7 October 1991 Income Tax Severed Letter - Carrying on the Business of Farming

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.

Dear Sirs:

Re: Carrying on the Business of Farming

We are writing in reply to your letter of August 15, 1991 and subsequent conversations during which you requested comments concerning carrying on of the business of farming.

Our Comments

The determination of whether a taxpayer carries on the business of farming at any particular time is a question of fact to be resolved after a review of all the circumstances. However, we are prepared to offer the following comments:

• 1. As stated in paragraph 7 of IT-373R, "A taxpayer who is not otherwise engaged in a lumbering or logging business and who undertakes the reforestation of an area of land with the objective of producing mature trees at a date that may be 40 or 50 years in the future, or even longer, is considered to be farming. Apart from the proceeds that may be obtained as a result of the thinning of the trees from time to time, no revenue can be expected until the trees have matured. In the meantime, recurring costs are incurred for property taxes, planting, fertilizing, thinning, etc. Whether such costs are deductible depends on whether the farming operation is a business that was undertaken with a reasonable expectation of profit." Where the reforestation project was undertaken in a systematic way, in a business-like manner in accordance with good forestry procedures, and holds forth the prospect of a profit when the trees mature, the Department generally considers that the tree farming operation is a business that was undertaken with a reasonable expectation of profit. MNR v Douglas C. Matthews [[1974] C.T.C. 230] 74 DTC 6193 is a leading case in the resolution of the reasonable expectation of profit issue with respect to tree farming operations. However, such resolution is a question of fact and the following comments made by the Tax Review Board in Dr. Jacques April v MNR [[1982] C.T.C. 2083] 82 DTC 1093 should also be noted: "... a taxpayer who avers the existence of such long-term program must put forward very convincing evidence that the running expenses claimed are part of an organized and systematic program, planned according to the aforementioned criteria for "earning a profit"."
• 2. Paragraph 2 of IT-373R states, "Where a farm includes a woodlot from which the income usually is minor in relation to the income from other farming operations: (a) Proceeds from the sale of logs, lumber, poles, firewood or Christmas trees are income from farming. (b) Amounts received (whether in a lump sum or on a stumpage basis) for permitting other persons to remove standing trees from the woodlot are considered to be on account of capital."
• 3. Paragraph 3 of IT-425 states, "Where a taxpayer in the business of farming retains the title to his farm and merely sells the right to harvest the crop therefrom, the consideration so paid for that right is income to the vendor and an allowable deduction to the purchaser for tax purposes."
• 4. From page 9 of the Farming Income Tax Guide, "Do not include amounts you receive for rent, whether from farm property or real estate, in your farming income. You report rental income separately ... You may receive rental income either in cash or on a share crop basis. Generally, this type of income is not included in farming income."

We realize that these comments are not all encompassing but we trust that they will be of some assistance.