Curtis v The Queen, 2012 TCC 248

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What a Farmer Needs to do, at a Minimum, so as Not to Get Caught by Section 30’s Limitation on Farming Losses.

Curtis v The Queen, 2012 TCC 248

The issue here was whether the taxpayer’s farm losses were limited by the rules in section 31, thus whether farming or a combination of farming and some other source of income constitutes a chief source of income for the taxpayer in the tax year.

The Court concluded that in order to constitute a “Chief source” of income, the farming operations must at least have the potential to be profitable based on the expectations and operations of the taxpayer.


Mr. Curtis (“taxpayer”) had a life-long interest in farming. After a career as a motor vehicle mechanic, and while employed at Air Canada, he bought a 230-acre farm (of which 150 acres were arable – though the farm had been out of production for a number of years).

The taxpayer and his family lived on the farm, which was about 100 km from his place of employment. The Crown did not argue that the taxpayer did not have a business, nor were any of the expenses or their amounts challenged. The Court, it seemed, considered both these to be in question.

Without a formal business plan, but based on a life-long dream, the taxpayer wished to operate a 40 cow cow-calf operation that would earn him between$22,500-24,400 in revenues annually.  The operations never reached ideal levels and, in part due to some accidents and market setbacks, the operations had losses which were for the 2005,2006, and 2007 tax years $15,500, $28,000, and $104,000 respectively. He stopped the business in 2010 as the tax assessment precluded him from continuing, and has now put the property up for sale.

The taxpayer also had an income from some crops, $18,000 from wind-turbine operations (by a third party), and his employment income from Air Canada (where he worked 4 days on and 4 days off earning between $75,00-100,000).

The taxpayer provided only a vague estimate of the time he spent working on the farm in a CRA questionnaire, but for trail estimated that he spent 14 hours each day 7 days a week working on the farm.

The taxpayer spent about $75,000 on farming equipment and had expenses for farm use of his pick-up truck, interest, insurance, property taxes, and hydro.


The court did not think the taxpayer’s time estimates were accurate and stated that the issue was not being decided on the basis of hours worked on the farm operations, though the court concluded that the time spent on farming was significantly less than spent on his employment with Air Canada. The court noted that the fixed costs alone exceeded the farming revenue in all but three taxation years.

The relevant portions of Subsection 31(1) of the ITA reads:

31. (1) Where 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]

The court began the analysis with the Supreme Court of Canada (SCC) decision in Moldowan v The Queen, [1978] 1 SCR 480 (as the leading decision on restricted farm losses), and stated that on the meaning of “chief source” of income the SCC wrote:

Whether a source of income is a taxpayer’s “chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. 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. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances. [emphasis added]

Based on this, the Court concluded that the taxpayer’s chief source of income was not farming, but the question remained whether farming and Air Canada employment were his chief source of income.  The Court again referred to the SCC decision above, and quoted:

The reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start‑up costs. [emphasis original to Curtis]

Thus, the combination approach applies to a person whose major pre-occupation is farming, but carried on other businesses on the side.  The Court noted that there is some uncertainty with the SCC decision, and referred to the decisions of the Federal Court of Appeal in Gunn v. Canada, 2006 FCA 281, and Canada v Craig, 2011 FCA 22 (which have been granted leave to appeal by the SCC).

In Gunn, the FCA interpreted the combination question to require a look only at the cumulative effect of the aggregate of the capital invested in each of the sources of income, the aggregate of the incomes from the various sources, and the aggregate of the time spent on each of the sources. This was to be done in light of the “ordinary mode of living, farming history, and future intentions and expectations”.  In Craig, the FCA stated that based on Gunn, the “farming source must make a meaningful contribution to the aggregation formula so as to suggest that farming is or has the potential to be a chief source.”

The court stated that regardless of the outcome of the issue of whether farming must be a predominant source of income, when looked at in combination, or not, the taxpayer’s appeal fails.  If it must be the predominant source of income, the taxpayer’s farming income won’t meet this test. If being predominant is not a requirement, then based on the “reasonable expectation of income, ordinary mode and habit of work, time spent, capital committed, actual and potential profitability, ordinary mode of living, farming history, and future intentions and expectations” of the taxpayer, then farming is not a chief source by itself or in combination.

The court noted that profitability if a significant consideration when looking at the question of chief source of income, and though the taxpayer invested significant capital in the farming operations and revolved his mode of living around the farming operations, and all other things aside the taxpayer failed to meet the “chief source” test based on his intentions and expectation, actual income derived from activities, and profitability (actual and potential) (para 35).  The Court quoted from the FCA decision in Gunn:

[…] if it is unlikely that the taxpayer’s farming operations will ever be profitable, notwithstanding all the time and capital the taxpayer is willing and able to devote to farming, the conclusion must be that farming is not a chief source of the taxpayer’s income.

Thus, based on the testimony of the taxpayer and the self-imposed limitations on the operations, the business was economically unattainable and could not be profitable.  The Court quoted from the FCA decision in Craig:

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. Such a test will not put recreational farmers in an advantaged position. [emphasis added]

Justice Boyle emphasised that one significant and predominant consideration in this case was the absence of even the potential of profitability.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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