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Generally, taxpayers may deduct losses from one business or source of income against income from another, without any restriction. However, this rule does not apply in all cases for farming.

What is Farming?

In order to be in the business of farming, a person must demonstrate an intention of carrying on the farming activity for profit, and must have evidence to support that intention. In the absence of such intention and evidence, the farming activities will generally be considered a hobby, and not a business. As a hobby, the income is not taxable and the losses are not deductible.

Subsection 248(1) of the Income Tax Act (the “Act”) defines farming to include tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing, and the keeping of bees. Furthermore, Canada Revenue Agency and the courts also consider the following businesses to be farming:

  • Tree farming
  • Market gardening
  • The operation of nurseries and greenhouses
  • The cultivation of crops in water and hydroponics
  • Raising fish
  • Cattle feed lots
  • The operation of a wild game reserve
  • A mechanical hatching operation where eggs are acquired, hatched in incubators and the chicks sold within a few days of hatching.

Restriction on Deductibility of Farming Losses

Subsection 31(1) of the Act restricts the deductibility of farming losses against other-source income “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.” Any loss in excess of the amount allowed by this subsection can still be used in the taxation year that it is incurred, or be carried forward 20 years or back 3 years; however, it can only offset farming income.

In other words, a taxpayer may only claim farming losses without restriction to reduce other types of income if their chief source of income is from farming or a combination of farming and another source of income.

The Act does not provide any guidance as to when a taxpayer’s “chief source of income” is farming or “a combination of farming and another source”, and, therefore, the farming losses are fully deductible and not subject to the above-noted restriction. As such, it is up to case law to determine this. In Moldowan v. The Queen, 1978 SCC 480, the Supreme Court of Canada held that a taxpayer’s chief source of income is from farming or a combination of farming and another activity only when farming is reasonably expected to provide the main source of the taxpayer’s income or be the centre of the taxpayer’s work routine. However, the Supreme Court of Canada’s recent decision in Canada v. Craig, 2012 SCC 43, overruled Moldowan.

The taxpayer in Craig earned the majority of his income as a lawyer. However, the taxpayer also had a business consisting of buying, selling, breeding and racing standard-bred horses. The issue to be decided was whether the taxpayer’s “chief source of income” was comprised of “a combination of farming and some other source of income”.

In Craig, the Court held that the combination of the taxpayer’s income from his law practice and farming constituted the taxpayer’s “chief source of income” because the taxpayer invested significant funds and spent considerable time in that business. Furthermore, it held that whether the combination of farming and some other source of income is the taxpayer’s chief source of income is a factual determination which must be made based on the following factors:

  • 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
  • The taxpayer’s ordinary mode of living, family history, and future intentions and expectations.

The combination is the taxpayer’s chief source of income if these factors tend to show that the taxpayer places significant emphasis on both the farming and non-farming sources of income. The Court noted that the approach to these factors must be flexible, recognizing that not each factor need be significant. Additionally, if the taxpayer places significant emphasis on the farming business, the fact that another source of income produces greater income than the farm does not mean that such a combination is not the taxpayer’s chief source of income. Finally, there is no requirement that the two sources of income be connected in order to meet the combination test.

The Court recognized that the taxpayer in Craig devoted a material amount of capital and time to his farming business. In addition, the court placed weight on the fact that the taxpayer was actively involved in the standard-bred racing community. Therefore, in this case the Court held that subsection 31(1) did not apply and the taxpayer was free to deduct his farming losses against other sources of income.

If the CRA is auditing you with respect to the deductions you have claimed for your farming losses, if it has denied those deductions, or if you simply wonder how to structure your affairs in order not to be subject to the restriction on deductibility of farming losses, call our office to find out more and schedule an initial consultation.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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