Canada: Restricted Farm Losses: The Plight Of The Part-Time Farmer


Not just anyone can become a farmer; yet many Canadians aspire to transfer from their existing occupation into farming. The challenge with said aspiration is that starting up a farm business is difficult, and though the federal government provides some financial incentives for farmers,1 the process of changing occupations can be risky, fraught with difficulty and is impeded by certain elements of Canada's taxation system, specifically that of the restricted farm loss regime.


Section 111 of the Income Tax Act (Canada),2 in combination with the definition of "farm losses" in subsection 111(8), and the definition of "farming" in subsection 248(1), enables taxpayers who are engaged in the business of farming to offset their income from their farm businesses, as well as their income from any incidental activities, with their farm losses. Additionally, farm losses may be used to offset other sources of income so long as the chief source of income of a taxpayer is generated through the business of farming.

Farmers have generally been classed into three categories. These include full-time farmers, part-time farmers and hobby farmers. Broadly speaking, farm losses are available only to full-time farmers and to part-time farmers under certain conditions. Farm losses are not available to hobby farmers at all since a hobby has been defined by the courts as a pursuit outside of one's regular occupation that is engaged in especially for relaxation, whereas a business is defined as a commercial venture undertaken with an expectation of profit.



The restricted farm loss regime in section 31 represents a carve-out of the overall farm loss rules in the Act. These rules have a potentially devastating impact upon the part-time farmer.

Where farming, together with incidental activities, represents the principal or chief source of business income, which generally speaking means more than 50 percent of all income, a taxpayer may claim farm losses realized for the year against all of their income. However, if a taxpayer's total income is not principally from farming, such taxpayer will only be entitled to a restricted farm loss, whereby only a portion of the total farm losses will be deductible against other sources of income. Effectively, where these rules apply, if a taxpayer incurs farm losses of greater than $32,500, such taxpayer may claim a maximum farm loss deduction of $17,500 ($2,500 plus 50% of the next $30,000 of losses) which may be used to offset all other sources of income. Any excess is considered a restricted farm loss, which is only deductible against farming income. These losses can be carried back 3 years, or carried forward 10 years for losses incurred 2005 or earlier, or 20 years for losses incurred after 2005.

Judicial and Legislative History of Restricted Farm Loss Rules

In August of 2012, the Supreme Court of Canada decided in The Queen v Craig3 that certain factors should be considered in the analysis as to whether a part-time farmer's secondary occupational activities should trigger the restricted farm loss regime. These factors include the capital invested in farming and in the second source of income, the level of income from each of the two sources, the time spent on the two sources of income and the taxpayer's ordinary mode of living, farming history, and future intentions and expectations. If, pursuant to such analysis, it were determined that such taxpayer placed significant emphasis on both the farming business as well as the other earning activity(ies), such that in combination they constituted a chief source of income, then the restricted farm loss rules should not be applied.

Shortly thereafter, in 2013, the legislature amended section 31, providing, "[i]f 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 that is a subordinate source of income for the taxpayer, then...,"4 and to paraphrase, such taxpayer may not deduct his or her farming losses against all other income without restriction. These amendments now required that the farming source of income must be the primary source of income in order to have the farming losses fully deductible.

Application of the Restricted Farm Loss Rules

It is no secret that the intention behind the restricted farm loss rules is to prevent hobby farmers, or individuals who engage in farming activities but who do not intend to earn business income, from deducting their losses against sources of income other than income from farming.

The purpose of this paper, however, is to illustrate that the rules capture far more than the activities of the hobby farmer. Take for example, the individual who works in a professional industry and desires to venture into the agricultural sector. The capital required to purchase or lease farm land and farming equipment is immense, and generally speaking, cannot be acquired at the outset but rather must be built up over time in piecemeal fashion. Usually, said individual would be obligated to maintain their initial occupation during the transition period since they obviously must sustain themselves during the initial stages.

Where a farming operation has not yet fully developed, there is a likelihood that it will sustain losses. According to the CRA's audit department,5 "the determination as to what extent losses incurred by [a] smaller, frequently one-person farming operation are deductible, is a difficult task, particularly in the early, formative years." Unfortunately, for the transitioning part-time farmer, not only is this determination difficult for the CRA, but the early formative years happen to be the most difficult period for a new farming operation with respect to efficacy.

During its audit procedure, CRA will first determine whether or not the activities of a taxpayer constitute a commercial activity, thus giving rise to a source of income. It is at this stage that hobby farmers are eliminated from consideration. If a commercial activity is detected, the next step will be to determine whether the activity constitutes the taxpayer's chief source of income. To this end, "farming operations must provide the majority of income or be the centre of the taxpayer's work routine and their major preoccupation"6 to avoid the restricted farm loss rules.

For a farm operation to be considered the chief source of income, a taxpayer must demonstrate that both the amount of time and capital that they contribute to their multiple occupations favour their farming business. CRA will examine the number of hours per week and number of years devoted to farming in comparison to other sources of income.7 Also to be considered is the question of what the focus of the taxpayer's routine was, and whether their schedule had been arranged to give farming the priority.8 This consideration, given the fact that the initial occupation of the taxpayer may require him or her to work during daytime hours, with farming activities relegated to the evening, produces an unjustifiably prejudicial result.


To its credit, CRA accounts for the circumstances in which a taxpayer "changes his or her occupation to farming," declaring that section 31 "does not restrict the initial losses in the first years when a taxpayer is in the process of changing occupations and leaving employment or another business to adopt farming as a chief source of income."9 However, the transition period is rarely so efficient that a part-time farmer who maintains a previous occupation, to some extent, is not captured by the restricted farm loss regime.

Given the factors recommended to be considered by CRA during its audit process, it would appear that its expectation is that a taxpayer who desires to venture into the agricultural sector must first be significantly financially prepared to do so, and secondly must set aside their previous occupation to great extent, immersing themselves primarily in the farming occupation. This is certainly a difficult prospect for the individual who must acquire land and machinery piece-by-piece over time, while using their initial occupation to fund the transition period; a period which can span many years.

The recommendation for those individuals who find themselves farming in a part-time capacity is that they strive to satisfy the requirements considered by CRA. Records should be kept of all of the time spent on the farming activity. Individuals should be employed by the part-time farmer, if possible, to assist in various aspects of the operation including financial and strategic planning. Non-farming capital expenditures should be reduced to a minimum. Funds earned through the individual's other occupation should be spent on the farming operation, to the greatest extent possible, and such funds should be traceable. A clear and concise written plan and timetable should be developed by the individual, which establishes his or her plan for maintaining and developing the farm business and which strengthens and solidifies the argument that the farming business represents such individual's chief source of income.

All things considered, it is doubtful, given the demographic landscape of the existing agricultural sector, and the growing trends as previously highlighted, that the penalizing nature of the restricted farm loss rules in section 31 will be sustained for long.


1 For example, in Ontario: Canada Business Ontario, Grants, Subsidies and Contributions – Agriculture, Government of Canada, online:>.

2 Income Tax Act (Canada) RSC 1985, c1 (5th Supp) (the "Act") [Unless otherwise indicated all statutory references in this paper are to the Act.].

3 [2012] 2 SCR 489, 2012 SCC 43.

4 Supra note 4 at section 31.

5 Canada Revenue Agency, Audit Manual, Chapter 29 – Losses, July 2014.

6 Ibid at 29.4.5, Farm losses not deductible—No source of income, (Revised September 2013).

7 Ibid at 29.4.7, Restricted farm losses, (Revised September 2013).

8 Ibid.

9 Ibid.

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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

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