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How will past farm losses be treated after the Craig decision?

In Canada v. Craig, 2012 SCC 43, the Supreme Court of Canada modified the combination test for determining whether the restricted farm loss rules in section 31 of the Income Tax Act (the “Act”) apply to farming losses. We discussed this case in our August 2, 2012 blog. This may have an impact on taxpayers whose farming losses, as a result of the Craig decision, are no longer considered to be restricted farming losses and how those losses were applied in the taxation year in which they were incurred.

Restricted farm losses

Restricted farm losses are calculated by section 31 of the Act and apply where the taxpayer’s chief source of income is not farming. The loss is limited to a maximum of $8,750 for any given taxation year and can be applied against other sources of income for the taxation year in which they are incurred. Any amounts in excess of $8,750 are “restricted” and are carried forward. Such carried forward losses can only be applied against future farming income realized by the taxpayer. Issues arise when the restricted farming loss is reclassified as an ordinary farming loss as may be the case as a result of the Craig decision.

Let us suppose that Mr. White has employment income of $100,000 and farm losses of $30,000 for his 2010 taxation year. If the farming losses are restricted farming losses, then he would only have a maximum loss of $8,750 and a net income of $91,250 for that particular taxation year. The remaining restricted farm losses of $21,250 can be carried forward 20 taxation years and carried back three taxation years from the year that the loss occurred under paragraph 111(1)(c) of the Act but, as mentioned above, can only be claimed against farming income earned in those other taxation years.

If the farm losses are reclassified as ordinary farm losses, then the full loss would be applied against the earned income for that particular taxation year. For the purposes of our example, Mr. White would then have a net income of $70,000 for his 2010 taxation year, rather than net income of $91,250 and the carry forward of restricted farm losses of $21,250.

The Craig decision may change the classification of farm losses from restricted farm losses to ordinary farm losses for some taxpayers. The question is what options are there for these taxpayers so they can correct their tax filings to apply the full farm loss in the year in which it was incurred.

Possible remedies

Where the taxpayer wishes to challenge the Canada Revenue Agency’s (“CRA”) prior assessment, he or she may file a notice of objection to the notice of assessment (“NOA”). The time period for filing a notice of objection is set out in subsection 165(1) of the Act and is the later of:

  1. The day that is one year after the taxpayer’s filing due-date for the year; and
  2. 90 days after the day of sending of the notice of assessment.

If the taxpayer misses this deadline, he or she can apply to the Minister of National Revenue (the “Minister”) for an extension of time in the manner set out in section 166.1 as long as the application is made within one year after the expiration of time for filing the notice of objection. If the Minister denies the extension of time application, the taxpayer can appeal to the Tax Court of Canada in the manner detailed in section 166.2 to have the application granted.

An unsuccessful notice of objection can be further appealed to the Tax Court of Canada under subsection 169(1).

Taxpayers who have missed the deadline for filing a notice of objection may be able to request a reassessment of their original NOA where the time limit for reassessment has not expired. Subsection 152(3.1) usually allows for a period of three years (four years for mutual fund trusts and non-Canadian controlled private corporations), for CRA to reassess the taxpayer, from the earlier of the date of sending the original notice of assessment or from the day notice was sent that no tax is payable.

For example, let us say that Mr. White in our previous example was sent an original notice of assessment on June 15, 2011. The reassessment period for CRA to reassess Mr. White’s original NOA would not end until June 15, 2014.

For reassessments for taxation years beyond the usual three year reassessment period, a possible solution may be found by having a taxpayer file what is commonly known as a “Fairness” application with the CRA. The basis for a Fairness application for a reassessment, beyond the reassessment time limit, is found at subsection 152(4.2) of the Act and Part IV of the CRA Information Circular IC07-1 – Taxpayer Relief Provisions. Subsection 152(4.2) allows the Minister to reassess the taxpayer’s original NOA, with the taxpayer’s consent, up to 10 calendar years after the end of the taxation year in which the loss occurred.

Again, let us use Mr. White as our example. With respect to Mr. White’s 2010 taxation year, he has until December 31, 2020 to make a Fairness application. Fairness applications are usually made by using CRA Form RC4288, Request for Taxpayer Relief.

There is a significant hurdle to asking CRA for a reassessment and that is found in paragraph 4(e) of the CRA’s Information Circular IC75-7R3. Known as the “Adverse Decision Policy”, IC75-7R3 states that the application for a refund cannot be solely based upon a successful appeal to the Courts by another taxpayer. The taxpayer would need to use the Craig decision in support of other factors mentioned in IC75-7R3 to have a successful chance of having his or her assessment reassessed.

As with reassessments made within the normal reassessment period, Fairness applications for reassessments beyond the usual three year reassessment period are subject to the Adverse Decision Policy as mentioned in paragraph 87 of IC07-1 (which refers to IC75-7R3). For a taxpayer to have a reasonable chance of success, they would need to rely on more than the Craig decision, as mentioned above for reassessment requests within the reassessment time limit, to have restricted farm losses reclassified as ordinary farm losses.

However, there has been a recent case, White v. Canada, 2011 FC 556, that may have some parallels to any taxpayer asking the CRA to reassess based on Craig. White dealt with subsection 152(4.2) reassessments. It involved a discrete group of taxpayers affected (fisherman in White, which may be analogous to farmers affected by the Craig decision). The Federal Court judge in White noted that paragraph 88 of IC07-1, which is similar to paragraph 87 mentioned above, is not a rule but a guideline in applying subsection 152(4.2). An argument could be made by a taxpayer using Craig to reassess farm losses that a discrete group of taxpayers nationwide is affected by not allowing farm losses to be reclassified and that paragraph 87 of IC07-1 is not a rule but merely a guideline in CRA’s decision-making process.


It will be interesting to see how the CRA decides to deal with these reclassified losses as a result of the Craig decision. Where the time period for filing a notice of objection has not expired, the taxpayer may apply for relief by filing a notice of objection to the CRA appeals division or from a further appeal to the Tax Court of Canada if the objection is unsuccessful.

Where the time period for filing a notice of objection has expired, subsection 31(2) gives the Minister discretion in determining restricted farming losses and reassessments under subsection 152(4.2) are also subject to Ministerial discretion. These levels of Ministerial discretion combined with the CRA’s Adverse Decision Policy may make it significantly difficult for taxpayers to use the Craig decision in support of a Fairness application. This means that taxpayers with restricted farming losses that go beyond the normal reassessment period will have to clear three major CRA hurdles to have farming losses reclassified and reassessed.

Finally, farmers should also consider the merits of other types of planning that can increase their income so as to “soak up” their restricted farm losses that are being carried forward and avail themselves of future fully deductible losses to the extent their conditions are similar to Craig. For example, perhaps affected farmers could increase their income for 2012 by specifying a proper amount under paragraph 28(1)(b) – known as the “optional inventory adjustment” (“OIA”). The OIA amount could not exceed the fair market value of the inventory on hand at the end of 2012 less any “mandatory inventory adjustment” amounts. Such increased income amounts my potentially enable the affected farmer to use his restricted farm losses that may be carried forward. In the next year, 2013, the amount brought into income under the OIA for 2012 would be fully deductible pursuant to paragraph 28(1)(f) of the Act. To the extent that the farmer’s conditions are similar those in Craig, such a deduction may trigger farming losses that are not restricted thus enabling other sources of taxable income to be reduced without restriction.

The tax professionals at Moodys Tax Advisors would be pleased to assist with this matter.