As many in the horse racing industry look to file their taxes for 2012, today's edition of Trot Radio provides a reminder of one of the few good news stories to affect horse owners last year.
Last August, the Supreme Court of Canada ruled against the Crown's appeal of a January 2011 Federal Court decision which sided in favour of lawyer/horse owner John Craig. The 2011 decision had allowed Craig to able to deduct more than the $8,750 currently allowed under the much-maligned Section 31 of Canada's Income Tax Act.
Prior to Craig's appeal, government relied on the seminal decision of the Supreme Court of Canada in Moldowan v. Canada, (1978) 1 S.C.R. 480 (“Moldowan”) which held that a taxpayer could only escape from the restrictive tax treatment in Section 31 if the taxpayer’s chief source of income was a combination of farming income and some other subordinate source of income. Under this interpretation, Mr. Craig clearly would be caught by Section 31.
"What [the Supreme Court] has done is gone back to that original decision in Moldowan and they said 'you know, we got it wrong, it's caused lots of problems, let's get it right now,'" said Equine Law specialist Catherine Willson of law firm Willson Lewis LLP.
The new test, in Willson's eyes, relies more on other factors -- such as "significant emphasis" on the horse business.
"What they're saying now is the combination of the two incomes is relevant. So they're saying if you have farming as your chief source of income, you're good to go. So Section 31 doesn't apply to you," notes Wilson. "If your income from that other business is larger, they're saying that's not fatal. They're going to look at the capital you invest in your horse business and in the other business...they're looking at the income generated by both of these businesses, and they're looking at the time spent at both of those businesses."
Willson thinks that individuals might get taken to task by Revenue Canada on what they feel is "significant emphasis."
"We're going to push back and we're going to say 'no, I'm sorry, but I spend a lot of time' and most people do."
Willson suggests that people affected by Section 31 should write to their MP to abolish Section 31 and reinforce that this only applies to businesses.
"If you're just doing this for a hobby and you're not running this like a business, you don't get any deductions."
To listen to the full interview with Borg and Willson, click the play button below.
Episode 286 – Catherine Willson on Section 31 of Canada's Income Tax Act.
Audio Format: MP3 audio
Host: Norm Borg