The pros and cons of being classified as a hobby farmer
A full-time farmer gets into the business of farming with the reasonable expectation of profit. When they compile their tax returns, they report all their farm revenue and have the ability to deduct relevant expenses against any revenue on their tax return. Someone who has a farming business on the side with a regular source of income outside the farm would be considered a part-time farmer. In these cases, reporting the farm as a business could be advantageous because the expenses related to the farm might be higher than the income and these losses can be applied against other sources of income, lowering the taxpayer’s liability. In addition to these two options, there is a third classification that presents a different set of advantages and limitations: hobby farming.
What is hobby farming?
Hobby farming is different from part-time farming in that the farming activities involved are primarily recreational and there is no realistic expectation of profit. It could be that the farmer in question lives on an acreage and has excess land available or perhaps they grew up on a farm and are conducting farming activities for nostalgic purposes. In most cases, these farmers have significant income outside their farm business and they’re simply farming because it brings them pleasure. You could be generating a little bit of revenue from the sale of a few cows or crop that’s growing on a small parcel of property, but if you’re not actively marketing your activities or looking to turn a profit, the CRA would consider these hobby activities.
The tax implications of hobby farming
If you are accurately classified as a hobby farmer, you do not have to report your farm income on your tax return. However, this also means losses related to this activity cannot be applied against other sources of income. Many farmers who have significant income in areas other than farming and a small, non-profitable farm on the side try to deduct their farm losses, but that is only possible if you demonstrate there was a realistic expectation of profit, which does not apply to hobby farms.
Classifying a farm
When working with clients who could be considered hobby farmers, we have an annual discussion about the classification of their farm. While many of these clients are tempted to use losses that might be incurred from these activities against sources of income to bring down their tax liability, we always make it clear this is only possible if you are classified as a part-time farmer, not a hobby farmer. If you are classified as a part-time farmer, you will need to demonstrate to the CRA that you have a reasonable expectation of profit. If you turn a profit in the future, you will be obligated to pay tax on that income and this will probably be at a higher marginal rate than you are accustomed to because you are adding this to your usual sources of income.
Other income potential
Even if your farming activity is primarily recreational and results in little income, you should keep in mind the potential for your land to increase in value throughout your period of ownership. If you classify yourself as a hobby farmer and file as a hobby farm throughout the life of your activity, your land will not be considered qualifying farm property and would not be subject to the lifetime capital gains exemption when it comes time to sell. In contrast, business farmers and part-time farmers can possibly access this exemption and pay little to no tax on the increase in the value of their farmland, even if this increase is significant. However, you don’t automatically qualify simply because you classify yourself as a part-time farmer. For the capital gains exemption to apply, farming has to be your main source of income for a period of that ownership.
Ryan Kitchen
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Ryan Kitchen