August 1, 2012

The Jockey Club of Canada’s Tax Committee Chair, John Unger, has released the following statement regarding the decision, released today by the Supreme Court of Canada.

“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.  In this case, Mr. Craig was successful in his position that section 31 did not apply to him as the Court dismissed the Government’s appeal.

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  ubordinate 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.”

The Tax Committee continues to plan to make representations to the federal government for changes to section 31 of the Income Tax Act by the end of this summer.  This is to be a joint approach with Standardbred Canada.