Canada: Follow My Lead: The SCC Rules On The Role Of Its Own Precedents

Are lower courts obliged to follow precedents of the Supreme Court of Canada, even if those precedents are decades-old and have been the subject of extensive criticism? And when should the Court overrule one of its own precedents? The Court recently addressed both of these questions in Canada v. Craig, a tax case involving the deductibility of losses from a lawyer's horse racing business. Notably, in this case the Court overruled a precedent from 1977, on the basis that there were compelling reasons indicating that the precedent was wrongly decided. At the same time, the Court held that the lower courts should have applied this precedent and were not at liberty to overrule it themselves.


In 2000 and 2001, the taxation years at issue, Mr. Craig was a partner at a downtown Toronto law firm and derived most of his income from his legal practice. He also had significant capital gains on equity investments. In addition, he had been actively involved for many years in the standardbred horse racing industry and operated a horse racing business on a year-round basis, with as many as 20 horses in 2000 and 14 horses in 2001. He would devote more than 600 hours annually to this business, which incurred losses of $222,642 in 2000 and $205,655 in 2001. This case arose when Mr. Craig sought to deduct these losses from his other income.

The deductibility of these losses turned on the interpretation of section 31(1) of the Income Tax Act (the "Act"), which applies "[w]here a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income ..." (emphasis added) Where section 31(1) applies, the maximum allowable deduction for a farming loss is $8,750. Section 248(1) of the Act provides that "farming" includes "maintaining of horses for racing." The Minister of National Revenue took the position that section 31(1) applied to Mr. Craig and therefore allowed him only the maximum deduction of $8,750, which meant that most of his horse racing losses for these taxation years were not deductible.

The correctness of the Minister's position depended on whether the Supreme Court of Canada's 1977 decision in Moldowan v. The Queen remained good law. In that case, Dickson J. (as he then was) interpreted section 13(1) (now section 31(1)) to apply to "the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business." (p. 487; emphasis added) This interpretation effectively read in the word "subordinate" before "other source of income," such that a taxpayer would be excepted from the deduction limitation of $8,750 only if farming constituted the taxpayer's chief source of income. Moldowan was subsequently criticized for having thus made the second exception in section 31(1) ("a combination of farming and some other source of income") redundant, as any taxpayer whose chief source of income was farming would be excepted from the deduction limitation by virtue of the first exception ("farming").

This criticism culminated in the Federal Court of Appeal's 2006 decision in Gunn v. Canada, which adopted a "more generous" approach to the question of whether a taxpayer's chief source of income is a "combination of farming and some other source of income":

In my view, the combination question should be interpreted to require only an examination of the cumulative effect of the aggregate of the capital invested in farming and a second source of income, the aggregate of the income derived from farming and a second source of income, and the aggregate of the time spent on farming and on the second source of income, considered in the light of the taxpayer's ordinary mode of living, farming history, and future intentions and expectations. This would avoid the judge-made test that requires farming to be the predominant element in the combination of farming with the second source of income, which in my view is a test that cannot stand with subsequent jurisprudence.  (emphasis added; para. 83)

Decisions Below

The Tax Court of Canada

As the Minister conceded at trial that Mr. Craig's horse racing operation was a "source of income" (and therefore not a mere personal endeavour), the case focussed on the applicability of the deduction limitation in section 31(1). Hershfield J. held that this limitation did not apply to Mr. Craig, on the basis of the more generous interpretation in Gunn.

In assessing the authority of Gunn in light of Moldowan, Hershfield J. noted that Dickson J. (in Moldowan) also considered the meaning of the term "chief source" of income. In particular, Dickson J. held:

The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. (Molowan, p. 486)

Given that these "distinguishing features" (reasonable expectations, mode of work, time, capital, and profitability) are similar to the factors that Gunn applies to the section 31(1) combination question (as set out in the above excerpt), Hershfield J. sought to reconcile Gunn and Moldowan:

Indeed, it is my view that Gunn simply puts the Moldowan analysis back on track as a workable construction of section 31 – one that does not render it sterile while paying heed to the language of the section. The Gunn analysis uses the personal and commercial commitment factors embraced in Moldowan in a manner that fits into the combination formula stipulated in section 31. (para. 61; emphasis added)

Accordingly, Hershfield J. held that Gunn did not violate the underlying principles in Moldowan, and he formulated the applicable legal test as follows:

I am suggesting then that the test is whether the taxpayer's mode of operation has sufficient commitment and commerciality and profit potential to be recognized as a chief source applying the Moldowan commitment and profitability criteria. Looking at time spent, capital invested, and a meaningful profit potential arising from a dedication to profitability, the question of whether the taxpayer is recognizable as a committed, viable commercial player in a genuine economic sector of the economy should be readily answered. (para. 72; emphasis in original)

Hershfield J. concluded that Mr. Craig satisfied this test and that the deductibility of his horse racing losses was therefore not limited by the $8,750 ceiling in section 31(1).

Federal Court of Appeal

Dismissing the Minister's appeal, Evans J.A., on behalf of a unanimous Federal Court of Appeal, held that there was no basis on which to depart from Gunn. Evans J.A. noted, firstly, that the Federal Court of Appeal normally follows its own precedent unless that precedent was made per incuriam, without regard to a decision that it ought to have followed. As Gunn considered Moldowan at length, Evans J.A. wrote that "Gunn was thus anything but a per incuriamdecision." (para. 14)

Evans J.A. provided other reasons for following Gunn, including:

Since Moldowan was decided before Gunn, we are not at liberty to depart from Gunn on the ground that it has been overruled by the Supreme Court of Canada.


... a decision by a panel of this Court on the precedential effect of a prior decision by the Supreme Court of Canada [i.e., Moldowan] deserves as much respect from a subsequent panel of this Court as a decision by a previous panel on any other question of law. ...

... in view of subsequent decisions from the Supreme Court of Canada on the interpretation of taxation statutes, the aspect of Moldowan in question here might be decided differently today.


... judge-made rules relating to precedent are not like other legal rules, in the sense that the Supreme Court of Canada does not reverse the decision of an intermediate appellate court on the ground that it failed to follow the principle of stare decisis. Rather, when the Supreme Court grants leave to appeal, the question before the Court will be whether the lower court's decision is consistent with substantive law, including extant decisions of the Supreme Court, or whether the Supreme Court should modify its own jurisprudence on the point. (paras. 16-18, 20; emphasis added)

Having concluded that Hershfield J. did not err in law in relying on Gunn, Evans J.A. then held that Hershfield J. did not misapply Gunn on the facts of this case:

... [Hershfield J.] concluded on the basis of the factors and analytical framework set out in Gunn that farming constituted a significant part of Mr Craig's income in 2000 and 2001, and was more than a "sideline business". Hence, section 31 did not apply.

The facts of this case may be fairly close to the line, and I might not have made the same decision as the Judge. However, I cannot say that his decision is based on a palpable and overriding error warranting the intervention of this Court. (paras. 25-26)

The Supreme Court of Canada's Decision

Writing on behalf of a unanimous Supreme Court of Canada, Rothstein J. dismissed the Minister's appeal. There were, in essence, three aspects to Rothstein J.'s decision.

Firstly, Rothstein J. stated that the courts below should have followed Moldowan. He characterized Moldowan and Gunn as "inconsistent precedents" (para. 19). And though he acknowledged that Moldowan had been the subject of "extensive criticism" (para. 20), Rothstein J. wrote that the courts below were not at liberty to depart from it:

But regardless of the explanation, what the court in this case ought to have done was to have written reasons as to why Moldowan was problematic, in the way that the reasons in Gunn did, rather than purporting to overrule it.

... the question of whether the Federal Court of Appeal should have followed Gunn simply did not arise, in view of the Moldowan Supreme Court precedent. (paras. 21-22)

Secondly, and notwithstanding the fact that the courts below were required to follow Moldowan, Rothstein J. held that it was appropriate for the Supreme Court to overrule that decision. He noted that the Supreme Court does not lightly overrule its own precedents, and that, in doing so:

... the Supreme Court engages in a balancing exercise between the two important values of correctness and certainty. The Court must ask whether it is preferable to adhere to an incorrect precedent to maintain certainty, or to correct the error. (para. 27)

In this case, Rothstein J. concluded that correctness weighed more heavily in the balance, and that Moldowan was incorrect as it "essentially read the combination test out of s. 31(1)" (para. 28). This was contrary to the words used by Parliament, which had created both a "farming" exception and a "combination" exception to the application of that provision.

Thirdly, Rothstein J. held that the "combination" exception should be interpreted as proposed in Gunn, such that farming itself need not be the taxpayer's predominant source of income:

The factors identified [in Gunn], namely, the capital invested in farming and the second 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, are all factors involved in running a farming business together with another source of income. If these factors tend to show that the taxpayer places significant emphasis on both his farming and non-farming sources of income, there is no reason that such a combination should not constitute a chief source of income, avoiding the application of the loss deduction limitation of s. 31(1). The determination is a factual one for the trial judge. (para. 42; emphasis added)

Having adopted this interpretation of section 31(1), Rothstein J. held that there was no basis on which to disturb Hershfield J.'s factual conclusion that Mr. Craig's horse-racing operation was more than a sideline business and that the loss deduction limitation was therefore not applicable.

Potential Significance

The Supreme Court's decision is perhaps most significant because it confirms that lower courts are required to follow its precedents, even if the precedent in question is relatively old and has been the subject of widespread judicial and academic criticism. The decision is also significant because it sets out when the Supreme Court will overrule one of its own precedents, and because it settles the interpretation of a frequently-litigated provision of the Act.

Case Information

Canada v. Craig, 2012 SCC 43

Date Decided: August 1, 2012

SCC Docket: 34144

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.