H. Brown v. The Queen, 80 DTC 6341, [1980] CTC 413 (FCTD)

Grant, DJ:—This is an appeal by the plaintiff from the reassessment by the Minister of National Revenue of his income for the 1976 income tax year. The plaintiff in his return filed for that year sought to deduct the sum of $21,599.53 on account of a loss from his farming operation in that year. There is no dispute, but that the plaintiff did sustain such loss in that amount but the Minister submits that the plaintiff should be allowed to deduct only a portion thereof in the amount of $5,000 by virtue of section 31 of the Income Tax Act which reads as follows:

Loss From Farming Where Chief Source Of Income Not Farming

31.(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) 1/2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words ‘‘and before making any deductions in respect of expenditures described in section 37” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

The Minister claims that the plaintiff’s chief source of income for 1976 was neither farming nor a combination of farming and some other source of income.

The plaintiff was born on November 12, 1915 on his fathers farm, consisting of 150 acres which lay within the limits of the Town of Orangeville, in the County of Dufferin. After his education, he became associated with his father in farming operations on such lands. The father also rented property known as the Hunter Farm consisting of 75 acres and which was close by the home farm. In 1940 he had purchased a 100 acre bush farm as well. When his father died in 1954, the plaintiff took over the entire farming operations as sole proprietor and has continued farming ever since. His father and he after the father’s death continued to be engaged principally in dairy farming on a large scale until 1975. In such operations he required extensive machinery and milking equipment, as well as other lands. He had purchased the Hunter Farm to add to his holdings in 1964. The Town of Orangeville had been steadily developing as an industrial centre for the past fifteen years and as a result the land within its boundaries was needed for development of factory sites and homes for the increased population. As a result land within the town greatly increased in value. The Municipal authorities had been pressing the plaintiff to sell his home farm for such development purposes but the plaintiff had not wished to do so. It had been his desire to continue farming on such premises as long as he was able to do so. Finally, in February 1972 by an agreement of sale the home farm was sold to a development company. The plaintiff retained only the home and garden associated therewith. The purchase price amounted to $517,654.50. The agreement, however, gave to the purchaser the privilege of cancelling the same at its sole option in the event that it had not been successful in getting certain approvals or authority in connection with the said lands with the Ontario Municipal Board prior to April 30, 1979. The development company which took over the lands did not notify the plaintiff that it intended to close the transaction until December 1974. Because of this uncertainty the plaintiff was unable to look for other farm lands. The transaction was actually closed as of December 15, 1974. The monies realized from such sale were invested by the plaintiff in mortgages and term deposits which yielded him income therefrom for the year 1976 in the sum of $49,119.75.

The plaintiff had an auction sale on April 23,1975 at which he sold all his producing dairy herd as the Hunter Farm which he retained was not sufficient to support such a large herd. He retained 12 or 15 young heifers. He sold some of his farm equipment but retained sufficient to work his similar holdings. He sold the hay and grain in the barn because he had not then needed it for feed for his cattle until the following winter. He also sold some implements but kept sufficient to operate his smaller holdings. At that time, his total herd had consisted of about 70 cattle of which 40 to 50 were milking cows and the rest young cattle. He kept his sole employee on the farm after the sale to assist him although he acknowledges there was not so much work thereafter that actually required him to retain the employee. He improved the Hunter Farm and carried on general farming operations thereon. Such farm would only support 35 to 40 cows. At this time, he was looking for another farm from which to provide further feeding and accommodation for his cattle. He bought the Looney Farm which was one-half a mile from his home and improved the same. He needed it for the feeding and accommodation of his livestock. The cost price was $220,000 which he purchased in December 1979. These funds came from the sale of his home farm and auction sale. During 1976 his farming operations were confined to the Hunter Farm and consisted of growing crops and selling cream from his milking cows under the provisions of a milking quota which he bought. He had to purchase further cows to meet the requirements of such milking quota. He now has approximately 40 milking cows. He continued to live on the home which he had retained on the home farm. It was a distance of about one-half mile also from the Hunter premises.

During all this period of time until the present the plaintiff has continued farming and is not engaged in any other work or occupation. It is true that the form of his enterprise has been altered from a dairy farm to one in which he has been producing cream for sale and later raising beef cattle. It was to his farming operations that he looked for his livelihood. The funds which provided his investment income were obtained from the sale of his farm and his farming operations. He is in good health and intends to carry on a cow and calf operation which consists of keeping the calves from his cows until they are fully grown, feeding them from the produce which he grows on his property and finally finishing them off as beef cattle.

In 1978, he sold the Hunter Farm because developers had purchased all the property surrounding it. He had the right under the terms of sale to retain the use of it until such time as the developer requires it for his purposes and still farms it. He improved the Looney Farm and has rented other property. He sold his milk quota in 1978 so that he may now be known as a beef farmer principally. He knew after his sale in the spring of 1975 that he could not operate profitably with the limited number of cows that he had and he intended to and did build up his herd through the years. He now has a herd of 47 cattle which will increase more readily with the greater number of cows. He has a poll angus bull so that his cattle are a good breed. I found the plaintiff to be absolutely honest in his testimony and have no hesitation in accepting what he said either in regard to his farming operations or his intentions.

The sole question of law is “does section 31 apply to the operation carried on by the plaintiff in the year 1976”.

It has application only where “a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.”’

It is true that the plaintiff had income from the investments which he purchased from the proceeds of the sale of the home farm and auction in the Spring of 1975. This fact does not in any respect alter his occupation as a farmer but the section to have application does not depend upon such occupation but rather on the taxpayer’s chief source of income. If this section has application then the result is that his loss, if any, for the year from all farming operations carried on by him shall be calculated in the manner set forth in such section and in the present case that would limit the amount which might deduct as fair loss for the year at the sum of $5,000 instead of the $21,599.53 which he claims.

In B James v MNR, [1973] CTC 457; 73 DTC 5333, Gibson, J traces the history of the legislation and refers to various cases that relate to the interpretation of such section. The appeal related to reassessments made by the Minister in respect of 1967 and 1968 taxation years. The section was then in somewhat different form than it is now found. At that time it read:

13.(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for the year exceeds $2,500, or

(ii) $2,500.

The section took its present form as outlined at the commencement hereof by amendment made by SC 1973-74, c 14, s 7.

The most authoritative case on the problem is W Moldowan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213 being the judgment Dickson, J in the Supreme Court of Canada. It was an unsuccessful appeal from the judgment of the Federal Court of Appeal found at [1975] CTC 323; 75 DTC 5216 which sustained the Minister’s reassessment to the effect that the appellant’s farming losses were limited to $5,000 under subsection 13(1) of the Act as it then was. It related to farming losses suffered in the 1968 and 1969 years. The taxpayer in these years was engaged in the business of training, boarding and racing horses which fell within the definition of farming under the Income Tax Act. He was also engaged in those years in the business of distributing racing farms and in 1969 as a manufacturer of screw products.

In determining what is meant by the words “source” of income as used in the section it is stated:

Whether a source of income is a taxpayer’s ‘‘chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of ‘‘chief source” are the taxpayer’s reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

It is further stated at 315 and 5216:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) A taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

(2) The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

(3) The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his nonbusiness farming are not deductible in any amount.

The reference in subsection 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

The case of Chester D Brown v Her Majesty the Queen, [1975] CTC 611; 75 DTC 5433 is a case resembling the present one. It dealt with returns for the years 1969 to 1971 and permitted the total farming losses to be deducted.

Other cases which are helpful are CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282—D J Gillis v The Queen, [1978] CTC 44; 78 DTC 6103.

I find therefore that subsection 31(1) of the Act does not deprive the taxpayer herein from having his total farming loss of $21,599.53 deducted from his total income in ascertaining his taxable income for the year 1976. The appeal should therefore be allowed and the reassessment for the plaintiff’s 1976 taxation year referred back to the Minister for reassessment so that his total farming losses as claimed by him should be deducted in computing his 1976 taxable income.

The plaintiff should have his costs of the appeal.