Klie v. The Queen, 81 DTC 5061, [1981] CTC 154 (FCTD)

Gibson, J:—Paul A Klie appeals from a decision of the Tax Review Board on an appeal from assessments for income tax for his taxation years 1971 and 1972 relating to deductions of losses from farming from the total of his income from all sources and to the allocation of outlays or expenses to two separate businesses, one of farming and the other of rental of property.

The Tax Review Board held that he was entitled only to the statutory restricted deduction of his farm losses and that the rental of property was a separate business from his business of farming.

The first finding of fact that must be made on the evidence in this case as in cases such as this is whether or not Paul A Klie was engaged in farming during the said taxation years. As to this, there was no dispute. It was admit- ted that Mr. Klie was farming, to wit, on a farm on the north side of Lake Erie, composed of Lot 6, First Concession, in the Township of Colchester South, in the County of Essex.

The second finding of fact that must be made in this case, as in cases of this kind, requires a determination as to whether or not Mr. Klie’s chief source of income for each of his taxation years 1971 and 1972 was farming or a combination of farming and some other source of income. (See section 13 of the Income Tax Act for Mr. Klie’s 1971 taxation year and section 31 of the Income Tax Act for his 1972 taxation year.)

In making such a second finding of fact, as was said in Moldowan v The Queen, [1978] S.C.R. 480; [1978] CTC 310; 78 DTC 310, per Dickson, J., all of the surrounding facts of the subject case must be considered before deciding into which one of the first two of three categories a taxpayer who is engaged in farming must be placed for the purpose of determining his taxable income and assessing him for income tax. (A taxpayer who should be placed in the third category referred to in the Moldowan ( supra) case is one who in fact is not engaged in farming. See the first finding of fact, supra, that must be made in these cases.) To be placed in the first category, so as to be entitled to a deduction of all losses arising out of farming operations from the total of all the sources of income of a taxpayer, farming “may reasonably be expected to provide the bulk of income or the centre of work routine” of a taxpayer. If such a finding cannot be made, but instead the finding that should be made is that a taxpayer does not look to farming or to farming and some subordinate source of income for his livelihood but instead carries on farming as a sideline business, then such a taxpayer must be placed in the second category and as a consequence he is only entitled to the restricted farm loss deductions from all his income in the determination of his taxable income. (Again see section 13 of the Income Tax Act for Mr. Klie’s 1971 taxation year and section 31 of the Income Tax Act for his 1972 taxation year.) Further, in making such second finding of fact, the often misused so-called test of reasonable expectation of profit from farming has no application and is irrelevant in this case, as it is in all cases of this kind, where the determination to be made is whether a taxpayer should be placed in the first or second category referred to in the Moldowan (supra) case. In addition, in making such a determination, it is not necessary to make any inquiry as to whether there is a “connection” between farming as a source of income and some other source of income in order to make a finding that a taxpayer’s chief source of income was or was not a combination of farming and such other source of income. (See p 486 of the Moldowan (supra) case above cited.)

The salient evidentiary proof in this case was as follows:

This subject farm property has been operated as a farm firstly commencing in 1879 by the great grandfather of Mr. Klie and his grandfather, secondly by the father of Mr. Klie, and subsequently, including 1971 and 1972, by Mr. Klie in conjunction with his father and brother. Their respective interests in the total of the farm and rental of property operations during 1971 and 1972 proven by paragraph 32 of the agreed statement of facts (Exhibit 2) were:

The sources of the revenues from this farm property for Paul A Klie during his taxation years 1971 and 1972 were from sales of market garden crops, such as vegetables, tomatoes and cucumbers, and of general cash crops, such as potatoes, corn and soya beans and from rentals of part of the shorefront lands to tenants who, on and for their own account, had constructed cottages on these lands.

The only other source of income for Paul A Klie during his 1971 and 1972 taxation years was from his employment at the plant of Chrysler of Canada Limited nearby his farm.

Mr Klie obtained his income from his farm operations, by working during the days, on week-ends and holidays, and his income from Chrysler of Canada Limited by working at Chrysler five days a week on the midnight to 8:00 a.m. shift.

After a careful consideration of all the facts of this case based on the proof adduced, I make this second finding of fact with some hesitation, and put Mr Klie in the second category of taxpayer instead of the first referred to in the Moldowan (supra) case: It is that Mr Klie during his taxation years 1971 and 1972, having regard to all the circumstances of his case and in particular of his employment with Chrysler of Canada Limited, has not established that farming was the “centre of (his) work routine” nor that he looked to farming and some subordinate source of income for his livelihood, but instead carried on farming as a “sideline business” within the meaning of the evidentiary guidelines of the Moldowan (supra) case.

As a consequence Mr Klie is only entitled to the statutory restricted deductions of farm losses from the total of his sources of income for his taxation years 1971 and 1972, up to the maximum of $5,000 which should include expense items for capital cost allowance. In computing his farming losses, however, there should be included as income and expenses from his farming business the receipts and expenses of the rental operations arising out of the leasing of certain of shorefront lands of his farm property to tenants who built cottages on these lands. The receipts and expenses from such rentals were not from a business separate from his farming business and this source of casual or incidental income and expenses of his farming business is an example of a commonplace situation that obtains in respect of farming operations on farms bordering on lakes and rivers in Canada, as was the case of this farm operation of Mr Klie.

Accordingly, the appeal is allowed with costs and the matter is referred back for further reassessment not inconsistent with these Reasons.

Appeal allowed.