A November 8, 2023 Tax Court of Canada case considered whether a taxpayer’s losses from farming activities deductible against non-farming income were restricted to the $17,500 ($2,500 plus half of the next $30,000) permitted by the restricted farm loss rules for the 2014 and 2015 years. The restriction applies where the taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income that is a subordinate source of income for the taxpayer.
The taxpayer was a physician but also operated a farm that produced organic beef. The taxpayer provided the following relevant details.
| Gross revenue | $174,433-2014, S31,128 -2015 |
| Net income (loss) | ($530,363)-2014, ($595,904)-2015 |
| Staff employed | four full-time employees and three seasonal part-lime employees |
| Taxpayers’ work schedule | f,ve hours/day on weekdays (before and after performing physician duties) and 8- 16 hours/day on the weekends |
| Hours worked by taxpayer (approx.) | 2,500 hours/year |
| Capital Investment | The operation included over 800 head of cattle, 5,314 acres of land, three large shelter and storage buildings, a building for processing meat, two more buildings under construction, and various pieces ol equipment such as tractors, trucks and haying equipment. |
| History | The farming operation commenced shortly after 1975 . Various different crops/products were attempted. Losses were reported in all years but two. |
Taxpayer loses
The Court noted that the taxpayer’s farm activities took place before and after normal working hours and gave way to her medical practice if an issue arose that required her attention. As such, the Court found that the centre of the taxpayer’s routine was her medical practice. Further, the Court noted that the farm was only commenced after the medical practice and that all of the investment in the farm came from the medical practice. The farm required the cash inflow of the medical practice to survive. The farming business had always been subordinate to the medical practice as a source of income, rather than the other way around, and there was no demonstration that this would change in the foreseeable future. As such, the Court determined that the restricted farm loss rules would apply and the taxpayer’s deduction would be limited to $17,500.
Court’s additional commentary
The Court noted that the result was most unfortunate as it resulted in the denial of a loss for a bona fide farming business that would have been available to the operator of any other business. In particular, the Court noted how this case demonstrated the difficulty in growing a viable farming business with the current restricted farm loss rule punishing those willing to put in the significant time and capital required to do so.
Action: If farming activities consume a significant portion of your resources but you earn income from other significant sources as well, seek consultation to determine if farming losses may be restricted.
If you have any questions regarding farming activities in Canada, feel free to contact finnection via email at info@finnection.ca or call us at (647) 795-5462
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