CRA Disagrees on Definition of a Farmer | FBC, Canada's Farm & Small Business Tax Specialist

CRA Disagrees on Definition of a Farmer

Appeal decision highlights differing definitions of when a farmer is really a farmer 

When it comes to off-farm income, CRA appears all too willing to view it as a reason to restrict farming losses. They seem to have a lack of understanding about how the business of farming really works.

A case in point was the reassessment of an Alberta farmer who was building a quarter horse operation from scratch. While doing so, he needed to supplement his income as an oil field drilling supervisor.

CRA saw the expense stream from farming along with the dominant revenue stream from oil field operations as indicating the taxpayer's preoccupation was with oil field employment and not the ranch. As a result, CRA restricted his farming losses for 1998 and 1999 to $8,750 for each year as prescribed by Section 31 of the Income Tax Act.

The Tax Court of Canada took a different view when the taxpayer (representing himself) appealed the decision.

The Court noted that, prior to 1994, the taxpayer had been a full-time cattle rancher on a half section of land. An arrangement with a lumber company to clear a stand of timber on the property proved so environmentally and financially damaging to the operation he had to sell both his land and cattle in late 1993. At that time he took on full-time employment in the oil fields to support his family, but his overriding interest was always farming.

In 1994, the farmer acquired access to three-quarters of a section on which he decided to breed and train quarter horses for eventual sale. He started his operation with a stallion and five brood mares, all chosen for their bloodlines. He bred the mares every year, keeping the fillies and training the colts for sale when they were ready.

All the time he was developing his operation, he spent part of each day working the farm while carefully managing his oil field work schedule to be on the farm at critical periods. The income from oil field operations went to support his family and build the quarter horse operation. By the time the appeal was heard in 2003 the operation had grown to some 100 horses and had a reputation as a source of high quality quarter horses for ranching and rodeo use.

The taxpayer's business plan also showed that within a year or two the operation would be consistently turning a profit.

The court found that the taxpayer's history of farming, his work schedule arranged to focus on the needs of the ranch, the use of non-farm income to invest in the quarter horse operation, and his forward planning for the creation of a profitable enterprise all suggested the taxpayer's main focus was indeed on farming and not his oil field job.

The Court overturned the CRA reassessment in a ruling handed down under the informal procedure and awarded disbursement costs to the taxpayer.

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