Some comments on the new rules in the Income Tax Act of Canada on restricted farm losses from Derek Michell.
Background
The Department of Finance proposed an amendment to the wording of subsection 31(1), included in the 2013 Budget, to provide that any other source of income must be a subordinate source of income to the farm. The amendment has essentially legislated the interpretation taken in Moldowan v The Queen.
The old wording of the restricted farm loss section did not specify that any non-farming sources of income needed to be subordinate to farming in order to have the losses fully deductible.
The amendment resulted from the Supreme Court of Canada case, The Queen v Craig. The amendment will apply to taxation years that end on or after March 21, 2013; thereby subjecting the 2013 T1 tax returns to the new rules.
Amended Section 31
Pursuant to subsection 31(1), when a taxpayer’s chief source of income (greater than 50%) is neither farming nor a combination or farming and some other source of income that is a subordinate source of income, the taxpayer’s loss from all farming businesses is deemed to be the total of:
The lesser of:
The losses from all farming businesses (before SR&ED deductions), and
$2,500, plus the lesser of:
½ of the excess of the losses over $2,500, and
$15,000, and
The amount of any SR&ED deductions from all farming businesses.
The restricted farm loss for the year will be the amount of all farm losses over the amount determined under subsection 31(1). This means that if a client falls into the new wording of subsection 31(1), their farm losses will be restricted to $17,500 once they have $32,500 in total losses.
Amended subsection 31(2) outlines the circumstances under which the restricted farm loss rules will not apply. In particular, subsection 31(2) provides that the restricted farm loss rules will not apply where the taxpayer’s chief source of income is a combination of farming and manufacturing or processing in Canada of goods for sale and all or substantially all of the output from all farming businesses carried on by the taxpayer is used in the manufacturing or processing.
If you are currently reporting farm losses as fully deductible and have another source of income, we should examine the facts to determine if those losses would be caught under these new rules. In order to determine if their other source of income is a subordinate source of income, it would be necessary to consider the factors previously outlined in Craig, being the amount of capital, time, effort, commitment and general emphasis on the part of the taxpayer.
If you have questions or concerns about your reporting of farming losses please contact us.