Stecko v. The Queen, 95 DTC 5215, [1995] 1 CTC 269 (FCTD)

Cullen J .:-This is an action by the plaintiff taxpayer Dr. George Stecko ("the plaintiff" or "the taxpayer"), an orthopaedic surgeon, arising out of reassessments by the defendant Minister of National Revenue ("the defendant" or "the Minister") for the 1983 and 1984 taxation years. The Minister restricted deduction of the plaintiffs farm losses for those years pursuant to subsection 31(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act").

Facts

This case has involved a number of days of testimony and eight witnesses. The facts, as set out below, are based upon my assessment of the testimony and other evidence that was submitted before me.

The plaintiff is an orthopaedic surgeon, carrying on practice of his profession in Windsor, Ontario since approximately 1966. In 1976, the plaintiff began experiencing problems with his right knee which eventually required surgery: first in 1976 and again in 1981. In 1985, he underwent surgery on his left knee and, in 1992, the plaintiff underwent a third major operation on his right knee. The plaintiff stated that as a result of these difficulties, which were diagnosed as a degenerative condition, he began plans for a future career change by planning and establishing a vineyard, at least as early as 1982.

Dr. Yovanovich, another orthopaedic surgeon and partner of Dr. Stecko, testified as an expert witness on behalf of the plaintiff. He performed the 1976 surgery on the plaintiff and examined him again in 1991. In Dr. Yovanovich’s opinion, the plaintiff would be able to pursue his vineyard operation as long as he hired labourers to perform any physically demanding tasks.

The taxpayer purchased 16.4 acres of land in 1982 at the cost of approximately $70,000. Mrs. Stecko testified that they had originally bought the land because they were considering building a smaller house, given that their children would soon leave home. They were approached by a German company, Heuriger Corporation, which was seeking investors in a vineyard operation. Although the plaintiff chose not to invest, Mrs. Stecko testified that Heuriger’s proposal led them to investigate the possibility of establishing their own vineyard on the property. In the fall of 1982, the Steckos set about gathering information and consulting experts about the cost and viability of establishing a vineyard on their property.

Both the plaintiff and his accountant, James Balfe, testified that on November 15, 1982, they met with Mike Mardell, an official of the Windsor District Office of the Department of Revenue. Both parties contended that the purpose of the meeting was to explain the proposed farming operation and to obtain assurance that the plaintiff would be entitled to deduct the start-up costs. Mr. Balfe, referring to notes that he had transcribed during the meeting, testified that Mr. Mardell stated that the costs of the first planting were deductible and that, on the facts, he would not "disturb things until the maturity period was up". Mr. Balfe admitted that the assurance received would not be binding but, in his experience, the Ministry had never "gone back on its word". Mr. Mardell also testified in regard to this meeting. Although he admitted that the meeting had taken place, he did not take any notes and could not recall anything that he might have said, answering most of his questions with "I can’t recall".

During the 1983 and 1984 taxation years, the taxpayer cleared and prepared this land, including arranging services such as water and hydro. He eventually planted about ten acres in vines and plants, of four varieties of high-quality grapes of the Vinifera family. He estimated that the first planting on this land was in July 1984.

In 1985, an additional 20 acres of land was purchased, adjacent to the first plot of land. On this piece of land, the plaintiff, in 1987, planted four acres of different types of vines known as French hybrids. These vines were hardier than the first types planted and were expected to produce a higher yield and, consequently, a higher cash flow. Although he anticipated developing this land at the rate of approximately five acres per year (at a cost of approximately $10,000 per acre), the plaintiff testified that, as a result of the assessment by the Minister, the development was reduced to about one-half to one-and-a-quarter acres per year until 1992 and 1993. Although counsel for the Minister put it to the plaintiff that there was more disposable income available that was not used for the vineyards, Dr. Stecko stated that this rate was consistent with what he and his wife felt they could afford at the time, given his earnings from the medical practice.

Between 1982 and 1985, he invested in excess of $300,000 in establishing and developing the vineyard. At present, the taxpayer estimates his investment in the vineyards to be approximately $650,000. Over the same period of time, his investment in his medical practice is estimated at $50,000. Of the 27 acres in cultivation between the two vineyards, the plaintiff estimates that, as of 1992, one-quarter was in full production. Although this is below the anticipated yields, the plaintiff still expects the vineyards to generate a reasonable profit in the future, as the plants continue to mature.

The plaintiff called three expert witnesses who testified about the future expectation of profit for the Stecko vineyard.

Mr. Negri, the master winemaker of Colio Wines of Canada, testified that since 1987, Colio has purchased grapes from the Stecko vineyard as follows:

1987 — 0.5010 tonnes: $ 440.48

1988 - 4.0860 tonnes: $3034.22

1989 — 8.0840 tonnes: $5676.95

1990 - 14.800 tonnes: $5872.05

1991 — 24.385 tonnes: $12,916.66

1992 - 56.839 tonnes: $29,693.21

1993-35.675 tonnes: $21,373

Mr. Negri states that in his opinion, the grapes purchased from the plaintiffs vineyard have been of excellent quality and that, owing to the shortage of quality grapes in the southwestern Ontario region, the Stecko vineyard is and will continue to be one of the main sources of grapes for winemaking in the region.

Mr. Michelutti worked as a grape biologist and viticulturist with Agriculture Canada in Harrow. He has also been a member of the board of directors of the Vintners Quality Alliance (VQA) of Ontario and of the Grape and Wine Adjustment Committee of the Ontario Grape and Wine Adjustment Program. Mr. Michelutti met the plaintiff and his wife in 1983 and learned of their intent to develop a vineyard. He frequently advised them on the operation, including recommending that they plant some Hybrid grapes in addition to the proposed Vinifera grapes. It was his opinion that in the mid-1980s, there was a lack of expertise in the growing of high-quality grapes in the southwestern region of Ontario. It was also his opinion that, although the Steckos made some initial mistakes in the establishment of their vineyard, the plaintiff and his wife have made the necessary improvements to make their vineyard profitable.

Ms. Hrastovec, a partner with the accounting firm retained by Mr. Stecko, was asked by the plaintiff’s solicitors to prepare projections of income and cash flow for the vineyard operations. Based on her projections, it was her opinion that the Stecko vineyard would begin to be profitable in 1988 if the '’optimal" projection was realized, in 1990 if the "expected" projection was realized and in 1991 if the "least favourable" projection was realized. In January 1987, Ms. Hrastovec prepared a second set of projections based on revised assumptions, particular to the Stecko vineyard and the types of grapes being planted, including overhead costs and replacement rates for the particular grapes. Based on these revised projections, it was her opinion that the vineyard would operate at a profit beginning in 1991. On or about May 10 or 11, 1994, Ms. Hrastovec was asked to prepare a third set of projections for an analysis of the projected income and cash flow of the vineyard. The third set projections assumed that Dr. Stecko applied the money paid to Revenue Canada on account of the assessments to the development of the vineyard; that the costs of establishing the vineyard were taken from the costs used in the second set of projections; that the selling price of grapes was based on the average of grape prices between 1983 and 1993 provided by the Ontario Grape Growers’ Marketing Board; and the yields of grapes were based on an average of the actual yields of acres in full production as provided by Mrs. Stecko in 1992 and 1993. Based on this third set of projections, it was her opinion that the vineyard would have operated at a small profit in 1990 and have been profitable thereafter.

With respect to the time spent on the plaintiff’s medical practice as compared to his vineyards, for the subject time periods, the taxpayer estimated that around 1980, he was working approximately 100 hours per week in his medical practice. However, after his second operation, he reduced his time commitment by bringing in two additional partners. From that point on, he stated that he was on call every fourth night, as opposed to every second, and worked every fourth weekend, as compared to previously working every second weekend, thus reducing the time worked to between 60 and 80 hours per week. Consequently, the plaintiff stated that the time spent with his vineyards increased, particularly during the late spring and summer months. He estimated the time spent to be approximately 20 hours per week. At the present time, the taxpayer estimated that he spends all his weekends off in the vineyards and Monday, Wednesday and Friday afternoons at the farming operation. He stated that this is significantly more time than in the subject years because of the maturation of the plants, although he knew and anticipated this when he began the vineyards in 1982. It should also be noted that the taxpayer has taken many courses relating to grape growing, farming and winemaking. Although the plaintiff’s occupational direction has allegedly changed, his income from his medical practice has not decreased. He stated that the reason for this was that he continued his practice, although he spent less time at it. However, as a senior orthopaedic surgeon, he would perform larger, more lucrative procedures. Also, there was a rise in OHIP premiums.

Dr. Stecko was selected for audit in 1985 and the evidence disclosed a document, signed by Mr. Mardell, which commenced the audit. Mr. Mardell, when asked about his involvement, testified that taxpayers are selected at random. As a result of the audit, the Minister determined that the costs incurred for the plants in 1983 and 1984, being $987 and $80,789 respectively, were capital expenditures and thus non- deductible. As a result, the plaintiffs farming losses for the subject taxation years were $16,637 in 1983 and $22,615 in 1984. The Minister, by notice of reassessment further restricted these losses to $5,000 for each year pursuant to subsection 31(1) of the Income Tax Act. The reason given for this was that the Minister was not convinced that the plaintiff had changed his occupational direction from the practice of medicine to farming within the meaning of the Income Tax Act.

Issues

There are three issues to consider in this matter. The main issue is whether the vineyard operation carried on by the plaintiff was his chief source of income or whether it, in combination with another source, was his chief source of income. If the answer is in the affirmative, the plaintiff is permitted to deduct the full amount of his farming losses. If the answer is in the negative, he is entitled to a deduction of $5,000 only in respect of farming losses for each taxation year. The second issue is whether the planting expenses incurred by the plaintiff were on income or on account of capital. The plaintiff’s final argument concerns an alleged abuse of process by the defendant.

I will address the abuse of power argument first. If I agree with the plaintiffs submissions on this point and grant the relief sought, the further arguments regarding the restrictions on the deduction of farming losses and the characterization of the planting costs as capital, need not be addressed.

Analysis

1. Abuse of power

The abuse of power argument centres on two events: the meeting which took place on November 15, 1982 between the plaintiff, his accountant, Jim Balfe, and Mike Mardell from the Windsor District Office of the Department of Revenue and the subsequent audit of Dr. Stecko by Revenue Canada. The essence of the plaintiff’s argument is that the Minister should be estopped from relying on subsection 31(1) of the Income Tax Act and the characterization of the vines as capital costs when the Minister’s agent made certain representations on which the plaintiff relied to his detriment. It would be a further abuse of power for the same agent who made the representations to then purposely select the plaintiff for audit.

As already noted, Mr. Mardell could recall very little of what happened during the meeting of November 15, 1982 and I am prepared to accept Mr. Balfe’s recollections as accurate. Mr. Balfe and Dr. Stecko met with Mr. Mardell, presented their business plan, and sought to obtain assurances that the plaintiff would be entitled to deduct his start-up costs. I accept that Mr. Mardell stated that he would not "disturb things until the maturity period was up".

However, that being said, I do not accept that the plaintiff could reasonably have relied on the statements made by Mr. Mardell. Moreover, even if the plaintiff did rely on the representations made by Mr. Mardell to his detriment, the plaintiff cannot rely on the doctrine of estoppel. First, as Mr. Balfe admitted, advice or assurances made by a Revenue Canada agent are not binding. They may be a reasonable way of "testing the waters" but they are not iron-clad guarantees. Second, the defence of estoppel can be invoked neither against the Crown, nor against the acts of the Crown’s servants or agents. This principle was enunciated in Gibbon v. The Queen, [1977] C.T.C. 334, 77 D.T.C. 5193 (F.C.T.D.). Although this case was not cited by counsel for the defendant, I think it provides a clear statement of the law in this area. Walsh J., having reviewed British authorities relating to estoppel against the Crown, stated at page 338 (D.T.C. 5196):

This judgement therefore makes a clear distinction between an erroneous decision on questions of fact which has nevertheless induced the beneficiary of the decision to act on it, and a failure to apply the law, and in the latter case no decision by a servant or officer of the Crown can bind it. The Canadian courts have consistently so held.

I relied on these statements in the case of Cohen v. Canada, [1991] 1 C.T.C. 288, 91 D.T.C. 5239 (F.C.T.D.), and stated at page 297 (D.T.C. 5245):

With respect to the argument that the Crown is estopped from arguing that the maintenance is not deductible because of its previous representations in the case of Naomi Cohen, the case of Gibbon v. The Queen, [1977] C.T.C. 334, 77 D.T.C. 5193 (F.C.T.D.), makes it clear that the Minister or other subordinate of the Crown cannot by any conduct or representation bar the Crown from enforcing a statute where there had previously been a failure to apply the law. Estoppel cannot override the rule of the land.

In the case at bar, the representations made by Mr. Mardell concerned the application of the Income Tax Act. Relying on the decisions in Gibbon and Cohen, supra, the plaintiff’s arguments on estoppel are without merit.

As already discussed, Dr. Stecko was selected for audit in 1985. From the documentary evidence, it certainly appears that the selection was made or at least approved by Mr. Mardell. Mr. Mardell testified that taxpayers are selected at random. The plaintiff submits, however, that he was singled out. In light of Mr. Mardell’s personal involvement in the file, the plaintiff argues that the Minister should not be permitted to defend the process in this Court. To do so would demean the judicial process and call into question the fairness of the administration of the Income Tax Act. The plaintiff relies on the House of Lord’s in In re Preston, [1985] 1 A.C. 835 (H.L.), in which Lord Templeman stated:

the commissioners are guilty of "unfairness" amounting to an abuse of power if by taking action under [the relevant statutory authority] their conduct would, in the case of an authority other than Crown authority, entitle the appellant to an injunction or damages based on breach of contract or estoppel by representation. I see no reason why the appellant should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the appellant because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation.

Canadian courts have not seen fit to hold the Crown to the standards enunciated by the Preston case. Although I am troubled by the way in which Mr. Mardell’s presence seems to hover over matters concerning Dr. Stecko, I would not go so far as to say that there is anything sinister about Mr. Mardell’s involvement or that he in some way abused his power. An action which is an abuse of process is, in my mind, frivolous, vexatious, or malicious. Although the assessments and subsequent judicial processes have surely proved time- consuming and onerous for the plaintiff, they are nothing more than an enforcement of the Income Tax Act.

Having found that the Minister is not estopped from proceeding in this action because of an abuse of process, I now turn the substantive issues in dispute.

2. Farming losses

Central to the case at bar in the construction of subsection 31(1) of the Income Tax Act. Subsection 31(1) of the Income Tax Act, formerly section 13, at the material time read as follows:

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 lessor of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, 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 lessor of

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

(B) $2,500,’ [1] 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 deduction under section 37 or 37.1" 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 leading decision on this section is Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. Dickson J. (as he then was) interpreted the Income Tax Act as envisioning three classes of farmers (at page 487 (C.T.C. 315; D.T.C. 5216):

1. a taxpayer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine,

2. a 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, and

3. a 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 hobby.

Only a taxpayer for whom farming may reasonably be expected to provide the bulk of income is free of the limitation imposed by subsection 31(1) for farming losses. A taxpayer who carries on farming as a sideline business is entitled to the deductions spelled out in subsection 31(1) in respect of his farming losses. A taxpayer who carries out farming as a hobby is not able to deduct any amount of farming losses. In the case at bar, the important distinction is between the first and second categories of farmers. The taxpayer submits that his chief source of income was farming; the Minister submits that farming was Dr. Stecko’s sideline business.

In Moldowan, supra, Dickson J. also discussed the means by which a "chief source of income" was to be assessed. His Lordship envisioned a two-part test, assessing both relative and objective elements. At page 486 (C.T.C. 314; D.T.C. 5215), His Lordship 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.

Moldowan, supra, has often been followed. Below, I have considered each of the Court of Appeal decisions which have considered Moldowan, supra, and were brought to my attention by counsel. A multitude of Trial Division and Tax Court decisions have also considered subsection 31(1) of the Income Tax Act, 27 of which were brought to my attention by counsel. However, since most of these rely on the Court of Appeal decisions and turn on the facts specific to each case, I have not summarized each Trial Division and Tax Court decision.

One of the first Court of Appeal decisions to consider Moldowan, supra, was Graham v. The Queen, [1985] 1 C.T.C. 380, 85 D.T.C. 5256 (F.C.A.). The Court of Appeal dismissed the Minister’s appeal against the decision of the trial judge to allow the deduction of the full amount of the farm losses. The majority of the Court held that, although the taxpayer was still employed full-time off the farm, the facts of the case supported the trial judge’s finding that farming was the main preoccupation of the taxpayer and, thus, that he fell within the "first class" of farmers enunciated by Dickson J.

However, in dissent, Mr. Justice Marceau, after reviewing the facts and the dicta of Dickson J., wrote (at page 393 (C.T.C. 5267)):

The general question raised is the following. Can a full-time employee who starts a farming operation without leaving his employment be regarded as having made farming his chief source of income, within the meaning of subsection 31(1) of the Act, before he even puts himself in a situation where he can develop an operation that can yield a profit? As I read the reasons in the Moldowan case and understand, through them, the intention of the statute, it seems to me that the answer to the question simply cannot be otherwise than in the negative.

Although not expressly adopted, I would suggest that in subsequent decisions, the Court of Appeal has been more closely following the reasoning of Marceau J.A., or at least found grounds upon which to distinguish the majority decision.

In Morrissey v. The Queen, [1988] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.), application for leave to the Supreme Court of Canada dismissed May 18, 1989, the appellant Minister conceded that the farming operation was being carried on with a reasonable expectation of profit. The sole issue before the Court was whether the taxpayer’s chief source of income was a combination of farming and his regular employment as chief engineer on a Great Lakes freighter. The Court had evidence that the taxpayer worked six to seven months per year on the ships and the rest of the time on the farm, and that his family also worked on the farm.

Mr. Justice Mahoney, speaking for the majority, stated that the criteria from Moldowan, supra-time spent, capital committed and profitability-were not to be considered disjunctively, as the trial judge suggested. At page 242 (D.T.C. 5084), Mahoney J.A. stated:

In defining the test as relative and not one of pure quantum measurement, Moldowan teaches that all three factors are to be weighed. It does not, with respect, merely require that farming be the taxpayer’s major preoccupation in terms of available time and capital.

In Morrissey, supra, the majority of the Court of Appeal determined that farming was not the taxpayer’s chief source of income because the profitability of the farming venture was improbable, notwithstanding the time and capital that the taxpayer was willing to invest in the operation. To count as "income" in the context of the Income Tax Act, that which is received must be money or money’s worth.

In Gordon v. The Queen, [1989] 2 C.T.C. 277, 89 D.T.C. 5481 (F.C.A.), the Court of Appeal upheld the trial judge’s assessment that the farming losses sustained by the taxpayer were restricted in accordance with subsection 31(1). The trial judge had found that the taxpayer’s cow-calf farming operation was a sideline business. The losses showed no signs of abatement after the start-up years and the profit projections to the year 1986 were unrealistic since they were predicated on the taxpayer leaving his very lucrative full-time employment as a construction superintendent with a pipeline construction company.

The issue of what constituted a taxpayer’s chief source of income was next considered in the case of MacRae v. The Queen, [1990] 1 C.T.C. 15, 89 D.T.C. 5526 (F.C.A.). The taxpayer in question was a dentist and also operated a cow-calf farming operation. The Trial Division judge had found that the taxpayer had evenly divided his time between the farm operation and his very successful dental practice. Nonetheless, the Trial Division, after assessing the totality of the evidence, concluded that the taxpayer had not looked to farming for a living. At best, farming was a sideline business to his dental practice which clearly was his chief source of income. The Court of Appeal found no reviewable error in the Trial Division’s reasoning.

In Roney v. M.N.R., [1991] 1 C.T.C. 280, 91 D.T.C. 5148 (F.C.A.), application for leave to the Supreme Court dismissed September 12, 1991, Desjardins J.A., allowed the Minister’s appeal from the decision of the Trial Division and held that farming for the taxpayer was a sideline, that he was "...someone who was testing the water..." (at page 288 (D.T.C. 5155)). The following passages at page 286 (D.T.C. 5153-54) are particularly instructive:

The ability of the farm to provide large profits, the viability of the ongoing business, the capital injected, the moving of the family, the retaining of employees, and the business experience accumulated by the respondent with his companies do not constitute a complete list of the relevant factors enumerated by Dickson J. in Moldowan. While I recognize the difficulty in applying the test, which is both a relative and objective one, and the fact that the criteria mentioned by Dickson J. are by no means exhaustive, I am far from being convinced that, in the circumstances of this case, a proper assessment was made in light of the proper criteria.

The ratio in Moldowan is that the reference in subsection 31(1) of the Act, to a taxpayer whose source of income is a combination of farming and some other source, contemplates a man whose major preoccupation is farming.

A quantum measurement of farming income, although not alone decisive, is relevant and cannot be ignored. The distinguishing features of "chief source of income", 1.e., the taxpayer’s reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work, are to be analyzed in the light of considerations such as the time spent, the capital committed and the profitability both actual and potential.

[Emphasis added.]

In Connell v. The Queen, [1992] 1 C.T.C. 182, 92 D.T.C. 6134 (F.C.A.), the Court of Appeal once again declined to allow the taxpayer to claim the full amount of his farm losses. In this case, it was the taxpayer who was appealing the decision of the trial judge and the Court held that the characterization of farming as a "chief source of income", either on its own or in combination with another source, is a question of fact for the trial judge. In that case, the judge had properly applied the principles laid down in Moldowan, supra. Although Strayer J. (as he then was) did suggest a disjunctive approach, the Court of Appeal held that it in no way affected his decision or rendered it defective.

Shortly thereafter, the Court of Appeal allowed the Minister’s appeal and confirmed the reassessments in Poirier Estate v. The Queen, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 (F.C.A.). After reviewing the ratio of the trial judge, MacGuigan J.A., speaking for the Court, stated at page 10 (D.T.C. 6336):

The learned judge here seems to suggest that farming income can be combined with, in the sense of supplemented by, another 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 page 487 (C.T.C. 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 the time spent, the capital committed, and the profitability, both actual and potential....

In The Queen v. Timpson, [1993] 2 C.T.C. 55, 93 D.T.C. 5281 (F.C.A.), application for leave to the Supreme Court of Canada dismissed February 3, 1994, the Court of Appeal allowed an appeal from a decision of mine, holding that I erred in limiting my examination of the facts solely to the question of reasonable expectation of profit and not looking at farming as the "chief source of income". The Court then held that the case, on its facts, was on all fours with Poirier, supra, in that farming was subordinate to the taxpayer’s ordinary source of income.

Finally, in Service d'Administration Champlain Inc. v. M.N.R., [1994] 1 C.T.C. 2451, 94 D.T.C. 6604 (F.C.A.), the taxpayer had attempted to argue that the language in subsection 31(1) permitted farming income to be characterized as either "primary" or "secondary", and that the Supreme Court of Canada had wrongly presumed that farming must constitute a "primary" source of income in every case. The Court of Appeal, while acknowledging the cleverness of the argument, found that the approach adopted by the Court did not permit such legal manoeuvres.

Based on the guidelines provided by the above-noted cases, the proper approach in determining whether farming constitutes a "chief source of income" is to consider the time spent, the capital committed, and the profitability, both actual and potential, of the vineyard operation, looking at the factors both relatively and objectively. In accordance with the Court of Appeal decision in Morrissey, supra, these factors should be assessed conjunctively; all of the factors should be considered as a group and no one factor should determine the existence of a source of income. Furthermore, based on the decision in Poirier, supra, it is important that the Court compare the time, capital, and profit factors in each of the two sources of income for the taxpayer. I now turn to the case at bar.

A. Time spent

The taxpayer testified that he spends approximately 20 hours per week working on the vineyard. He spends all his weekends off, as well as Monday, Wednesday and Friday afternoons, at the farming operation. The taxpayer has taken many courses relating to grape growing, farming and winemaking.

In comparison, the plaintiff spends approximately 60 to 80 hours per week in his medical practice. I note that the plaintiff has considerably reduced the time spent in his medical practice, from approximately 100 hours per week in 1980.

There is no question in my mind that, in both objective and relative terms, most of the plaintiff’s time each week is spent in his medical practice. He devotes three or four times as many hours to his medical practice as to the vineyard. While I acknowledge that the taxpayer does spend a good deal of time at the farming operation, he remains a full-time orthopaedic surgeon and a part-time farmer. It would be difficult to characterize his practice of orthopaedic surgery as an "employment sideline". The taxpayer has not satisfied me-and the onus is on him to do so-that his major preoccupation during the years in question was farming.

B. Capital committed

In terms of capital committed, the plaintiff has invested considerable sums of money in developing his vineyard. Dr. Stecko testified that, in his estimation, he has committed over $600,000 to the establishment of his vineyard since 1982; the actual figure, given by Mrs. Hrastovec was $629,783 as at December 31, 1993. This amount was not challenged by counsel for the respondent, although an (undated) internal Revenue Canada memorandum placed the investment at over $400,000. I do not think that the discrepancy between the two amounts is material, particularly when the capital committed to medical practice was considerably less. Mrs. Hrastovec testified that the taxpayer’s equity in his medical practice was $53,595 in 1983 and $50,822 in 1984, the taxation years in question. As of December 31, 1993, the equity in the medical practice stood at $28,080.

The plaintiff devoted all of his resources, other than those used for living expenses and retirement savings, to the development of his vineyard operations. In both relative and absolute terms, the capital committed by the taxpayer to the farming operation was significant.

C. Profitability, actual and potential

Denise Hrastovic, accountant for the Steckos, provided considerable information about the profitability of the Stecko vineyard. As already discussed, Mrs. Hrastovic prepared three projections of income and cash flow for the vineyard operations.

The first set of projections was prepared at the request of the taxpayer’s former solicitors and include optimal, expected, and least favourable projections. Under the optimal projections, losses on the vineyard operation would cease in 1988 and, by 1995, the net pre-tax income would be $176,613. Under the expected projections, losses would cease in 1990 and, by 1995, the net pre-tax income would be $125,605. Under the least favourable projections, losses on the vineyard operation would cease in 1991 and, by 1995, the net pre-tax income would be $68,197.

The second set of projections were prepared at the request of Revenue Canada and included information from Leslie Huffman, the fruit crops advisor at the Harrow Research Station. Again, the projections include four categories: highest, high, mid, and low. In all cases, Mrs. Hrastovic predicted that losses would cease in 1991. Under the highest projections, the net pre-tax income would be $121,197 by 1995. Under the high projections, the net pre-tax income would be $97,389 by 1995. Under the mid projections, the net pre-tax income would be $85,045 by 1995. Finally, under the low projections, the net pre-tax income would be $73,581 by 1995.

The third set of projections were prepared at the request of the taxpayer’s current solicitors. These projections assumed that Dr. Stecko applied the money paid to Revenue Canada on account of the assessments to the development of the vineyard. The projections assumed that the costs of establishing the vineyard were taken from the costs used in the second set of projections; that the selling price of grapes was based on the average of grape prices between 1983 and 1993 provided by the Ontario Grape Growers’ Marketing Board; and the yields of grapes were based on an average of the actual yields of acres in full production as provided by Mrs. Stecko in 1992 and 1993. Based on this third set of projections, losses would cease in 1990 and the net pre-tax income would be $55,314 by 1995.

I believe that the projections prepared by Mrs. Hrastovic are reasonably accurate, although I acknowledge that there is a difficulty in making longterm calculations in the agricultural area. Overall, I think that the third set of projections reflects most accurately the potential profitability of the Stecko vineyards since these projections include the actual yields of grapes for 1992 and 1993 and assume that the moneys were not paid as assessments to Revenue Canada. From these projections, the taxpayer’s net pretax income from the vineyard operations would be a "positive" amount in 1990 and would climb quickly from that point onwards. However, even if the taxpayer’s farming income reaches its projected amounts, his professional income from his medical practice would remain much higher. For the ease of comparison, I have set out below the actual reported net income from the taxpayer’s professional practice, [2] the projected net pre-tax income of the vineyard operation (up to 1993), and the actual farming income as reported on the tax returns:

Although the Stecko vineyard has yet to show a profit, I agree that it has the potential to do so. In objective terms, farming income of over $50,000 is not insignificant. However, when the projected farming income is compared to the income from the taxpayer’s professional practice, particularly for the taxation years in question, the professional income is appreciably higher. Moreover, the professional income, in my opinion, shows no indication of decreasing. Despite the fact that Dr. Stecko has testified that he devotes less time to his medical practice now than before he began the vineyard operation, his professional income has not changed significantly since his "career-switch”.

I am wary of putting too great an emphasis on the discrepancy between the taxpayer’s professional income and his potential farming income given the difficulty, if not the impossibility, of starting up a farming operation without some sort of supplemental income. I believe that the taxpayer would like to see the profits on his vineyard grow. Nonetheless, when the situation is viewed as a whole, I do not accept that the actual or the potential profitability of the farming operation is sufficient to place it in the "chief source of income" category.

When the time spent, the capital committed, and the profitability, both actual and potential, of the vineyard operation are considered as a whole, it does not appear that the taxpayer has changed his occupational direction significantly and made farming his chief occupation. The plaintiff remains a full-time orthopaedic surgeon, albeit one who has devoted considerable amounts of time and money to developing his vineyard. However, in my opinion, the farming operation neither constituted his "chief source of income" for the 1983 and 1984 taxation years, nor will it do so in the foreseeable future. As such, his losses for the taxation years in question will be limited to the amounts set out in subsection 31(1) of the Income Tax Act. The appeal from the decision of the Minister is dismissed.

3. Planting expenses

The defendant Minister found that the costs of original plants and planting, totalling $978 in 1983 and $80,798 in 1984, were not deductible as they were expenses on account of capital. I agree with the position taken by the Minister. Contrary to the plaintiff’s submissions, it does not appear to have been the Department’s policy to permit the deduction of vines as an expense.

It is not always facile to distinguish between an expenditure on account of capital or on account of revenue. However, in the case at bar, I think the classic law school illustration between the two is useful: the fruit on the tree is profit and the tree itself is capital. When one plants a tree from which one intends to sell the fruit, the tree is a capital investment, along with the land on which the tree is planted. The fruit is intended to be sold for a profit and, accordingly, the costs associated with growing it-labour, spraying, watering-are deductible as expenses on account of revenue. Grape vines last for 20 or 25 years. In the plaintiffs operation, the vines are not themselves harvested; rather, the fruit they bear is picked. Considering all of the circumstances, I can see no reason to depart from the Minister’s assessment.

In summary, I have found the Steckos to be hardworking people who are committed to building a fine vineyard. Nonetheless, the assessments of the Minister are correct and the appeal is dismissed.

Appeal dismissed.