Result: Moldowan has been overruled. It took an
uncharacteristically short period of time for the SCC to render its
judgment – the unanimous decision emphatically stated
that "Moldowan cannot stand."
Justice Rothstein delivered the reasons, which prescribe a new
analysis to be undertaken when a taxpayer needs to determine if his
or her income from farming activities (such as a horse racing or
breeding business), when combined with some other source of income
(such as employment or business income) constitutes a "chief
source of income." If this test is satisfied, then the
taxpayer may deduct the full amount of any losses from the farming
operation against the other source of income, without restriction.
If the test is not satisfied, then section 31 restricts the amount
of the deductible loss in any given taxation year to $8,750.
The New Test: The new test outlined by the SCC
is still a fact-based analysis to be applied to the particular
circumstances of the taxpayer, and has two steps:
Step 1: At the outset, a determination needs to
be made that the farming business is in fact a business (a source
of income from which losses may be deducted), as opposed to a
personal endeavour. This test is enunciated in Stewart v. Canada (2002 SCC 46) as the
"commercial manner" test, stating that the farming
operation is a business if there is no personal or hobby element;
or if there is a personal or hobby element, then the venture must
be undertaken in a sufficiently commercial manner "in
accordance with objective standards of businesslike behaviour"
in order to be considered a business.
Step 2: Once it is determined that the farming
operation is a business, the taxpayer is entitled to full deduction
of farming losses against another source of income if it is
determined that farming and the other source of income is his or
her chief source of income, based on the following factors, taken
together: the amount of capital invested in farming and the other
source of income; the income from each of the two sources of
income; the time spent on the two sources of income; and the
taxpayer's ordinary mode of living, farming history and future
intentions and expectations. To be successful, it must be shown
that the taxpayer has invested significant funds and has spent
considerable time attending to the farming business and that the
taxpayer places significant emphasis on both the farming and
non-farming sources of income. Further, it is not necessary that
income from the farming business exceed income from the other
source of income – this fact is irrelevant to the
The new test could be described as the "significant
endeavors" test – which is much more palatable than
the defunct 'reasonable expectation of profit' test or
'three classes of farmer' test that has now been buried
along with Moldowan. RIP.
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