The Supreme Court of Canada today released its decision in the case of The Queen v. John Craig concerning section 31 of the Income Tax Act. Section 31 limits the ability of taxpayers to deduct farming losses against other income. Section 31 does not apply to a taxpayer whose chief source of income is farming or a combination of farming and another source.
Prior to today’s decision, the applicable Supreme Court of Canada ruling in the 1978 case of Moldowan was that section 31 would limit a taxpayer where farming was subordinate to the taxpayer’s other sources of income. In today’s decision, the Supreme Court of Canada stated that this was not a correct interpretation of the law. Rather, the Court states that section 31 will not apply to a taxpayer where the farming activity of the taxpayer is a business and not a personal endeavor and where the taxpayer places significant emphasis on his or her farming business. While a definition of “significant emphasis” is not provided, the Court states that one looks at the factors of the capital invested, the income generated, the time spent and the taxpayer’s ordinary mode of living, farming history and future intentions and expectations to determine whether a sufficiently significant emphasis is placed on farming so as to be outside section 31.
Whether section 31 applies to you will depend on your particular circumstances. If you believe that this case is relevant to your tax position, you should consult your own tax advisor.