What is a restricted farm loss?
If you run your farm as a business, you may be able to deduct a farm loss in the year. However, if your chief source of income is neither from farming nor from a combination of farming and some other source of income, you can only deduct a portion of your farm loss for the year.
For tax years ending after March 20, 2013, the amount that you can deduct may increase. For more information, see Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide, or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.
The portion of the loss that you cannot deduct becomes a restricted farm loss (RFL). You can carry an RFL incurred in tax years ending before 2006 back 3 years and forward up to 10 years.
You can now carry an RFL incurred in tax years ending after 2005, back 3 years and forward up to 20 years.
However, the amount you can deduct in any year cannot be more than your net farming income for that year. For more information on determining your chief source of income and how to calculate an RFL, see Guide T4002, RC4060, or RC4408.
You may have RFLs that you incurred in your farming operation that you could not deduct when you calculated your income for previous years. You can apply part of these RFLs against any capital gain you may have when you sell your farmland. The amount of RFLs that you can apply cannot be more than the property taxes and the interest on money you borrowed to buy the farmland that were included in the calculation of the RFLs for each year. Reduce your capital gain by adding these amounts to the adjusted cost base (ACB) of your farmland. Also, you have to reduce your RFL balance by these amounts.
You can only use RFLs to reduce any capital gain from selling your farmland to zero. You cannot use an RFL to create or increase a capital loss from selling farmland.
Milan sold his farmland in 2019 for $200,000. The ACB of the property was $160,000. Milan has an unapplied RFL of $20,000 from 2000. This amount includes $5,000 for property taxes, $5,000 for interest, and $10,000 for other expenses.
Milan wants to reduce his capital gain from selling his farmland by applying his RFL against the capital gain. He calculates his capital gain as follows:
Proceeds of disposition - (ACB + property taxes + interest) = capital gain.
$200,000 - ($160,000 + $5,000 + $5,000) = $30,000.
Milan can only apply the portion of his RFL that relates to property taxes and interest on the money he borrowed to buy the farmland.
Completing your Schedule 3
Do not report your restricted farm losses on Schedule 3. For instructions on how to report the RFL on your income tax return see the farming guides below.
Forms and publications
- Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
- RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide
- RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide
- Income Tax Package
- Form T1A, Request for Loss Carryback
- IT322R, Farm Losses
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