Noel v. The Queen, 94 DTC 6606, [1994] 2 CTC 357 (FCTD)

Dubé J:— This appeal by the plaintiff is from notices of reassessment issued by the Minister of National Revenue in respect of the plaintiff's 1985 and 1986 taxation years wherein he deemed the losses from the plaintiff's farming business to be $5,000 in accordance with subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

In 1984, the plaintiff, at the time a practicing lawyer, purchased 85 acres of farmland near Woodland, Ontario, approximately twenty miles west of Ottawa and began the development and operation of a farming enterprise consisting of the purchase, sale, breeding, training and racing of horses. During the relevant taxation years (1985 and 1986) she purchased horses and equipment and engaged in the conversion of buildings to facilities suitable for the farming operation. Paddocks were created and fenced, fields were seeded with feed grains and hay. A training track was constructed.

In her statement of claim she alleges that although she continues to be engaged in the practice of law and in the management of real properties, a major part of her working day is spent in the operations and activities related to the operation of the farming enterprise. She claims that during the two years in question she was engaged in a business of farming and that her chief source of income in each of those two years was either farming or a combination of farming and some other sources of income. She claims that in 1984 she changed occupational direction by entering in the farming business and from 1985 she has devoted a substantial part of her working life to the operation of the farm: she has made a major investment in time and money in the pursuit of the farming enterprise. She alleges that the losses from her farming enterprise represent start-up costs in the initial stages of her farming business and they ought to be properly deductible in full and not limited to $5,000.

The classic decision in such farming cases is Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, a Supreme Court of Canada decision dated May 31, 1977 wherein Dickson J. (at the time a puisne judge) held that the Income Tax Act envisages three classes of farmers at page 487-88 (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. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

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

3. the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

In the instant case, the plaintiff clearly is not to be considered a class (3) farmer who carried on some farming activities as a hobby. The issue to be resolved is whether or not during the two taxation years in question her chief source of income was farming and some other source of income and thus was a class (1) farmer, or whether she carried on farming as a sideline business and thus was a class (2) farmer. In Moldowan, the learned judge further refined the distinctions between the classes as follows at page 488 (C.T.C. 315, D.T.C. 5216):

The reference in subsection 13(1) [now 31(1)] to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognize that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

Dickson J. provided certain criteria to assist in determining whether or not a source of income of a taxpayer is a “chief source" of income as follows at pages 486 (C.T.C. 314, D.T.C. 5215-16):

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.

In 1985, the plaintiff was working under contract for the Federal Government and earned $105,097 in net professional income. In the year 1986, she earned $65,035 from that same source, plus $503 in investment income and $950 in brokerage fees. During those same two years, her farm losses were $85,516 and $28,541 respectively. A statement of income and losses for the years 1985 to 1993 as filed by the taxpayer at the trial and as reflected in her income tax reports is as follows:

According to her own evidence, which I found to be very forthright and credible, the taxpayer and her husband were already interested in horses when they married in 1971. They owned race horses shortly after marriage and ran them at the local race tracks. At the time, they had to find places to board their horses. Racing horses was not only for pleasure but as an investment and the expectation to win purses.

In 1984, they decided to buy a farm near Ottawa and began developing it, as mentioned earlier. At first, they did not live on the farm and during the two taxation years in question her brother was living there and working there. Gradually, they converted the old dilapidated farmhouse into a very attractive residence wherein the couple and their children moved to live in 1988.

During the two taxation years in question, the taxpayer lived in Ottawa, worked as a lawyer for the government on contract and as a broker and invested in properties as well. She does not recall with precision the number of hours actually spent on the farm during those two years but she would average it at about 22 hours a week. She was involved in the administration of the farm, looking after the paper work and informing herself about the farm business. She attended horse sales and read farm magazines and race horse catalogues. Her husband was more knowledgeable in the training and racing of horses. The ambition of both spouses was to develop one of the finest horse farms in Eastern Ontario. According to their friend Darrell Monroe, an experienced horseman, they have succeeded. He found the farm to be immaculate and the training top notch, when he took his horses there after 1986.

The plaintiff has paid $106,000 for the purchase of the farm and paid for losses sustained by the farming enterprise. Over and above that, the plaintiff has purchased horses and equipment. Clearly, these substantial investments would not have been made without a serious intention of achieving profitability. As appears from the income and loss statement, the farm did not become profitable until the year 1990 when the farm income was $16,308, but her professional income during that year was $91,885.

Obviously, the heavy expenses made during the two taxation years were startup costs and, as stated by Mr. Justice Dickson in the Moldowan case, "a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs". However, in my view, the taxpayer did not change her occupational direction in those two years when her chief source of income still came from her work as a lawyer for the government.

She testified that her hours were flexible but admitted that she spent more time doing legal work than she did with respect to the farm. It is not for me to decide at what stage she changed occupational direction but the year when she left Ottawa and moved to the farm would certainly be an indication of her intentions. And with reference to start-up costs, it must be borne in mind that under paragraph 111(1)c) of the Income Tax Act, restricted farm losses may be deductible.

Consequently, I cannot find that farming or a combination of farming and some other source of income was the taxpayer's chief source of income for the taxation years 1985 and 1986.

It follows that the action must be dismissed with costs.

Appeal dismissed.