Farmers are categorized into three types under tax rules: those whose only income and occupation is farming; those who farm and have another occupation or business; and those engaged in hobby farming with no intention of making money.
In the first category, farm losses can in many instances be used against income in other years. In the latter case, because there is no expectation of profit, losses cannot be deducted.
It is the middle category that has proven to be the most complex and difficult. Section 31 of the Income Tax provides that when a taxpayer’s “chief source of income is neither farming nor a combination of farming and some other source of income” the amount of farming loss that is deductible is restricted to a maximum of $8,750. The Federal Court of Appeal has noted there are “many section 31 cases being brought before the Tax Court and the appeal court, producing sometimes conflicting results.”
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A recent Federal Court of Appeal judgment, Gunn vs. the Queen, highlights the difficulty of this area. Gunn was both a practising lawyer and an active farmer. He had been farming for more than 30 years and kept expanding by buying land, improving barns on the property and building a breeding herd of 50 cows.
According to the court record, he spent about 50 hours a week on his law practice and 20 hours a week on farm duties. His wife was actively involved in the farming business. Further, his practice was near his farm, so he could be available on short notice. In addition, he was active in various farming activities and estimated that a portion of his law clients came to him because of his agriculture connections.
In the years 1987 to 2004, his farming income showed a profit in only two years due to substantial investments made to improve the farm.
While the Tax Court ruled that Gunn could only deduct $8,750 in farm losses, the Court of Appeal disagreed. It said it was “difficult to characterize Mr. Gunn’s farming activities as a mere sideline, given his substantial investment of capital, time and expertise, and his undisputed evidence as the profit potential of his farm… . It follows that he should be entitled to a full deduction for his farm losses.”
A different result occurred in the Watt case where a Saskatchewan dentist testified that he spent 1,500 hours a year on dentistry and 2,000 hours farming.
The Federal Court of Appeal concluded that “dentistry remained the central focus of his occupational life … . In contrast, he continued to operate the grain farm without major change and to enlarge his investment in it despite continuing losses.” Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
