Pollon v. The Queen, 84 DTC 6139, [1984] CTC 131 (FCTD)

Addy, J:—These six cases were ordered to be tried together on common evidence. They involve the assessments for income tax purposes of a business, namely, Westline Chick Sales, owned by June A Pollon for the year 1980 and of another business, namely, Western Hatchery, owned by her husband, Clifford M Pollon for the years 1977, 1978, 1979 and 1980.

In all cases the issue is whether, during the taxation years in question, either one or both of the taxpayers were operating a “farming business” as mentioned in subsection 28(1) of the Income Tax Act and were therefore entitled to compute their income on a cash basis as opposed to an accrual basis.

“Farming” is defined in subsection 248(1) for the purposes of the Income Tax Act as follows:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

“Business” is defined in the same section as follows:

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment. [Emphasis is mine]

The two taxpayers and an expert agrologist testified on behalf of the plaintiffs. No evidence was adduced by the defendant. The facts are undisputed.

The business known as Westline Chick Sales (hereinafter referred to as Westline) was both owned and operated as a sole proprietorship by the wife and Western Hatchery was owned and operated as a sole proprietorship by the husband. Neither of the two plaintiffs had any financial interest in the business of the other.

Westline purchased on a regular basis from an American firm known as Forans Farms, and imported into Canada, day-old baby chicks specially hatched for breeding purposes. Each shipment of chicks consisted of approximately 13 per cent cockerels and 87 per cent pullets. These breeder chicks were delivered to various breeder farms in Canada by trucks owned by Western Hatchery and, on certain rare occasions, by trucks of Forans Farms.

The contracts between Westline and the breeder farms provided that the latter would purchase the pullets while Westline would continue to own the cockerels. In return for the breeder farms undertaking to purchase the pullets, Westline would, on the other hand, undertake to purchase the resulting eggs. There was no profit from the sale of the chicks to the breeder farms as the latter would purchase them from Westline for the same price as Westline paid Forans Farms. When over 70 per cent of the eggs ultimately hatched, the breeder farm would be entitled to a bonus based on the excess over 70 per cent. Westline would, in addition, pay for the veterinary services at the breeder farm at a fixed rate of $50 per flock. In any given month during 1980, Westline had about 15,000 of its cockerels on various breeder farms.

It normally takes 20 to 24 weeks before the pullets at a breeder farm begin to lay fertile eggs. The fertilized eggs which became the property of Westline were picked up from the breeder farms and taken, on behalf of Westline, to Western Hatchery by Western Hatchery trucks.

The eggs arrived in boxes and were kept in a cool room at Western Hatchery for approximately one week. They were then put into plastic trays at room temperature for one day, following which they were put in special trays in an incubator for 17 to 18 days. The incubators maintained the eggs at an even, relatively warm, temperature and at a fixed degree of humidity. The eggs were turned mechanically approximately every hour to simulate as closely as possible the conditions which eggs would experience if being hatched naturally by the mother hen. The maintenance of proper humidity in the incubator is most important to prevent dehydration. The maintenance of proper temperature is required in order to ensure the development of the embryo and the regular hourly rotation or movement of the eggs is necessary in order to prevent the embryo from adhering to the shell. All these operations were mechanized and the proper environment was maintained automatically.

From the incubator the special trays with the eggs were brought into the hatcher room where they were put into a hatcher unit for three or four days, during which time most of the eggs finally hatched. A constant temperature and humidity slightly different from that maintained in the incubator had to be maintained in the hatcher units. When the trays were pulled from the hatcher units, most of the chicks would have hatched a day or so previously; others might have been in the process of hatching and still others might have had to be returned to the hatchery unit for a day or so. The hatched chicks were then put into shallow pans, taken on a conveyor to a special room where they were culled by the hatchery staff and the poor or deformed ones removed. From there the chicks, which were the property of Westline, since the eggs remained its property throughout, were delivered to broiler farms who purchased them from Westline for the broiler market pursuant to previously negotiated contracts of sale.

The role of Western Hatchery can possibly best be described as the providing of mechanical brood hens. Neither Westline nor Western Hatchery had any facilities for feeding or caring for the chicks as they were delivered to the broiler grower farms within 48 hours after hatching. Western Hatchery hatched approximately 17 million eggs for Westline during 1980.

The title to the chicks, which are generally one day old or so on delivery, passes at that time to the broiler farms. After about seven weeks the chicks have reached a sufficient size to be sold as broilers. The prices of the eggs, of the chicks and of the chickens are fixed and set throughout and the quantities of same are controlled by the British Columbia Egg Marketing Board.

Western Hatchery at no time owned either the eggs or the chicks resulting therefrom but was paid for the above described hatching services rendered on the basis of the number of eggs delivered for hatching and not on the basis of the number of chicks hatched. Western Hatchery supplied its services mainly to Westline although it did hatch eggs for other customers. It charged Westline slightly more (ie $2 or $3 a case of 30 dozen eggs) than its other customers for hatching the chicks because it also furnished accounting services for Westline and supplied its trucks to pick up and deliver the eggs and the chicks. Westline possessed no assets whatsoever, with the exception of the eggs which it purchased from time to time and resold and the chicks which it also resold and the cockerels which it owned and which were maintained for it on the breeder farms.

At times, when disease was discovered on a broiler grower farm, the latter, to prevent new chicks from being contaminated, would request Westline to have them vaccinated before delivery. Western Hatchery with its staff would perform this service for Westline on the new-born chicks and would charge it to the latter who, in turn, would charge the broiler farm for the cost of those services.

A well qualified agrologist specializing in the breeding and raising of poultry, one Dr Fitzsimmons, was called on behalf of the plaintiffs. He explained that although originally breeder, hatching and broiler farm operations were carried on on the same farm, the breeder and broiler portions were now required to be completely separated for sanitary purposes and to prevent the spread of disease. He explained the requirements in the hatchery itself of ensuring, for sanitary reasons, that the incubator and hatcher be in completely separate rooms. He also explained in some considerable detail, with the aid of exhibits and slides, the development of the embryo of the fertilized egg, from its first day in the incuba- tor until it finally hatches some three weeks later in the hatcher. He also stressed the importance of a completely controlled environment and of ensuring that the eggs are moved approximately every hour whilst in the incubator.

After testifying that, in the view of agrologists, farming is looked upon as part of the process of growing and producing food, he stated that, although normally each hatchery would handle both of the operations of Westline and of Western Hatchery, he and his fellow agrologists undoubtedly considered both individually as being an integral part of an agricultural undertaking and not as being a food processing operation. He had never heard of a hatchery at any time being referred to as anything other than an agricultural undertaking or farming operation.

Other evidence was adduced on behalf of the plaintiffs. This latter evidence does not directly tend to establish that the activities of Westline or of Western Hatchery were agricultural in nature but, in my view, it is nevertheless relevant as evidence showing how certain government departments, agencies and individuals responsible for dealing with agricultural matters and for administering public funds for such purposes, regarded those activities. I shall summarize this evidence briefly.

(a) With regard to Westline:

Although Westline was not registered as a hatcher, it was granted a permit by the BC Broiler Marketing Board as a chick supplier to grow the registered product. Westline had also been qualified as an agricultural borrower by the Agricultural Credit Branch of BC and was reimbursed by that provincial agency in 1980 the amount of $7,473.63 in interest paid to the Royal Bank on its agricultural loan.

(b) With regard to Western Hatchery:

It was registered as a hatchery by the Poultry Division of the Production and Marketing Branch of the Department of Agriculture of Canada. The land and buildings used in the hatchery operations were assessed by the BC assessment authorities as agricultural property. It was allowed by the B BC government to use in its vehicles specially coloured gas exempt from road tax as an agricultural undertaking. It was exempted as a farming operation from both federal and provincial sales tax for the purchase of equipment and materials required in the business. Pursuant to a change in the Unemployment Insurance Regulations effective January 1, 1983, it was advised in the latter part of 1982 that its employees would be considered agricultural employees and qualified for the special benefits provided for in the new regulations.

It seems clear on reading the definition of farming in section 248(1) quoted at the beginning of these reasons that, since “farming” is defined as including the raising of poultry, together with various other agricultural activities, the enumeration of these matters is not intended to constitute an exhaustive definition and one must look to the common, ordinary and generally accepted meaning of the word as well as to the specific activities detailed in the statute. It follows that, should I not be satisfied that the activities of the taxpayers fell within the meaning of raising poultry, I must still consider whether they fell within the generally accepted meaning of farming.

Counsel for the defendant cited the case of Federal Farms Limited v MNR, [1966] CTC 62; 66 DTC 5068, as authority for the proposition that the court should reject the evidence of Dr Fitzsimmons as to the meaning of farming since he is an expert in the field and it is not the technical definition attributed to the word by an expert which should be adopted by the court in a taxing statute but rather its commonly accepted meaning. I fully agree with the views expressed by my brother Cattanach in the Federal Farms case on this subject. What he said was that in a taxing statute where the technical meaning of a word is in conflict with the common ordinary meaning of that word, then it is the latter meaning which should be applied by the court. He did not state that the evidence of an expert in the field was not to be considered. In the present case, there is no evidence whatsoever that the generally accepted meaning of the word is anything else but that which Dr Fitzsimmons or the other persons, departments and officials associated with agriculture seem to attribute to it.

In so far as Westline is concerned, without repeating all of the activities of that undertaking, the following matters are of particular importance:

1. Mrs Pollon selected the breeding lines required from Forans Farms.

2. She retained title to the cockerels and, as such, participated in the actual production of fertile eggs with the breeder farmers who owned the premises and fed and raised poultry.

3. She assumed the risk and benefits in relation to the number of fertile eggs which would result from the breeding.

4. She took the risk in so far as the actual hatching of those eggs by Western Hatchery was concerned as the latter was paid on the basis of eggs received for hatching and not on the basis of eggs hatched.

5. Since she was paying a fee for the hatching services, she was, in effect, contracting out that aspect of the enterprise.

6. She did not herself take part in the hatching operation but the eggs remained throughout her property and the hatched chicks were hers.

7. The whole of the success of the undertaking of Westline depended on the physical qualities and attributes of the chicks purchased from the United States, the success which the breeding farms attained in breeding the cockerels and the pullets which depended not only on the environment and the feeding of the chicks but on the quality and quantity of production of fertile eggs and finally, the success attained in hatching those eggs into healthy, marketable chicks.

8. With the exception of the original purchase of the chicks, all of the above described activities pertain to the control of the breeding and the biological development of chickens from the egg to a resulting chick. One might even qualify the first one, that is the selection and purchase of the chicks for purposes of breeding which was directed by and for the benefit of the purchaser, as also being a farming activity in the accepted sense of the word.

The fact that Mrs Pollon did not herself physically take part in the hatching operations is, in my view, immaterial in view of the provisions of subsection 28(1) of the Act, the relevant portions of which read as follows:

28.(1) For the purpose of computing the income of a taxpayer for a taxation year from a farming or fishing business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method (in this section referred to as the “cash method”) whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(a) all amounts that

(i) were received in the year, or are deemed by this Act to have been received in the year, in the course of carrying on the business and

(ii) were in payment of or on account of an amount. . .

(b) such amount, if any, as may be specified by the taxpayer in respect of the business in his return of income. ..

minus the aggregate of

(c) all amounts that

(i) were paid in the year. . .

The benefit of an accounting on a cash basis is thus dependent upon the income of the taxpayer being derived from farming’, there is no requirement whatsoever that the taxpayer be personally engaged in any physical sense in the farming activity. Gentlemen or absentee farmers would benefit from the privilege providing the income in issue is derived from farming. For the general principle that farming activities may be contracted out by the taxpayer and the latter will still be considered as engaging in a farming operation, see the decision of Cat- tanach, J in The Queen v Fred Juster, [1973] CTC 410; 73 DTC 5325, affirmed by the Court of Appeal in [1974] CTC 681; 74 DTC 6540.

I therefore find that Westline’s claim is to be allowed.

With regard to the claim of Western Hatchery, several cases were quoted by counsel on the legal effect of mechanical rather than natural means being employed to hatch the eggs from the initial stage of fertilization to a fully developed chick. Most of them, however, are not applicable or are entirely distinguishable from a factual standpoint. There appears to be no decision of a Canadian court of superior jurisdiction on the subject.

There are several decisions of the Tax Review Board and of the former Tax Appeal Board to which I was referred but none of them, with the exception of the case of Fleming Farms v MNR reported in [1977] CTC 2471; 77 DTC at 351, seem to deal directly with the point in issue. With all due respect to the presiding member in that case, I cannot share his view that the provision by artificial or mechanical means of the required conditions to ensure the biological development of an egg into a chicken constitutes manufacturing. The process which takes place within the egg is entirely natural and is not artificial and it is that process which creates the chicken. It is solely the environment which is mechanically or artificially controlled.

There are, on the other hand, two American cases which are quite similar to the present case from a factual standpoint wherein it was held that a hatcher operated by mechanical devices constitutes an agricultural operation.

In the appeal of USA v Chemell et al, 243 Federal Reporter Second Series 944, it was held by the United States Circuit Court of Appeals (5th circuit) that, for taxation purposes, similar hatchery operations qualified the operators as farmers and that the hatcheries were not to be considered as industrial enterprises. Similarly, in the case of Miller Hatchery Inc v Boyer, 1931 Federal Reporter Second Series, the United States Circuit Court of Appeals (8th circuit) held that, although the Fair Labour Standards Act was remedial in nature and had to be strictly interpreted against the plaintiff, the latter, who operated a similar hatchery in a city and not on a farm was, nevertheless, entitled to the benefits of that statute as a hatchery constituted an integral part of agriculture and was a necessary link between the production of two agricultural commodities, namely poultry and eggs. The operators were not to be regarded as having changed the fundamental aspect of the work involved but as having merely altered the surroundings in which the work is being performed. Refer to page 285 of the above report.

Since mechanically operated hatcheries are a very recent development, it is not at all surprising that the activity is not specifically included in the dictionary definitions of farming. More and more today because of numerous and rapidly developing scientific and technological methods and procedures in the field of food production, men and manually controlled implements are being replaced by machinery and scientifically developed technical processes. Where the development of the basic food product still involves the growing process and natural biological changes as opposed to artificially manufactured foods or mere processing, I do not feel that, generally speaking, the activity would be considered by the general public as anything other than agricultural in nature and would, therefore, generally be considered as a farming operation.

In so far as the activity carried out by Western Hatchery is concerned, it seems obvious that should the same operation have been carried out by brood hens rather than machinery, there could be no doubt that the activity would constitute farming as defined in subsection 248(1).

Where one considers that it takes approximately 10 weeks from the time that the hatching process begins until the broiler is ready to be slaughtered for market and that the hatching process takes three weeks or approximately one- third of that time, one must conclude that not only is the hatching process a necessary integral and indispensable part of the development of the broiler but it is also a very substantial part. Western Hatchery also inspected each chick and was responsible for discarding those judged to be unsuitable for raising for the broiler market and it vaccinated the new-born chicks when required.

For the above reasons, I find that the activities carried on by Western Hatchery during the taxation years in question also constituted farming.

The plaintiffs therefore both succeed in their actions and the assessments in issue will be referred back to the Minister of National Revenue for reassessment on the basis that the operations of Westline and Western Hatchery were farming operations and fell within the provisions of subsection 28(1) of the Income Tax Act.

The plaintiffs will be entitled to their costs.