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SCC Revisits Farming Loss Deductions Limit

28 Aug 2012

On the 1 August 2012, the Supreme Court of Canada (SCC) delivered its decision in the case of Canada v Craig in which it revisited the interpretation of section 31 of the Income Tax Act (ITA). The question to be decided by the SCC was under what circumstances the combination of farming and some other source of income constitutes a "chief source of income", allowing a taxpayer to avoid the farming loss deduction limit of section 31.Taxand Canada investigates into the case where the SCC recognised its power to overturn its own decisions.

In Moldowan v The Queen, the SCC found that the predecessor of section 31 provided for three classes of taxpayers involved in farming. In the first class are taxpayers for whom farming provides the bulk of their income or is the centre of their work routine. Loss deductions are not limited for the first class. In the second are taxpayers who don't look to farming, or to farming and some subordinate source of income, for their livelihood but carry on farming as a sideline business. For this class, subsection 31 limits the possible loss deductions. The third class consists of taxpayers who carry on some farming activities as a hobby, not as a business, and whose losses are not deductible in any amount.

However, section 31 provides two distinct exceptions to the loss deduction limitation. One is where farming is the taxpayer's chief source of income. The second is where the taxpayer's chief source of income is a combination of farming and some other source of income.

In the case of the appellant John H. Craig, his primary source of income came from his law practice. He also had farming income from buying, selling, training and maintaining horses for racing. During the trial, the Crown conceded that Mr. Craig's horse-racing operation was a business, not a personal endeavour, and the relevant factors, other than demonstrated profitability, clearly pointed to it being more than a sideline business. Even though Mr. Craig derived his principal income from the practice of law and the total hours spent at his law practice exceeded the time spent on his farming business, he devoted both a material amount of capital and a very significant part of his daily work routine to the farming business.

Discover more: SCC rulings on tax deductions for farmers

Your Taxand contact for further queries is:
Julien Bourgeois

Taxand's Take

The SCC in Craig overturned an incorrect precedent and opted for a more flexible approach. However, courts will still encounter cases pertaining to section 31, as the determination of what constitutes a taxpayer's chief source of income is a factual one for the trial judge and rests on the weighing of multiple factors as well as case specific circumstances.