Farm Losses can be Restricted: May Apply Even When Significant Time and Cash is Invested

Posted on May 8th, 2024 in Agribusiness, Domestic Tax

Holstein cattle grazing in green pasture by silo and red barn.

A November 8, 2023, Tax Court of Canada case considered whether a taxpayer’s losses from farming activities deductible against non-farming income were restricted to the $17,500 ($2,500 plus half of the next $30,000) permitted by the restricted farm loss rules for the 2014 and 2015 years. The restriction applies where the 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.

The taxpayer was a physician but also operated a farm that produced organic beef. The taxpayer provided the following relevant details. (See chart below.)

	Medical Practice	Farming
Gross Revenue	$805,321 – 2014 $851,621 – 2015	$174,433 – 2014 $31,128 – 2015
Net Income (loss	$648, 480 – 2014 $697,050 – 2015	($530,363) – 2014 ($595,904) – 2015
Staff Employed	Three part-time employees	Four full-time employees and three seasonal part-time employees
Taxpayers’ Work Schedule	Commenced work on weekdays between 7 am and 9 am and ended between 2 pm to 5 pm	Five hours/day on weekdays (before and after performing physician duties) and 8-16 hours/day on the weekends
Hours Worked by Taxpayer (approx.)	1,900 hours/year	2,500 hours/year
Capital Investment	There were no significant assets. The operating facilities were rented for $250/year from the municipality, likely as an incentive to maintain a local physician.	The operation included over 800 head of cattle, 5,314 acres of land, three large shelter and storage buildings, a building for processing meat, two more buildings under construction, and various pieces of equipment such as tractors, trucks, and haying equipment.
History	The taxpayer commenced a continually profitable practice as a physician in 1975.	The farming operation commenced shortly after 1975. Various different crops/ products were attempted. Losses were reported in all years but two.

Taxpayer loses

The Court noted that the taxpayer’s farm activities took place before and after normal working hours and gave way to her medical practice if an issue arose that required her attention. As such, the Court found that the centre of the taxpayer’s routine was her medical practice. Further, the Court noted that the farm was only commenced after the medical practice and that all of the investment in the farm came from the medical practice. The farm required the cash inflow of the medical practice to survive. The farming business had always been subordinate to the medical practice as a source of income, rather than the other way around, and there was no demonstration that this would change in the foreseeable future. As such, the Court determined that the restricted farm loss rules would apply and the taxpayer’s deduction would be limited to $17,500.

Court’s additional commentary

The Court noted that the result was most unfortunate as it resulted in the denial of a loss for a bona fide farming business that would have been available to the operator of any other business. In particular, the Court noted how this case demonstrated the difficulty in growing a viable farming business with the current restricted farm loss rule punishing those willing to put in the significant time and capital required to do so.

ACTION: If farming activities consume a significant portion of your resources but you earn income from other significant sources as well, seek consultation to determine if farming losses may be restricted.

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Originally published in Tax Tips & Traps Q1 2024