Farming Income

FARMING INCOME

Hobby Farm loss calculation for 1998 on.



QUESTION: Our children bought a hobby farm in the  Cariboo.  Where would we search to find  out the tax implications of such a  purchase?  (They have 10 acres, a barn,  outbuildings etc.)

___________________________

ANSWER: The fact that you have called it a hobby farm means that it has NO tax consequences on anybody's tax return.  There are no tax deductions associated with a hobby farm.

 

 

 

Loss up to $2,500                

 $______________    $_____________   B

 

Balance - up to $12,500         $______________  C

 

Half of Balance (max $6,250) $______________    $_____________   D

  

Restricted Farm Loss (Max $8,750)     (B + D)       $_____________       $_____________ E

 

Carry Forward Restricted farm Loss     (A - E)        $_____________ F

 

The carry forward loss can only be used against future farming profits. 

 

A WORKING (non-restricted) farm is one where the farm is the principal source of work and income and in this case 100% of losses are deductible but there is not usually anything to deduct them against.

 

The CCRA (old revenue Canada) also has a farm pamphlet which explains the basics well.  You can get it mailed to you or pick it up off the web at:

 http://www.ccra-adrc.gc.ca

  

My own chapter is far superior when it comes to the definition however, because it gives specific tax cases for you to compare your own operation with.

There is no limitation on the size of the farm.  Small poultry operations can be run successfully on 10 acres. Small orchards of 10 acres can be a working farm.  On the other hand, 640 acres of horse ranch owned by DAND AUTO Parts was ruled to be a restricted farm even though they were grossing significant amounts of money.

Hope this helps

david ingram

 From 1990 Ultimate Year Round Tax Guide

 

The major farming cases have been moved to the section on EXPECTATION of PROFIT (about page 180 - see alphabetical list at bottom of page under Profit, expectation of.) This has been done so that they were accessible by any businessperson. By keeping these farming cases in the farming section, other business people with no interest in farming would not have seen them.

Since 1988 CCRA has recognized: Gentleman Farmers, Hobby Farms, Dual Incomes

Since 1989 CCRA has recognized:Fish Farmers

Fish Farming is causing great consternation in the fishing industry. The courts are treating them as farmers rather than fishermen as the following case shows.  

TAXCASE: In 1989, Paul and Maureen Durst won their right to deduct their losses from a fish farming operation in Ontario. However, Judge Taylor of the Tax Court of Canada ruled that they were limited to the losses allowed by section 31(1) of the Income Tax Act and restricted the amounts to $5,000 each per year.

The June 18, 1987 Budget has finally helped to resolve the situation for farm losses where there is a farmer with an outside source of income. The provision requiring profits in three out of seven years is a little dicey, but any legitimate farmer will be able to put off a purchase, or speed up a sale to create a profit in three years. It will just increase losses in the other four years. Any accountant will have to wonder about the intelligence of the individual or individuals who thought this one up.

 For 1988 and 1989, the old $5,000 limit for `part-time' farmers has been increased to $15,000 (it should have been increased to $25,000 to keep up with inflation since its inception in the early fifties).

However, the farmer with the dual incomes must have farm profits in three out of seven years. It is this last provision, which will be easy to circumvent. In the ensuing pages are many examples of when a Dual Income Farmer will be able to make the deduction and `what the rules are'. (See the Profit - expectation section for 1990 cases). 

Since 1989 CCRA has implemented a new system where farmers will no longer `write-off' their animals. Instead of being able to write-off the cost of a race horse, for instance, there is a class of animals, much like the system for other types of assets. This should stop a `city slicker' from buying a horse and writing it off (or trying to write it off) in the year of purchase.

1988 and 1989 saw over 40 cases in the courts dealing with farm and restricted farm losses. However, there were no new breakthroughs and the new rules have addressed many of the problems with regard to losses and restrictions. Therefore, I am merely listing them and their results. If you are involved in a major case, it will assist you in your research.

 

1988 TAX COURT OF CANADA DECISIONS

 

Taxcase: Ianson - lost - no reasonable expectation of profit

Taxcase: Leighland - lost - restricted to $5,000

Taxcase: Weiss - lost - restricted - horses were a sideline

Taxcase: Epstein - lost - no business - no deduction - hobby

Taxcase: Smith - lost - tree farm not expected to make profit

Taxcase: Armstrong - half/half - referred back to recalculate

Taxcase: Boddington ? lost, no expectation of profit horses sold

Taxcase: Campbell ? won, full time dairy to beef to hogs to dairy

Taxcase: McCullough ? lost, restricted farming a sideline for doctor

Taxcase: Howes - lost - restricted - business but only a sideline

Taxcase: Chandler - lost - restricted - major but no profit expectation

Taxcase: Rose - lost - restricted - horses a sideline for doctor

Taxcase: Gray - won - Class 1 farmer - horses a business

Taxcase: Solotorow - won - Class 1 farmer - Xmas trees a business

Taxcase: McGinnis - lost - No expectation of profit

Taxcase:  McAllister - lost - No reasonable expectation of profit

 

As you can see, not many people won in the Tax Court of Canada in 1988!

 

1989 TAX COURT OF CANADA DECISIONS

 

Taxcase: McLeese - lost - Chief source of income not farming or combination

Taxcase:  Sniderman - lost - dog breeding not farming - no reasonable expectation of profit

Fish Farming is causing great consternation in the fishing industry.

The courts are treating them as farmers rather than fishermen as the following case shows.

TAXCASE: In 1989, Paul and Maureen Durst won their right to deduct their losses from a fish farming operation in Ontario. However, Judge Taylor of the Tax Court of Canada ruled that they were limited to the losses allowed by section 31(1) of the Income Tax Act and restricted the amounts to $5,000 each per year.

Taxcase: Aujla - lost - losses restricted to $5,000 each

Taxcase: Livergant - lost - restricted to $5,000 even though 1980 gross over $140,000

Taxcase: Harris - lost - no evidence as to how he intended to make a profit farming

 

1989 FEDERAL COURT - TRIAL DIVISION DECISIONS

 

Taxcase: Richardson - lost - business was accounting, not horse breeding

Taxcase: Madronich - won - tree farm operation a real business with expectation of profit

Taxcase: Hoeft - lost - Judge Martin overturned win in Tax Court - restricted to $5,000

Taxcase:  Mohl - lost - Judge Strayer upheld earlier Tax Court loss - restricted to $5,000

Taxcase: Pavlkovich - WON - Judge Muldoon overturned Tax Court Loss - expectation of profit

Taxcase: Glass - WON - Judge Dube ruled his 30 hour a week job a desperate attempt to provide needed cash flow to keep full time farm going - no restrictions

 1989 FEDERAL COURT OF APPEAL DECISIONS

 

Taxcase: Morrissey - lost - Tax Court of Canada Decision reversed by Judges Mahoney, MacGuigan and Desjardins

Taxcase:  Gordon - lost - Judges Marceau, Stone and Desjardins upheld

 

*   As an example, if the auto is judged a passenger vehicle, only $20,000 of its capital cost can be depreciated, and interest on a loan is limited to $10.00 a day. If leases, only the value of $20,000 can be deducted (changed to $24,000 for vehicles purchased after August 31, 1989).

Clearing or leveling land expenses may be deducted or carried forward to another year.

 FARMHOUSE OFFICE

Beginning in 1988, there is not an automatic deduction of 25% of the farm home for business. For 1988 and 1989, you must keep a detailed record of the area used and pro-rate that area's expenses as a percentage of the total costs of the home. In addition, the work space must be your principal place of business and it must be dedicated to the business. It may not be part of a rec room anymore. If you are using a fiscal year that started in 1987, this does not apply until the 1989 year.

 BUILDINGS - CLASS 1

 *     Buildings now go into class 1 and are depreciated at 4%, unless they were contracted for prior to June 17, 1987.

      *    Existing buildings in class 3 may not have additions exceeding $500,000 or 25% of the value of the building on December 31, 1987.

 

ELIGIBLE CAPITAL EXPENDITURES

 

       *   The additions or deductions from your Eligible Capital Account are based upon 3/4's instead of 1/2 of the amounts.

       *    The maximum annual deduction has been reduced from 10% (of 1/2) to 7% (of 3/4's).         

       *    The existing balance of your cumulative eligible capital      account is increased by one-half.

       *    A disposition of an eligible capital property may result in an addition to business income or a deemed taxable capital gain.

  *    Any deemed capital gains are eligible for the lifetime capital gains deduction (up to $500,000).

 

CAPITAL GAINS DEDUCTION

 *      You must include 1/2 of a capital gain in your income.

Therefore the maximum lifetime exemption has been changed to $250,000.

The definition of Qualified Farm Property has been modified.

 

QUALIFIED FARM PROPERTY MUST BE OWNED BY:

 

           *   you or your spouse

           *    a partnership, an interest in which is an ?interest in a family farm partnership? of you or your spouse.

 It may include property that is:

 *      a share of the capital stock of a family farm corporation that you or your spouse owned,

      *     an interest in a family farm partnership that you or your spouse owned, or

      *      real property or eligible capital property.

 

Real property or eligible capital property can only be qualified farm property if it is used in carrying on a farming business in Canada and is used by:

 

*      you or your spouse

*      any of your children, grandchildren or great grandchildren,

*      either of your parents

*     a family farm corporation where any of the above individuals

owned a share of that corporation, or

*      a family partnership where you, your spouse or any of

your children, grandchildren, great grandchildren or parents owner  an interest in that partnership

 

Real property or eligible capital property acquired before or after June 18, 1987 under the terms of an agreement entered into before June 18, 1987 will qualify if:

 

*      in the year you dispose of the property, it or the property for which it was substituted, was used in carrying on a farming business in Canada by either an individual, a partnership or a corporation referred to above, or

 

*      it was used in carrying on a farming business in Canada at least five years during which the property was owned by either or a partnership referred to above.

 

Real property or eligible capital property acquired after June 17, 1987 will meet this requirement if it is owned by an individual or partnership referred to above throughout the 24 months immediately before its disposition and 

*     if the property or property for which it was substituted was used by an individual for at least two years while the property was so owned, and the individual's gross revenue from the farming business in Canada in which the individual was actively engaged on a regular and continuous basis must have exceeded the individual's income from all other sources in the year, or

 

?      if the property was used by a family farm corporation or partnership, the corporation or partnership used the property in carrying on a farming business in Canada for at least 24 months during which time you, your spouse, or any of your children, grandchildren, great grandchildren or parents were actively engaged in the farming business.

 

Stay tuned for further information as it is released.

INVESTMENT TAX CREDITS

 

?      you may use investment tax credits to reduce your federal individual surtax;

 

?      the annual investment tax credit limit is a new limit

restricting the deductibility of credits;

 

?      the carry-over period for credits earned after April

19, 1983 has been extended from 7 to 10 years;

 

?      you may now claim a partial refund of the investment

tax credit; and

 

?      the capital cost of related property is reduced in the year following the year in which you deduct or receive a refund for an investment tax credit.

 

 

STANDBY CHARGES

 

If a partnership makes an automobile available to a partner or an employee, it must include a reasonable standby charge in the income of the partner or employee. See the 1989 Income Tax Deduction at Source Tables for information on how to calculate the standby charge.

 

FORWARD AVERAGING

?      there is no more forward averaging.

 

FIVE YEAR BLOCK AVERAGING

 

?      There is no more 5 year block averaging for blocks starting after 1987. For the purposes of block averaging, minimum tax provisions do not apply.

 

 

1984, 1985, 1986, 1987 LIMITS

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