Were your ears ringing this morning? They might have been if you are a racehorse owner or breeder in Canada, or if you are any other type of farmer who earns income from farming and some other source of income and are thus subject to section 31 of the Income Tax Act (the “Act”).
Section 31 of the Act is the restricted farm loss rule that operates to restrict the deductibility of your full farming losses against other sources of income if farming or a combination of farming and some other source of income is not your “chief source of income.”
For the past 35 years, section 31 has been applied to taxpayers on the basis of the Supreme Court of Canada’s decision in Moldowan v. R., 1977 DTC 5213 (S.C.C.), which has resulted in section 31 being one of the most litigated provisions of the Act and replete with confusion, ambiguity and inconsistent results. Finally, the Supreme Court of Canada granted leave in The Queen v. John R. Craig, which was heard this morning by a seven judge panel (Madam Chief Justice McLachlin and Mr. Justice Fish were absent). For our earlier blog post on the case (including the factum filed by each party), click here
The argument took two hours to complete. In the first hour the Court heard argument from counsel representing the Canada Revenue Agency (“Crown Counsel”), which was divided equally into two distinct sets of submissions organized by issue, and argued in succession by two Department of Justice lawyers.
The first issue addressed by Crown Counsel was its assertion that the legal doctrine of stare decisis was misapplied by the Federal Court of Appeal when it decided Craig, which, in the Crown’s submission, suggested that if Moldowan was applied in the manner desired by the Crown, then the case should have stopped there with a Crown victory. Madam Justice Abella and Mr. Justice Rothstein took charge of this issue and put Crown Counsel to task with several related questions.
Justice Abella was very active in her questioning and emphasized that the evolution of the principles of statutory interpretation over the course of time makes it appropriate for outdated concepts to be reviewed. Further, the Supreme Court of Canada is THE venue for addressing any inconsistencies and is charged with the task of adjusting the principles for future application if the updated approach yields a different outcome.
It was also emphasized by both Justice Abella and Justice Rothstein that it is appropriate for lower courts to indicate that there is a problem with a prior precedent or an approach to interpretation, since that is the only way the record can be built and the matter brought before the Supreme Court of Canada for final resolution. That’s why they are there.
It was also noteworthy that Crown Counsel stated that the main issue to be decided was stare decisis, whereas Justice Rothstein was clear in his comments that the Supreme Court of Canada is free to overrule itself, and emphasized to Crown Counsel that the real question is whether Moldowan is right or wrong in the face of so much judicial and academic criticism. Those are the submissions he wanted to hear.
The second half of Crown Counsel’s submissions focused on the assertion that the Moldowan analysis of section 31 is correct and should not be disturbed.
Other tidbits from the panel during Crown Counsel’s submissions was Mr. Justice Moldaver’s comment that the ‘government is quite happy with Moldowan’ and Justice Abella’s comment that ‘farming is inherently unreliable as a source of income’ emphasizing the complexity of dealing with farming in the context of tax law. Justices LeBel, Karakatsanis and Cromwell also engaged Crown Counsel with questions during argument.
Mr. Craig’s counsel (“Taxpayer Counsel”) spent his hour focusing on Moldowan and why it needs to be overruled, given current principles of statutory interpretation, its unfairness to taxpayers and emphasizing the better approach taken by the Federal Court of Appeal in Gunn v. R., 2006 DTC 6544 (F.C.A.), which was followed by the Federal Court of Appeal in Craig. Further, it was submitted by Taxpayer Counsel that Mr. Craig would be successful with respect to the section 31 issue even upon strict application of the Moldowan principles.
The Justices were quite engaged in this discussion, which elicited questions or comments from Justices Abella, Moldaver, Cromwell, Karakatsanis, Deschamps and LeBel, all primarily directed at the wording of section 31 and how sense can be made of its wording to create fairness and certainty.
Taxpayer Counsel spent very little time on the stare decisis issue on the basis that, in its submission, the real issue is the correct interpretation of section 31.
After exactly two hours of argument, the far reaching financial implications on racehorse owners, breeders and other part-time farmers is now in the hands of the highest Court in the land to determine the future application of section 31, once and for all. The judgment is expected to be rendered within the next six to twelve months. Stay tuned.
For further background on this issue and a more comprehensive analysis of the history of section 31 prior to the appeal of Craig to the Supreme Court of Canada, click here.
For more information, visit our Tax Litigation blog at CanadianTaxLitigation.com