For many Canadian producers, periodic farming losses have become the norm, although not all of those losses have translated into tax deductions.
This year, the Canadian government reaffirmed that the deductibility of farm losses will depend on the taxpayer’s non-farm related income and activities.
This recent ruling was in response to a 2012 Supreme Court of Canada decision, which briefly expanded the number of farmers who could claim their entire farm loss as a deduction on their tax return.
The federal government amended the legislation to clarify that farming must be the major occupation of the taxpayer, and the taxpayer’s other source of income must be subordinate to farming, in order for farming losses to be fully deductible against income from those alternate sources.
The Canada Revenue Agency (CRA) has determined there are three different types of farming activities for taxpayers:
1) A taxpayer for whom farming may reasonably be expected to provide the bulk of income, and be the centre of their work routine. Such a taxpayer, who looks to farming for his or her livelihood, can deduct the full loss in the years in which he or she sustains a farming loss.
2) The taxpayer who does not look to farming, or to a combination of farming and some subordinate source of income, for his livelihood, but continues farming as a sideline business. Such a taxpayer is entitled to deduct farming losses on a restricted basis.
3) The taxpayer who does not look to farming, or to a combination of farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible at all.
Some producers will be able to claim additional farm losses this year. The government has increased the maximum restricted farm loss to $17,500 for 2013. Previously, the maximum amount of restricted farm loss that a taxpayer could claim was $8,750. The taxpayer can now claim 100% of the first $2,500 of farm losses, then 50% of an additional $30,000 of farm losses.
Contact your Kemp Harvey Group professional to further discuss these issues.