In a recent tax case (The Queen v. Craig) that was appealed all the way to the Supreme Court of Canada (SCC), a lawyer successfully argued that his significant farm losses should be deductible against his other income. The SCC’s decision reversed the long-standing precedent that for farm losses to be fully deductible against other sources of income, farming had to be the taxpayer’s chief source of income.
In response to the outcome of the Craig case, the Department of Finance announced a change to the income tax provision that sets out the tax treatment of part-time farmers and their ability to deduct farm losses against their other sources of income.
The wording of the new provision will be as follows:
“If a 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’s loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of . . .”
This new provision adds the underlined phrase “that is a subordinate source of income.” This proposal means that, for losses to be fully deductible, farming will now have to be the largest source of income for the taxpayer, and any other source of income must be smaller or subordinate. This new phraseology creates a clearly defined rule that eliminates any need for interpretation by the courts, which had been the case under the prior wording of this provision.
For part-time farmers, there is a “deeming” element within this provision that incorporates a formula to restrict the taxpayer’s farm loss and allow only a portion to be deductible against the taxpayer’s other sources of income. Where the “deeming” rule applies, it will establish the tax result and the true economics of a situation are disregarded.
While tightening the rules as described above, the budget at the same time proposes to raise the maximum limit to which farm losses can be deducted against other sources of income, and to change the deeming formula that restricts a part-time farmer’s ability to deduct farm losses against other income. If a part-time farmer suffers a loss from the farm operations, his or her loss will be deemed to be the lesser of:
- the actual loss; and
- $2,500 plus the lesser of (a) one-half of the loss in excess of $2,500, and (b) $15,000.
This proposed change means that the maximum loss that a part-time farmer can deduct against other income will be $17,500, twice the current limit of $8,750.
Three examples utilizing this new formula follow:
|Example 1 ($)||Example 2 ($)||Example 3 ($)|
|Actual farm loss||A||7,500||32,500||62,500|
|1/2 of (A – $2,500)||B||2,500||15,000||30,000|
|Lesser of B and $15,000||C||2,500||15,000||15,000|
|C plus $2,500||D||2,500||17,500||17,500|
|Deemed Farm Loss||5,000||17,500||17,500|
|Balance available for carry-back or carry-forward||2,500||15,000||45,000|
Any amounts that are non-deductible because of the application of the formula become restricted farm losses and can be carried back three years or carried forward ten years, and deducted against farm income realized in any of those years.
There is a certain ebb and flow in the ever-changing landscape of income tax planning. If the courts interpret the income tax legislation in different ways from the intent of the Department of Finance, legislative change can often be anticipated.
E.O. & E.
This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.
The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.
The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.
Advocis*, the Institute for advanced financial education.
(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).
The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.
Copywrite ISSN 0382-7038
Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.