Nijjar v. The Queen, 90 DTC 6092, [1990] 1 CTC 147 (FCTD)

Pinard, J.: —This is an appeal by the plaintiff from a decision by the Tax Court of Canada which upheld notices of reassessments from the Minister of National Revenue serving to deny this taxpayer the right to deduct the total amount of his farming business losses, limiting said deductions to a maximum of $5,000 per year, pursuant to subsection 31(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended.

This litigation thus involves the plaintiff's right to deduct the total losses of his farming business for taxation years 1979, 1980, 1981 and 1982 for income tax purposes.

In reassessing the plaintiff as he did, the Minister of National Revenue proceeded on the basis that:

(a) during the years 1979 to 1982, inclusive, the plaintiff was a partner in a trucking business and worked full time in that business;

(b) the plaintiff had the following net income from the trucking business:

(c) during the years 1979 to 1982, inclusive, farming was not the center of the plaintiff's work routine;

(d) during the years 1979 to 1982, inclusive, the plaintiff's chief source of income was neither farming nor a combination of farming and some other source of income.

The Law

Subsection 31(1) of the Income Tax Act provides:

31. Loss from farming where chief source of income not farming.—(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 section 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before marking any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

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

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's “restricted farm loss" for the year.

This legislative provision has been the subject of frequent consideration and criticism by the courts over the past few years. The most widely recognized authority on its interpretation however remains a decision of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. In this case, Dickson, J., who has since become Chief Justice, expressed the following opinion, at page 315 (D.T.C. 5216):

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 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 carried 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 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 subsection 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.

Somewhat further on in the same decision, Dickson, J. established as follows, at page 314 (D.T.C. 5215-5216) the required test for determing if the farming business truly constitutes the chief source of income, within the meaning of subsection 31(1) of the Act:

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.

Subsequently, Urie, J., of the Federal Court of Appeal, in The Queen v. Graham, [1985] 2 F.C. 107; [1985] C.T.C. 380; 85 D.T.C. 5256 (at page 112), reiterated these comments of Dickson, J. and added the following in specific reference to the above paragraph:

It would thus appear that the reasonable expectation of profit from the farming operations having been conceded (and such a concession was a proper one having regard to the evidence objectively) the next step in the determination of the "chief source of income" is to consider the taxpayer's "ordinary mode and habit of working” employing tests of the kind suggested by Mr. Justice Dickson in the last two sentences of the quotation, supra. These, of course, involve a weighing of the facts objectively and relatively.

In this latter case, the Federal Court of Appeal, in a majority decision, held that the judge of the Trial Division [1983] C.T.C. 370; 83 D.T.C. 5399, had not erred in law in his two-step application of the test defined by Dickson, J. when he decided that the taxpayer fell into the first category above. The Court of Appeal thus refused to intervene in an issue involving the interpretation of facts.

In a more recent case, Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, Mahoney, J. of the Federal Court of Appeal, speaking for the majority, interpreted the Supreme Court Moldowan decision as follows, at page 242 (D.T.C. 5084):

Moldowan suggests that there may be a number of factors to be considered but we are here concerned only with three: time spent, capital committed and profitability. In defining the test as relative and not one of pure quantum measurement, Moldowan teaches that all three factors are to be weighed. It does not, with respect, merely require that farming be the taxpayer's major preoccupation in terms of available time and capital.

On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

The Facts

As shown by the evidence, the plaintiff is an individual who resides at and owns and operates a farm on some 29.2 acres of land located in the district of Surrey, B.C. The land was purchased by the plaintiff in 1978 when he changed his lifestyle and disposed of his city homes. The purchase was financed by the net proceeds of one of the two homes owned by the plaintiff, that is $40,000, and borrowings of $125,000. The proceeds from the sale of the other home were used to buy a tractor.

The plaintiff was born in India where he obtained experience in farming. At the time of purchase, the land was not in a productive state, being overgrown and containing a substantial number of stumps which required removal and burning. As a matter of fact, the witness P. Singh Gill, a neighbour of the plaintiff, stated that the land “scared” him, that it was “a total disaster”.

Along with his wife and his three sons, the plaintiff has invested a great deal of his labour and made every effort within his means to bring the land into production by plowing, tilling, removing stumps, burning, clearing and draining the soil and finally, in 1982, installing drain tile and drainage ditches.

In 1979, the plaintiff attempted to grow a potato crop. The results were disappointing as were the results of his attempt to grow cauliflower in 1980. The main reason for the failure of potato and cauliflower crops was the poor drainage of the land and consequent wet nature of the soil.

In 1979 and 1980, the plaintiff had sought advice concerning the utilization of his land and was advised that with proper drainage the land would be suitable for the growing of blueberries. The plaintiff continued his farming efforts in 1981, including the planting of strawberries, but was hampered by a lack of funds and consequent inability to make necessary capital expenditures. In 1982, the plaintiff was able to secure the necessary funds and by September of that year had planted eight acres in blueberry bushes. The plaintiff planted a further seven acres of blueberry bushes in 1983. The plaintiff now has 21 acres of blueberry bushes and intends to expand his blueberry production by planting 5 to 6 additional acres during the spring of 1991. In 1985, because his blueberry production would not yet give him any revenue, the plaintiff leased some additional 77 acres of land and since then has produced a variety of vegetables that indeed increased his gross revenue substantially.

It was also established by the evidence of the expert witness J.P. Hill, a blueberry specialist, that the potential production on the plaintiff's 15 acres of blueberries planted in 1982 and 1983 could be estimated at 8,000 lb. acre in 1993 or 1994 (maturity). Mr. Hill stated that he would expect the gross margin for 15 acres of mature planting to be in the area of $35,000 to $45,000. He explained that gross margin is the dollar return after deducting cultural costs and does not include such items as interest on operating and capital loans, taxes and other fixed overhead.

In 1975, the plaintiff entered into a partnership, which continued until 1983, in a trucking business. Subsequently, he continued to drive a truck as an employee. His trucking endeavours produced the following net income (as admitted at trial) during the taxation years under appeal:

During the same taxation years, the plaintiff's farm revenue, expenses and losses, after adjusting for personnel expenses, (also as admitted at trial) were as follows:

Conclusion

I am satisfied on the evidence that, although trucking produced the income during the relevant taxation years, it was farming that had the first call on the plaintiff's time and financial resources. Indeed, because he did not take any holidays, the plaintiff, whose habit was to work long hours, was able to devote, during the summer, some 35 to 40 hours a week to his trucking business, and some additional 60 hours a week to his farming business. In the winter time, while the plaintiff devoted to his trucking business half the time as in the summer, he worked up to 68 hours a week pulling and burning stumps on his farm. With regard to the capital committed to farming, the plaintiff invested first $40,000 and subsequently all his resources, including the income from his trucking activities and his borrowings. Under such circumstances, there is no doubt in my mind that the plaintiff has succeeded in showing a substantial commitment to farming in terms of the time spent and the capital invested.

However, the plaintiff also needed to demonstrate that at the relevant time there was a reasonable expectation of his farming business being significantly profitable. As stated by my colleague Mr. Justice Strayer in a recent decision, Mohl v. Canada [1] : "unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income, then farming will at best be regarded as a ‘side line business’ to which the restriction on losses will apply in accordance with subsection 31(1)." In that context, I consider that the plaintiff, in the present case, has failed to establish profitability.

Indeed, learned counsel for the plaintiff recognized that the only potential profitability here is in relation to the blueberry-growing operation of the plaintiff. It is obvious that proper drainage needed to be installed and blueberry plants had to be put in the soil before any such profitability could be considered. It was not until the fall of 1982 that both those prerequisites were satisfied. Furthermore, by September 1982, the plaintiff had planted only eight acres in blueberry bushes. It is not before 1983 that he had the 15 acres of blueberry bushes that the expert witness Hill indicated were the minimum required for a family size plan, such plan not being capable of significant production before 1993 or 1994. Under such circumstances, I find that it was not before September of 1982 that the plaintiff's farm became a property capable of productive use, and that it was not until the spring of 1983 when a total of 15 acres had been planted that the blueberry farming could be said to have become a probable chief source of income in combination with the plaintiff's profitable trucking activities. I must therefore conclude that the plaintiff has failed to establish the required profitability for him to be allowed to deduct the total losses of his farming business for the relevant taxation years 1979, 1980, 1981 and 1982.

For the foregoing reasons, the plaintiff's action will be dismissed with costs.

Appeal dismissed.