Farming businesses

While the term “farming business” is not defined, the tax legislation does state that “farming” includes tilling the soil, raising or exhibiting livestock, maintaining horses for racing, raising poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but it does not include an office or employment under a person engaged in the business of farming.

Case law has established that farming can also include other activities, such as forestry operations or the operation of a game reserve, as well as an artificial incubation business, which includes the purchasing and incubating of eggs, followed by the sale of chicks a few days after they have been hatched. Under certain specific circumstances, farming can include fish breeding, market gardening, the operation of nurseries and greenhouses, and aquaculture and hydroponics.

In addition, to benefit from the specific farming rules, your farming operations have to be of a business nature. The CRA has established the following criteria for determining whether a farming operation is a business:

  • The extent of the activity in relation to businesses of a similar nature and size in the same locality—The best criterion is the area used for farming. If your farm property is much too small to generate a reasonable expectation of profit, it can be assumed that it’s for your personal use or pleasure.
  • The time devoted to farming compared to the time devoted to a job or other means of earning income— If you devote the major portion of your time to the farm during harvesting season, you’re likely carrying on a farm business.
  • The financial commitments for future expansion in light of your resources—This criterion is based on the capital you have invested in the operation over a number of years and the acquisition of buildings, machinery, equipment and inventories.
  • Your entitlement to some sort of provincial farm assistance.

A farm business that only generates a small amount of gross revenue over a number of years might be indicative of a hobby rather than a business. However, it has to be remembered that this could be the situation during the initial years of operation or during certain periods where there are special circumstances such as prolonged droughts, frost or floods.

A number of related activities can also be considered a farming business: raising and maintaining racehorses to the extent you can demonstrate it’s not a hobby; a woodlot operation carried on jointly with a farming business if you elect to report the income on a cash basis; payments you receive as consideration for the right to use your marketing quotas; the reforestation of land with the intention of letting the trees grow until they have matured, i.e., from 40 to 60 years or longer; the planting and harvesting of Christmas trees (however, if tree sales have not been reported by the sixth year after the trees have been planted— or later, depending on local growing conditions—your operations may be considered forestry).

Methods of reporting income

If you carry on a farming business, you can calculate your farming income using either the cash or the accrual method.

The accrual method means that revenues should be recorded in the year they are earned, regardless of when the cash is received. Similarly, expenses are deducted in the year they are incurred, not when they are actually paid. Inventories at the end of the fiscal year also have to be taken into account.

Under the cash method, you do not account for amounts receivable or payable in computing income. For tax purposes, expenses are recorded when they’re paid and revenues when they’re received. Inventories are not included in determining income, with the exception of the mandatory and optional inventory adjustment.

You can switch from the accrual method to the cash method simply by filing an income tax return using the cash method. However, if you file a tax return using the cash method, you must continue to do so in subsequent years unless permission is obtained from the minister to do otherwise.

There are specific rules for calculating the inventories of a farm business that effectively prevent you from using inventories to create a loss.

Farming losses

There are two types of farming losses: farm losses and restricted farm losses. Where farming is your principal source of income (i.e., more than 50% of all income), you can claim your farm loss realized for the year. However, you’ll have a restricted farm loss if your total income is not principally from farming. In such a case, only a portion of the loss is deductible against your other sources of income. Any excess can only be deducted against farming income.

If farming is just a hobby, you cannot deduct any loss.

Restricted farm losses

A long-standing Supreme Court decision, Moldowan v. The Queen, held that farming that results in a loss could satisfy the chief source of income test (such that the restricted farm loss rules would not apply) if farming was the taxpayer’s chief source of income in combination with a non-farming source of income that was a subordinate source or a side-line employment or business. As a result of this test, if farming was not your principal business, you were restricted in your ability to deduct farm losses from your non-farm income.

A 2012 Supreme Court decision, The Queen v. Craig, overruled this decision by holding that a taxpayer could satisfy the chief source of income test even though his primary source of income was from a non-farming source (such as the practice of law). This case established that a full deduction could be claimed for farming losses if you placed significant emphasis on both farming and a non-farming source of income, even if farming was subordinate to your other source of income.

The government has introduced rules to override this decision. For taxation years ending after March 20, 2013, your other sources of income must be subordinate to farming in order for farming losses to be deductible in full against your income from those other sources.

Where the restricted farm loss rules apply, the loss otherwise determined for your farming business is limited to a maximum of $17,500 ($2,500 plus 50% of the next $30,000).6 This loss can then be applied against all other sources of income. To the extent losses otherwise determined exceed the maximum amount, the excess is considered a restricted farm loss, which is deductible only against farming income. Restricted farming losses can be carried back a maximum of three years and carried forward a maximum of 20 years. Losses incurred prior to 2006 were limited to a 10-year carry-forward period.

Example: John incurs a $24,000 loss from his horseracing business in 2016. Raising horses is not his main source of income. The loss he can deduct against his other sources of income is equal to $13,250; i.e., $2,500 + (50% × [$24,000 – $2,500]). The balance of $10,750 can only be deducted against farming income earned by John in future years.

6 For taxation years that end after March 20, 2013. A different calculation applied to taxation years ending before this time.

Capital gains deduction for qualified farm property

Subject to certain conditions, if you sell or transfer a qualified farm property, you can take advantage of a capital gains deduction with respect to the capital gain on the sale or transfer. This deduction is discussed in more detail in topic 137.

Intergenerational transfers

There are rules to permit a deferral of all or part of the income tax arising on the transfer of a farm property to a child, grandchild or great-grandchild. If you transfer or sell farm property to such a person, you can elect proceeds of disposition for the property at any amount between the tax cost and the fair market value. However, if you simply give the farm property to a child, grandchild or great- grandchild, or if you sell it for less than its tax cost, the proceeds of disposition will equal the property’s tax cost.

Similar rules govern the transfer of farm property on death.

There is also an intergenerational tax-deferred rollover for woodlot operations provided you or a family member is actively involved in the management of the woodlot to the extent required by a prescribed forest-management plan.

For transfers that occur in 2014 and later taxation years, eligibility for the intergenerational rollover is extended to situations where you are involved in a combination of farming and fishing (see Topic 138).