Buchanan Forest Products Ltd. v. The Queen, 86 DTC 6282, [1986] 2 CTC 7 (FCTD)

Teitelbaum, J.:—Plaintiff, Buchanan Forest Products Limited, (Buchanan Forest) by means of a statement of claim, is appealing a judgment of the Tax Court of Canada rendered on the 19th of March 1984. The case before me is on a trial de novo.

Buchanan Forest is appealing the assessments for income tax made by the defendant, through her Minister, for the taxation years 1976 and 1977.

The action before me by Buchanan Forest regards alleged losses from farming operations for the years 1976 and 1977, which losses Buchanan Forest claims are fully deductible and as such are not subject to the restricted farm loss provisions of Section 31 of the Income Tax Act for the years 1976 and 1977.

Section 31 of the Income Tax Act states:

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 11 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the lesser of

(a) the amount by which the aggregate of his losses for the year otherwise determined from all farming businesses carried on by him exceeds the aggregate of his incomes for the year from all such businesses, and

(b) $2,500 plus the lesser of

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

(ii) $2,500;

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

(2) For the purpose of this section, the Minister may determine that 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.

Buchanan Forest states that as a result of the farming operation, it had the following expenses, which expenses were disallowed by the defendant in a notice of reassessment.

In its statement of claim, Buchanan Forest also states that it is a private Ontario corporation and during the years 1976 and 1977 it was engaged in the logging business in northwestern Ontario and in the farming business in Manitoba. It was during the summer of 1976 that the farm land was purchased in northern Manitoba for approximately $300,000, that farming was commenced in 1976, and that personnel and equipment of Buchanan Forest were used in the operation of the farm.

For the above stated reasons, Buchanan Forest is asking the Court to allow its appeal and allow, as fully deductible, the total moneys spent for the operation of the farm for the years 1976 and 1977.

The defendant, Her Majesty The Queen, in its statement of defence admits that, during the years 1976 and 1977, Buchanan Forest was engaged in the logging business in northwestern Ontario and in farming in the province of Manitoba as well as that Buchanan Forest commenced farming operations in 1976 using both personnel and equipment of Buchanan Forest in the operation of the farm for the years 1976 and 1977.

The defendant then states in its defence that, although the total sums mentioned in Buchanan Forest's statement of claim are correct, the amounts are divided into lesser amounts and for specific expenditures.

At the hearing, the attorney representing Buchanan Forest informed me that he admits the above-mentioned breakdown of the figures mentioned in his statement of claim.

The defendant in her statement of defence further alleges that the land purchased in Northern Manitoba was personally purchased by Kenneth Buchanan for approximately $300,000 and that in making its reassessment for the years 1976 and 1977 it assumed the following facts

(a) since its inception in 1965 and at least up to 1977 inclusively, the corporate Plaintiff has always been into the timber contracting business;

(b) in 1976, the Plaintiff also entered into the farming business until 1977 when it ceased farming;

(c) the Plaintiff’s overall time commitment for the years 1976 and 1977 was mostly related to the timber contracting business;

(d) at all material times, the Plaintiffs capital was mostly committed to the timber contracting business;

(e) the Plaintiffs net revenues from the timber contracting were of $1,718,813.18 in 1976 and of $2,415,284.18 in 1977;

(f) the Plaintiffs gross revenues from farming were nil in 1976 and 1977;

(g) at all material times, the Plaintiff’s chief source of income was timber contracting.

and that Buchanan Forest's principal occupation and chief source of income was its logging business.

As a result of the above, the defendant submits to me that Buchanan Forest's chief source of income for its 1976 and 1977 taxation years was neither farming nor a combination of farming and some other source of income.

The issue is then to determine, through the proof to be made before me, whether or not, the plaintiff was in the farming business and if so, it was reasonable to assume that the farming business was going to be its chief source of business and revenue.

The facts in this case can be summarized as follows. The plaintiff, Buchanan Forest Products Ltd. was formally known and incorporated in March 1965 as Buchanan Brothers (Ontario) Limited (Exhibit P-1). In the articles of incorporation one can see that the object of the company was the logging and timber business.

(a) To carry on in all and any of their branches the businesses of loggers, pulpwood cutters, lumbermen, lumber merchants and sawmill, planing-mill and pulpmill owners;

(b) To buy, sell, prepare for market, manufacture, import, export and deal in pulpwood, sawlogs, timber, piles, poles, lumber and wood of all kinds and generally to carry on the business of lumbering and the lumber trade in all its branches;

(c) To carry on the business of general manufacturers and to establish shops and stores, and to purchase, sell and deal in all kinds of goods, wares and merchandise;

(d) To carry on the business of loading, unloading or transporting pulpwood, sawlogs, timber, piles, poles and any other goods, chattels or merchandise;

(e) To construct roads and ways of every description;

(f) To purchase or acquire and to hold and deal with lands and timber limits or licences;

(g) To carry on the business of leasing trucks, bulldozers, power shovels and other types of heavy equipment;

(h) To conduct and carry on the business of builders and contractors for the purpose of building, erecting, altering, repairing or doing any other work in connection with any and all classes of building and improvements of any kind and nature whatsoever, including the building, rebuilding, alteration, repair or improvement of houses, factories, buildings, works or erections of every kind and description whatsoever and the locating, laying out and construction of roads, avenues, docks, slips, sewers, bridges, wells, walls, canals and power plants and generally all classes of buildings, erections and works, both public and private, or integral parts thereof, and generally to do and perform any and all work as builders and contractors, and with that end in view to solicit, obtain, make, perform and carry out contracts covering the building and contracting business and the work connected therewith; and

(i) For the objects aforesaid to acquire and take over as a going concern the partnership business and undertaking heretofore carried on in the said Improvement District of Red Rock and elsewhere in the said District of Thunder Bay by Kenneth Buchanan, John Buchanan, Frank McKenzie Buchanan and William Grenhall Buchanan under the name of Buchanan Brothers.

There is no mention that it was a possible object of the company that it would enter, as a principal business, farming but this of itself does not mean that the company could not enter into the business of farming as its principal occupation and possible chief source of income.

Buchanan Brothers (Ontario) Limited formally changed its name to Buchanan Forest Products Ltd. on December 8, 1980.

I was informed, through the testimony of Kenneth Buchanan, Buchanan Forest's president and main witness, that before the incorporation in March 1965, he, with his three brothers, started on their father’s farm in 1953 where the chief crop was potatoes but that they also raised hogs. He stated he went and graduated from agriculture college in 1956 and that he and his brothers continued to operate the farm to 1958 when a disastrous fire destroyed the farm, the farm equipment and potatoes. As a result of the fire, the family was badly in debt forcing the family to search for other sources of revenue. It was found that by cutting wood behind the farm the Buchanans were able to pay off all their debts within a period of one year. As no funds were available to the Buchanans they were unable to return to the farming business and thus remained, from 1958-59 in the timber or logging business. In 1959, they received a contract for 1,000 cords of timber and were thus on their way to establishing themselves in the forest products business. Kenneth Buchanan explained that although the logging business was established in 1959, there were many years when business was so bad that he considered going back to the farming business.

I believe that this is a normal reaction. If one is a successful entrepreneur, and Kenneth Buchanan is, one should always be on the lookout for other business opportunities. This does not mean that the original business will be abandoned or reduced to such a point that the new venture would automatically become the main source of business of the individual or corporation as plaintiff is in this case.

In March of 1965, the Buchanan brothers formed a corporation known as Buchanan Brothers (Ontario) Ltd. The letters of incorporation clearly show that the purpose of the business was forestry and logging (Exhibit P-1). In fact, the business carried out by the company was the business of harvesting lumber for wood mills.

From 1965 to 1976 the business of the plaintiff had its ups and downs. As Kenneth Buchanan explained, in 1965 times were very difficult because the weather was bad for logging, his brother John sold out his shares in the company and started a hauling business. Soon after business picked up again when Buchanan Forest began to supply various mills near Thunder Bay.

In 1967, Buchanan Forest and others started up a bankrupt mill (Northern Plywood) with Buchanan Forest owning 30 per cent of this mill. This allowed Buchanan Forest to have access to large tracts of timber and access to certain union agreements. Business continued to flourish in that Buchanan Brothers supplied most if not all the wood for the mill now named Multiply Plywoods.

In February 1962, Buchanan Forest, plaintiff, who by then owned 70 per cent of Multiply Plywoods sold the mill to MacMillan Bloedel and received for its 70 per cent interest a sum of approximately $1,960,000 together with a contract that Buchanan Forest would forever supply 50 per cent of the wood needed by the mill. Buchanan Forest would also have access to a vast area of hard wood. This is referred to as an "Evergreen Agreement".

The witness then relates that MacMillan Bloedel failed to honour its agreement and gradually purchased less and less so that by 1974 Buchanan Forest sales began to drop forcing the plaintiff to look for new business.

In cross-examination, the witness admitted that the phasing out by MacMillan Bloedel began soon after the sale of the mill (1972) but that the sales of plaintiff continued on a level plane. The tax return filed for the years 1972-73 and 1974 really show that sales increased rather than decreased.

Kenneth Buchanan went on to explain the operation of the timber business and the problem with obtaining licences to cut timber from large paper or mill companies, that the licences were for only one year and thus it was allegedly difficult to plan for the future. In cross-examination Mr. Buchanan stated that the granting of the licence for one year was how the trade operated and really was a matter of form only. In practice, the licence was always renewed. The witness admitted the arrangement that he had in the previous years is still in place even with regard to the union agreements. This arrangement is the use of licences from the large mills and their union agreements.

It would thus seem to me that if the arrangement in 1976, 1977 was the same as it was before these two years, then the main thrust of plaintiff's business is logging, forest products and certainly not farming.

The witness, Kenneth Buchanan, went on to explain, in great detail, of the strikes in the industry in the fall of 1974 and the summer of 1975, the loss of business because of the closing of the Great-West Mill, the nonpayment of moneys owing to plaintiff by Great-West, and the insolvency of his brother's trucking firm. This, he claims, caused him to decide to search out other forms of business. Due to the fact that he was always interested in farming, he stated he began a concentrated effort to purchase farm property. He also stated that he was always on the lookout for farms in Canada, the U.S.A. and South America.

No proof was made to me of this except for the testimony of the witness. Not a single document was submitted to corroborate the trips that the witness allegedly took to search for farms in the U.S., Canada or South America. The witness stated he made an offer for a coffee plantation in South America to Mr. Salgato but states it was made verbally.

I have no doubt as to the honesty of the witness but must state that I find it difficult to believe that a successful businessman, such as this witness, would offer to purchase a coffee plantation with a verbal offer and not even submit air line tickets to show that he went to South America at the time he allegedly made the verbal offer.

Be that as it may, the witness states that in 1976, because of his concern of the state of the timber business he personally purchased land in the Manitoba lakeland district to start a corporate farm. Exhibit P-2 (1 & 2) shows the acreage of the land purchased, from whom purchased and when the purchase was made. According to this document P-2 (1 & 2) the witness purchased a total of 648 acres of land in June 1976, 1931 acres in January 1977 and 1440 acres in June of 1977 for a total of 4019 (an error appears on Exhibit P-2 (1) in that the total acreage shown purchased in June 1976 and January 1977 is 2580 acres when it should be 2579 acres). The total cost, including legal fees of $2,584, for the land purchase was $233,585 (Exhibit P-2-(1)).

The witness, in explaining the purchases he made, went on to state that he examined the area in which he purchased the land (Exhibit P-3 black markings), visited the township offices, talked to the local residents and made a full investigation leading me to believe that before the witness purchased any of the land to set up his corporate farm he made the investigation, spoke to the local residents and visited the township offices.

In cross-examination, the witness admitted that it was by chance, on his return from an auction in Moncton, New Brunswick in April 1976, where he went to purchase timber equipment, that he stopped at a coffee shop in Nepawa, Manitoba and saw an ad in a newspaper called the “Co-Operator” for the sale of some land. He stated he contacted the owner, a certain Mr. Flatt and in June 1976 purchased the land. He admitted he purchased this land and the land of a Mr. Skanderberg before he had seen the soil survey document produced by the Provincial Government of Manitoba (Exhibit P-4).

This would seem to me to partially contradict the witness' own testimony when he states that when he purchased the land in June 1976 it was his intention to make farming the main thrust of his business.

I cannot accept the proposition that by seeing a chance ad in a newspaper for the sale of some farm land, an individual would decide that farming would then become his main business notwithstanding that in 1975 the total revenues of the plaintiff company was $2,650,785.48 (Exhibit D-1 Page 28-9 Statement of Operations of Plaintiff company), and in 1976 it was $4,534,359.25 an increase of almost $2 million (Exhibit D-1 Page 34).

In order to attempt to convince me that it was plaintiffs intention to make farming its main source of income, the witness then stated that the land he purchased was perfect for a corporate farm because it was 50 per cent for cattle and 50 per cent for crops and that he knew exactly what it required to be run as a corporate farm, yet he admits in cross-examination that the Glenella area land was 26 per cent clear and 73 per cent wooded or waste, the Alonsa area land was 21 per cent clear and 78 per cent wooded or waste.

I believe that the land purchased would probably be a good investment for the wood or timber business rather than for farming purposes.

In the examination-in-chief the witness, plaintiffs main witness, stated that he had the survey (P-3) before he made the acquisitions of land but this turned out to be incorrect in that he did not have possession of the survey until after he acquired part of the total land in June 1976.

In Kenneth Buchanan’s testimony, he stated he spent almost full-time in trying to put the farm together from April 1976 to September 1976 and that as of June 1976 the farm “was the main force of his business’’. He admits that he continued to operate his timber business.

I cannot accept the proposition that the farm was, as of June 1976, the plaintiff's “main force of business''. The income tax returns of the plaintiff company show differently.

Plaintiff company's gross revenue from its logging operations always increased from 1972 to 1977.

The gross revenue of the plaintiff company to March 1972 was $1,203,945, to March 1973 $1,828,220, to March 1974 $2,785,743, to December 1974 $1,687,737, to December 1975 $2,650,785, to December 1976 $4,534,359 and to December 1977 $9,208,253. (Exhibit P-7).

Plaintiff's witness admits that there was no income of any kind from the operation of the farm.

It is therefore difficult to conclude that in June of 1976 plaintiff’s “main force of business” was going to be in the farming business. The proof is clear that the first lands purchased by Kenneth Buchanan, the Flatt & Skanderberg lands, were purchased by a chance reading of an advertisement in a small local newspaper.

Plaintiff showed that a Brian Driver, an employee of plaintiff’s since 1967 came from the Thunder Bay area to Manitoba at the end of July 1976 to manage the farm operation.

It must now be remembered that, according to Kenneth Buchanan, the busy time in the logging business is the fall and winter months.

As a result of this statement I have come to the conclusion that Brian Driver came to manage the farm operation only because it was the slow period in the logging business. Furthermore, Kenneth Buchanan informed the Court that he had “wanted to get the farming as part of the Corporate Operation”.

The witness stated that it was his desire that the farming business would take up the slack of the logging business because he believed that one day he would have to get out of the logging business. Really what is being said is that he was looking for another business to incorporate into the plaintiff corporation so that in slow times, the spring and fall, he would be able to supply work for his employees in the logging business. The witness admits that he tried to convince his employees to go to work the farm during the slow period but that they refused because he offered lower wages for the farm work than he paid to them in the logging business and that they, for a lower salary, did not wish to leave their homes and family in Thunder Bay.

After Mr. Driver had arrived, end of July 1976, the witness stated he tried to get out of Thunder Bay to Manitoba every week for two or three days at which time he would discuss the plans for the operations of the farm with Mr. Driver and or would “walk the land".

He also admitted that there were a number of occasions when he would not go to visit the farm.

Mr. Driver in his testimony stated that from July 1976 to July 1977 he saw Kenneth Buchanan for the first two weeks, then later in the fall of 1976 he saw him once a week. He also stated that Kenneth Buchanan may have come out to the farm but that he did not see him.

There was no definite proof that Kenneth Buchanan had actually spent the time in Manitoba that he said he did other than his own testimony. The fact that the plaintiff's business was still operating and doing better would seem to me to require Mr. Buchanan’s attention and thus would lead me to believe that Mr. Buchanan spent most of his time in the logging business. As Mr. Buchanan stated in a reply to the defendant's attorney, that from 1974 to 1976 he was “always running to chase more business”. In fact, he obtained more business as is clearly shown on Exhibit P-7, the recapitulation of gross revenue from March 1972 to December 31, 1977.

Moneys were spent for farming by plaintiff company for wages in 1976 and for wages and other expenses in 1977.

There is no doubt, and it has been admitted by the defendant, that the plaintiff did attempt to farm part of the land.

In July 1977, the plaintiff, on the advice of Mr. Russel York, the chartered accountant for plaintiff company, decided that the company should cease all of its farming operation and it was then decided to offer the land to Mr. Driver to operate, who did take over the operation of the farm.

It was decided to cease the farm operation because it was claimed by the witness that costs were going up and the prices of the crops were falling.

The witness stated that the cost of fertilizer was increasing and his accountant felt it would be better to “contract out” the operation of the farm.

The witness Driver contradicted this statement when he stated that because the land was “new" to plant oats no fertilizer is really necessary for the first two or three years.

It therefore could not be the cost of fertilizer that caused Mr. York to inform Mr. Buchanan to "contract out” the farm operation.

By agreement dated July 8, 1977, but not signed, Exhibit P-6, Driver took over the operation of the farm and from this time, the witness “backed off" from his involvement in the farm.

It is also at this time, by coincidence I assume, that the major mills decided to support logging operations such as plaintiff's thus allowing plaintiff, and others, access to large tracts of virgin timber. It was also at this time that the witness, for the plaintiff company, became aware of a mill that would be for sale, Hudson Mill, a division of Abitibi Paper and actively pursued this purchase which was consummated in October 1977.

All of the above would indicate to me that most of the witness’ time was spent looking after his very successful logging business, as it should have been.

During cross-examination, there were numerous instances of lapse of memory and I was left with the impression that the witness, plaintiff's main and most important witness, was not always telling the complete facts. On a number of occasions, he stated he did not know what the gross revenue of the company was until after being shown the financial statements and didn't know where he would have placed certain important documents. It is hard to imagine a very successful businessman, the president of one or more substantial corporations, not knowing or verifying the figures of the company.

Nevertheless, in cross-examination the witness admitted that at no time did plaintiff suffer a sharp decline in sales even when there were strikes and mill problems. He stated that in the fall of 1975 plaintiff lost a substantial amount of business as a result of a company or mill known as Great-West going out of business but that plaintiff was able to obtain other business to offset this loss. “1 had to work very hard to maintain sales.” This indicates that from the fall of 1975 onwards his time was devoted to the logging business and no thoughts or time given to a farming business or very little time devoted to a possible farming operation.

In the statement of operations ending December 31, 1976 (Exhibit D-1 Page 36), we are able to see that the plaintiff company had a net profit of $113,600.75. The witness admits that included in the expenses for the year are the farm expenses and that there was no revenue from the farm.

It is therefore very difficult for me to conclude that "the farm was the main force of business” for the plaintiff in 1976 taking into account that plaintiff's gross revenue was $4,349,326.11 from the timber operations in 1976 and nothing for farm operations.

The witness admitted that for the logging operation the wages and benefits paid for 1976-1977 were in the million dollar range and for the farm operations they were, as listed in paragraph 2 of the statement of defence, namely $19,630 in 1976 and $38,164 in 1977. He also admitted that Brian Driver had limited farm experience, Driver himself admits to having only worked on farms as a summer job.

I am of the opinion that Brian Driver's farm experience was almost nil.

The witness also admitted that before making any farm or land purchases he had not prepared nor had someone prepare for him a feasibility study but did have one made before he purchased the Hudson Mill, the cost of the survey being $31,000.

The witness stated that he purchased for the farm operation new and used equipment in the amount of approximately $41,000, sent logging equipment to the farm of a value of about $100,000 to $150,000, the total capital committed to the farm operation being somewhere between $370,000 to $410,000, the logging operation having $1,378,029.02. This sum includes, according to Mr. Buchanan, $41,000 of the equipment purchased for the farm (Exhibit D-1 Page 49 Schedule of Fixed Assets for year ended December 31, 1977). In addition, plaintiff, in 1977, acquired $381,802.65 of other equipment (D-1 Page 49). In 1976, the plaintiff acquired additional equipment in a sum in excess of $400,000 (D-1 Page 36 Schedule of Fixed Assets for year ended December 31, 1976).

This clearly shows the relationship of the logging operation and the farming operation. It is difficult to conclude that “farming is the main force” of plaintiff's business.

The witness, at the end of his cross-examination, admitted that the main force of business, as of July 1976 was a combination of logging and farming, that before April 1976 it was exclusively logging and that from the spring of 1977 the logging business started to rise dramatically.

Russel York, a chartered accountant, and full-time employee of the plaintiff tried to explain the operation of plaintiff company, the problems the plaintiff was encountering up to the end of 1977 and the type of individual Kenneth Buchanan is in relation to the general operations of the business.

Kenneth Buchanan had, on a number of occasions, answered that he would not know what I would consider relatively important facts in the operation of his business, whether or not the gross revenue reported on income tax returns was correct, or that he would not know where he had placed an important document, the Evergreen Agreement with MacMillan Bloedel. In order to explain to me why Kenneth Buchanan would not know or remember important matters, Russel York, in describing Kenneth Buchanan, stated he was “an entrepreneur” not a very organized person and was only an “Idea Man". He stated that the functions of Kenneth Buchanan in the business were “to seek new opportunity and leave the day-to-day operations to managers”.

I assume that this was stated to show me that, notwithstanding the operation of the logging business, Kenneth Buchanan was not required to spend any time in the logging operation, or very little and could devote himself entirely to the farm operation.

If this is correct, then why was it necessary for Kenneth Buchanan to visit the farm on an allegedly regular basis to “walk the farm” to see what should or should not be planted or where cattle should be left to graze or where a fence should be removed and/or placed. Surely an expert in farming, with the most up-to-date knowledge of the farming industry, would have been the best individual to “walk the farm” and make the necessary decisions to operate a corporate farm. This fact is an important consideration in my believing that the farm truly was not ever considered to be the main or most important source of income for the plaintiff but was simply another business that Kenneth Buchanan thought plaintiff should attempt.

Mr. York, in his testimony, went on to explain the problems that the plaintiff had with obtaining licences, third party licences and the various money problems that plaintiff had in 1975 with what was thought to be a loss of approximately $250,000 from the Great-West Mill. Because of the possible losses of timber rights and money, Mr. York tried to state that this was the reason why Kenneth Buchanan was looking for “other areas of business or some other way to expand the business”. There was also a question that Kenneth Buchanan’s brother, who was operating a trucking busi- ness, became insolvent and this supposedly was an indicator that the logging business was failing.

Surely it is always the function of an executive of a corporation to continuously look for businesses to expand. It surely does not mean that when an executive is “looking at other areas of business or some other way to expand” that the new business will necessarily become the main source of income; it would, possibly, be another source of income.

The witness went on to state that "Ken's function was to seek out opportunities in the forest area and in the farming area”. This means both areas. This does not mean that it was plaintiff’s intention to abandon the lumber business nor to make farming the chief source of income.

This statement of Russel York's goes hand in hand with that of Kenneth Buchanan who basically stated that plaintiff would have two operations, the timber (logging) and farming.

It would seem the defendant agreed with this, in that, it allowed the plaintiff a loss of $5,000 for 1976 and 1977 in virtue of section 31 of the Income Tax Act.

Mr. York went on to testify that notwithstanding that he was against the plaintiff becoming involved in the farming business, Mr. Buchanan went ahead, on his own, and personally purchased the farm land in question, which land was transferred to plaintiff in 1980. He stated that from the Spring of 1976 to the Fall of 1977 Kenneth Buchanan was out of the office looking to purchase farm land and personally making a study of the land. Moneys were being spent, for equipment, for wages and the sums spent in the two years exceeded the projection "Spent more than $100,000”, thus causing the witness to have a meeting with Kenneth Buchanan in 1977 to suggest plaintiff get out of the farming operation.

If plaintiff really had the intention to make farming its chief source of income and relating the expenditures for the farm to its logging operation, can one really believe that because a sum slightly in excess of $100,000 is being spent, the operations should close down. I believe not.

In any event, at the end of July 1977, the farming operation was given over to Mr. Brian Driver, an ex-employee of plaintiff.

In cross-examination, the witness admitted that from 1977 the business of logging of plaintiff has been growing and that by 1980, it was almost double 1977, approximately $15 to $20 million in revenue and that the plaintiff's business is still growing. Plaintiff has not gone into the farming business.

Brian Driver testified that he began to work for Kenneth Buchanan in 1967 doing different logging jobs. In 1970 he formed, at Camp 33, the first formal wood camp for plaintiff and operated, as camp foreman, the camp for a period of one and one-half years. In 1975, he states he left the camp and began to arrange subcontractors to do plaintiff's hauling and to look after the trucks belonging to plaintiff. He states that in March 1976, he became woods superintendent, that at this time there was not much work generally and that the work at Camp 33 was diminishing because the plaintiff had cut the timber "quite thoroughly” and the camp at Wolf River was operating slowly.

This witness states that the first time he heard anything about a farm was when Kenneth Buchanan brought up the subject and he was asked to go to see the area. This was in the summer of 1976. In July 1976 he went to the area where he spent two days walking the farm and spoke to Kenneth Buchanan who stated that plaintiff wanted to make the farm a viable operation with 10,000 acres but to have the minimum amount of manpower to operate the farm. The only farming experience that Driver had was some summer jobs.

Mr. Driver states that he was offered the job of organizing the farm and decided, at the end of July 1976, to remain and work the farm on a full-time basis. Some equipment and trucks were given to him to commence "breaking the land”. He had the help of two other persons. He states that he and the hired help, two persons at most, continued to clear land through the Fall of 1976 and the Winter of 1976-77.

He states, and this indicates the amount of experience of this witness, that they worked through the winter, but that they were in a drought period even if he didn't know it.

Here again, it is difficult to believe that the farm was to become the chief source of income for plaintiff. The idea of having a non-experienced individual like Driver to organize and operate a corporate farm on a professional basis is difficult to conceive when Kenneth Buchanan was the type of individual who would hire experienced managers to operate the day-to-day businesses he was involved in.

Driver stated that it was unusual that the ground didn't freeze during the winter and I believe that if Mr. Driver had any experience in farming this should have been a first warning of a possible drought. If there is little snow then there is likely to be a shortage of water. This turned out to be the case and as a result the harvest of what was planted was less than what should have been obtained.

It was at the end of July 1977 that Driver was asked to take over operations of the farm and did so.

As I have stated, the appeal to the Federal Court of Canada from a decision of the Tax Court of Canada is a trial de novo.

Subsection 175(3) of the Income Tax Act states:

Deemed action.—An appeal instituted under this section shall be deemed to be an action in the Federal Court to which the Federal Court Act and the Federal Court Rules applicable to an ordinary action apply, except as varied by special rules made in respect of such appeals, and except that

(a) the Rules concerning joinder of parties and causes of action do not apply

except to permit the joinder of appeals instituted under this section;

(b) a copy of a notice of objection filed in the Registry of the Federal Court by the Minister pursuant to paragraph 165(3)(b) shall be deemed to be a statement of claim or declaration that was filed in the Registry of the Federal Court by the taxpayer and served by him on the Minister on the day on which it was so filed by the Minister; and

(c) an originating document or copy of a notice of objection filed by the Minister in the Registry of the Federal Court shall be served in the manner provided in subsection (4).

This is to say that the plaintiff has the burden to prove its case. It, the plaintiff, must present sufficiently satisfactory evidence to convince me of its position and that its evidence is such as to allow the full deduction of the farming expenses.

The burden of proof is on the taxpayer, in this case a corporate plaintiff, to prove that the Minister's assessment was wrong (Wilfrid Riendeau v. M.N.R., [1982] C.T.C. 2433; 82 D.T.C. 1412 and Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182).

The leading case relating to the issue of whether a taxpayer is entitled to deduct the full amount of its losses from a farm operation from its total income or whether it is subject to the restricted farm loss provisions of section 31 of the Income Tax Act is Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213.

It has been stated many times, section 31 of the Income Tax Act is badly drafted and is extremely difficult to read and understand. As Mr. Justice Dickson stated in the Moldowan case (supra) at 310 (D.T.C. 5213), in referring to subsection 13(1) of the Income Tax Act, R.S.C. 1952 c. 148 as it then was, . . an awkwardly worded and intractable section and the source of much debate.”

Since Mr. Justice Dickson's judgment numerous other cases have been decided on this very same point. Some of these cases are The Queen v. Paul

E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.), Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.), The Clarkson Company Limited v. The Queen, [1986] 1 C.T.C. 308; 86 D.T.C. 6124 (F.C.T.D.), Helen Kasper v. The Queen, [1982] C.T.C. 178; 82 D.T.C. 6148 (F.C.T.D.).

In each of these cases, the principles established by Mr. Justice Dickson in the Moldowan case were followed.

Mr. Justice Dickson states that in his opinion, the Income Tax Act envisages three classes of farmers (page 315; D.T.C. 5216):

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

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 s. 13(1) in respect of farming losses (underlining is mine);

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 non-business farming are not deductible in any amount. [Emphasis added.]

Thus, only taxpayers who fit into the first class of farmers, as defined by Justice Dickson, can deduct the full amount of their losses.

As stated, the defendant admits that the plaintiff carried on a farming business.

As a result of this admission, it is possible to eliminate the third classification of farmer, the hobby farmer.

In order to classify plaintiff, it now becomes necessary to apply the criteria as set forth in the Moldowan case.

Chief Source of Income

Mr. Justice Dickson, in speaking of this item states (page 314; D.T.C. 5216):

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. [Emphasis added.]

I cannot agree with plaintiff's contention that it has shown from the facts proven that it fulfils the conditions as set out by Mr. Justice Dickson to fall into the first class of farmers.

The plaintiff is a corporation and as such, and as stated by Mr. Buchanan, it was always looking for business opportunities.

Defendant concedes that plaintiff had a reasonable expectation of profit but not that farming was to become the chief source of income for plaintiff.

I agree. Exhibit P-7 clearly shows that plaintiff, from March 1972 to December 1977 had a growing business. It is true that some years were “leaner” than others, but at all times plaintiff’s logging business increased to some extent.

I cannot believe that the representative of plaintiff ever really contemplated giving up the business of logging. It is true that what plaintiff wished was to remain in the logging business and also try farming.

This fact was conceded by Mr. Kenneth Buchanan in his testimony upon cross-examination.

The proof clearly indicates, that at no time was plaintiff going to give up its logging operation. In the argument presented by plaintiff, plaintiff’s attorney stated “obviously Plaintiff was not going to drop logging but that plaintiff went from logging to farming and logging.”

I am of the view that Exhibit P-7 shows otherwise. There was never any income from farming but substantial income from logging.

Time Spent

The question arose as to “time spent” by the plaintiff corporation.

The attorney for defendant states that in looking at “time spent” one does not look at the “time spent” by one principal officer of plaintiff but of all employees of the corporation.

There is no doubt that in so far as employee hours are concerned, little time was spent on farming as compared to logging.

There were over 40 employees working for plaintiff in its logging operation in 1976 and 1977 while, at most, there were three employees working on the farming operation.

I am satisfied that Mr. Kenneth Buchanan spent a relatively short period of time devoted to the farming operation as compared to his logging business. As stated, he testified he was always looking for ways to improve the logging business because he would not be satisfied unless the logging business continued to grow at a rapid rate.

Capital

In attempting to understand the question of capital invested, one must look at the total of plaintiff’s capital invested into the farm operation as compared to its total capital.

Plaintiff is not an individual. It is a corporation with a very successful timber business.

Taking into account the cost of land and equipment, only 17 per cent of plaintiff’s capital was invested into the farming operation.

I do not think that this investment would lead one to believe that plaintiff expected its “chief source” of income to come from farming.

It was also proven, by plaintiff’s admission to questions, that all of the logging equipment sent by plaintiff to the farm was equipment that had been depreciated from the logging business. Only some $41,000 was spent on new or used equipment for the farming operation.

The capital investment for farming equipment, as compared to the investment in equipment for the logging business of plaintiff, is quite minimal.

Profitability

The proof clearly shows that the logging business was always profitable.

There was never any profit nor any revenue in the farming business and I believe that there really was never any reasonable expectation of profit.

The land purchased was subject to both flooding and drought. After having purchased the land, plaintiff obtained, Exhibit P-4, a Report of Reconnaissance Soil Survey of West-Lake Map Sheet Area.

On page 19 of Exhibit P-4, the area of land purchased by plaintiff is shown to be low-lying land. This section of land is known as the West-Lake Area. On page 92 of Exhibit P-4, it states of this land:

The depressing history of recurring land settlement and abandonment in the low-lying eastern portion of the West-Lake area is tragic evidence of improper land use . . . All attempts at such utilization have failed. The cultivated soils are subject to flooding in wet seasons and to time induced physiological drought in dry season.

It is fairly obvious that the prospects of making a profit are very negligible.

I am satisfied that there was virtually nothing in the evidence to show me that plaintiff would reasonably be expected to provide the bulk of its income from farming or that farming would become the centre of its activity.

I have applied the same criteria as did Mr. Justice Dickson in the Moldovan case notwithstanding that plaintiff is, in this case, a corporation. The same criteria can be applied, the only difference being that it would be more difficult for a corporate plaintiff to prove that it was its intention to change the centre of its activity.

Corporations, generally, in their normal everyday business activity, attempt to “branch out”, to acquire new businesses either in the same field of activity or in other fields.

I believe that in order for a corporate plaintiff to fall into class one of three classes of farmers as listed by Mr. Justice Dickson, strong proof of a change in the corporate structure would have to be shown whereby almost all of its efforts would be directed to “farming”.

For the reasons above stated, plaintiff’s action is dismissed with costs.

Action dismissed.