Farm Losses Revisited by SCC

On Friday March 23, 2012, The Queen v. John R. Craig was heard by the Supreme Court of Canada (SCC). This was the first opportunity for the SCC to revisit the issue of restricted farm losses since its decision in Moldowan v. The Queen, [1978] 1 SCR 480. In Moldowan, the SCC concluded that farm losses could only be deducted against other sources of income, without restriction, if farming or a combination of farming and some other source of income was a taxpayer’s chief source of income. This vague direction resulted in over 30 years of inconsistent decisions from the courts below.

In Craig, the Federal Court of Appeal (FCA) followed its earlier decision in Gunn v. The Queen, 2006 FCA 281, in which the FCA moved away from the Moldowan articulation of the test and determined that the test is satisfied where the taxpayer’s farming business has potential profit and the taxpayer has invested significant time and capital into the business. The FCA supported its decision on the basis that taxpayers ought to be able to rely on the words of the Income Tax Act (ITA) and those words should not be eroded by judge-made rules without statutory foundation.

At the SCC hearing, the Crown argued that the legal doctrine of stare decisis was wrongly applied by the FCA and that, based on that doctrine, the Moldowan case ought to have been determinative of the matter in the Crown’s favour.

During the hearing, Justice Abella and Justice Rothstein challenged the Crown’s reliance on stare decisis making the point that the SCC is the appropriate venue for revisiting legal principles and that it is appropriate for the lower courts to indicate a concern with precedent since that is the only way that such concerns may be brought to the attention of the SCC.

The resulting challenge for the SCC will be to interpret the ITA to make sense of the statutory language while at the same time promoting certainty and fairness for taxpayers.

The SCC reserved its decision.