Supreme Court


Taxpayer must devote significant time and resources to farming business


Section 31(1) of Income Tax Act (Can.), limits deductible losses where taxpayer’s chief source of income for taxation is neither farming nor combination of farming and some other source of income. Supreme Court of Canada held in

Moldowan v. Canada



D.L.R. (3d) 112 (S.C.C.), that s. 31(1) contemplated three classes of taxpayer involved in farming. Loss deductions not limited for taxpayers for whom farming provided bulk of income or centre of work routine. Loss deductions limited for taxpayers who carried on farming as sideline business and did not look to farming or farming and some subordinate source of income for livelihood. Losses not deductible for taxpayers who carried on some farming activities as hobby, not as business. More generous interpretation of combination of farming and some other source of income adopted by Federal Court of Appeal in

Gunn v. Canada

(2006), 150 A.C.W.S. (3d) 958 (F.C.A.). Taxpayer’s primary source of income was law practice. He also had income from farming in form of buying, selling,


and maintaining race horses. Minister of National Revenue limited deductions for losses from horse-racing business from other income, finding that combination of law practice and horse-racing business not chief source of income. Trial judge, following


, did not apply loss deduction limitation and Federal Court of Appeal dismissed Minister’s appeal. Appeal to Supreme Court of Canada dismissed. In determining whether to overrule Moldowan, court must be satisfied based on compelling reasons that precedent wrongly decided. Court must determine whether preferable to adhere to incorrect precedent to maintain certainty, or to correct error. Relevant considerations justified overruling




essentially read combination test out of s. 31(1). There are two separate exceptions to loss deduction limitation and each must be given meaning. Significant judicial, academic and other criticism of


and judge-made rule that reads exception out of provision not consistent with statute. Authorities supported interpretation that s. 31(1) does not contemplate simple aggregation of two sources of income but requires wider inquiry into amount of capital, time, effort, commitment and general emphasis by taxpayer with respect to sources of income. Under combination test, taxpayer must devote significant time and resources to farming business even if he also devotes significant time and resources to another business. Crown conceded taxpayer’s horse-racing operation was business. Trial judge held that although taxpayer derived principal income from and devoted more hours to law practice, he devoted both material amount of capital and very significant part of daily work routine to horse-racing business. Finding that horse-racing operation was chief source of income and that loss deduction limitation not applicable supported by evidence.

Craig v. Canada

(Aug. 1, 2012, S.C.C., LeBel, Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis JJ., File No. 34144) Decision at 199 A.C.W.S. (3d) 1357 was affirmed. 217 A.C.W.S. (3d) 495 (27 pp.).

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