TAX AGENCY CHASES FARMER WITH OFF-FARM JOBS
Originally published on May 20, 2004
Imagine having a Canada Revenue Agency auditor tell you that you have no reasonable expectation of profit, or REOP, from your farm. As a result you have no source of income for the purpose of claiming income tax deductions under the Income Tax Act.
The auditor says that he has no option but to reassess your last four years of income tax and disallow your farm losses that were previously written off against your off-farm income. He then tells you that since you have no source of income, you have no commercial activity and this means that you will also be forced to repay three years of previously refunded GST input tax credits.
To Barry Enright, who had never heard of REOP until his tax troubles began, the costly reassessments could have ended his farming career.
Enright was born and raised on a farm in eastern Ontario. His father and grandfather were full-time farmers. He lived on his father's farm until he was 35 years old, during which time he was involved in the operation of the farm. He got title to his first farm property in 1975 from his father as compensation for the years of work he had put into the family farm.
In 1978, he bought his second farm property and in 1986 a third farm.
The three farms have a total area of about 500 acres. Between 1982 and 1998, Enright spent about $200,000 building livestock facilities that could house 400-500 head of cattle on a year-round basis. He also spent about $190,200 on farm equipment.
By 1998, Enright had 230 head of purebred Limousin animals, showed them at the farm and at national farm shows, and had diversified into embryo and semen straw sales.
Enright was also employed with an Ontario road construction company. He began working for it in 1967. From 1994 to 1997, he served as a superintendent at various highway worksites.
From November through February, the construction company was closed, so Enright could spend all his time on the farm. In March and April, Enright worked two or three days a week off the farm. In May and June it was five days a week. By July and August, Enright was able to compress his work days
at the construction company and spend more time on the farm to get involved in such activities as haying. In September and October, Enright worked five days a week off the farm.
Overall, Enright calculated that on average he spent 140 days working for the road builder and 225 days a year on the farm.
In the case of Enright vs. Queen, Judge Lucie Lamarre ruled that Enright was entitled to deduct his farm losses for the 1994 through 1997 taxation years respectively, and was entitled to GST input tax credits for the quarterly periods from Jan. 1, 1995 to Dec. 31, 1997. Enright was also awarded costs, which meant that the Canada Revenue Agency would pay his legal fees.
The threat of REOP has sent more than a few chills up the backs of taxpayers. Academics and others argued that the agency was using REOP to second-guess the business judgment of taxpayers. According to one tax court judge, "it is easy for the minister of national revenue to substitute its or his judgment, or penalize the taxpayer for having to make a judgment call that, with the benefit of 20-20 hindsight, the minister of national revenue might not make today."
The agency's interpretation of REOP was handed its hardest blow by the Supreme Court of Canada in May 2002. In the case of Stewart vs. Canada, the court stated that REOP should not be the test for determining whether there is a source of income under the Income Tax Act.
"Where the nature of an activity is clearly commercial, there is no need to analyze the taxpayer's business decisions," the court concluded.
It is presumed that business people pursue profit, therefore a source of income exists. There is no need to look further. Only in situations that involve some personal or hobby element is it necessary to determine whether "the venture is undertaken in a sufficiently commercial manner" to constitute a source of income.
For Enright, justice was eventually secured but at a great emotional cost.
For others, the recent Supreme Court ruling should ease the worries of those individuals who are writing off farm losses against their off-farm wages.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.