Granger v. The Queen, 2001 DTC 386 (TCC)

Date: 20010316

Docket: 98-2968-IT-G

BETWEEN:

ROBERT NORMAN GRANGER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bell, J.T.C.C.

ISSUES:

[1]1.         Whether the Appellant suffered a capital loss of $180,000 in 1989 which would be available in computing the taxable capital gain arising from a sale of shares in his 1995 taxation year.

                2.              Whether the Appellant is subject to the restricted farm loss provided for in subsection 31(1) in the Income Tax Act for his 1994 and 1995 taxation years.

FACTS:

[2]            The Appellant, a lawyer with a Toronto law firm, left that firm in 1994 to work with a mining corporation. He served as temporary president of, and then became Chairman of, that new company. The Appellant testified that 17 days after he left the law firm, the directors of the new company fired him. He testified that he is now a farmer and holds himself out also as a consultant in the mining industry.

[3]            He said that his grandparents owned a farm near Sturgeon Lake and that he spent all his summers there, his grandfather having been a sheep farmer and having grown grains and hay. He stated that he had always wanted to farm.

[4]            He bought land in 1974 in Prince Edward County in Ontario. The purchase price of that land, being $63,500, was paid in four or five years. The land was used for "cash cropping". The Appellant said that he did not want to raise animals, but simply to cash crop. He continued renting it to the person who had rented it before his purchase. The land came together with a house which has been restored. The Appellant testified that there were no horse stables, no country club membership, no tennis courts, no swimming pool extant in connection with the land. He said that they had put lots of effort and money into the house.

[5]            In April, 1975 he bought another 36 acre parcel of land intending to cash crop it and he, in fact, rented it out for cash crops. He stated that in the mid-90s it was seeded to alfalfa and hay for his cattle. In 1983 another purchase of 180 acres was made for the purchase price of $83,000. In 1985 he bought an additional 160 acres for $73,000. That sale was financed by a bank loan, none of which has been paid. It is rented out for cash crop. In 1987 he bought another piece of land for $26,000, bringing his total land holdings to approximately 550 acres. He stated that it is a larger farm holding than most other farms in the area, a number of which consist of approximately 100 acres.

[6]            The Appellant testified that he demolished some buildings but put two buildings into good shape, ending up with approximately 11,000 square feet at approximately $115,000.

[7]            He stated that no usable equipment came with the farm and that he had acquired all equipment presently on the farm. He testified that he learned how to plow and cultivate and won a local plowing contest. He said that all equipment was bought second-hand and that all equipment except large machinery was repaired by him and his son who lived on the farm.

[8]            A list of farm acquisitions subject to capital cost allowance was produced as an exhibit. It showed the acquisition of items in each of the 1985 to 1998 years, the total cost being $180,525.

[9]            Appellant testified that the spring work to prepare for seeding included fertilizing, spraying, cultivating, picking stones, et cetera. He said that he performed a lot of the work himself but that he hired different people for specific jobs such as spraying herbicides and pesticides, having stated that one must retain the services of professionals for that. He said that he operated his own seed drills and other machinery. He further said that he was the farm manager. He stated that the cash crop operations were conducted from the beginning of the farm operation until 1994 at which time they were no longer justified, the price of these commodities having reduced substantially. His research persuaded him to "go up the protein chain". He planted more hay and alfalfa. He testified that the cash crop prices increased after he stopped that aspect of his business and stated that during that subsequent period he likely would have been profitable.

[10]          The Appellant testified that he commenced a cattle operation in 1994. He intended to start with hereford cattle and then cross-breed. He stated that he had good water, gas and fences which he personally had repaired and installed. He also testified that he did nearly all the planting and harvesting of crops such as grain, corn and hay for the cattle. He stated that there were not many options respecting a farm which was bought for one business purpose that went sour and that the cattle operation seemed appropriate.

[11]          The Appellant testified that he was continuously thinking of other ventures and that he learned that the clay soil with limestone base and limestone chips is ideal for growing wine grapes. He stated that different people had bought land and planted grapes, there being no more space for grapes in the Niagara Peninsula. He testified that his daughter, who lives on the farm, had planted grapes in spring of 1999 and was doing well in that business. He testified that the Farm Credit Corporation application was being processed and that the site would be inspected the week following the hearing. He testified that the conduct of cattle and grape operations are compatible, the limestone soil being good for grapes and cattle waste being a natural fertilizer.

[12]          The Appellant has sold none of the land purchased by him and testified that he has no plan at present to sell any land.

[13]          Appellant's counsel filed a schedule showing farming income and other income. It is reproduced as follows:

FARMING INCOME VS. OTHER INCOME

Taxation Year	Gross Revenue (Law)	Net Revenue (Law)	Gross Revenue (Farming)	Net Income/ Loss (Farming)	Other Income
1989	474,196	445,025	29,170	(24,079)	5,272
1990	332,290	306,680	19,532	(38,839)	1,200
1991	232,135	210,835	17,768	(52,411)	813
1992	268,625	242,243	20,802	(30,181)	432
1993	350,125	320,447	19,050	(39,025)	288
1994	351,115	327,364	31,565	(47,776)	225
1995	382,644	351,396	14,713	(50,839)	23,228
1996	-	-	15,583	(32,795)	108,318
1997	-	-	15,220	(43,782)	167,261
1998	-	-	10,140	(32,735)	163,626

[14]          He explained that the law revenue for 1995 was for the fiscal period ended January 31, 1995, most of that having been earned in the eleven months of 1994. He explained that the $108,318 for 1996 was from a new company, the sum of $167,261 for 1997 was from mining financing and the sum of $163,626 in 1998 was from mining and financial consulting.

[15]          Although Appellant's counsel also filed an exhibit showing farm expenses for the years 1989 through 1998 they are reproduced here from 1994 to 1998 only.

FARM EXPENSES

		1994	1995	1996	1997	1998
1	Salaries				3,203	2,200
2	Interest - Real estate mortgage	10,148	12,186	8,834	8,051	9,963
3	Interest - other
4	Property Tax	4,111	4,290	2,888	4,359
5	Machinery (gas etc.)	2,137	2,105	1,445	1,635	2,972
6	Machinery (repairs etc.)	1,357	972	629	1,667	795
7	Motor Vehicle Expenses	585	479	630	1,149	960
8	Fertilizers and lime	5,700	1,416	245
9	Pesticides	5,651	3,272	409	2,443
10	Seeds and Plants	6,807	2,419	1,610	5,636	1,041
11	Livestock	10,000	10,425	10,265	690
12	Feed etc.		1,885	2,094	4,300	2,546
13	Veterinary etc.		303	1,773	2,040	304
14	Repairs (buildings and fences)	4,233	3,591	1,340	2,004	1,231
15	Containers etc.			115
16	Small Tools		450	460	1,171	1,409
17	Insurance (including crops)	2,223	1,166	813	910	900
18	Accounting etc.				380	133
19	Telephone		393	350		604
20	Electricity	707	1,605	1,557	2,024	2,949
21	Heating Fuel				536	634
22	Custom Work etc.	11,711	4,191	283	1,209	2,539
23	Freight and Trucking
24	Clearing Land etc.		325	393	1,125	1,900
25	Drainage etc.
26	Memberships	150	250	257	279	150
27	Miscellaneous	591	966	1,000	5,091
28	CCA	12,962	12,856	10,913	11,536	9,637

[16]          The following, supplementing the Appellant's viva voce evidence, became part of the evidence at the hearing, having been included in the JOINT BOOK OF DOCUMENTS as:

BIOGRAPHICAL MATERIAL

After the war of 1812-14, an ancestor of mine, Sarah Granger, applied to the authorities in Kingston, Ontario for a loyalist land grant because her husband, John, had fought and died for the English during the war. In the hundred years that followed, our family farmed in a number of places in Eastern Ontario: near Bath and Adolphustown and especially near Napanee and Belleville. Years ago, my grandfather and I took a tour of these and other locations where members of our family had lived and farmed in Eastern Ontario and where they were buried.

When I was growing up I used to go to my grandfather's farm each summer and I think it was as a result of that early exposure that I came by my love of the land. My father worked for The Bell Telephone Company and could never afford a farm or I am sure he would have had one.

Shortly after I became a lawyer and as soon as I could afford a down payment, I started looking for a farm in Eastern Ontario which was my area of interest both for the historical reasons just referred to and because the cost of land there was much lower. In 1971 and 1972, my wife and I began looking in earnest and in the fall of 1972, we thought we had purchased a 200 acre property with wonderful bottom land near Thomasburg (north of Belleville) but the deal fell through.

It was on such a farm hunting visit to Hillier Township in Prince Edward County early in 1973 that we saw what is now our Home Farm and purchased it. It had a large barn, drive shed and house, all of which were at least 100 years old. With the stream in spring flood, it looked like water supply would never be a problem - and it hasn't. With its rolling fields, I thought the ground would be early and by and large it is. I have not been disappointed by the selection we made. It was good quality farm land at a price we could afford. There was no speculative value in the land then nor is there any now. It is farm land plain and simple.

ORIGINAL BUSINESS PLAN

and

CHANGE IN PLANS

Because all the properties around the Home Farm were farms themselves, I thought the location was ideal to permit me to add to the size of the farm. I felt this was important because, to my knowledge, very few successful farms operate today on less than 500 acres.

Accordingly, my plans had as the number one priority the need to assemble a larger land package. I planned to rent the land out to the farmer who had been working it (in cash crops) when I bought the Home Farm and then, when I had a sensible holding, to move into the cash crop business on my own behalf.

Like everyone else in farming, I knew I would need serviceable buildings in order to operate - so my second priority was to spend what was necessary to put our buildings back in good condition. Accordingly, after I got started in cash cropping, I began the repair of our barns and drive shed.

While I had been preparing the way for a year or two before I got going, I really entered the cash crop business in earnest in 1985 when I acquired the adjoining farm to the east of the Home Farm (the "Veenstra North Farm"). This farm has three large fields which had been worked in cash crops by the prior owner.

During the years in which I was in cash crops, I became increasingly convinced that going into the cattle business as an addition to my cash crop business was the thing to do. Many Ontario cash crop operators also operated cattle farms. This was because it is widely believed that "going up the protein chain" is the right course to follow in order to overcome the depressed prices paid for cash crops. When grain prices soared in 1995, many of these operators sold their cattle (thereby depressing prices) so that they could retain their grain for sale in the grain markets.

In the period between 1990 and 1994, I came to feel that if prices were going to stay low (as they were) I had to do something different. Moving into cattle was where I was headed - but as an adjunct of my cash crop business. When I lost my job in February 1995, the cash demands for me to stay in both the cash-crop business and the cattle business were too great and I decided to drop out of the cash-crop business. As it turned out, if I had stayed in the business, I would be making money now that soya beans trading at $8.00 to $8.50 U.S. per bushel and wheat and corn both selling at much higher prices than I ever received. Clearly, I would have made money in 1995 and 1996.

A most important point to observe is that most farmers inherit their farms in fully-equipped and operational form from their families. I didn't do this. Everything I did I had to do for myself, from scratch. I had to start modestly because I had to learn as I went and because I had to pay for everything.

LAND HOLDINGS

The land I now own in Hillier Township, Prince Edward County is as follows:-

1.              Home Farm                                                    +/-150 acres            Cost $60,000

                Large Barn                                                                                    1973

                Drive Shed

                Farm House

This property was purchased in March, 1973 and for a number of years was rented to the local farmer who was growing cash crops on it when I purchased it under an arrangement with the previous owner.

Subsequently, in association with another local farmer, I cash cropped most of this farm (and our other lands) until February, 1995 when I went out of the cash crop business.

In 1994, 1 took a crop of hay off two fields on this farm as feed for the cattle I planned to buy later on that year.

In 1995, we took hay off this property as well as mixed grain to feed our cattle through the winter of 1995-96.

In 1996, we moved part of our hereford herd to this property where they wintered and calved out.

We are currently working this farm. Four fields on this property have been seeded down for pasture (about 25 acres), 3 other fields (about 50 acres) have been seeded in hay and two fields (about 20 acres) have been seeded in mixed spring gains. All this work has been done by my son and myself.

2.              Panting South Farm+/- 40 acres                                     Cost $7,000

                Vacant Farm Land                                                              1976

This property was purchased in 1976. Since that time, it has been treated as part of the Main Farm and operated in the same way. In 1995, this acreage was planted in spring grain and undersown in alfalfa and has been operated for hay since that time. The hay crop is exclusively for our beef herd.

3.              Veenstra South Farm+/- 90 acres                                   Cost $35,000

                2 Old Barns                                                                           1983

                Old Drive Shed

This property was purchased in 1983. Shortly after its purchase, it has been operated as a cash crop property along with our other properties. In 1994, we started into the cattle business with 4 hereford cows which we housed in this barn and fed with hay off our properties.

The whole of this property has now been converted to the cattle business.

4.              Veenstra North Farm+/- 150 acres                                 Cost $70,000

                Vacant Farm Land                                                               1985

This property was purchased in 1985 for the cash crop business and operated as such until I withdrew from that business in February, 1995. Since then, the land has been rented out and is being cash cropped. I will continue to rent this property out until I am ready to make the next step in our cattle business when we will be feeding a much larger number of cattle (from100 to 300) and will require a large quantity of green silage in order to do so. It would be this property that we would most readily use for this purpose.

5.              Chase Side Road+/- 115 acres                                         Cost $26,000

                Vacant Farm Land                                                               1989

This property was purchased in 1989 and was operated by me in the cash crop business through the 1994 crop year. In 1995 and 1996 we rented this land to a local cash crop farmer.

Part of this farm is an old pasture - about 40 acres. We asked our tenant to break this ground in 1995 - he agreed to do so but did not do so in either 1995 or 1996. We have once again told him we want this ground broken in 1997. If he does so we will agree to let him farm it for the next several years, otherwise we will attempt to plant the entire farm in hay this spring.

These farms are all on close proximity to each other.

With over 550 acres we have sufficient land to house and feed a beef operation of 300 cattle. It is our near term objective to do so.

EQUIPMENT

Over the years, I have purchased the field equipment which the operations I have been engaged in have needed. Following the purchase of the Home Farm in 1973, I started out by purchasing the equipment needed to keep our lanes and fields free from weeds and underbrush.

To this end, I acquired several tractors, trailers, wagons, chain saws, power saws and a trimmer (Bush Hog), sprayers, pruners, etc. Also needed was equipment to build and maintain fences. To assist in this, I eventually purchased a Case back hoe for use in cleaning out fence bottoms, to ditch and drain our fields, to dig several farm ponds and to perform a vast number of other farm chores.

In order to grow grain and hay, I acquired a haybind, a baler, a rake, a buncher, wagons, hay elevator, grain auger, grain bins, etc. In order to plant these crops, I have acquired several plows, two spring tooth cultivators, two disc cultivators, a seed drill, drags and rollers.

Our move into cattle required us to outfit our barns with year round water which necessitated the installation of electricity in one barn and the installation of a heated water supply system in both. With the back-hoe we were able to dig all the lines ourselves. The move into cattle has required us to construct a great deal of new fencing as well as new corrals at the barns.

By and large we have used materials drawn from other fence bottoms for this purpose and hauled by us to the needed locations. We also had to construct calving pens, bull pens, etc. and to acquire heavy duty metal gates, cattle feeders and water troughs. My son and I (plus some help from time to time from other family members) have done all the work involved ourselves.

In order to move the refuse, I acquired a loader for our 35 Massey in order to clean out under our barns. I acquired a manure spreader to return the manure to our fields and most recently I have acquired a 65 h.p. 4WD Universal tractor capable of keeping up with our current herd of 43 animals which we expect to grow to about 70 head after calving next year, to about 120 head in two years' time and to about 175 after calving in the year 2000. This is set out below under the heading "Cattle Operation to Date and Three Year Business Plan".

At this time, we have barns capable of holding over 15,000 bales of hay. Over the winter just finishing, our herd has consumed about 6,000 bales of hay.

Given our business plan which follows, I believe we have adequate hay storage for our growing herd for at least the next two years before we have to adopt an alternative strategy. We have already decided that we will go to round bales like our competition and will not build storage for additional square bales.

All of the equipment I have purchased has been used. I have invariably acquired it at very good prices after study of what is available in the market and at what price.

CATTLE OPERATION TO DATE

AND

THREE YEAR BUSINESS PLAN

I estimate I have invested between $70,000 and $75,000 in equipment to this date. I estimate that if I was to auction it off, I would recover in the aggregate approximately the same amount for it.

1994

In anticipation of moving into the cattle business, early in 1994 my son and I planted the Panting South Farm in mixed grain and undersowed it with alfalfa, etc. also in the spring of 1994, we began building a barn yard at the small barn on the Veenstra South Farm and a paddock next to it. In the summer we cut, baled and stored hay for winter feed for the cattle we planned to buy later in the year. Also during the summer we took off the grain. Later in the year, we had Ontario Hydro bring power into the barn. We then wired the barn and installed a heated water supply. Finally, late in the year, we took delivery of our first four cows for a cost of $10,000: -

(1) GOR 30C         $2,500

(2) GOR 3Z          $2,500

(3) GOR 5Y          $2,500

(4) JJ2    20B         $2,500

These cows were acquired from George McNeely (c.o.b. as Golden Oak Herefords), Hillier, Ontario.

1995

In 1995, we had two heifer calves RNG 1E and RNG 2E and one bull calf RNG 2E from the above cows and we rebred them.

In 1995, we purchased the following cattle:-

(1) Les 6E (heifer calf)       $850                                              from Harvest Hill Farm

                                                                                                  Newbourg, Ontario

(2) AGH 424E (heifer calf) $750         from Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

(3) GWR AZD (bred yearling) $1,200                                   from Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

(4) GOR 3E (heifer calf)      $7,500         from Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

Total Cost                 $10,350

We subsequently sold a half interest in GOR 3E for $3,750 plus other non-cash consideration.

1996

In 1996, following spring calving (and before any 1996 purchases) our herd consisted of:-

(a) 5 cows

(b) 5 yearling heifers

(c) 1 yearling bull - RNG 2E - Sonic

(d) 2 heifer calves

(e) 3 bull calves

Total 16 head

We bred the 10 females [(a) plus (b)] and subsequently lost 1 heifer calf due to illness.

In 1996, we bought the following hereford cattle:

(1) AOIZ 5D (cow with heifer

calf at side)                                           $925                           from R & D Cotton Farm

                                                                                                  Belleville, Ontario

(2) AOIZ 10D (cow with bull calf

at side)                                                  $1075                         from R & D Cotton Farm

                                                                                                  Belleville, Ontario

(3) KOO 5B (cow)                                  $550                           from Tom Harrison Hereford Sale

                                                                                                  Newbourg, Ontario

(4) KOO 8A (cow)                                 $575                           from Tom Harrison Hereford Sale

                                                                                                  Newbourg, Ontario

(5) unregistered (heifer calf)                $200                           from Tom Harrison Hereford Sale

                                                                                                  Newbourg, Ontario

(6)unregistered (bred heifer)               $570                           from Tom Harrison Hereford Sale

                                                                                                Newbourg, Ontario

(7) unregistered (bred heifer)              $570                           from Tom Harrison Hereford Assn

                                                                                                  Newbourg, Ontario

(8) GOR 2C (cow)                                  $1450                         Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

(9) NFDJ 7E (bred heifer)                     $2700                         Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

(10) HBH 5F (heifer calf)                      $900                           Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

(11) WWDW 116F (heifer calf)          $750                           Quinte Quality Hereford Sale

                                                                                                  Belleville, Ontario

Total Cost                      $11,265

1997

Following calving this spring and the purchase of one cow with calf and one heifer calf for a total of $2,225 our herd consisted of:-

(a) 19* cows

(b) 6 yearling heifers

(c) 2** yearling bulls

(d) 1 steer

(e) 1 Herd Sire - RNG 2E - Sonic

(f) 9 1997 heifer calves

(g) 8 1997 bull calves

(* Two of our yearling heifers aborted late in the fall of 1996 so we only had 16 calves.)

(**To be sold)

Current Total Herd 46 Head

1997 breeding 23 females

In the balance of 1997, I expect to purchase 1 additional cow and 4 yearling heifers.

Projected Total Herd Fall 1997 49 Head

1998

Projected Herd Inventory

Post-calving 1998

(a) 30 cows

(b) 9 yearling heifers

(c) 1 Herd Sire (RNG 2E - Sonic)

(d) 7* yearling bulls

(e) 15 heifer calves

(f) 15 bull calves

(*To be sold)

Total Herd 77 Head (prior to any 1998 acquisitions or sales)

1998 breeding 39 females (prior to any 1998 acquisitions)

In 1998, we expect to purchase 6 yearling heifers and sell 7 yearling bulls.

Projected Total Herd Fall 1998 77 Head

1999

Projected Herd Inventory

Post-calving 1999

(a) 45 cows

(b) 15 yearling heifers

(c) 1 Herd Sire (RNG 2E - Sonic)

(d) 15* yearling bulls

(e) 23 heifer calves

(f) 22 bull calves

(* To be sold)

Total Herd 121 Head (prior to any 1999 acquisitions or sales)

1999 Breeding 60 females

In 1999, I expect to buy 7 yearling heifers and to sell 15 yearling bulls.

Projected Total Herd Fall 1999 113 Head

2000

Projected Herd Inventory

Post-calving 2000

(a) 67 cows

(b) 23 yearling heifers

(c) 1 Herd Sire (RNG 2E - Sonic)

(d) 22* yearling bulls/steers

(e) 34 heifer calves

(f) 33 bull calves

Total Herd 176 Head (prior to any year 200 acquisitions or sales)

2000 Breeding 90 females

(*To be sold)

I think I am going about building this herd and getting a viable cattle business going in an aggressive yet sensible manner. I am doing this with a view to sustainable profit in as short a period as is prudent given the resources available to me.

My actual and projected calvings over 5 years is as follows:-

Year                        Live Calves                            % Increase

1995                                        3

1996                                        5                              66% actual

1997                                        16                            220%actual

-------------------------------------------------------------------

1998                                        30                            87%                   projected

1999                                        45                            50%                   projected

2000                                        67                            49%                   projected

Over the full five years, this is a 94% annual rate of growth in the most vital aspect of any cow-calf operation.

During this early stage of my cow-calf business, it will have to be financed (by me) until it reaches at least a cash-flow break even point. I believe that it will be at that point after two more calving seasons.

It is important that the reader understand where we are going with this business and how one can make money out of it. There are two distinct aspects to our business plan as follows:-

(1)            Polled Hereford Cow-Calf Business

To begin with what I am currently developing is a purebred, registered, polled hereford cow-calf herd. Currently, I have two areas in which to generate revenue:-

(a) the sale of bull calves either (1) in purebred hereford sales or (2) as bull calves to the feedlot business or (3) as fattened steers either to a finisher or directly to the stockyard. I am currently following the #(3) alternative because we can provide feed at low cost and because The Grange is not yet sufficiently established as a hereford producer. We are working at it.

(b) the sale of heifer calves, bred heifers or cows at Hereford sales. The problem with this is that this works directly against the growth of your herd when you sell off your breeding stock. On the other hand, you have to get quality product on the market and develop a reputation as a quality producer if you want to become successful in this market. I will probably sell one or perhaps two animals this year for just this reason. It is my plan to be a substantial player in this very lucrative market by the time our herd meets critical mass.

(2)            Feed Lot Business

As I have shown above, in 1999 and 2000 we will begin to produce larger numbers of cattle to be fattened for market. At this point I propose to purchase weaned grade bull calves to supplement our numbers. We can do this because we have more than adequate acreage to produce the silage needed to feed them at competitive cost. This aspect of our business will experience the greatest growth after the year 2000. 1 propose to keep the purebred herd at between 100 and 150 breeding females for the foreseeable future.

Revenue Projections

In Appendix 1, 1 have laid out my business plan for this and the next three years. If I am not at cash break-even in 1999, 1 certainly will be in 2000. 1 anticipate and intend that net income from farming will become my principal source of income.

CAPITAL COMMITTED AND VALUE

Land

Our farmlands currently total over 550 acres. Viewed simply as agricultural lands, this package would, at $1,000 an acre, have a value of $550,000 for its land value alone - counting nothing for barns, houses, etc. or for fencing and general condition.

If the land is valued at $1,500 an acre, it has a value of $825,000. Because of the recent dramatic increase in prices for corn, wheat, barley and soya beans, agricultural land values have shot up in our area to between $1,500 and $2,000 per workable acre.

Our cost price for all of our properties since 1973 totals about $200,000.

Buildings

It is almost impossible to separate the value of our buildings from the overall value of our land. But the truth is that the land without the buildings on them would have cost almost the same to purchase. I think this is because the principal buyers are established farmers who really only want the land since they already have establishments elsewhere.

After I acquired the Veenstra North Farm in 1985, 1 turned my attention to our outbuildings since you have to have them if you are in the farming business. The buildings on our properties, while old and very much in need of repairs, could either be repaired or replaced.

I clearly could not have acquired replacement buildings which would come close to these for the money I have spent to repair these buildings. Not only do they provide shelter for the herd (they also serve for breeding and calving purposes as well as a lock-up for our bulls) but they store our hay crop and much of our equipment when it is not being used. In addition, the main barn contains a workshop and stores a great deal of farm materials.

Main Barn - Home Farm. The main barn on the Home Farm contains about 6,000 square feet of floor space on two floors. This consists of (1) 3,000 square feet of hay lofts which can easily store 10,000 bales of hay and/or straw; (2) 1,200 square feet of box stalls for calving and for bull pens; and (3) 1,800 square feet used for a welding shop, wood working shop and timber and general storage. This building also has about a 350 square foot lean-to off it for cattle shelter.

Small Barn - Veenstra South Farm. The Small Barn on the Veenstra South Farm contains about 3,000 square feet of floor space on two and one half floors. This consists of a cattle floor of about 1,000 square feet, hay loft for about 4,000 bales and straw lofts for over 2,000 bales. There is also a bull pen, a calving pen and a grain bin with a 6" reinforced cement floor.

Drive Shed - Home Farm. We also have a large drive shed on the Home Farm on the ground floor of which we keep four tractors and a farm truck under cover. We operate a modest vehicle repair shop in this building where we can keep the expensive tools needed for this work under lock and key. On the second floor, we have dry storage for seed and many other items.

Each floor of the drive shed is about 1,200 square feet so that the building has 2,400 square feet inside plus about another 150 square feet under the lean-to we constructed off the back.

The following itemizes the work done on each building:-

The work done on the Main Barn consisted of-

I .             Removal of all old pine siding;

2.              Repairs to foundations;

3.              Replacement of a number of beams and timbers;

4.                                    Removal of all old flooring (approximately 4,000 square feet)

                with new 2" flooring;

5.              Removal of old broken cement floor in cattle barn and

                replacement with 5" cement floor;

6.              Construction of new calving and bull pens;

7.              New siding throughout;

8.              New wiring throughout;

9.              New roofs and steel roofing; and

10.           Construction of a lean-to off the back of the barn, 12'x 35'

                with 5" cement floor.

The work done on the Small Barn consisted of.

1.              Replacement of a number of beams and timbers;

2.              Repairs to siding;

3.              Repairs to flooring;

4.              Repairs to foundation and stone walls;

5.              Repairs to roof and roofing;

6.              Removal of old broken cement floor at front of barn and

                replacement with 6" cement floor;

7.              Construction of new calving and bull pens;

8.              New wiring throughout; and

9.              Construction of new grain bin.

The work done on the Drive Shed consisted of-

I .             Removal of all old pine siding

2.              Repairs to footings;

3.              Replacement of a number of beams and timbers;

4.              Removal of all old wooden flooring (approximately 1,200

                square feet) with new 2" flooring);

5.              Removal of old post and beam plank flooring on ground

                floor and replacement with 5" cement floor;

6.              New pine siding throughout;

7.              New wiring throughout;

8.              New roof - asphalt shingles; and

9.                               Construction of a 7'x 20' lean-to off the back of the drive             shed.

In total, I expended about $114,000 in the work described above, most of which took place in 1986, 1987, 1988 and 1989. I have always felt I got good value for the money I spent. We now have over 11,000 square feet of first class useable space - which will last for another hundred years without much additional cost.

Cattle

As shown above, to December 31, 1996 I had invested $30,565 in cattle and have a herd of 43 registered polled herefords to show for it. At an average price of $2,000 per mature animal, by the end of this year our herd will be worth about $85,000.

Recently I have purchased a cow and calf for $1,550 (the cow is bred back to a great bull) and a bred heifer calf for $725. This brings my investment right up to date to $32,840 and brings my herd up to 46 at the time I write. While I remain a small operator in an overall sense, I am already one of the largest cow/calf operators in the Bay of Quinte area.

Equipment

To date, I have invested approximately $70,000 in equipment.

CAPITAL COMMITTED TO DATE

In summary, I have made the following investments in the farm up to this date:-

Land                                                            $200,000

Buildings                                                      114,000

Cattle                                                               35,000

Equipment                                                      70,000

*Miscellaneous                                             40,000

Total                                                            $459,000

*Includes items such as: fencing, water supplies, ponds, ditching, etc.)

The amount I have expended on my farming operation - while significant - is not large. Most of the successful farmers we are in competition with have investments two or three times as large and in some cases ten times as large.

I envisage having to spend more money to put my operation in a state where it can sustain itself. I will have to spend a modest amount more to bring the herd up to the size I want in the next two or three years. I will also have to spend somewhat more money on larger forage equipment once the herd has 100 breeding females. I will also have to spend something between $10,000 and $20,000 to build an open loafing barn in which to operate our feeder business once we have 50 animals in that side of our business. Finally, I will have to pay off the farm debt and replace it with equity.

With the exception of the last item, I believe I have the resources to meet these capital requirements. The last one will have to wait until I win my lawsuit against the firm that fired me.

PERSONAL TIME AND LABOUR

Even an operation as modest as my farm is nevertheless requires the commitment of a great deal of time and effort. This has never been a problem for me - it has always been like a tonic to work on the farm compared to life as a solicitor. Moreover, the farm has always been the focus of my life and I dare say of my wife's as well since we bought the Home Farm in 1973.

We are now in our 25th year of farming - and propose to keep at it for the rest of our lives.

In my early years of owning it - from 1973 to about 1984 - before I became the "senior" partner of my law firm at the time - I had to devote more time to my legal practice. In 1985, and certainly in 1986, when I went into the cash crop business in earnest (and by the way - turned 50 years of age) I began to reduce the amount of time I spent in Toronto at the law firm and increased the time I spent at the farm.

In the years 1985 to 1990, I was at the farm about 3 days a week plus holidays or about 170 days a year. As we went deeper into the nineties, the time I spent increased so that by 1995 and 1996, 1 have been at the farm over 200 days a year. The details are as follows:

Year                        Days at the Farm                                  % of Year

1993                         170                                                           47%

1994                         185                                                           51%

1995                         230                                                           63%

1996                         210                                                           58%

I expect the division of my time between the farm and elsewhere will continue much as it has in the last two years during the period outlined in the attached business plan. By the end of that period, I expect I will be devoting over 75% of my time to the farm.

APPENDIX "I"

Projected Financial Statements

Year        Revenue                                  Expense

1997

                Purebred sales       $ 4,500     input costs (seed, feed, etc.)               $ 5,000

                Beef sales               4,000                        Taxes, etc.                                              4,000

                Rent                         7,500                        Utilities, etc.                                           1,000

                Misc.                       3,000                        Machinery expenses                            4,000

                                                                                Cattle purchases                   4,500

                                                                                Repairs                                                    1,000

                                                                                Sub-total                                                 19,500

                                                                                Amortization                                          9,000

                                                                *               Bank interest                                          8,000

                Total                        $19,000                                    Total                        36,500

                                                                                                                Loss                        ($17,500)

Year        Revenue                                  Expense

1998

                Purebred sales       $ 7,000     Input costs (seed, feed, etc.)               $ 6,000

                Beef sales               10,000                      Taxes, etc.                                              4,000

                Rent                         7,500                        Utilities, etc.                                           1,000

                Misc.                       3,000                        Machinery expenses                            4,000

                                                                                Cattle purchases                   4,000

                                                                                Repairs                                                    2,000

                                                                                Sub-total                                                 21,000

                                                                                Amortization                                          6,000

                                                                *               Bank interest                                          8,000

                Total                        $27,500                                    Total                        35,000

                                                                                                                Loss                        ($7,500)

Year        Revenue                                  Expense

1999

                Purebred sales       $10,000    Input costs (seed, feed, etc.)               $ 9,000

                Beef sales               39,000                      Taxes, etc.                                              5,000

                Rent                         7,500                        Utilities, etc.                                           1,500

                Misc.                       3,000                        Machinery expenses                            6,000

                                                                                Cattle purchases                   15,250

                                                                                Repairs                                                    3,000

                                                                                                                Sub-total                 39,750

                                                                                Amortization                                          5,500

                                                                *               Bank interest                                          8,000

                Total        $59,500                                                    Total                        53,250

                                                                                                                Profit                       $ 6,250

Year        Revenue Expense

2000

                Purebred sales       $15,000    Input costs (seed, feed, etc.)               $ 8,500

                Beef sales               60,000                      Taxes, etc.                                              5,000

                Rent         2,500                                        Utilities, etc.                                           2,000

                Misc.       5,000                                        Cattle purchases                   22,500

                                                                                Repairs                                                    3,000

                                                                                Transportation                                      2,000

                                                                                                Sub-total                                43,000

                                                                                Amortization                                          7,500

                                                                                Bank interest                                          8,000

                Total        $82,500                                    Total                                        58,500     

                                                                                                Profit                                       $24,000

*The bank debt is owed to The Bank of Nova Scotia and will be repaid a.s.a.p. Accordingly, this item may not exist in certain years depending upon my ability to repay the debt.

[17]          The Appellant testified that he had prepared this around 1997. He also said that matters didn't turn out as projected because of events in his life including the fact that "the tax matter hangs over his head", an obvious reference to the assessments from which appeals have been taken.

[18]          On cross-examination the Appellant said that he and his wife were going to sell the house in Toronto and that she would lend him the money to pay off farm loans.

ANALYSIS AND CONCLUSION:

[19]          In Moldowan v. Her Majesty the Queen, 77 DTC 5213 Dickson, J., at page 5216, said:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 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 carried 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.

(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.

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

[20]          In Nelson Paquette v. Her Majesty the Queen, [2000] 3 C.T.C. 2714 Bowman, J. of this Court referred to his decision in Martin v. Her Majesty the Queen, 96 DTC 1915 and Miller v. Her Majesty the Queen, 2000 DTC 1502. In reference to the Martin case Bowman, J. said:

Mr. Martin's mode of life, commitment of time, commitment of capital, and dedication to farming all point inexorably to the conclusion that Mr. Martin is a full time farmer within Class 1 of the Moldowan categories. Yet the Crown would deny him that on the basis of one factor, the lack of profitability. There are two reasons why this factor cannot determine the result in this case. In the first place although pleaded as a separate allegation, the so-called "no reasonable expectation or profit" point was not pressed by the Crown and no evidence was advanced to substantiate it. I must therefore assume, as Mr. Martin undoubtedly did, that there was a reasonable expectation of profit.

Even more importantly, to permit this factor to prevail against all of the other factors would be to ignore the principles laid down by the Federal Court of Appeal in such cases as Morrissey, Poirier, and Connell, which require that no single factor can be determinative.

[21]          The Appellant is entirely credible. I accept all of his evidence. He left his law practice and turned to his love, farming. He acquired farm lands over a substantial period of time and strove earnestly to make his operations productive. It is unfortunate that his cash crop program was halted because of inadequate monetary return on the brink of commodity prices increasing. He then turned to a cattle operation and, according to his evidence, it is progressing well. He also turned to the seeding and production of grapes for which the soil on his farm was satisfactory. The Appellant has learned, and appears willing to learn, the facets of the various operations conducted and to be conducted by him on the farm. He has spent an enormous number of hours in preparing land for the various operations, fencing fields, et cetera. He is still available, according to his evidence, for mining financing consultation but his devotion of energy and interest is to his farm.

[22]          Bowman, J. also referred to the Federal Court of Appeal's decision in R. v. Donnelly [1998] 1 F.C. 513 and said:

It puts section 31 in its proper perspective. It involved a wealthy doctor who took up raising racehorses, and lost large amounts of money. One needs only to state those facts to realize why he lost. He was, one of those persons who, as Robertson, J.A. said:

earned their income in the city and lost it in the country.

This cannot be said of Mr. Miller whose situation is not even comparable. Dr. Donnelly was a doctor who dabbled in raising racehorses. Mr. Miller is a full time farmer who works at Safeway.

[23]          It is significant to note that the Respondent did not pursue the pleading in the amended Reply to the Notice of Appeal, namely:

... the Appellant did not have a reasonable expectation of profit from the cattle farming operation in the 1995 taxation year.

[24]          The Appellant was so involved, in time, money and effort in his farming operations that farming was not a sideline for him. That rules out Class (2) above. It is clear that the taxpayer was not carrying on some farming activities as a hobby. That rules out Class (3) above. It is equally clear that farming may reasonably be expected to provide the centre of work routine with the potential of providing the bulk of income. The Appellant is, therefore, free of the limitation of section 13(1) in the years under question.

[25]          Accordingly, the appeal respecting the farming operation for the 1994 and 1995 taxation years will succeed.

[26]          As noted above, the Appellant, by concession of the Respondent, will be entitled to a capital loss of $180,000 in 1989 which is available to him in computing his taxable capital gain in 1995.

[27]          The Appellant will be entitled to costs.

Signed at Ottawa, Canada this 16^th day of March, 2001.

"R.D. Bell"

J.T.C.C.