Federal tax rules punishing farmers with other jobs, judge says

A federal judge lamented having to deny hundreds of thousands of dollars in tax deductions to a doctor who also ran an organic beef farm

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OTTAWA – A federal judge says one of Ottawa’s tax rules punishes farmers who finance their operations by making a living through another job in a ruling in which he lamented having to deny hundreds of thousands of dollars in tax deductions to a doctor who also ran an organic beef farm. 

Now, a leading farming industry group is calling on the government to update its law to remove yet another obstacle for people wanting to launch a farm while paying for it with another job.  

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“It doesn’t make sense to hold farmers to a higher standard at a time where the barriers to entry to the operation from a capital standpoint are already so high,” said Canadian Federation of Agriculture (CFA) executive director Scott Ross. 

It’s exceedingly rare for a judge to note that they regret having to come to a certain conclusion in a case, but that’s what Tax Court of Canada Justice John R. Owen did in a ruling published in early November. 

“The result in this appeal is most unfortunate,” he wrote in the penultimate paragraph of a ruling in a case opposing Dianne Stackhouse, a New Brunswick doctor who has also owned and operated a farm for over four decades, to the Canada Revenue Agency (CRA). 

The question he had to solve was if federal tax law allows Stackhouse, whose main source of income is her medical practice, to claim $530,363 and $595,904 respectively in farming business losses in 2014 and 2015 for her organic beef farm.  

That’s because, contrary to nearly any other type of business, the Income Tax Act only allows farmers to fully deduct their business losses in a year if the taxpayer’s main source of income is their farm, regardless of the amount of money and hours they put into the operation.  

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Otherwise, they’re capped at $17,500 and can claim a “restricted” loss, which is limited to the amount of revenue generated by the farm. 

In Stackhouse’s case, even if the judge found she worked roughly 50 hours per week on average on her farm, employed seven people, invested millions of dollars into the operation and had grown it to roughly 800 heads of certified organic beef cattle by 2014, the fact that her primary occupation was being a doctor meant that she could only claim $17,500 of over $530,000 in losses those years. 

In other words, she’s now facing a tax bill worth hundreds of thousands of dollars. 

The ruling notes that Stackhouse has “diligently put all her available time, effort and money” towards making her farming business viable but has barely, if ever, turned a profit in over 40 years. 

But Owen said in his decision that the farming loss deductibility rule “punishes such efforts to the detriment” of people like Stackhouse who are “willing to commit that time and capital.” 

“The rule has the effect in this case of precluding the operator of a bona fide farming business from deducting losses that would be available to the operator of any other type of business,” Owen wrote. 

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“The facts amply demonstrate how difficult it is to build a viable farming business from scratch even if one dedicates an inordinate amount of time and capital and has the assistance of government programs,” he added. 

Stackhouse, through her lawyer, declined to comment and said she was considering an appeal. 

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Both a tax law expert and the CFA say Ottawa’s rules around the deductibility of farming losses are outdated, unfair and need to be changed to bring them in line with other types of businesses. 

Tax lawyer David Rotfleisch said in an interview that the rule was designed a long time ago to exclude “gentleman farmers,” a.k.a. hobbyist farmers, to claim massive business losses on small operations to offset their revenues from other, more lucrative endeavours. 

But those cases are very rare and there are now other rules in the Income Tax Act that limit those kinds of excessive deductions, no matter the type of business. 

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“If you’re a hobbyist farmer, Parliament says you shouldn’t be able to deduct it. I don’t think that’s the correct policy decision,” he said. “It’s completely unreasonable.” 

The CFA’s executive director said his organization is deeply uncomfortable with the rule and that farms will occasionally declare “extreme losses” even if they’re a legitimate commercial operation with a viable interest in generating revenue. 

“You need that ability, from a tax planning standpoint, to be able to invest in your business in those (early) years. The more barriers you put up to being able to deduct expenses, the more challenging that becomes,” he said. 

On her website, Stackhouse says she turned the farm, Angus Arabian Devon East, towards organic beef in 1994 because “modern farming practices have introduced chemicals and pesticides into our foods.” 

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