Wilson v. The Queen, 94 DTC 6645, [1994] 2 CTC 393 (FCTD)

Dubé J:—This is an appeal by the plaintiff from a decision of the Tax Court of Canada which upheld notices of reassessment from the Minister of National Revenue ("the Minister”) in respect of the plaintiff's 1978, 1979, 1980 and 1981 taxation years. In his reassessment, the Minister deemed the losses from the plaintiff's farming business to be $5,000 for each of the years under appeal in accordance with subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

This is another of the so-called farm cases involving three classes of farmers. Class (1) farmers who look to farming for their livelihood may deduct all their farming losses; class (2) farmers carrying on farming as a sideline business are limited to $5,000 yearly in respect of farming losses; class (3) farmers carrying on some farming activities as a hobby whose farming losses are not deductible in any amount. The issue here is whether or not the plaintiff is a class (1) or a class (2) farmer.

The basic facts have been conveniently agreed to and are as follows. The plaintiff's farm is 250 acres located near Kars, Ontario. It has been in his family for three generations, having been acquired by his grandfather in the 18805. The plaintiff was raised on the farm and worked there while at school and, when time permitted, while attending university. He is the only son of four children. After completing grade 12 he enrolled in the Kemptville College of Agriculture but did not pursue this. Upon graduating from grade 13 he enrolled at Queens. He was not happy with what he was doing there and went to Carleton University.

In the spring of 1961 he accepted a position as a teacher commencing in the fall of that year. He received his degree from Carleton in 1962 and, in 1963,he secured a position at the South Carleton High School where he remained for 18 years. He then transferred to the A.Y. Jackson High School in Kanata. He was promoted to head of the Mathematics Department at A.Y. Jackson and continues to teach there to this day.

He married in 1964. The couple acquired an apartment in Ottawa where they resided for four years. In 1965 his father auctioned his cattle and machinery. He passed away in the spring of the following year. The plaintiff inherited the farm subject to a condition, which is irrelevant, that was fulfilled. In February 1968, construction of a new home on the farm began and it was occupied by the plaintiff and his wife the following August. He started accumulating his herd of cattle in 1969. The early acquisitions were a mix of breeds, but later he decided to focus on purebred Aberdeen Angus stock. By about 1975 his herd was composed exclusively of this breed. The plaintiff gave 65 as the average size of the herd.

At the hearing, the plaintiff described himself as a farmer and a teacher. He grew up on a farm and always intended to become a farmer. He keeps on as a teacher of mathematics as a source of income to finance the farm. In the course of the year, he would spend, according to his estimates, some 1,872 hours teaching and about 2,500 hours farming a year. He has been living on the farm since August 1969. During the school year, he drives out to school where he arrives at 8:30 a.m. and leaves at 5:00 p.m. or earlier when he can. On the farm, he does all the daily chores himself. He also keeps the farm books, attends farm meetings, beef organization seminars, fairs and exhibitions. He was elected councillor for the township of Rideau and sat in that capacity from 1974 to 1982. That position involved about two evening meetings a week. He has become specialized in Angus cattle and involved in breeding. He has collected a number of awards in that field. He would classify his farm in the top 40 per cent in scale in Ontario.

He explains his losses for the taxation years 1978 to 1981 on the grounds that those were the worst years for Canadian farmers, involving foreclosures and bankruptcies; interest rates had reached above 20 per cent and half of his revenues had to go against the payment of interest. The inflation rate was at about nine per cent, whereas the price of beef only went up about half of one per cent a year.

Despite the growing pains of his farming business, he claims that farming is his chief source of income, his major occupation and constitutes his most important investment in time, capital and resources. His testimony established beyond doubt that he is a very knowledgeable farmer, highly tuned to agricultural modernization and very much interested in ecology. He expects to retire as a teacher next year, in June 1995, and to spend most of his energy on the development of his Angus herd.

Although the taxation years involved in this appeal are from 1978 to 1981 inclusive, a summary of income and expenses for employment and farming from 1976 to 1993 was filed at the hearing and is relevant to show the comparison between gross income from teaching and from the farm for the years preceding and following the taxation years in question.

The leading case on the interpretation of subsection 31(1) of the Act is the Supreme Court of Canada decision in Moldowan v. The Queen'. Dickson J. (as he then was) described the three classes of farmers for the purposes of that section as follows (at pages 487 and 488):

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 carries 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 carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

In Moldowan, supra, Dickson J. pointed out that section 31 of the Act includes the combination of farming and some other source of income as the chief source of income. At page 487, he said as follows:

It is clear that “combination” in section 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farmin loss with his most important other source of income, thereby constituting his chief source. I do not think subsection 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

And, at page 488:

The reference in subsection 13(1) [now subsection 31(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.

Dickson J. also set out the following test of “reasonable expectation of profit" at pages 485-86:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., [1972] C.T.C. 151, 72 D.T.C. 6131. See also paragragh 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not

1 [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213; followed in The Queen v. Morrissey, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.); Gordon v. The Queen, [1989] 2 C.T.C. 277, 89 D.T.C. 5481 (F.C.A.); The Queen v. Roney, [1991] 1 C.T.C. 280, 91 D.T.C. 5148 (F.C.A.); Connell v. The Queen, [1992] 1 C.T.C. 182, 92 D.T.C. 6134 (F.C.A.); The Queen v. Poirier, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 (F.C.A.); The Queen v. Timpson, [1993] 2 C.T.C. 55, 93 D.T.C. 5281; Johnson v. The Queen, [1993] 2 C.T.C. 169, (F.C.T.D.); and Conray-Dymond Truck Line Ltd. v. M.N.R., [1994] 1 C.T.C. 199, 94 D.T.C. 6166 (F.C.T.D.).

maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230, 74 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Dickson J. then outlined certain criteria or guidelines to be used for the purposes of determining whether the taxpayer's “chief source of income” is either farming or a combination of farming and some other source of income. He continued at page 486:

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.

The requirements of this test were recently re-stated by the Federal Court of Appeal in The Queen v. Poirier, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 where MacGuigan J.A. at page 10 (D.T.C. 6336) ruled that:

The learned judge here seems to suggest that farming income can be combined with, in the sense of supplemented by, another source of income in order to constitute a chief source of income. It is clear from Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 at 314 (D.T.C. 5216) that the word “combination” in subsection 31(1) is not to be read in that sense. It is also now clear that what is required for a determination that farming is a chief source of income is a favourable comparison of farming with the other source of income as to such matters as time spent, the capital committed, and the profitability, both actual and potential: The Queen v. Connell, [1988] 1 C.T.C. 247, 88 D.T.C. 6166 (Strayer J.), approved on that point by this Court in A-341-88 (decided January 16, 1992).

It is common ground that section 31 is badly drafted and the difficulties involved in its interpretation are compounded by the obvious fact that the taxation years in question are years for which the taxpayer claims losses. This is why the consideration of these matters cannot be limited to the taxation years in issue but must encompass to a broader period.

The purpose of section 31 is to screen out gentlemen farmers from real farmers. Gentlemen farmers who operate a farm as a hobby are not entitled to deduct any farm losses. However, a further distinction is made between a class (1) full-time farmer whose chief source of income is farming and a class (2) farmer who operates a farm as a sideline business. At times, the distinction between these two classes is not easy to establish.

The jurisprudence in the matter has provided six criteria which I find to be of assistance in the instant case: 1. The actual income from farming and the other sources. 2. The time spent on each occupation. 3. The capital committed. 4. The reasonable expectations of a farming profit. 5. The change in occupational direction. 6. The ordinary mode and habit of work.

1. As we are dealing with the chief source of income, the first criteria, but not the only one, has to be a comparison between the taxpayer's farm income and his income from other sources. On that score, the chief source of the plaintiff's income is clearly his teaching profession. In fact, during the whole period canvassed, the taxpayer has always claimed farm losses, except for the year 1993, and even for that year the employment income was greater than the farm income.

2. As to the time spent on each occupation, obviously the plaintiff spent more time on the farm as he lives there. However, except for weekends and holidays, his prime time is spent at school as a full-time teacher.

3. As to capital committed, none was required for his employment as a teacher and that criteria does not provide much assistance. The situation would be different in the case of a businessman running another business along with a farm in which case a comparison could be made between the capital invested in the farm business and the other businesses.

4. In the area of reasonable expectations of farming profit, there were certainly high hopes present in the plaintiff's mind and profit may become a reality once he retires and becomes a full-time farmer. But mere intention is not sufficient. During the 18 years canvassed, such expectations remained illusory as farm losses remained consistent except for the year 1993.

5. Neither can it be said that in his case there was a change in occupational direction at any time during the period. He started as a full-time teacher and still is a full-time teacher. The situation would most certainly be different if at any stage he had become a full-time farmer and merely a part-time teacher.

6. Finally, as to the plaintiff's ordinary mode and habit of work, although he lives on the farm, his daily schedule, except for weekends and holidays, is centered around his teaching profession. He has to drive to school, arriving there at 8:30 a.m. and returning home at 5:00 p.m. That is a fixed schedule which takes up his daily quality time. His work on the farm has to be adjusted accordingly.

Consequently, I must find that during the relevant taxation years, the plaintiff's chief source of income was not farming in combination with something else but teaching and possibly something else.

Therefore, the appeal must be dismissed with costs.

Appeal dismissed.