision to provide end-users with the option to purchase only a single strain of pre-ground, gamma-irradiated cannabis from its monopoly supplier; the government's policy decision to cut patients off from the government supply because of their economic inability to afford the medicine; the government's policy decision to not include cannabis resin in by-products within the ambit of the MMAR; and the government's unwillingness to license and regulate the network of community-based dispensaries, the compassion societies, which pre-date the MMAR and currently serve, according to the applicant, and I so find, more end-users than the federal government program.
REMEDIES
[134] Such regulation and licensing requires careful thought in drafting. Consistent with the reasoning in Schachter v. Canada, 1992 CanLII 74 (S.C.C.), [1992] 2 S.C.R. 679, 93 D.L.R. (4th) 1, these provisions, unduly restricting DPLs from growing for more than one ATP or growing in concert with two other DPLs, are hereby severed from the MMAR.
[135] The government, in my view, will need time to put in place appropriate monitoring and enforcement mechanisms in relation to such compassion clubs. Thus, it is appropriate to stay the effect of this declaration of invalidity for one year.
RESULT
[136] In relation to the charges against Mr. Beren, the Crown, having proved beyond a reasonable doubt that Mr. Beren was producing and trafficking in marihuana for the purpose of supplying a compassion club, which in turn was selling the marihuana to most of its members who did not have ATPs, and thus were not licensed to possess, which parts of the MMAR I have found to be valid, is guilty on both counts."
You ask whether the income earned by a Supplier from supplying medical marijuana to not-for-profit societies (e.g., compassion clubs) would qualify as income from a farming business.
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 (as is the case in your situation), the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
A taxpayer's profit from illegal activities is subject to Canadian income taxation not unlike the profit from "legal" business activities.
According to the definition of "farming" in subsection 248(1) of the Act, "farming" includes the 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. However, this list is not exhaustive and it has been decided by the courts that the word "farming" also includes tree farming, the operation of a wild game reserve and a mechanical hatching operation where eggs are acquired, hatched in incubators and the chicks sold within a few days of hatching. In certain factual circumstances, it is considered that "farming" includes raising fish, market gardening and the operation of nurseries and greenhouses.
According to the definition of "business" in subsection 248(1) of the Act, "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade but does not include an office or employment.
Usually the frequency and systematic nature of an activity will be indicative of a business. Generally, an organized activity that occupies the time, attention and labour of an individual and is carried on for the purpose of profit or with a reasonable expectation of profit may constitute a business.
In Louis De Villard v. MNR (78 DTC 1047) the Tax Review Board (TRB) made reference to the case No. 240 v. M.N.R. (55 DTC 147) where the TRB cites the English case Re Pszon, [1946] OR 229, in which Laidlaw, J. stated as follows at page 234:
"The word "business" is of wider import than "trade". As used in various statutes, it involves at least three elements: (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit. A person who devotes no time or attention or labour, by himself or by servants or employees, to the working or conduct of the affairs of an enterprise does not carry on the business of such enterprise. He might, for instance, be only financially interested. But to carry on business he must give attentions, or perform labour, for the maintenance or furtherance of the undertaking, and devote time to the accomplishment of its objects. He must also be in such relation to the public that he may be held liable to others. The liabilities must be such as to be referable to the carrying on of the enterprise. Obligations assumed in connection with and for the purpose only of betterment of property owned by a man do not necessarily constitute him a person who carries on business. Finally, it is an essential element of carrying on business that the purpose of the engagement is for a livelihood or profit. If an enterprise is not conducted as a means to accomplish that object it does not come within the ordinary meaning of the term "business"."
While the growing of plants under controlled conditions (e.g., in a greenhouse) may qualify as a farming activity, whether such activity is carried on in the context of a farming business for profit or a reasonable expectation of a profit as opposed to, for example, as a personal activity for social welfare purposes is a question of fact to be resolved by a detailed review of the facts and circumstances of the case under review.
It is also a question of fact as to whether a taxpayer performs an activity as an employee of another person or as an independent contractor carrying on a business. As previously noted, the definition of business excludes an office or employment. In determining whether a taxpayer is an employee or self-employed person, consideration is generally given to the following four criteria: (1) the extent to which the worker is subject to the control of the payor, (2) whether the worker provided his or her own tools, (3) whether the worker has a chance of profit or risk of loss, (4) whether or not the worker is employed as part of the business and performing services integral to the business. No one criterion is determinative as to whether a person is an employee or independent contractor, but all the criteria are considered relevant. The CRA publication "RC4110 Employee or Self-employed" further elaborates on these criteria.
In view of foregoing comments, the information provided is not sufficient for us to make definite conclusions. In fact, it would depend on a review of the specific circumstances of a case whether a Supplier would be considered to be involved in a non-business social activity or in the business of farming or whether a Supplier would be considered to be an employee of another party (e.g. a compassionate club or a patient).
We trust that these comments will be of assistance.
Yours truly,
Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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