Israel v. The Queen, 79 DTC 5418, [1979] CTC 468 (FCTD)

Cattanach, J:—This is an appeal from a decision of the Tax Review Board whereby the learned member of the Board confirmed the assessment of the plaintiff to income tax by the Minister for the plaintiff’s 1974 taxation year and dismissed the appeal from that assessment.

A document described as a “notice of assessment’’ dated July 7,1975, on which document the printed name “E B ARMSTRONG”, over the title “DEPUTY MINISTER OF NATIONAL REVENUE FOR TAXATION” appears, which legend by virtue of subsection 244(13) of the Income Tax Act lends authenticity to an otherwise unlawful identification, proffers this explanation:

Your election to average has been disallowed because your chief source of income in the averaging period was not farming or fishing.

A notice of objection to that assessment was lodged in response to which by a notification dated December 8, 1975, on stationery properly identifying its source and with the courtesy of a manual signature, the Minister confirmed the assessment on the ground that:

The taxpayer’s chief source of income was not farming during the taxation year and the four immediately preceding years within the meaning of subsection 119(1) of the Act.

Subsection 119(1) reads:

119.(1) Where an individual’s chief source of income has been farming or fishing for a taxation year (in this section referred to as the “year of averaging”) and the 4 immediately preceding years for which he has filed returns of income as required by this Part (in this section referred to as the “preceding years”), if the individual, on or before the day on or before which he was required to file a return of his income for the year of averaging, or on or before the day on or before which he would have been required to file such a return if any tax had been payable by him for the year of averaging, files with the Minister an election in prescribed form, the tax payable under this Part for the year of averaging is an amount determined by the following rules:

The subsection then proceeds to outline the formula for computing the tax.

The purpose of the section is abundantly clear. Farmers are recognized as being peculiarly vulnerable to the vagaries of nature with consequent fluctuations in income from year to year. Farming is a hazardous occupation subject to the elements which cannot be foreseen, guarded against or mitigated.

Thus the purpose of section 119 is to provide a measure of stability in the income tax exacted of farmers by extending to them the privilege, if they elect to exercise it, of averaging their income over five-year periods. They do not pay tax on an annual basis as other taxpayers do. In the last year of the five-year period (in this instance 1974) which is the “averaging year” the averaging process is invoked over the five-year period in accordance with the formula prescribed.

Basically what the formula accomplishes is that for the “averaging period” which consists of the averaging year and the four preceding years (in this instance 1974, the averaging year, and 1973,1972,1971 and 1970) the aggregate net income is apportioned equally to each of those years and taxes payable are recomputed on that basis.

The tax payable for the fifth or “averaging” year is what remains after deducting the taxes paid in the first four years from the aggregate of the whole five years.

However the conditions precedent to a farmer electing to average his income under subsection 119(1) is that his chief source of income for the year of averaging and the four immediately preceding years for which he has filed returns as required by Part I has been farming.

The issue in this appeal is whether the plaintiff’s chief source of income in each of his 1970 to 1974 taxation years inclusive has been farming. If farming has been the plaintiff’s chief source of income in each year then he is entitled to elect to average. If farming has not been his chief source of income in each and every one of the five years then he is not entitled to average.

It is a well established rule that the exemption provisions of a taxing Statute must be construed strictly.

Therefore the plaintiff to avail himself of the provisions of section 119 of the Act must show that every constituent element necessary to its applicability is present in his case and that every condition required by the section has been complied with.

Prior to the hearing of this matter the parties agreed upon the following statement of facts:

AGREED STATEMENT OF FACTS

1. The plaintiff filed a return of income tax with the Minister of National Revenue for each of his 1970, 1971, 1972, 1973 and 1974 taxation years, reporting in each year the following gross and taxable imcomes:

Year	Gross	Gross	Taxable
1970		$ 1,586	$	nil
1971		2,813		nil
1972		32,502	24,476.99
1973		4,000		nil
1974		44,162	35,540.00

2. The plaintiff commenced mixed farming as a sole proprietor on his farm (“the farm”) in Wallenstein, Ontario in 1965; the year end of the sole proprietorship at all material times, was December 31.

3. On November 1, 1972, Carl Israel Farms Limited (‘the Company”) was incorporated for the purpose of running the business of the farm, the year end of the Company, at all material times, was October 31.

4. On November 1, 1972, and at all material times thereafter, the plaintiff and his wife were the sole directors, officers and employees of the company and held 70% and 30% of the outstanding shares, respectively.

5. On November 1,1972 by the first agreement dated January 25,1973, the assets of the plaintiff’s farming business were sold to the Company at their book value as follows:

Vacant Land S /2 Lot 4, Concession 4,
Township of Peel, 70 acres	25,000
Equipment	14,219
Prepaid expense	125	$39,344
Liabilities Assumed
Bank Overdraft	10
Bank Loan	7,000
Note—Carolyn Israel	2,100
Mortgage—I Gingrich	4,000	$13,110
Net Assets		$26,234

and in payment thereof the plaintiff was issued 69 common shares of the Company at $1 each and a promissory note dated January 25,1973 payable on demand in the amount of $26,165 which note is still outstanding in full; a copy of the First Agreement and promissory note relating thereto is attached and forms Exhibit A to this Agreed Statement of Facts.

6. On November 1, 1972, by the Second Agreement dated January 25,1973, the inventory of the plaintiff’s farming business was sold to the Company for the amount of $42,950 and in payment thereof the plaintiff received a promissory note dated November 1, 1972 due January 2, 1973 in the amount of $2,000 and a promissory note dated November 1, 1972 due January 1, 1974 in the amount of $40,950 both of which were exchanged for demand notes in the same amount issued by the Company to the plaintiff on October 31, 1974 which notes are still outstanding in full; a copy of the Second Agreement and Promissory Notes relating thereto are attached and form Exhibit B to this Agreed Statement of Facts.

7. On January 25, 1973, by the Third Agreement dated January 25, 1973, the plaintiff agreed to transfer to the Company remaining farm land for the amount of $114,000 which was effected by Deed dated December 7, 1973 and registered January 11, 1974, and in payment thereof the Company assumed existing encumbrances in the amount of $30,710 and the plaintiff received 2000 Preference shares at $10 each and a promissory note dated January 25, 1973 payable on demand in the amount of $63,290 which was exchanged for a demand note in the same amount issued by the Company to the plaintiff on October 31, 1974 which note is still outstanding in full; a copy of the Third Agreement and Promissory Note relating thereto is attached and forms Exhibit C to this Agreed Statement of Facts.

8. The opening balance sheet of the Company as of November 1, 1972 and the financial statements of the Company for the 1973 and 1974 taxation years are attached and form Exhibits D, E and F, respectively to this Agreed Statement of Facts.

9. The plaintiff, during the years 1970, 1971 and until November 1, 1972 was engaged in the business of farming.

10. The plaintiff, from November 1, 1972 was an employee of the Company and was not paid any salary by the Company in 1972, 1973 and 1974.

11. The Company, from November 1, 1972, was engaged in the business of farming.

12. From November 1, 1972, the plaintiff on his own behalf and not as an employee of the Company maintained the buildings and the laneways with respect to the property referred to in the Third Agreement until the property was transferred to the Company, however, all expenses incurred in this regard were charged directly to the Company.

13. From November 1, 1972, the property referred to in the Third Agreement was used by the Company free of charge.

14. The plaintiff at all material times reported income on a cash basis.

15. The incomes for the years 1970, 1971 and 1972 were as follows:

	Farming	Other	Total Total	Percentage
Year	Income	Income	Income	from Farming
1970	$ 1,414	$172	$ 1,586	89.16%
1971	$ 2,813	$ nil	$ 2,813	100.00%
1972	$32,502	$ nil	$32,502	100.00%

16. In 1973, the plaintiff had no income from farming.

17. In 1973, $4,000 of taxable income was derived from the deregistration of a RRSP which Plan was commenced in 1972 by a deposit of $4,000; said monies for the deposit having come from farming income.

18. The income earned by the plaintiff in 1974 in the amount of $44,162 included the amount of $1,212 from sources unrelated to farming and the amount of $42,950 relating to the sale of the plaintiff’s inventory to the Company pursuant to the Second Agreement.

I have not reproduced the exhibits to the agreed statement of facts. The first such exhibit in Exhibit A mentioned in paragraph 5 of the statement of facts is an agreement whereby the assets of the plaintiff’s farming business were sold to a company incorporated by him. Exhibit B is mentioned in paragraph 6 and is an agreement for the sale of the plaintiff’s stock in trade to the company. The proceeds of that sale are in my view, incoming from farming. Exhibit C mentioned in paragraph 7 is an agreement whereby the plaintiff sold his farm land to the Company. Exhibits D, E and F are the opening balance sheet of the Company and the financial statements of the Company for the 1973 and 1974 taxation years.

It is abundantly clear from paragraph 9 of the agreed statement of facts that the plaintiff was engaged in farming during the years 1970, 1971 and until November 1, 1972. It is equally clear that the plaintiff’s chief source of income in those taxation years was farming.

From November 1, 1972 there is no doubt that the plaintiff was an officer and employee of the Company (see paragraph 4 of the agreed statement of facts) from which it follows from the definition of “farming” in subsection 248(1) of the Act that since the plaintiff held an office or employment under a company engaged in farming this office and employment precludes the plaintiff being engaged in farming by virtue of that office and employment.

However, as submitted by counsel for the plaintiff, the fact that the plaintiff was an officer and employee of a “person” engaged in farming would not preclude the plaintiff from having farming as his chief source of income if he engaged in farming on his own behalf and separate and apart from his office and employment. There is no allegation whatsoever in the agreed Statement of facts that such is the case. Neither the allegations in paragraph 12 of the agreed statement of facts nor the provisions of the agreement, Exhibit C thereto, justify such a conclusion.

In paragraph 16 of the agreed statement of facts it is stated that the plaintiff had no income from farming in his 1973 taxation year.

However paragraph 17 recites:

17. In 1973, $4,000 of taxable income was derived from the deregistration of a RRSP which Plan was commenced in 1972 by a deposit of $4,000; said monies for the deposit having come from farming income.

I accept without question that the $4,000 deposited in a registered retirement savings plan came from farming income for 1972 or earlier but when that amount is paid out, as it was in 1973, it no longer retains the character of farming income but rather is a benefit under that plan and is taxable as such.

That is the only income which the plaintiff received in 1973. For the reasons expressed above it is not income from farming.

Counsel for the plaintiff pointed out that even if no farming income was received in a taxation year it is still possible that farming can be the chief source of taxpayer’s income in that year.

This is so. It has been held in many instances that a source may be source of income in a particular taxation year even though the taxpayer receives no income or suffers a loss. This being so the simple mathematical task of computing the net income from two sources (if there are two sources) is not a conclusive test for determining which of two sources may be the chief source. To so determine resort may be had to other criteria.

In this respect Ryan, J in W Moldowan v The Queen, [1976] 1 FC 355; [1975] CTC 310; 75 DTC 5213, said:

In seeking an answer, gross income, net income, capital investment, cost flow, personal involvement and other factors may be relevant considerations.

While the criteria specifically mentioned by Mr Justice Ryan were not intended to be all inclusive, nevertheless none of the specific criteria mentioned are present in the facts of the present appeal nor any facts ejusdem generis thereto.

Accordingly the only criterion remaining is a comparison of income from different sources.

In 1973 the sole receipt of income by the plaintiff was $4,000 from a registered retirement savings plan which, for the reasons previously expressed is not income from farming. There was no income from farming received by the plaintiff in that year. His employment by and capacity as an officer of a company engaged in farming in the 1973 year do not qualify as “personal involvement” in farming nor does any income received from that employment or office qualify as farming income by reason of the express exclusion in subsection 248(1) of the Act.

Therefore the plaintiff had no farming income in 1973 and, as previously stated, there is no evidence that the plaintiff was engaged in farming from November 1, 1972 to December 31, 1974 other than as an employee and of- ficer of the Company engaged in the business of farming which does not qualify as farming by specific statutory definition.

Accordingly the plaintiff has failed to establish an essential condition precedent to the application of subsection 119(1) that is to say that the plaintiff’s chief source of income in the averaging year, 1974, and the four immediately preceding years, amongst which four years the 1973 taxation year falls, was farming.

For the foregoing reasons the appeal is dismissed with costs.