Canada v. Craig , 2012 SCC 43, Canada v. Craig, 2012 SCC 43, 2012 SCC 43 (2012)

Docket Number:34144
 
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SUPREME COURT OF CANADA

Citation: Canada v. Craig, 2012 SCC 43

Date: 20120801

Docket: 34144

Between:

Her Majesty The Queen

Appellant and

John H. Craig

Respondent

Coram: LeBel, Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis JJ.

Reasons for Judgment:

(paras. 1 to 48)

Rothstein J. (LeBel, Deschamps, Abella, Cromwell, Moldaver and Karakatsanis JJ. concurring)

Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.

canada v. craig

Her Majesty The Queen Appellant v.

John H. Craig Respondent

Indexed as: Canada v. Craig

2012 SCC 43

File No.: 34144.

2012: March 23; 2012: August 1.

Present: LeBel, Deschamps, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis JJ.

on appeal from the federal court of appeal

Taxation - Income Tax - Deduction of farming losses - Taxpayer drawing income from farming and other sources - Taxpayer deducting farming losses from total income - Whether farm income combined with other income constitutes chief source of income - Whether totality of farming losses deductible from income - Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 31(1)(a).

Courts - Decisions - Stare decisis - Whether subordinate courts may overrule higher court precedent - Circumstances in which prior Supreme Court of Canada decisions will be reconsidered or revised.

Section 31(1) of the Income Tax Act limits deductible losses "[w]here a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income". In Moldowan v. The Queen, [1978] 1 S.C.R. 480, this Court found that a predecessor to s. 31(1) contemplated three classes of taxpayer involved in farming. In the first class are taxpayers for whom farming provides the bulk of income or the centre of work routine. Loss deductions are not limited for this class. In the second are taxpayers who do not look to farming, or to farming and some subordinate source of income, for their livelihood, but carry on farming as a sideline business. For this class, s. 31(1) limits loss deductions. The third class consists of taxpayers who carry on some farming activities as a hobby, not as a business, and whose losses are not deductible in any amount.

In Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57, the Federal Court of Appeal adopted a more generous interpretation of what could constitute a combination of farming and some other source of income.

In this case, C's primary source of income came from his law practice. He also had income from investments, stock options, and farming (buying, selling, training and maintaining horses for racing). He deducted losses from the horse-racing business from his other income in 2000 and 2001. Based on Moldowan, the Minister reassessed and limited the deductions on the grounds that the combination of the law practice and the horse-racing business was not C's chief source of income. Following Gunn, the trial judge allowed C's appeal, finding that the loss deduction limitation in s. 31(1) did not apply. The Federal Court of Appeal dismissed the Minister's appeal, holding that it was required to follow its prior decision in Gunn.

Held: The appeal should be dismissed.

Moldowan was a binding precedent and the lower courts should have limited themselves to writing reasons as to why it was problematic rather than purporting to overrule it. This Court can, however, overrule its own decisions. While this is not a step not to be lightly undertaken, the Moldowan approach to the combination question is incorrect and it is appropriate for this Court to revisit this aspect of the interpretation of s. 31. Section 31(1) provides two distinct exceptions to the loss deduction limitation. A judge-made rule that reads one of them out of the provision cannot stand.

Taking a contextual approach, the relevant factors to consider are the capital invested in farming and the second source of income; the income from each of the two sources of income; the time spent on the two sources of income; and the taxpayer's ordinary mode of living, farming history, and future intentions and expectations. If they tend to show that the taxpayer places significant emphasis on both his farming and non-farming sources of income, there is no reason that such a combination should not constitute a chief source of income, avoiding the application of the loss deduction limitation of s. 31(1). Both endeavours must be significant endeavours of the taxpayer, but they do not need to be connected, and farming does not need to be the predominant source of income. The determination is a factual one for the trial judge. The approach must be flexible, recognizing that not each factor need be significant. The question is whether, looking at these factors together, the taxpayer places significant emphasis on each of the farming business and other earning activity, and if so, the combination will constitute a chief source of income and avoid the loss deduction limitation of s. 31(1). Such an interpretation is consistent with the general policy of the Income Tax Act that, subject to specific exceptions, taxpayers may offset losses from one business or source of income against profits from another without limitation.

There is no basis for this Court to disturb the findings that farming, in combination with C's law practice, was a chief source of income, and that the loss deduction limitation in s. 31(1) did not apply to the facts. The Crown conceded that the horse-racing operation was a business, not a personal endeavour, and the relevant factors, other than demonstrated profitability, clearly pointed to it being more than a sideline business. C devoted both a material amount of capital and a very significant part of his daily work routine to the farming business, and he was an active member of and contributor to the community of standard-bred racing.

Cases Cited

Overruled: Moldowan v. The Queen, [1978] 1 S.C.R. 480; discussed: Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57; referred to: Hover v. M.N.R., [1993] 1 C.T.C. 2585; Hadley v. The Queen, [1985] 1 C.T.C. 62; The Queen v. Graham (1985), 85 D.T.C. 5256; Morrissey v. Canada, [1989] 2 F.C. 418; Poirier (in bankruptcy) v. Minister of National Revenue (1986), 2 F.T.R. 11; Watt v. Minister of National Revenue, 2001 FCA 72, 273 N.R. 201; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Stackhouse v. R., 2007 TCC 146, [2007] 3 C.T.C. 2402; Falkener v. R., 2007 TCC 514, [2008] 2 C.T.C. 2231; Loyens v. R., 2008 TCC 486, [2009] 1 C.T.C. 2547; Johnson v. The Queen, 2009 TCC 383, 2009 D.T.C. 1245; Scharfe v. The Queen, 2010 TCC 39, 2010 D.T.C. 1078; Turbide v. The Queen, 2011 TCC 371, 2011 D.T.C. 1347; Miller v. Canada (Attorney General), 2002 FCA 370, 220 D.L.R. (4th) 149; Ontario (Attorney General) v. Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3; R. v. Chaulk, [1990] 3 S.C.R. 1303; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683; R. v. Salituro, [1991] 3 S.C.R. 654; Minister of Indian Affairs and Northern Development v. Ranville, [1982] 2 S.C.R. 518; Hamstra (Guardian ad litem of) v. British Columbia Rugby Union, [1997] 1 S.C.R. 1092; R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609; Queensland v. Commonwealth (1977), 139 C.L.R. 585; R. v. Bernard, [1988] 2 S.C.R. 833; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645; Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147.

Statutes and Regulations Cited

Income Tax Act, R.S.C. 1952, c. 148, s. 13(1).

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 31, 248(1).

Authors Cited

Felesky, Brian A. "‘Hobby' Farm Losses", in Report of Proceedings of the Twenty-Sixth Tax Conference. Toronto: Canadian Tax Foundation,...

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