“the SCC corrected its previous interpretation of the combination test.”
In the recent case of Canada v. Craig, 2012 SCC 43, the Supreme Court of Canada (“SCC”) overturned its previous decision on the deductibility of farm losses. Farming (which also includes the maintenance of horses for racing) is no longer required to be a predominant source of income in order for the farm losses to be fully deductible against other income.
Where a taxpayer’s chief source of income is neither farming nor a combination of farming and some other sources of income (the “combination test”), the amount of farm losses that may be deducted against other income is restricted to $8,750 per year. Such restricted farm losses over the limit may only be deducted against farming income.
Prior to the Craig case, Moldowan [1978 1 S.C.R. 480] was the only SCC case on the deductibility of farm losses, and it provided for three categories of farming:
- Where farming produced the bulk of income or was the centre of work routine, then there was no restriction on the deductibility of farm losses against other income.
- Where farming was a sideline business, then the amount of farm losses deductible against other income was restricted.
- Where farming was a hobby, then no deduction was allowed for the farm losses.
Based on Moldowan, in order for farming not to be a sideline business, it had to be the predominant element in the combination of farming with the second source of income. This position effectively eliminated the “combination” test and replaced it with the requirement that farming be the chief source of income or the predominant activity.
In the Craig decision, the SCC corrected its previous interpretation of the combination test and confirmed that farming need not be the predominant activity. Nevertheless, the farming activities must be conducted in a businesslike manner. In addition, the court ruled that the tests to be met under the combination test should be the same as applicable when farming is the chief source of income. It is still required that considerable amount of time and resources be devoted to the farming business but another source can produce greater income. It has also been recognized that the approach must be flexible, recognizing that it is not necessary that each factor be significant.
This position is much welcomed news for taxpayers. If you engage in farming activities and your farm losses were restricted in the past, you should contact your TSG representative to revisit whether or not this should still be the case.
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