Restricted Farm Losses

The Canada Revenue Agency (CRA) allows farmers to deduct farm losses from their income. However, if farming is not your primary source of income, you can only claim a portion of your annual farm loss against your income. The remaining portion of the loss becomes a restricted farm loss.

When your farming expenses exceed your farming income, you have a farm loss. If farming is your primary occupation, you may deduct your entire farm loss from your income. This includes income from your farm, as well as any other part-time jobs or businesses that you have.

However, if farming is not your primary source of income, you can only claim a portion of your farm loss each year. The unclaimed portion of your loss becomes your RFL.

For 2018, if your farm loss exceeds $32,500, you may claim a farm loss deduction of $17,500. The remainder becomes a part of your RFL.

If your losses are less than $32,500, the CRA requires you to claim the lesser of your net farm loss for the year or $2,500 + 0.5 x (your net farm loss – $2,500).

For example, if you have a small farm that is not your primary source of income and you suffer a loss of $10,000, you must calculate $2,500 + 0.5 x ($10,000 – $2,500). The result, $6,250, is less than your net farm loss. This means you can claim a $6,250 loss for the current year, and you can roll the remaining $3,750 into your RFL.

The CRA allows you to carry RFL occurring after 2005 back three years and forward 20 years. If you have RFL from before 2006, however, you may carry it forward only ten years.

When you carry losses back, the CRA deducts them from your previous year’s income. This can trigger a refund or a reduction in the amount of tax you owe. It cannot, however, reduce your penalties or earn you benefits retroactively.

To carry RFL back, fill out form T1A, and attach it to your current year’s tax return. You do not have to fill out an amended tax return.

If you want to carry RFL from previous years forward on your current year’s income tax return, you need your notice of assessment from the CRA. This notice has the balance of your unclaimed losses, which will translate into the allowable amount of your RFL deduction. Write this amount on line 252, with your other non-capital losses.

If you sell your farm, you can use some of your RFL against your capital gains. However, you can only use RFL linked to the farm’s property taxes and mortgage interest.

To calculate your reduction, add your RFL from interest and tax to the adjusted cost base of your farm. Then, subtract the total from your proceeds of disposition to calculate your reduced capital gain. Remember to subtract the RFL you use from your remaining RFL balance.