Budget 2013 - Restricted Farm Losses
In the Queen v. Craig 2012 SCC 43, the Supreme Court of Canada outlined a new interpretation of the restricted farm loss rules different from what the Canada Revenue Agency (CRA) was applying. The budget proposes to restore the rules applied by the CRA, which were based on the interpretation previously outlined by the Supreme Court of Canada in Moldowan v. The Queen,  1 S.C.R. 480.
The budget also proposes to increase the maximum limit for the amount of restricted farming losses that may be deducted.
Is a farm loss always fully deductible from other income?
No. The amount of a net farm loss that you can deduct depends on the nature and extent of your farming activity. Your farm loss may be:
- restricted (partly deductible); or
- fully deductible.
If there is a personal element to the farming activity and you did not run your farm as a business, you cannot deduct any part of your net farm loss. The size and scope of your farm may make it impossible for the farm to make a profit, either now or in the near future. In this case, you cannot deduct your farm loss. The CRA considers this kind of farm to be personal; therefore, any farm expenses are personal expenses.
Losses from a farming business are restricted unless the taxpayer's chief source of income is farming or a combination of farming and some other source of income. In this respect, the CRA followed the criteria established by the Supreme Court of Canada in Moldowan which determined that the other source of income should be subordinate to farming income. However, the recent Supreme Court decision in Craig held that farm losses may be fully deductible even if a source of income other than farming is not subordinate to a taxpayer's farming income.
Addressing the Craig Decision
What is the difference between the Craig and Moldowan interpretations of the restricted farm loss rules?
As stated in Question 1 above, losses from a farming business are restricted unless the taxpayer's chief source of income is farming or a combination of farming and some other source of income. Moldowan held that the “other source of income” had to be subordinate to farming or else the losses would be restricted. Craig held that the other source of income did not have to be subordinate to farming but that the taxpayer must place significant emphasis on both farming and the other source of income, based on a series of factors, including:
- capital invested in farming and the other source of income;
- the income from each source of income;
- the time spent on the activities associated with each source of income;
- the taxpayer's ordinary mode of living;
- farming history; and
- Future intentions and expectations.
How do the proposed changes affect fully deductible farm losses?
Farm losses will be fully deductible if:
- farming is the taxpayer's chief source of income; or
- the taxpayer's chief source of income is a combination of farming and some other subordinate source of income (e.g., where the other source of income was a side-line employment or business).
When does the Moldowan test, as re-instated by Budget 2013, apply and when does the Craig test apply?
For taxation years that end after March 20, 2013, the budget proposes that a taxpayer's farm losses will be restricted where a taxpayer has a combination of farming and some other source of income, which is not subordinate to the farming income. In this situation, a taxpayer's losses will be restricted even if the farming activities represent a significant endeavour.
The interpretation of the rules as set out in the Craig decision will apply for taxation years ending before March 21, 2013, where the period for filing a notice of objection has not expired.
Annual Maximum deduction for Restricted Farm Losses
What has changed with respect to the annual maximum deduction for restricted farm losses?
For taxation years that end after March 20, 2013, the budget proposes to increase the annual maximum deduction used in the calculation for restricted farm losses from $8,750 to $17,500. This means that if your net farm loss is $32,500 or more, you will now be able to deduct $17,500 from your other income.
If your net farm loss is less than $32,500, the amount that you will be able to deduct from your other income is the lesser of:
- your net farm loss for the year; or
- 2,500 plus 50% x (your net farm loss minus $2,500)
Where can I get more information about the new rules for restricted farm losses?
The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.
In the meantime, please see the Department of Finance Canada's Budget 2013 documents for details.
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