ARCHIVED - Farm losses
DATE: October 25, 1978
SUBJECT: INCOME TAX ACT
REFERENCE: Section 31 (also paragraph 18(1)(h), section 111 and subsection 248(1)).
This bulletin replaces and cancels Interpretation Bulletin IT-322 dated May 20, 1976. Current revisions are designated by vertical lines.
1. This bulletin deals with the deductibility of farm losses and the application of the Section 31 loss restriction. The Income Tax Act envisages three classes of taxpayers who farm. The following are the classes together with the tax treatment of any losses that may be incurred:
(a) a taxpayer whose chief source of income is farming or a combination of farming and some other source of income. Such a taxpayer's farming operations may reasonably be expected to provide the bulk of income or the centre of work routine and are the taxpayer's major preoccupation. Such a farmer may deduct the full amount of the farming loss from other income in the year of the loss. The phrase "a combination of farming and some other source of income" means that while the chief source of income is farming there are also subordinate sources of income such as employment, business or property that may be unrelated to the farming operations.
(b) a taxpayer whose chief source of income is not farming or a combination of farming and some other source of income but who still carries on a farming business. Such a taxpayer must operate the farm with a reasonable expectation of profit but devotes the major part of his or her time and effort to other business or employment. The amount of the farming loss deductible in the year by such a taxpayer is restricted by section 31.
(c) a taxpayer, whose chief source of income is not farming or a combination of farming and some other source of income, and who carries on some farming activities but with no reasonable expectation of profit. The whole amount of such losses will be disallowed as personal or living expenses (paragraph 18(1)(h)) which are defined in subsection 248(1) as including the expenses of properties maintained by the taxpayer for his or her use or benefit or for that of related persons and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.
SOURCE OF INCOME
2. In order for a farming activity to be considered a source of income it must be a business carried on with a reasonable expectation of profit.
3. For a source of income to be a taxpayer's chief source of income in a particular taxation year it is not necessary that the income produced from it be greater in that year than the income from all the taxpayer's other sources of income nor, in fact, from any of the taxpayer's other sources of income. Section 31 envisages that a taxpayer may have a farming loss without prejudicing the status of farming as a chief source of income in the taxation year in which the loss occurs. Accordingly, the test of simply comparing net income from each source as the test for determining the chief source of income in a taxation year is not valid. Gross income, net income, capital investment, cash flow, personal involvement and all other factors may be relevant considerations. Due weight must be given to the taxpayer's plans for development of the operation and his activities in implementing the plans. The Department takes the view that where a farming business was a chief source of income in previous years and is being carried on in the same manner in a loss year, that the limitations of section 31 will not necessarily apply and the farming business will normally form part of a contribution of sources of income that constitute the chief source of income in the loss year.
4. In determining whether or not a farming operation is a business, the following are some of the criteria which must be considered:
(a) the extent of activity in relation to that of businesses of a comparable nature and size in the same locality. The main test is the size of the property used for farming. If it is much too small to give any hope of profit, the presumption is that the property is being held for personal use or enjoyment of the taxpayer. On the other hand, where the land is large enough to be profitable, it may also be non-business, but in limited circumstances. Where for example, the taxpayer has made no attempt at farming or developing the land and has no viable plans to do so, it is presumed the land is held for personal use or enjoyment or for capital gain, and expenses (net of incidental income) should be disallowed. This is particularly so where the taxpayer has a more or less regular job and devotes little time to the farm. This of course assumes that the taxpayer has not employed other persons to carry on a farming operation. The farm may also be non-business where the taxpayer, over a number of years, has demonstrated that there was no intention of utilizing more than a fraction of the land (e.g. the taxpayer who buys a farm but uses only one field as a paddock for one or two horses);
(b) time spent on the farming operation in comparison to that spent in employment or other income-earning capacity. If the taxpayer spends most of his or her time during the crop season attending to the farm, there is a strong presumption that he or she is carrying on a farming business. This is particularly so where the taxpayer has farming background or experience;
(c) the development of the farming operation and commitments for future expansion according to the taxpayer's available resources. This test is based on the capital investment of the taxpayer in the operation over a number of years and on the acquisitions of buildings, machinery, equipment and inventory by the taxpayer;
(d) qualification of the taxpayer for some type of provincial farming assistance. The particular assistance program may be useful to determine whether the granting authority requires or presumes the recipient to be in the business of farming.
5. The most usual indication that a farming operation does not constitute a business with a reasonable expectation of profit is that it reports no, or a very small amount of, gross income for several years. However, consideration must be given to the fact that such a situation may arise in the first years of a farming operation or may be the result of extremely adverse weather conditions such as prolonged drought, severe hail, frost or flood. Where, on the other hand, a taxpayer owns a piece of land in conjunction with his or her home and grows thereon a small quantity of fruit or vegetables or maintains thereon a few animals, such activities do not constitute the carrying on of a business. Even though the taxpayer occasionally may sell some surplus produce or a small quantity of hay from the piece of land, this alone will not qualify such an operation as a business. The fact that a taxpayer, in a given taxation year or for years before and after, had or appeared to have no reasonable expectation of profit is one of the facts to be considered in determining whether or not the taxpayer was in the business of farming in that year. However, it is not conclusive evidence in itself that the taxpayer was not engaged in the business of farming and other facts may support the conclusion that he or she was in fact engaged in the business of farming.
DEFINITION OF FARMING
6. For purposes of the Act, the word "farming" is given a wide definition by subsection 248(1). It includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees. This list is not exhaustive and it has been decided by our courts that the word "farming" also includes tree farming and the operation of a wild game reserve. In certain factual circumstances it is considered that "farming" includes raising fish, market gardening, the operation of nurseries and greenhouses, and the operation of a chick hatchery. However, "farming" does not include trapping or an office or employment under a person engaged in the business of farming.
7. For more information concerning the calculation and the deductibility of the restricted farm losses, refer to IT-232 entitled "Losses - Deductibility of Restricted Farm Losses, Non-Capital Losses and Net Capital Losses".
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