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The Deductibility of Farm Losses

There are loss deductibility rules in place which have applied to farmers whose chief source of income is not farming or a combination of farming and some other source. The Income Tax Act restricts the amount of farming loss that can be used to write off against other non farming income in these instances. A recent court case has changed the interpretation of the act in favor of the farmer. Whereas before in order to write off all the farm losses proof was required that farming was the chief source of income or the predominant source of income in combination with another source, now it is implied that farming only has to be a "significant endeavor" of the taxpayer to be entitled to write off all the losses.

The first test to determine the deductibility of a farm loss is to determine if there is a reasonable expectation of profit. If the farm operation is much too small to give any hope of profit, the presumption is that the property is being held for personal use or enjoyment of the taxpayer, and no losses are deductible whatsoever.

If there is an expectation of profit, then the next test is to determine if farming is a "significant endeavor". The following are some of the factors considered:

  • the significance of time spent on the farming operation
  • the development of and investment in the farming operation and commitments for future expansion according to the taxpayer's available resources

These are similar tests to those used before, but it appears that there is now less emphasis put upon the predominance of income from farming compared to other sources. If a farm operation has a reasonable expectation of profit, but does not pass the significant endeavor test, then the losses will be restricted to the first $2500.00 plus 50% of the loss over $2500.00 up to a maximum of $8750.00. The losses over this limit will carry forward up to 20 years or back 3 years to be used only against farming income.