Federal Budget 2013 – Proposed Amendments to the Tax Rules on Restricted Farm Losses

March 22, 2013 | Jennifer Spencer

The Federal Budget was released yesterday and of particular interest to the agriculture sector are proposed amendments to the tax provisions on restricted farm losses.

Read the extensive Budget analysis from Miller Thomson’s Tax Group.

The excerpt on Restricted Farm Losses is as follows:

The restricted farm loss (“RFL”) rules apply to taxpayers who have incurred a loss from farming, unless their chief source of income for a taxation year is farming or a combination of farming and some other source of income. The RFL rules limit the deduction of farm losses to a maximum of $8,750 annually ($2,500 plus ½ of the next $12,500). Farm losses incurred in a year in excess of that limit can be carried forward for 20 years to be claimed against farming income.

The Budget proposes to amend the RFL rules to overturn a recent Supreme Court of Canada decision in The Queen v. Craig, 2012 SCC 43. In Craig, it was held that a taxpayer could meet the chief source of income test even though his primary source of income was not farming provided that the taxpayer places significant emphasis on both farming and non-farming sources of income. This decision had the effect of overruling a previous decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 SCR 480. In Moldowan, the Court had held that farming that results in a loss could satisfy the chief source of income test if farming is the taxpayer’s chief source of income in combination with a non-farming source of income that is a subordinate source or a side-line employment or business. The Budget restores this prior Moldowan test requiring that a taxpayer’s other sources of income must be subordinate to farming in order for farming losses to be fully deductible against income from those other sources.

The Budget also proposes to increase the RFL limit to $17,500 of deductible farm losses annually ($2,500 plus ½ of the next $30,000).

Application Date

These measures will apply to taxation years that end on or after Budget Day.

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