How does the CRA view the activity of making wine?
When you are an accountant dealing with tax issues on a daily basis, you need to get comfortable with the fact that there are few “black and white” answers when it comes to Canadian tax law. Most situations require a careful evaluation of the facts combined with knowledge of the Income Tax Act, related resources and case law. The question of whether the activity of making wine constitutes farming is a great example.
Why does it matter?
The question has relevance in a number of tax-planning areas including the ability to report income on the “cash basis”, transfer farm property between generations on a tax-deferred basis and claim the lifetime capital gains exemption on qualified farm property.
Subsection 248(1) of the Income Tax Act says farming “includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees”. Clearly, this is not an exhaustive list but it seems a safe bet that growing grapes in a vineyard is considered farming.
But what if the producer of those grapes goes on to make wine from them? That’s where things start to get gray in a hurry. There is no clear guidance in the Act to answer this question. Instead, we must turn to other resources, such as Canadian case law.
In the 1993 Tax Court of Canada case of Leblanc v. MNR, Judge Brule stated “one could compare growing grapes and producing wine to growing tomatoes and making tomato sauce and paste. In both scenarios, the first activity falls under the broad definition of farming whereas the latter does not”.
The Canada Revenue Agency has adopted this line of reasoning, as demonstrated in their 1999 Income Tax Ruling where they state “where a person’s activities involve, for example, grape growing and winemaking, it is our view that these two activities are too different to classify both as various aspects of a single commercial production. Therefore, the activity of growing grapes would be considered farming, but the activity of winemaking would not, since the end product is totally different from the raw materials and it goes beyond the normal growth stage”.
Just when the issue seemed pretty clear, along came Judge Campbell’s decision in the 2005 Tax Court of Canada case of Tinhorn Creek Vineyards Ltd. v. the Queen. In that case, Judge Campbell found the estate winery operated by Tinhorn Creek to be one business, not two separate activities, and that the one business was farming. So why the different outcome in this case? Judge Campbell wrote in her judgement that “the case before me is very much fact driven and I consider the facts here to be substantially different than those before Judge Brule (in LeBlanc v. MNR).”
In LeBlanc, the appellant was trying to prove that he was not farming so that the losses in question would qualify as regular business losses instead of restricted farm losses. It was difficult to prove he was actually engaged in winemaking and not farming since at the time in question he had neither a winemaking licence nor a winery.
In the case of Tinhorn Creek, the CRA was not disputing the fact that the appellant was engaged in only one business. They grew their own grapes in their own vineyard and this aspect of their operation consumed the majority of their labour costs and their invested capital. Very few grapes were either purchased from or sold to outside parties. If growing conditions during the year were poor, it had a direct impact on the quantity and quality of the wine produced for that year. Judge Campbell stated that in this particular case “the two operations (vineyard and winemaking) are so interdependent and intermingled that it is difficult to isolate one from the other in respect to the profit aspect of the operation”.
So where does this leave us?
Clearly, the CRA’s default position is to consider winemaking to be a separate business activity apart from the farming activity in the vineyard. This should be kept in mind when keeping your records, because if the vineyard activities and production cannot be clearly distinguished, then your entire operation will be considered to be non-farming.
The Tinhorn Creek case, however, demonstrates that, in very specific and limited circumstances, an estate winery operation where grapes are grown and used exclusively to produce estate bottled wine could be considered to be a farming operation in its entirety. As Judge Campbell noted in her judgement, “I believe each situation must be decided within the particular set of facts to that case”.
Geoff McIntyre, CA, is a business advisor to the Agrifood industry in Meyers Norris Penny’s Kelowna office. He has a special interest in the wine sector and serves as MNP’s vineyard and winery specialist for the Okanagan, helping grape growers and wineries enhance profitability and manage growth. To find out what Geoff can do for you, contact him at 1.888.766.9735 or Geoff.firstname.lastname@example.org