Farming and law: two noble pursuits that don't often go hand-in-hand. Or do
they? A year ago, we wrote about the case of Douglas Gunn, a lawyer and farmer
who was restricted by the Canada Revenue Agency from deducting his farming
losses from his income earned in his law practice.
At the time, Mr. Gunn argued unsuccessfully that his farming business and law
practice were so intrinsically connected that they constituted the same business
and as such, he should be able to write off his farming losses against his law
income. Mr. Gunn appealed the Tax Court's decision to the Federal Court of
Under the Income Tax Act, farmers can be divided into three categories: The
first is someone who derives the bulk of his income for the year from farming.
This farmer is entitled to write off any farming losses against all other
sources of income without any restrictions.
The second category of farmer is someone who does not depend solely on
farming for his livelihood but rather as a sideline business. This farmer is
restricted in the amount of farming losses that can be deducted against other
sources of income to $8,750 per year. So that any remaining loss is not
forfeited forever, the Tax Act does permit the loss to be carried back three
years or forward 20 years to offset farming losses in those years. (The
seemingly random choice of years is a topic for another day.)
The final category of farmer is a taxpayer who does not look to farming for
his livelihood but carries on some farming activities as a hobby. The losses
sustained by this type of farmer are never deductible.
Mr. Gunn does most of the work at his farming operation, with his wife's
assistance, spending about about 20 hours per week on farm work. He also spends
50 hours per week working at his law practice. He argued that there were
"substantial synergies between his law practice and his farming operations,"
since many of the clients of the law practice are people he met through his
The lower tax court noted that the amount of capital and time he spent on the
practice of law was far more significant than what he spent on his farm and
concluded that Mr. Gunn's farming operation was "a sideline business" and not
his chief source of income. The court restricted his losses to $8,750 per year.
Fortunately for Mr. Gunn, last month the appeal court disagreed, overturning
the lower court's decision. This time around, the court traced the history of
the farm loss rules from Canada's first tax legislation in 1917, through to the
present, including a 1952 exchange in the House of Commons in which the
explanation was given that the farm loss restriction "was needed to deal with
the problem of 'gentlemen farmers' who never make money from their farm but
claim losses for tax purposes."
In explaining the term "gentlemen farmers," one MP referred to them as people
who make their money in the city and lose it in the country.
The appeal court concluded that Mr. Gunn's "chief source of income is a
combination of farming and the practice of law," and permitted a full deduction
for all his farm losses against his professional income.