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Lawyer wins tax dispute at SCC

|Written By Kendyl Sebesta

The Supreme Court of Canada has delivered good news to a Toronto-area lawyer and horse-racing businessman with a decision last week that changes the circumstances in which taxpayers can combine farming and non-farming income in order to avoid farm-loss deduction limits under s. 31 of the Income Tax Act.

Writing in Canada v. Craig, the Supreme Court overruled a strict interpretation of s. 31. It found lawyer and horse-racing businessman John Craig could combine his farming and non-farming income to overcome a farm-loss deduction limit of $8,750 annually under the act.

“It seems to me that, as long as the taxpayer devotes considerable time and resources to the farming business, the fact that another source of income produces greater income than the farm does not mean that such a combination is not a chief source of income for the taxpayer,” Justice Marshall Rothstein wrote in his Aug. 1 decision with justices Louis LeBel, Marie Deschamps, Rosalie Abella, Thomas Cromwell, Michael Moldaver, and Andromache Karakatsanis concurring.

Craig had deducted more than $200,000 in losses from his horse-racing business from his other income during the 2000 and 2001 tax year. Based on the test established in Moldowan v. The Queen for farm loss, the minister of national revenue limited Craig’s deductions on the grounds that his horse-racing business wasn’t his chief source of income.

The minister had argued the Moldowan test should apply instead of the Federal Court of Appeal’s flexible interpretation of farm loss in Gunn v. Canada. The Gunn test allowed taxpayers to combine farming with their primary income to become a chief source of income and thereby avoid the deduction limit under the act.

The Supreme Court hadn’t taken a look at its highly criticized ruling in Moldowan for some time. In this case, it overruled it in favour of a more flexible interpretation of the act.

David Piccolo, a Toronto tax and business lawyer, says Moldowan was a particularly sticky decision and likely warranted the simplification.

“It looks as if the judge found that framework was inconsistent with Stewart [v. Canada], which essentially said if you’re running a hobby farm, that loss would not be deductible,” says Piccolo. “The court seems to be saying we can’t really engage in that type of analysis.”

But Piccolo says the court’s ruling will likely still give the Canada Revenue Agency enough teeth to question those losses if necessary.

“Perhaps the taxpayer won the battle, but at first glance the act still gives the CRA enough room to question whether or not calculations are being done correctly.

There could still be some personal element in the farming activities but there will always be that question of whether or not that calculation of loss is done correctly. The test is really whether or not a reasonable businessperson would continue to spend that money while incurring that loss.”

The Federal Court of Appeal had ruled last year that a combination of Craig’s income as a lawyer and the income from his horse-racing business made farming his chief source of income. That made the restrictions on his tax deduction under s. 31 inapplicable under the Gunn test.

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