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The recent Supreme Court of Canada (“SCC”) decision in Canada v. Craig 2012 SCC 43 has clarified the rules relating to farm losses and the treatment of those losses in terms of whether or not they will be classified as restricted farm losses.

Pursuant to subsection 31(1) of the Income Tax Act if farming is not the chief source of income the farm loss deduction is limited to $8,750 and any losses in excess of this amount are restricted and carried forward to be applied against future farming income. Canada Revenue Agency (“CRA”) has long taken a more strict view in determining whether the farm income was actually the chief source of income.

CRA’s view in assessing chief source of income has been that the actual income from farming activity needed to be the primary source of income or the majority of the income when there is a combination of income from other sources. This view was based more on the Moldowan judgement (1978 1 SCR 480) that held that for the restricted farm loss provisions not to apply the farming must be the predominant source of income.

In the Craig decision the SCC has essentially reversed the Moldowan decision allowing taxpayers to classify farming as a chief source of income if they can prove that the taxpayer is investing significant funds and time into the farming business, thus making this their chief occupation. Some of the items that the court considered when there is a combination of farming activity and other sources of income:

  • Time spent on farming compared to the other activity
  • Their ordinary mode of living
  • Farming history
  •  Future intentions and expectations including actual and potential profitability


Thus if it can be shown that the farming is a business as defined in Stewart v. Canada (2002 SCC 46) and the farm income is shown to be a chief source of income or the taxpayer places significant emphasis on both farming and non-farming then the losses should not be restricted. The Stewart case helped to remove the requirement that a business needed to show a reasonable expectation of profit to be deductible which allows CRA to “second guess” an individual’s business decisions. Instead, the Stewart case established a two stage approach to determine if an activity is a business:

  • 1) Is the taxpayer activity in pursuit of profit or is it a personal endeavour?
  • 2) If it is not a personal endeavour than is the income business or property.


Thus the CRA should not be analysing the taxpayers business decisions whether good or bad in determining if the losses should be deductible.

As the Craig decision has just been released it is still too hard to say how the CRA will respond in its assessing policies on the matter, but the case is definitely good news for taxpayers. If you think you are in a situation where the CRA has restricted your farm losses incorrectly you may wish to challenge CRA by filing a notice of objection (if applicable), request an extension, or even apply for a taxpayer relief application in an effort to persuade CRA to grant the change even though the statutory period has expired.

Phil Hogan
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Philip Hogan

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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.

Phil Hogan


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