|
Federal Tax - Farming Loss Restriction Rule. Stackhouse v. Canada
In Stackhouse v. Canada (Fed CA, 2025) the Federal Court of Appeal dismissed a taxpayer's appeal, here from a Tax Court finding that the "amended farming loss restriction rule" applied to her situation. Where this rule applies then a taxpayer who "incurs a loss from carrying on a business" cannot "deduct it against their income from another business, property or employment".
Here the court reviews the 'farming loss restriction rule', it's history and some relevant cases:[10] For more than 70 years, the Income Tax Act has restricted the deduction of farming losses. Although the details have changed from time to time, one feature has not changed—a taxpayer with a farming loss may deduct it against income from other sources without restriction only where farming, either alone or in combination with another source of income, is the taxpayer’s chief source of income.
[11] The farming loss restriction rule is currently found in section 31 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). The portion of the rule relevant to this appeal provides as follows:"31(1) If a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income that is a subordinate source of income for the taxpayer, then for the purposes of sections 3 and 111 the taxpayer’s loss, if any, for the year from all farming businesses carried on by the taxpayer is deemed to be the total of"
"31(1)"" Si le revenu d’un contribuable, pour une année d’imposition, ne provient principalement ni de l’agriculture ni d’une combinaison de l’agriculture et d’une autre source qui est une source secondaire de revenu pour lui, pour l’application des articles 3 et 111, ses pertes pour l’année, provenant de toutes les entreprises agricoles exploitées par lui, sont réputées correspondre au total des montants suivants :"
"…"
"[…]"
"(Emphasis added.)"
"(Soulignement ajouté.)" [12] The preamble is followed by a formula limiting the maximum farming loss that may be deducted. In 2014 and 2015, the maximum was $17,500. Prior to the 2013 amendment, the same portion of the rule provided as follows:"31(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 the taxpayer’s loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of"
"31(1)"" Lorsque le revenu d’un contribuable, pour une année d’imposition, ne provient principalement ni de l’agriculture ni d’une combinaison de l’agriculture et de quelque autre source, pour l’application des articles 3 et 111, ses pertes pour l’année, provenant de toutes les entreprises agricoles exploitées par lui, sont réputées être le total des montants suivants :"
"…"
"[…]"
"(Emphasis added.)"
"(Soulignement ajouté.)" [13] Although written in the negative, in essence subsection 31(1) asks whether the taxpayer’s chief source of income is farming or a combination of farming and some other source of income or, as amended, farming and some other source of income that is subordinate. If the answer is no, the farming loss restriction rule applies.
[14] As is evident, until the 2013 amendment, the combination exception placed no express conditions on the sources that comprised the chief source of income except that one of them had to be farming. Under the amendment, unless the non-farming source in the combination is a subordinate source, the farming loss restriction rule applies, with one proviso. The proviso is found in subsection 31(2) of the Income Tax Act, added at the same time and with the same effective date as the amendment to subsection 31(1) at issue in the appeal.
[15] Subsection 31(2) provides that the farming loss restriction rule does not apply where the combination is comprised of farming and manufacturing or processing in Canada of goods for sale, and all or substantially all the output from the taxpayer’s farming business is used in the manufacturing or processing business. In other words, in that circumstance, the combination exception is read as it was before the 2013 amendment—whether farming or the manufacturing or processing business is subordinate is not relevant.
[16] Except to the extent that it provides context, this proviso is not relevant to this appeal. Accordingly, for simplicity, I proceed as if subsection 31(1) was the only provision concerned with the combination exception.
[17] The pre-2013 version of the combination exception was the source of significant debate and many disputes, including before this Court and the Supreme Court of Canada. The Supreme Court considered the interpretation and application of the farming loss restriction rule in two cases: Moldowan v. The Queen, 1977 CanLII 5 (SCC), [1978] 1 S.C.R. 480, 15 N.R. 476 [Moldowan] and Canada v. Craig, 2012 SCC 43 [Craig].
[18] Both these decisions considered the same text in the farming loss restriction rule—"“where [or if] a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income”". However, Craig overruled Moldowan, leading to the 2013 amendment, the effect of which lies at the heart of this appeal. Therefore, it is useful to summarize these decisions, starting with Moldowan.
A. 1978: Moldowan
[19] In Moldowan, the Supreme Court first considered what "“chief source of income”" meant. It observed that, because the farming loss restriction rule applied only when a taxpayer had a loss from farming, to give the provision meaning emphasis must be placed on the words "“source of income”": Moldowan at 485.
[20] The Supreme Court explained that "“[w]hether a source of income is a taxpayer’s ‘chief source’ of income is both a relative and objective test”" but is "“not a pure quantum measurement”": Moldowan at 486. Rather, "“[t]he distinguishing features of ‘chief source’ are the taxpayer’s reasonable expectation of income from [their] various revenue sources and [their] ordinary mode and habit of work”": Moldowan at 486. Those features could be tested by considering, in relation to a source, such factors as the time spent, the capital committed and actual and potential profitability: Moldowan at 486.
[21] As for the combination test, the Supreme Court said it contemplated a person whose major preoccupation is farming but recognized that they may have income "“from a side-line employment or business”": Moldowan at 488. However, those "“subsidiary interests”" would not bring them within the farming loss restriction rule: Moldowan at 488. Whether the non-farming source was "“auxiliary”" also was both relative and objective and tested by employing the same criteria as those indicative of a chief source: Moldowan at 488.
[22] The Supreme Court concluded that the farming loss restriction rule did not apply to a person "“for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine”"—what the Supreme Court called a class (1) farmer—but would apply to a person who "“carries on farming as a sideline business”" and "“does not look to farming, or ""to farming and some subordinate source of income, for [their] livelihood”"—a class (2) farmer: Moldowan at 487 (emphasis added). A class (3) farmer was one who did not have a farming business but farmed as a hobby and so had no ability to deduct losses.
B. 2012: Craig
[23] In the following years, Moldowan was subject to "“criticism from the judiciary, academics and members of the profession”" because the effect of its interpretation of the combination exception was "“that the taxpayer’s chief source of income must be farming, the same as the [first exception]”": Craig at paras. 11-12, 29.
[24] Put another way, notwithstanding that the farming loss restriction rule contemplates two distinct exceptions—either farming is the chief source of income, or the chief source of income is a combination of farming and some other source— "“""Moldowan collapsed the second exception into the first”": Craig at para. 28. It did so "“[b]y requiring that the [combination] exception apply only where the other source of income was subordinate to the farming source”": Craig at para. 28.
[25] In Craig, the Supreme Court was satisfied that the Moldowan approach to the combination test was incorrect, and the relevant considerations justified overruling it and considering the interpretation question afresh. At the same time, the Supreme Court cautioned that any substituted combination test could not render section 31 incapable of application: Craig at paras. 28-32.
[26] With that in mind, the Supreme Court made several points worthy of review in the context of this appeal.
[27] Contrary to Moldowan, under the combination exception as then formulated, neither source needed to be predominant: Craig at paras. 12, 39, 43. Nonetheless, Craig agreed with Moldowan that the exception did not contemplate a simple aggregation of income: Craig at para. 37; Moldowan at 487. Accordingly, it was insufficient to simply identify two or more sources of income and claim that together they comprise a chief source of income.
[28] Rather, for farming in combination with another source to constitute a taxpayer’s chief source of income, the taxpayer must "“devote significant time and resources to the farming business, even if he or she will also devote significant time and possibly resources to another business or employment”": Craig at para. 41. The "“fact that another source of income produces greater income than the farm does not mean that such a combination is not a chief source of income”" provided "“the taxpayer devotes considerable time and resources to the farming business”": Craig at para. 41.
[29] Simply put, the Supreme Court concluded that each source in the combination that comprises the chief source must be a significant endeavour, a source on which the taxpayer places significant emphasis: Craig at paras. 42-43, 45.
[30] To test that, the Supreme Court said that factors such as "“the capital invested in farming and the second source of income, the income from each of the two sources of income, the time spent on the two sources of income, and the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations”" should be considered: Craig at paras. 42, 45. If these factors showed that the taxpayer placed significant emphasis on both their farming and non-farming sources of income, then that combination together would constitute a chief source of income.
[31] That said, the Supreme Court stated that the approach "“must be flexible, recognizing that not each factor need be significant”": Craig at para. 45. The determination is a fact-based one for the trial judge: Craig at paras. 38, 43.
C. 2013: The Government’s Response
[32] The Craig decision led Parliament to amend the text of the combination exception with effect for taxation years ending after March 20, 2013. The technical notes that accompanied the draft amendment explained that the objective was to codify Moldowan’s interpretation, substituting it for Craig’s interpretation:Subsection 31(1) of the Act restricts the farming losses deductible by a taxpayer against income from other sources in a taxation year unless the taxpayer’s chief source of income for the year is farming or a combination of farming and some other source of income. This restriction ensures that taxpayers for whom farming is not the principal occupation are limited in their ability to deduct from their non-farm income losses from farming…
...
Subsection 31(1) is amended to codify the interpretation of subsection 31(1) set out in the Supreme Court of Canada’s decision in Moldowan v. The Queen, 1977 CanLII 5 (SCC), [1978] 1 SCR 480. Specifically, the amendment clarifies that a taxpayer will be limited to the deduction in respect of farm losses set out in subsection 31(1) if the taxpayer does not look to farming, or to farming and some subordinate source of income, for their livelihood. This amendment replaces the interpretation placed on section 31 by the Supreme Court of Canada in its decision in The Queen v. Craig, 2012 SCC 43, and applies to taxation years that end after March 20, 2013.
Canada, Department of Finance, Explanatory Notes Relating to the Income Tax Act, the Excise Tax Act and the Income Tax Regulations (October 2013), Clause 14. At paras 46-55 the court addresses a nomenclature issue regarding when the "chief source of income comprised the combination of farming and her medical practice", and at paras 106-131 explains the determination of "which source in the combination is subordinate".
|
