The Canadian Federation of Agriculture is warning that government-proposed Income Tax Act changes will make it more difficult to attract new entrants or outside investment into farming.
The federal government is proposing to place new limits on the ability of producers to write off farm losses against income from other sources in cases where off-farm income exceeds on-farm income.
The measure is contained in Ottawa’s latest 300 page budget implementation bill tabled in Parliament last week.
“This raises a number of concerns for smaller farming operations, which continue to represent the most common entry point into the agricultural industry, as well as the burgeoning interest from non-farming investors in agricultural operations,” the CFA said in a brief to Finance Canada.
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There has been no indication from the government that it is considering the CFA’s proposed changes, although amendments can be proposed when the legislation is studied at a parliamentary committee.
The budget implementation bill contains one piece of good news for established or retiring farmers. It raises the lifetime capital gains exemption from $750,000 to $800,000 and ties that level to inflation so it will rise each year.
“We’re happy with that,” said Scott Ross, CFA director of business risk management and farm policy.
But the tightening of farm loss writeoffs is another story.
“We really see this as a setback for new entrants, beginning farmers,” Ross said. “That is our main focus. It really will limit the ability of new entrants to come into the business.”
The proposal, first referred to in this year’s spring budget and now included in the budget bill expected to be approved by the Conservative majority this autumn, will limit writeoffs against off-farm income to $17,500 per year, which could be fully claimed only if farm losses were as much as $40,000.
It is an increase, but the legislation stipulates that the Canada Revenue Agency can take into account only the balance between farm income and off-farm income to determine the write-off eligibility.
It reverses in legislation a Supreme Court ruling last year that ordered the tax department to consider the context of the farm income picture and not just the actual dollar comparison.
It was a case involving lawyer and horse farm owner John Craig, who wrote off farm losses against lawyer income and was rejected by Revenue Canada.
The Supreme Court ruling sided with Craig, giving latitude to the income tax filer to argue that while on-farm income is dwarfed by off-farm income, it is because it is a start-up farm or has a business plan to make the farm operation profitable.
The legislation tabled last week will put into law an argument that the federal government lost last year at the Supreme Court.
Under Section 31 of the Income Tax Act, full-time farmers can claim unlimited losses against off-farm income.
In its brief to Finance Canada, the CFA asked that the proposed tax law change be reconsidered.
It said the new rule would be a “disincentive and barrier to entry” because most new entrants must rely on off-farm income as they build their farm business.
It would be a blow to Canadian competitiveness. As well, the CFA argued that outside investment, a key to agricultural expansion, will be scared away from agriculture.
“For non-farmer investors, the inability to claim associated losses creates additional downside risk relative to other industries,” it said.
