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Are Farming Losses Always Fully Deductible?

Last updated: Jan. 25, 2017 

Can Farmers Claim All Farming Losses?

Are farming losses always fully deductible for Canadian farmers? It sounds like an easy question, but it isn’t.

In general, self-employed individuals can deduct losses from one business (or income source) against another without any restrictions.

However, this across-the-board rule does not apply for farming.

Determining the Source of Income

First, in order to qualify for farming losses, you need to demonstrate to Revenue Canada that you, in fact, run a farm for profit.

According to the Canada Revenue Agency (CRA), farming income comes from revenue generated by one of the following activities:

  • Raising livestock
  • Tilling soil
  • Maintaining race horses
  • Raising poultry
  • Fur farming
  • Dairy farming
  • Fruit growing
  • Wild farm reserves
  • Keeping of bees

Canada Revenue also considers the following businesses to be farming:

  • Tree farming
  • Market gardening
  • Nurseries and greenhouses
  • Raising fish
  • Feed lots
  • Mechanical hatching operations
  • Cultivation of crops in water
  • Hydroponics

The CRA looks at a number of different factors to determine whether a farm is the primary source of income. These factors include:

  • The amount of money that comes from each source of income
  • How much money is invested in farming compared to other sources of income
  • How much time you dedicate to the farm or source income if you live on the farm
  • How long you’ve been farming
  • What your future goals and expectations are

Farming Losses

Whether you can claim your farming losses depends on whether farming is your main source of income.

In some instances, you’ll be able to deduct your entire farming loss. In others, you’ll discover that a farming loss is not deductible at all or that it is restricted to part of the total farm loss.

There are two different types of farming losses: farming losses and restricted farming losses.

If your farming activities are considered a hobby and not a business, the income is not taxable and losses are not deductible. Any costs associated with a hobby farm are considered to be a personal expense.

If farming is your primary source of income, for arguments sake, more than 50% of all income, you can claim your farm loss for the year.

Restricted Farm Losses

But, you have a restricted farm loss if your total income does not come principally from farming.

In this case, only a portion of the loss is deductible against other sources of income. Any excess can be deducted against the farming income.

Restricted Farm Loss Deduction

The CRA allows for an annual maximum deduction when calculating restricted farm losses.

For example, the maximum farm loss deduction limit is $17,500.  If your net farm loss is $32,000, you will be able to deduct $17,250 from your other income. If your farm loss exceeds $32,500 the maximum loss you can claim in the year is $17,500.

Applying Farm Losses to Other Years

As a Canadian farmer, you can apply your farm loss, restricted or otherwise, to income from other years. You can carry back your farm loss up to 3 years and carry it forward 20 years.

The earliest year needs to be applied first before you can use losses from other years. On top of that, the deducted amount cannot exceed the farms net income for the years. It can only reduce it to zero.

FBC, Helping Canadian Farmers Minimize Their Tax Burden

If you are a Canadian farmer and are unsure whether your farm losses are deductible, the agribusiness and farm tax experts at FBC can help.

FBC has worked exclusively with Canadian farmers and small business owners since 1952, helping them maximize their assets and minimize their income taxes. How did we get to be Canada’s largest and most experienced rural income tax consulting firm? We make it easy for our clients.

FBC is the only firm in Canada that offers integrated tax services on a year-round Membership basis. For a fixed fee, you get access to tax planning, tax preparation, business consultation, bookkeeping, accounting, and financial planning services.

To ensure your books are in order, FBC provides all new Members a review of their previous 3 years’ tax returns.

For more information on how an FBC tax consultant can help your farm or small business prepare and file your annual income taxes, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

Connect with your Local Tax Consultant to learn more