Farm Losses… Are They Always Deductible?
With tax season not quite over for unincorporated farmers and business owners (they have until June 15th to file their personal tax returns, although if there are taxes owing the balance was due April 30th) we thought it beneficial to provide answers to the titled question.
We often get comments from clients as to their eligibility to claim farm losses on their tax returns. Below we will define different farming categories and how losses in each of these categories can be claimed.
Note that the following italicized information is a direct extract from Tax Management Strategies for Farms, 2nd Edition.
Regardless of what type of farming activity individuals undertake, they are only allowed to write off losses for tax purposes if they are engaged in the business with a reasonable expectation of profit. The income tax act classifies people engaged in farming in three different categories. The principal difference among these groups is the extent to which they can deduct losses relating to their farm activities.
An individual whose chief source of income is farming is considered a full-time farmer. Such individuals are allowed to treat their farming business like any other business. As a result, they can claim losses against other income for tax purposes if they suffer losses in any given year.
Those individuals who do not have a reasonable expectation of profit from their farming activity are referred to as hobby farmers. Hobby farmers cannot deduct losses from their farm activity at all.
Part-time Farmer or Restricted Farming Losses
Farmers who have a reasonable expectation of profit but whose “chief source of income” is neither farming nor a combination of farming and some other source of income are restricted in the amount of loss they can deduct.
Now let’s add a bit more details to how restricted losses apply. If your farming activity falls in the category of part-time farmer and you incur a loss is a particular year you will not be able to deduct the entire amount. Rather you will be limited to only deduct the first $2,500 of the loss plus ½ of the remaining loss to a maximum deduction of $17,500. The portion that cannot be deducted is what is referred to as the restricted farm loss. The restricted portion can either be carried back up to three years or carried forward up to 20 years but only to offset net farming income. Any restricted farm loss not claimed within 20 years will expire.
It is also important to mention that the CRA has another limitation on losses, regardless of the farming category. This limitation only applies when there is purchased inventory on hand at the year-end (i.e. inputs, feed, livestock, other supplies, etc.). If a farm has a loss and has purchased inventory on hand it must reduce the loss up to the value of the purchased inventory. This is called the Mandatory Inventory Adjustment (MIA). MIA is not in the scope of this article however what is important to remember is that you cannot create a loss by purchasing inventory otherwise MIA will kick in to limit the loss.
Hopefully, we’ve provided some clarity on the ability to deduct farm losses but because every farm operator’s situation is different you may have questions on how the above applies to your situation.
Therefore if you have any questions on the above, please don’t hesitate to contact our Ag Team. We’ll gladly speak with you.