Canada: How Will Past Farm Losses Be Treated After The Craig Decision?

Last Updated: November 7 2012

Article by Greg Gartner CA, QC and R. Daniel Lyons LLB, LLM (Tax)

In Canada v. Craig, 2012 SCC 43, the Supreme Court of Canada modified the combination test for determining whether the restricted farm loss rules in section 31 of the Income Tax Act (the "Act") apply to farming losses. We discussed this case in our August 2, 2012 blog. This may have an impact on taxpayers whose farming losses, as a result of the Craig decision, are no longer considered to be restricted farming losses and how those losses were applied in the taxation year in which they were incurred.

Restricted Farm Losses

Restricted farm losses are calculated by section 31 of the Act and apply where the taxpayer's chief source of income is not farming. The loss is limited to a maximum of $8,750 for any given taxation year and can be applied against other sources of income for the taxation year in which they are incurred. Any amounts in excess of $8,750 are "restricted" and are carried forward. Such carried forward losses can only be applied against future farming income realized by the taxpayer. Issues arise when the restricted farming loss is reclassified as an ordinary farming loss as may be the case as a result of the Craig decision.

Let us suppose that Mr. White has employment income of $100,000 and farm losses of $30,000 for his 2010 taxation year. If the farming losses are restricted farming losses, then he would only have a maximum loss of $8,750 and a net income of $91,250 for that particular taxation year. The remaining restricted farm losses of $21,250 can be carried forward 20 taxation years and carried back three taxation years from the year that the loss occurred under paragraph 111(1)(c) of the Act but, as mentioned above, can only be claimed against farming income earned in those other taxation years.

If the farm losses are reclassified as ordinary farm losses, then the full loss would be applied against the earned income for that particular taxation year. For the purposes of our example, Mr. White would then have a net income of $70,000 for his 2010 taxation year, rather than net income of $91,250 and the carry forward of restricted farm losses of $21,250.

The Craig decision may change the classification of farm losses from restricted farm losses to ordinary farm losses for some taxpayers. The question is what options are there for these taxpayers so they can correct their tax filings to apply the full farm loss in the year in which it was incurred.

Possible Remedies

Where the taxpayer wishes to challenge the Canada Revenue Agency's ("CRA") prior assessment, he or she may file a notice of objection to the notice of assessment ("NOA"). The time period for filing a notice of objection is set out in subsection 165(1) of the Act and is the later of:

  1. The day that is one year after the taxpayer's filing due-date for the year; and
  2. 90 days after the day of sending of the notice of assessment.

If the taxpayer misses this deadline, he or she can apply to the Minister of National Revenue (the "Minister") for an extension of time in the manner set out in section 166.1 as long as the application is made within one year after the expiration of time for filing the notice of objection. If the Minister denies the extension of time application, the taxpayer can appeal to the Tax Court of Canada in the manner detailed in section 166.2 to have the application granted.

An unsuccessful notice of objection can be further appealed to the Tax Court of Canada under subsection 169(1).

Taxpayers who have missed the deadline for filing a notice of objection may be able to request a reassessment of their original NOA where the time limit for reassessment has not expired. Subsection 152(3.1) usually allows for a period of three years (four years for mutual fund trusts and non-Canadian controlled private corporations), for CRA to reassess the taxpayer, from the earlier of the date of sending the original notice of assessment or from the day notice was sent that no tax is payable.

For example, let us say that Mr. White in our previous example was sent an original notice of assessment on June 15, 2011. The reassessment period for CRA to reassess Mr. White's original NOA would not end until June 15, 2014.

For reassessments for taxation years beyond the usual three year reassessment period, a possible solution may be found by having a taxpayer file what is commonly known as a "Fairness" application with the CRA. The basis for a Fairness application for a reassessment, beyond the reassessment time limit, is found at subsection 152(4.2) of the Act and Part IV of the CRA Information Circular IC07-1 – Taxpayer Relief Provisions. Subsection 152(4.2) allows the Minister to reassess the taxpayer's original NOA, with the taxpayer's consent, up to 10 calendar years after the end of the taxation year in which the loss occurred.

Again, let us use Mr. White as our example. With respect to Mr. White's 2010 taxation year, he has until December 31, 2020 to make a Fairness application. Fairness applications are usually made by using CRA Form RC4288, Request for Taxpayer Relief.

There is a significant hurdle to asking CRA for a reassessment and that is found in paragraph 4(e) of the CRA's Information Circular IC75-7R3. Known as the "Adverse Decision Policy", IC75-7R3 states that the application for a refund cannot be solely based upon a successful appeal to the Courts by another taxpayer. The taxpayer would need to use the Craig decision in support of other factors mentioned in IC75-7R3 to have a successful chance of having his or her assessment reassessed.

As with reassessments made within the normal reassessment period, Fairness applications for reassessments beyond the usual three year reassessment period are subject to the Adverse Decision Policy as mentioned in paragraph 87 of IC07-1 (which refers to IC75-7R3). For a taxpayer to have a reasonable chance of success, they would need to rely on more than the Craig decision, as mentioned above for reassessment requests within the reassessment time limit, to have restricted farm losses reclassified as ordinary farm losses.

However, there has been a recent case, White v. Canada, 2011 FC 556, that may have some parallels to any taxpayer asking the CRA to reassess based on Craig. White dealt with subsection 152(4.2) reassessments. It involved a discrete group of taxpayers affected (fisherman in White, which may be analogous to farmers affected by the Craig decision). The Federal Court judge in White noted that paragraph 88 of IC07-1, which is similar to paragraph 87 mentioned above, is not a rule but a guideline in applying subsection 152(4.2). An argument could be made by a taxpayer using Craig to reassess farm losses that a discrete group of taxpayers nationwide is affected by not allowing farm losses to be reclassified and that paragraph 87 of IC07-1 is not a rule but merely a guideline in CRA's decision-making process.

Conclusion

It will be interesting to see how the CRA decides to deal with these reclassified losses as a result of the Craig decision. Where the time period for filing a notice of objection has not expired, the taxpayer may apply for relief by filing a notice of objection to the CRA appeals division or from a further appeal to the Tax Court of Canada if the objection is unsuccessful.

Where the time period for filing a notice of objection has expired, subsection 31(2) gives the Minister discretion in determining restricted farming losses and reassessments under subsection 152(4.2) are also subject to Ministerial discretion. These levels of Ministerial discretion combined with the CRA's Adverse Decision Policy may make it significantly difficult for taxpayers to use the Craig decision in support of a Fairness application. This means that taxpayers with restricted farming losses that go beyond the normal reassessment period will have to clear three major CRA hurdles to have farming losses reclassified and reassessed.

Finally, farmers should also consider the merits of other types of planning that can increase their income so as to "soak up" their restricted farm losses that are being carried forward and avail themselves of future fully deductible losses to the extent their conditions are similar to Craig. For example, perhaps affected farmers could increase their income for 2012 by specifying a proper amount under paragraph 28(1)(b) - known as the "optional inventory adjustment" ("OIA"). The OIA amount could not exceed the fair market value of the inventory on hand at the end of 2012 less any "mandatory inventory adjustment" amounts. Such increased income amounts my potentially enable the affected farmer to use his restricted farm losses that may be carried forward. In the next year, 2013, the amount brought into income under the OIA for 2012 would be fully deductible pursuant to paragraph 28(1)(f) of the Act. To the extent that the farmer's conditions are similar those in Craig, such a deduction may trigger farming losses that are not restricted thus enabling other sources of taxable income to be reduced without restriction.

The tax professionals at Moodys Tax Advisors would be pleased to assist with this matter.

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 Mondaq.com.

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

Events from this Firm
18 Oct 2018, Webinar, Calgary, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

20 Oct 2018, Seminar, Vancouver, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

27 Oct 2018, Seminar, London, UK

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions