Mott v. The Queen, 88 DTC 6359, [1988] 2 CTC 127 (FCTD)

Denault, J.: —This is an appeal by way of statement of claim, pursuant to subsection 172(2) of the Income Tax Act, from notices of reassessment for the 1978, 1979, 1980 and 1981 taxation years, restricting losses from the plaintiff's farming operation to $5,000 in each of those years (per subsection 31(1) of the Income Tax Act, S.C. 1970-71-72, c.63, as amended, referred to as "The Act").

The appeal also involves the disallowance of “aircraft expenses" in the 1980 and 1981 taxation years, pursuant to paragraph 18(1)(h) of the Act.

The plaintiff is a practising lawyer in Penticton, B.C. In 1978, he acquired a large (approximately 100 acres) apple orchard at Keremeos, B.C. which is roughly 50 miles from his residence at Summerland, B.C. His chief source of income was from his law practice in Penticton, B.C. In order to operate his farm, he purchased machinery, equipment, and in 1980, a private aircraft to commute between his residence and his farm. The plaintiff incurred losses from his farming operations and deducted the following amounts on his

income tax returns: in 1978, $36,179.75; in 1979, $33,722; in 1980, $54,478; and in 1981, $120,043. In calculating his income for 1980 and 1981, the plaintiff also deducted $9,820.67 and $5,317.36 respectively, as aircraft expenses for the "purposes of operating and supervising the farming business”.

The Minister of National Revenue reassessed the plaintiff in respect of his 1978, 1979, 1980 and 1981 taxation years and restricted losses incurred from the farm to $5,000 in each year, in accordance with subsection 31(1) of the Act and disallowed the aircraft expenses in the 1980 and 1981 taxation years on the basis that they were personal expenses. The taxpayer filed notices of objection but was later advised that the notices of reassessment were confirmed.

Plaintiff's Position:

Plaintiff argues that from 1978 he carried on a "business of farming” as defined in subsection 248(1) of the Act and that his chief source of income was from farming, or if not from farming it was from a combination of farming and income from his law practice. Plaintiff maintains that he changed his occupational direction from law to full-time farming and that he has spent considerable time and capital in his farming business. Further, he argues that after acquiring the farm he began to implement plans for the development of the farm, which included clearing and cultivating the land, installing irrigation lines and planting fruit trees. Equipment was purchased and improvements were made to develop a viable operation. Plaintiff adds that he works on the farm (including managerial work) and when required he also employs a person to work on the farm.

Therefore, as plaintiff carried on the business of farming, he argues that he properly deducted the full amount of his losses in each of the 1978, 1979, 1980 and 1981 taxation years (per paragraph 3(d) of the Act).

With respect to aircraft expenses, plaintiff contends that expenses incurred by him on flying his aircraft to and from the farm were for the purposes of operating and supervising the farming business and therefore incurred in connection with his farming business.

Defendant's Position:

Defendant argues that plaintiff's "farming operation” was a secondary pursuit to other activities and "constituted neither the plaintiff's chief source of income nor a chief source of income of the plaintiff in combination with some other source of income, within the meaning of subsection 31(1) of the Income Tax Act".

Defendant also argues that the aircraft expenses incurred by plaintiff in 1980 and 1981 were non-deductible personal or living expenses within the meaning of paragraph 18(1)(h) of the Act.

Farming:

Farming as defined in subsection 248(1) is set out below:

“Farming” — “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;

By operating an orchard, the plaintiff was obviously involved in a farming business.

Subsection 31(1) (Farm Losses)

The first issue basically centres around the interpretation of section 31 of the Act within the fact situation at hand.

The provisions of subsection 31(1) are outlined below:

SEC. 31 Loss from farming where chief sources 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 sections 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 making 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) '/2 of the amount by which the amount determined under subparagraph (i) exceeds $2,5000, 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.

The definitive judgment on farm losses is Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. Mr. Justice Dickson (as he then was) in Moldowan at page 315 (D.T.C. 5216) made the following comments:

. . . 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.

In Hadley v. The Queen, [1985] 1 C.T.C. 62 at 62; 85 D.T.C. 5058 at 5059, Mr. Justice Joyal summarizes these three classifications:

Suffice it to say at this time that with respect to farming losses, a taxpayer may fall within any one of three classifications. In the first classification, a taxpayer is entitled to deduct all his farming losses and in that respect, such farming losses are treated no differently from losses experienced in any other endeavour. The second category is where the taxpayer is limited, in charging his farming losses, to a sum of $5,000 for any one taxation year. The third classification is where a taxpayer is not entitled to deduct any farming losses at all.

Mr. Justice Joyal also gives a summary of the guidelines provided by the Supreme Court of Canada to determine which category a taxpayer fits into:

Section 31 [1] creates no problem for the full-time farmer whose money, time and efforts are exclusively devoted to his farming operations and who has no other source of income. Treatment of farming losses for such a taxpayer is substantially in accordance with general tax rules. Neither does the section create much of a problem when dealing with a taxpayer who makes no pretense of being a farmer but, nevertheless, owns a country place with sufficient acreage to keep a couple of horses, who spends weekends and holidays there and has a neighbouring handyman look after his stock during week days. The public is not in the mood to subsidize the losses which might be experienced by such a taxpayer. Such losses are not business losses. They are merely the costs of maintaining a life-style.

Where the application of section 31 creates problems is in respect of a farming operation which is run as a business but where the taxpayer has other sources of income. Such a taxpayer might fit into the first category articulated by Dickson, J., in which case, any farming losses sustained may be charged against the taxpayer's other income. In the alternative, the taxpayer might fit into the second category in which case, his farming losses are, for tax purposes, limited to $5,000 annually.

The issue of whether a taxpayer fits into the first or second category is essentially a factual one. In this regard, the judgment of the Supreme Court in the Moldowan case provides us with certain tests, guidelines and indicia to assist a trier of facts in making his determination.

For example, Mr. Justice Dickson finds that a taxpayer engaged in farming need not have a "source of income”. It is sufficient, he says, that a taxpayer have a “reasonable expectation of profit”. In effect, an operation which suffers a loss may be found to be a source of income.

His Lordship further states, at page 314 [5215], that "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 of measurement . . . ”

In applying the test of “reasonable expectation of profit” in relation to a chief source of income, Mr. Justice Dickson lists, inter alia, at page 314 [5216], ”. . . the time spent, the capital committed, the profitability both actual and potential . . .” And he says “. . . 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 a similar vein, Mr. Justice Dickson lists, again at page 314 [5215], a number of criteria which might be considered in the determination of a “reasonable expectation of profit”, such as ”. . . the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.” However, "the list is not intended to be exhaustive”, warns His Lordship.

The Moldowan decision has purified the air. It has provided us with legal principles and guidelines which narrow considerably the field of inquiry in determining under which of the three heads enunciated by Mr. Justice Dickson farming losses might be treated. The decision, of course, is also of a nature where both devil and saint may quote it with equal impunity and immunity.

My task now is to review the facts in the present case. At the outset, I stress that the defendant presented no evidence. I also stress that there is no issue here about the plaintiff being regarded as a so-called "hobby farmer"; if so, he would have been disallowed the entire loss. The issue is whether the plaintiff is entitled to deduct for tax purposes the entire amount of farm losses incurred by him in the 1978, 1979, 1980, 1981 taxation years or whether that deductibility should be limited to $5,000, per subsection 31(1) of the Act. The Evidence

Mr. Mott's background

Preston S. Mott was born and raised in Summerland, B.C., an agricultural orchard community in the Okanagan Valley, where his father had purchased a small orchard. To make a living, his father was always engaged in farming while being a minister and later a steam engineer. At the age of 8 — he is now 52 — young Preston earned his first salary picking up prunings in an orchard, and he continued working in the agricultural industry on weekends, holidays, summers until he went to university. He was influenced to take the practice of law because of his uncle who was a lawyer — he later became a judge — and a farmer. Other lawyers in the area owned extensive orchard holdings. After he became a lawyer, the plaintiff practised in Penticton, B.C. He soon became a well-known leader in the para-legal methods and earned a high level of income.

The farm

In 1975, with two friends, Mr. Mott went into the farming business by purchasing under a corporate structure, Kiskana Farms Ltd., a piece of property of 420 acres in the Keremeos area, at about 50 miles from his residence and 35 miles from his office. Out of this parcel of land, approximately 35 acres now owned by the plaintiff had been planted to orchard, in 1971. But the year after, it was purchased by land developers who had to face new legislation called the Agricultural Land Reserve Act. They neglected it so when Kiskana Farms Ltd. acquired it in 1975, they had a lot to do to rejuvenate the plantings. Their purpose in buying this land was to establish a viable farm for each of the three shareholders and to develop and market the balance of the land in 20-acre agricultural parcels. At the time, those were the size of family farm operations and orchards being supported by government programs. They would use the income from the sale of these 20-acre parcels to develop and run the three farms the shareholders would own. The government policy changed and it now supported a policy of keeping large holdings entirely together. In 1978, the shareholders of Kiskana Farms could no longer go ahead with their original business plan so they took out their three farms from the whole of the 420 acres, with the plaintiff taking out 108 acres, 50 acres of which consisted of apple plantings. As previously stated, approximately 35 acres of this parcel of land, about 9,400 trees, had been planted in 1971 by Mr. Rehnish, and in 1976 Kiskana Farms had planted 4,000 more trees on the 15-acre piece of land that was to become Mr. Mott's property. Kiskana Farms had the largest orchard planting in the area of the Okanagan Valley south of Kelowna. Between 1975 and 1978, the company also set up a modern irrigation system. When he took out his orchard of roughly 13,400 trees, the plaintiff continued with that rejuvenation program trying to bring all the plants back into production.

The purchase price of Mr. Mott's farm was $251,160. According to the witness, since they had purchased from their own company, the price paid was approximately half of the current market value. He did not put up any cash for this purchase. He said he had previously contributed $86,160 to Kiskana Farms, and in 1978 he assumed a debt of $165,000.

The plaintiff expected a net income of $2,000 per acre from a mature apple orchard, approximately $100,000 a year.

The farm operations from 1978 to 1981

A summary of the appellant’s income and apple production from his orchard, for the years 1978 to 1986 is set out below:

From 1978, the plaintiff had a lot to do to grow the trees. Unlike almost every other form of agriculture, there is no off-season in orchards. At trial, the witness described in a lengthy way all the operations that had to be done in his orchard, mostly by himself, until the harvest time.

Mr. Mott had strained his financial resources to the limit to raise the money necessary to buy the land, the buildings and the irrigation equipment, so for the first years he made arrangements with his former associate, Mr. Kampe, to use his equipment, his crew of contract labour and to do those functions which he was unable to perform by himself. For the year 1978, he expected that there would be a large enough crop that all of the cost of the operation of the orchard would be covered by the crop return and that there would be enough additional income from the orchard to pay for all the other expense items and the interest on the borrowed money. But he had no orchard revenue for that year, while his expenses ranged $36,179.75. The witness explained the custom in the orchard industry is that payment for a crop grown in one year is received the next year. The plaintiff arranged to sell his crop to Mr. Kampe, and be paid early in the following year as to sell to a packing house would mean a longer wait. He followed this practice during the years 1978, 1979, and 1980. For example, in 1979, the plaintiff was paid $14,500 for the fruit that he had grown in 1978. That was equivalent to the cost of the contract for equipment rental and equipment operator labour. In addition, he had significant costs for equipment and interests. He had then sold approximately 145,800 lbs. of fruit at .10/lb.

When asked if his orchard was capable of producing sufficient income from its crop to pay for the cash outlay of such equipment in 1978, the plaintiff testified: (page 67)

It was my opinion based on the research that I had done before I purchased the orchard, that I would not be able to afford to buy equipment for the first three years and still perform all of the necessary functions, because during that period of time, it was really a start-up period of time. There had been no significant production prior to the time I purchased it because they were very young trees.

The witness explained that apple trees take several years to grow and mature. Part of his orchard was six and one-half years old when he took it over but the damage it had received had effectively reduced it to a young orchard. 1978 was its first production year. The plaintiff did not expect a production from the 15 acres planted in 1976 until about 1980. For these reasons, he estimated that his production would not be sufficient to support the purchase of needed agricultural equipment.

The witness said one can expect a substantial increase in an apple tree production between the fifth and the tenth year, but that it will not reach maturity until it is between 10 and 15 years old. It will then remain a mature producing tree for about 20 years.

Shortly after his acquisition, the plaintiff's research showed he could expect a net income of $4,000 to $5,000 per acre from a good block of properly producing cherry trees. In 1979, he prepared a 10-acre field for the production of cherries, but the cherry orchard was not planted until the spring of 1980. The variety he planted would take a minimum of five years before starting to produce and another seven years before reaching maturity. Facing a shortage of capital, he chose to develop his best land. This unbroken land was easier, and required far less expensive machinery to clear. He never did develop the rest of his land, due to lack of capital. Of the 4,200 cherry trees he now owns, 2,000 were planted in 1980, and the rest in 1983-84.

He expected the cherry trees to bring a net income of $40,000 to $50,000, in addition to the income from his apples. The cherry trees planted in 1980 experienced problems with deer, and although they were still the subject of a constant battle, they were beginning to grow and develop well by the time of the hearing in the fall of 1987.

Since 1978 the plaintiff and his family did most of the manual work. Others would be hired only when absolutely necessary. If the Court is to believe the plaintiff, he was physically present in his orchard at least 250 days of the year. He would spend all his weekends there with his family. During the week he was an early bird who would go to his law office and then spend anywhere from a half hour to four or five hours on the farm, performing inspections and doing whatever else was required. The time spent depended upon the season, and the plaintiff's other duties.

The plaintiff stated that his orchard would normally require two to three full-time labourers in addition to a resident farmer. In 1981, he hired a resident farmer who moved into a mobile home. The plaintiff could not afford to hire more than one permanent labourer because of his shortage of capital. He did as much work by himself as he could but the orchard suffered as a result of this labour shortage. During that same year, he made modifications to his tractor, mainly additional headlights so that he could work at night. In fact, he was spending so much time at his orchard that it was more convenient for him to sleep there in his camper, or even in his office, than at home. His family life suffered from this situation. The plaintiff told the Court that he is now separated from his wife; his divorce will be through in a few days. The witness did not say when and on what grounds he separated from his wife. Surprisingly enough, his wife endorsed the mortgage loan in 1983, so the Court has to presume that the separation did not take place during the material years.

During 1978 and 1979, he devoted much time travelling to his orchard from his home in Summerland or his place of business in Penticton by way of car or truck. Since he was an airplane pilot, he decided that flying from a small landing field adjacent to his property to another one on his orchard would be less time consuming and less expensive. In fact, flying from his home to his orchard would take 17 minutes one way instead of three quarters of an hour. In 1979 he decided to buy a 1955 two-seater Supercub aircraft for $20,000. That expense was found to be reasonable even by his banker, in view of the distance between his home and the orchard.

It was not until the fall of 1980 that the plaintiff purchased the equipment he needed, from his sick friend, at a cost of $44,000.

In 1980, the crop went from a mere 170,000 lbs. to 770,000 lbs. It was his first crop to reach its potential, but a severe hail storm in July destroyed the commercial value of the fruit. The selling price dropped to 2.4 cents/lb. British Columbia has an agricultural insurance program to cover hail and frost damage to crops, but the amount of insurance is gauged on the average pounds of production for the preceding five years. The plaintiff had no previous record of fruit production because his orchard was just emerging and so he was not insured.

The plaintiff attributes his net orchard income losses, from 1978 to 1980, to the previous drought conditions, to the soil condition caused by leaching which was more serious than first anticipated, and to the unexpected frost conditions. The frost was and still remains his major problem but he effectively corrected it by the use of five wind machines. They consist of a car engine mounted on a tower activating a four-bladed propeller 14 feet in diameter. A wind machine blows the warmer air above the six or eight foot ground frost level, so that the buds do not freeze. He had had a severe frost problem in 1984 but because of a poor financial situation, he had to wait until 1987 to buy those wind machines.

The plaintiff experienced losses in 1978 and 1979, so in 1980, the bank required him to change his financing from a demand loan to a mortgage loan. His mortgage loan went up to $260,000. With the interest rates starting to rise significantly, his costs increased.

In 1981, the reduction in production was primarily due to spring frost damage, and to the slowness of the orchard to develop because of the nutrient situation. The orchard expenses increased substantially from $66,000 to $135,000 mainly because of interest and the cost of labour. The 11 per cent interest rate in 1979 had reached a peak of 24 per cent in 1981. He also had to buy a mobile home, more equipment, and had to spend $6,000 to build a deer fence to prevent them from destroying his cherry crop. Nevertheless, during that year, the market was much higher and the plaintiff received 14 cents/Ib. for his crop.

The plaintiff also had a very good crop in 1982. The crop showed an increase of about 200,000 lbs. over the previous year, but again it suffered from frost. In spite of this frost problem, the plaintiff attributes the low market price to a very large production year throughout his trading area. As a result of his farm financial difficulties, his banker forced him to reduce his borrowing in 1982. He sold the only asset with a significant value that would not affect his farming operations, a small lot with a house where his employee stayed. The proceeds of that sale went to reduce his indebtedness to the bank. The employee was relocated to a neighbouring piece of property. As early as 1981, the bank made it a condition of their advancing funds to the plaintiff, that he list his property for sale, in order to determine its market value.

Things got worse. In 1984, the plaintiff had to sell the property for $575,000. The apple production for 1984 was estimated at 1,500,000 Ibs. at 10 cents/lb. However, the purchaser tried unsuccessfully to do his own marketing, and much of his crop was lost. He did not pay the plaintiff who had to take the orchard back in February 1985.

The plaintiff stated that he made a net contribution of about $400,000 to his farm, from his own money. In fact, when one looks at the financing of this farm, it shows that the indebtedness increased from an assumption of debt of $165,000 in 1978, to $264,000 in 1982. This was refinanced for $450,000 in 1983, with the mortgage now covering only the two remaining lots. The plaintiff was so short of capital in 1984 that he had to sell the property, but wound up taking it back in 1985 with the same outstanding loan of $450,000. In the meantime, he had to borrow more money to pay the operating expenses so his total indebtedness to the banks is now in excess of $450,000. Still the property is not listed for sale. The plaintiff stated in cross-examination that under no circumstances, not even if a reasonable offer came along, would he sell the property because, to him, the benefits are very significant and substantial.

His law practice

Throughout all of those years, it was increasingly difficult for him to attend to his law practice as he used to. The witness stated that in 1978, he ceased being involved in the Canadian Bar Association and committees of the Law Society and kept in touch with the profession only as related to his own practice. When he purchased the farm in 1978, his intention was to give up the practice of law by the time he reached 50 years old. This would give the farm six or seven years to develop.

During the material years, the plaintiff's net income from his law practice increased from $30,000 in 1978 to $50,000 in 1979, $60,000 in 1980, and then back to $39,000 in 1981. His living standard did not go up with his income. On the contrary, he had to trade his car for an older one, quit skiing and scuba diving, and sell his four-passenger airplane. Previously, the witness stated he had sold his four-passenger aircraft in 1977. He was not investing in any other income producing sources, and had no art collections or anything of the kind.

In his examination-in-chief, the plaintiff stated that during the material years, law practice profits were distributed equally amongst the partners even though the income was not earned equally. He said he had dropped from being the most productive partner to the fourth most productive, out of eight lawyers, by about 1983, and the income splitting formula was changed. It is clear from cross-examination, however, that until 1982 the plaintiff shared the net practice income with his law partners, except Mr. Smith, who had special status. Except for 1981, the plaintiff's net law practice income gradually increased. After 1983 the partners no longer distributed their net profits on an equal basis. The plaintiff remained the second highest earner in the firm, right below Mr. Smith, and never dropped to the fourth place as he previously stated.

Setbacks

The plaintiff encountered many setbacks which he tried to overcome.

In addition to the rise in the interest rates, a hail storm hit his orchard in July 1980. The plaintiff also had to face a so-called non-anticipated frost condition in the spring of 1981. During that same year, he built a fence around the perimeter of the orchard, facing the mountain, to stop the deer from coming down into the orchard. This was only partially effective so in 1985, he erected an 8-foot high electric fence all around the ten acre orchard so that the deer could not get at the cherry orchard from any direction. This worked for one year but he still had difficulties. He discovered that by putting peanut butter on the wire, the deer would be attracted but would get an incredible shock by licking it with its tongue. They would stay away for a considerable period of time, but this operation had to be repeated every six to eight weeks. The wind machines were very expensive, so the plaintiff could not afford to buy them before spring of 1987. The plaintiff also developed two systems of pruning, one pneumatic and one hydraulic, which considerably reduced the time spent pruning. He also developed a method of mowing the grass and spraying herbicides at the same time.

Revenues and expenses

When one looks at the plaintiff's orchard revenues and expenses, it appears that, except for a $26,000 profit in 1984, there was an uninterrupted succession of losses. In that year, he sold the farm in March and so incurred expenses only for a two month period. Had he had expenses for a full year, even very substantial production and reasonable prices would not have generated a profit.

In 1981, there was no revenue from the crop that had been completely hailed out in 1980. The only revenue was a $15,000 loan from the federal government. In 1978 there was a $30,000 cash outlay. Plaintiff deducted a $5,000 capital cost allowance in both 1978 and 1979. All the other expenses were cash outlays ranging from $66,000 in 1980 to $135,000 in 1981. The plaintiff suffered a loss of $58,000 in 1986 and was expecting another $60,000 loss for 1987. According to Mr. Swales, the expert horticulturist who visited the farm on May 2, 1986 (B-29), the estimated crop potential for 1986, in view of the extent of the frost damage, was approximately 40 per cent of the prefrost potential, i.e. approximately 1,000,000 lbs. Unfortunately, the apple production was only 570,185 lbs. Both the expert and the plaintiff had overestimated the apple production from this orchard.

The statements of orchard operations, beginning in 1978, clearly show that the shortage of capital caused the plaintiff to borrow more money. This increased his interest charges from approximately $14,000 in 1978 to $56,000 in 1981. In 1982, but for the $50,000 interest charge, the plaintiff would have cleared a $6,000 profit. Even now with a fully or almost fully matured orchard, the plaintiff is still suffering a $60,000 loss. The plaintiff expects his orchard to reach its maximum capacity within the next three or four years.

An analysis of the orchard operation shows that the labour costs which were in the $30,000 to $40,000 range from 1981 to 1983 dropped to a mere $1,257 in 1985, and to approximately $12,000 in 1986. This was due to the plaintiff not being able to afford to hire more labour.

Overall, the evidence shows that the plaintiff had both training and experience in farming from his adolescent days. As a farmer, he has been attending seminars and has been receiving periodicals for over ten years. In the practice of law, on the other hand, he has been attending only the basic legal seminars required to keep his insurance in force. When he bought this farm in 1978, his intention was to entirely discontinue the practice of law within ten years, or as soon as the orchard would produce the necessary income to carry itself and provide him with sufficient income. The plaintiff stated that, had his projection worked out, he would not have the interest debt and the income from the farm would be more than adequate to provide for all of the expenses as well as a significant income. He would be practicing law on a reduced basis with a view to getting out of the practice entirely. In brief, the setbacks he had to face with the weather, the unusual rise of interest and the adverse market surpluses were the reasons for his failure. Even though he still gets his income from his law practice, the plaintiff states that his farm demands and receives much more of his time and his capital than his practice.

The plaintiff's banker

G.W. Good, the plaintiff's banker, took the stand to confirm his client's long-term goal to lessen his role as a solicitor and work in agriculture where his real interest was. As a banker who loaned money to the farm, he regularly reviewed the projections. In the last half of the 1970s and the early 1980s, virtually any purchase of land was seen by the bank as being a good investment. Later events, mainly the rise of interest rates to historically unseen levels, proved that wrong. Mr. Good knew Mr. Mott as "one of the few individuals that would work up to 19 hours a day both in the practice and on the orchard”. He confirmed that the bank once required the property to be listed for sale. The money which came in from the sale of a portion of the property was used to reduce the debt. Asked whether the fruit growing in that part of the Okanagan Valley was a risky business, the witness stated that historically, the region "has been a major fruit producer for 50 years with some very highs and some very lows in that particular industry". He also added that historically, apple prices have been particularly volatile due to the proximity of the American states where they get higher yields, and where the fruit growing business is less risky due to warmer air.

The expert witness

The plaintiff's expert witness, horticulturist J.E. Swales, wrote in a letter to Mr. Mott dated September 22, 1982 (P-26) that “it would not be unreasonable to expect, with good cultural practices, an annual production potential of 1,500 boxes (60,000 lbs.) per acre". He continued: “In other orchards with similar tree density it has been demonstrated that higher yields can be obtained but 60,000 lbs. per acre is a reasonable average annual figure". With respect to income per acre for a farm of the plaintiff’s size, he stated that it would not be unrealistic to expect a net income “in the range of $800, in good years, maybe up to a $1,000 per acre". In addition, according to this expert witness, a farmer could expect a net return of $5,000 an acre for cherries. Costs can vary quite considerably from year to year, depending on the weather conditions.

Mr. Swales, as district horticulturist with the B.C. Department of Agriculture, has been familiar with that farm since the time it was renovated by Mr. Rehnish who planted the present plantings. Considering the varieties that were selected, the method of planting and the spacing of the trees, his view is this orchard has good potential. Mr. Swales stated that Mr. Mott's 60-acre orchard ranked as one of the larger orchards in the area. From his own experience, he said a 20 to 30-acre orchard could be more efficiently managed than a 5 to 10-acre property. Mr. Mott's orchard ranked as third or fourth in an organization of 500 orchardists. The location of the orchard is good but is subject to spring frost, a problem that has particularly affected that part of the valley because of a lot of land clearing which allowed cold air from the mountains to come down to the valley. Many orchardists had to install wind machines to help overcome that frost problem. The witness is familiar with damage caused to Mr. Mott's orchard from hail in 1980 and from spring frosts in 1984 to 1986. He is aware that Mr. Mott expended a great deal of effort physical and managerial, to improve his orchard. From his. own point of view, it is not unreasonable to expect a mature orchard to net a profit of $800 to $1,000 an acre, for a 50 to 60-acre plantation.

In cross-examination, the expert spontaneously recognized that the fruit growing business in that part of the Okanagan Valley was quite risky because of the fluctuating weather conditions and market prices. From his calculations, on the basis of a 50-acre mature orchard in full production, a farmer can expect about $40,000 to $50,000 net income per year, provided that the weather and the market prices are good. From his knowledge of Mr. Mott's orchard, the expert stated that the owner could expect the orchard to be fully mature and in full production, eight years after planting. The expert stated that the optimal expectation for cherries of about $5,000 per acre is realistic if one assumes good weather conditions, and no spring frosts, winter freezes, untimely rain, hail or pests. The witness recently visited the plaintiff's orchard, and stated that the crop appeared better than in previous years but still disappointing with an expected quantity of less than 50,000 lbs. per acre.

Analysis

By allowing the plaintiff to deduct only limited losses under subsection 31(1) of the Act, the defendant has excluded the plaintiff from the first class, and concluded that he is a farmer in the second class. The onus is on the plaintiff to establish that on the preponderance of probability the Minister's assessment is wrong.

In my opinion, the plaintiff has failed to meet the test set forward by the Supreme Court of Canada in the Moldowan case.

Obviously, the plaintiff cannot be regarded as a hobby farmer. If he was, the Minister of National Revenue would have disallowed his entire losses. In the present case, the plaintiff testified that his intention was to change his occupational direction to eventually reduce his activities as a lawyer while becoming a farmer. So, in the context of subsection 31(1) of the Act, the real issue is whether this contemplated activity is reasonably expected, on objec tive evidence, to provide him with his chief livelihood, not only in the future, but reasonably soon. Was farming in fact providing the plaintiff with his chief source of income in the years 1978 to 1981, or was it only, at best, a possible source of future income?

Undoubtedly, the plaintiff's devotion to his orchard, his physical work on the farm and his intentions and projections regarding it are considerations that must be taken into account. These are not in dispute. However, these factors alone cannot possibly be decisive of the question of whether this farming operation is the taxpayer's chief source of income. When the shareholders of Kiskana Farms Ltd. decided to split the farm in 1978, the plaintiff expected to break even as soon as 1979 or 1980 but the evidence shows that he suffered substantial losses year after year. With the exception of 1984, when the plaintiff had only two months of operating costs, his orchard produced appreciable and recurring losses, year after year. This includes 1987 by which time it was a mature orchard. Frost and hail kept the quantities of apples produced in those years far below the projected quantity. Revenues also dropped because of bad market prices, especially in 1980. But the frost and other adverse weather conditions as well as the fluctuation [in] prices were foreseeable. The plaintiff's expert, Mr. Swales, knew of the low lying frost condition in this area. Had the plaintiff sought professional advice, he too would have known. The fluctuating market price in the Okanagan Valley was predictable and is an inherent risk in this kind of business. Since the orchard continued to show losses when it should have shown a profit, it was, even in the mid-eighties, neither a chief source of income, nor something that could provide him with a livelihood comparable to that of his law practice.

The plaintiff has testified on his projections and expectations to retire from the law practice and take up farming activity. Unfortunately, I think that he has been much too optimistic in his projections. As Judge Christie said in White v. M.N.R. ([1987] 1 C.T.C. 2178 at 2182; 87 D.T.C. 122 at 125) in a similar cause:

While there has been substantial commitment by the appellant to his farming enterprise, these things must not be lost sight of in determining whether he is entitled to full farming losses. His prescience regarding the profitability of his farming business is unreliable. It appears to be based on subjective hopes rather than on objective expectations as it should be. His projections do not give sufficient weight to the vagaries of farming in respect of both production and marketing.

As Mr. Justice Dickson pointed out in the Moldowan case, the test has to be an objective one rather than a subjective one. There has to be a reasonable expectation on the basis of demonstrable facts and circumstances and not on the basis of fervent hopes and the amount of money and effort put into the project.

In this instance, the evidence fails to show that the plaintiff could reasonably expect to provide the bulk of his income from farming or that farming would become the centre of his activity. As the plaintiff explained, he expected a net income of $2,000 per acre with a full mature orchard, roughly $100,000 for 50 acres, the equivalent of his income from his law practice or even slightly higher. However, the expert Swales said that the optimal figure would be $800 to $1,000 per acre for a figure of $40,000 to $50,000. He further testified that it could be considerably less than that because of adverse weather conditions or poor market conditions. An optimal figure of $5,000 net income per acre for cherries could likewise be considerably less if adverse conditions were to prevail as they have in the past. The plaintiff earns an income in the neighbourhood of $100,000 from his law practice. Realistically, the chances are this orchard will never replace the plaintiff's lucrative law practice. A quantitative analysis of the orchard's income producing potential when viewed realistically, and not hopefully and optimally, shows this orchard will never provide the plaintiff with an income which is in any way near comparable to his income from his law practice.

Another factor bearing on whether or not farming is the taxpayer's chief source of income is the amount of capital contribution required to do everything that had to be done, including hiring labour and performing various tasks. From the evidence, it appears this orchard was under-capitalized in that the bulk of the money that went into it was borrowed money which carried with it an enormous interest cost of about $50,000. The plaintiff had to borrow in order to operate his orchard. He then could not afford to employ and therefore did not employ enough labour to get all the work done. As a result, some of the work that was required to be done remained undone. By his own estimation, two or three permanent resident labourers were required for the orchard to give it full justice, but he could not afford to hire these. He hired only one and he of course personally tried to do all the work himself while pursuing his law practice.

The work contribution that the taxpayer made to his farm is not in dispute. The evidence shows that he spent a lot of time working on his farm. The question, however, is not whether a taxpayer spends most of his available time farming, but whether the amount of time that he does spend on the farm is providing him with his chief source of income. In this case, the answer is obviously no. Further, it cannot be said he has changed his occupational direction in the years in question. He has neither abandoned his law practice, nor used it as a sideline in order to become a farmer. Quite the converse, his law practice was his livelihood, and without it neither he nor his orchard would have survived.

Aircraft expenses

The Court now turns to the deductibility of the aircraft expenses for the years 1980 and 1981. The plaintiff charged 75 per cent of the operating expenses of the aircraft as a deduction in his income. The Minister disallowed $9,820.67 in 1980 and $5,317.36 in 1981. The plaintiff purchased the aircraft in the fall of 1979 for the specific purposes of travelling more quickly and efficiently to and from his orchard. He used it until 1983 to commute from his residence (Summerland) or his office (Penticton) to his orchard (Keremeos). The years 1982 and 1983 are not in dispute since on the advice of his accountant he did not claim these expenses as deductions in those years, even though he still owns and uses the aircraft. In the material years, particularly in 1981, the plaintiff claimed $5,317.36 in his statement or orchard operations but they were entirely disallowed by the Minister.

According to subsection 18(1) of the Act, no expense is deductible unless it is incurred for the purpose of gaining or producing income from the business. It is now well established that travelling expenses incurred for the purpose of commuting between one's place of residence and his place of business is not deductible (Henry v. M.N.R. [1972] C.T.C. 33; 72 D.T.C. 6005 (S.C.C.)). So to the extent that the aircraft expenses were incurred for the purposes of travelling from the plaintiff's home in Sumerland, B.C. to his orchard, they clearly fall in the class of commuting expenses to go to a place of business and therefore are not deductible.

Moreover, the expenses of travelling between one's residence and his business en route to another business, and back, are also not deductible (Sargent v. Barnes, [1978] 1 W.L.R. 823; [1978] 2 All E.R. 737). Consequently, the aircraft expenses incurred for purposes of travelling between the plaintiff's place of business, namely his law practice in Penticton and his other place of business, namely the farm, are also not deductible because it involved commuting between two different businesses and the residence.

For these reasons, the aircraft expenses were correctly disallowed by the Minister and the plaintiff's action must be dismissed.

Appeal dismissed.