Citation: 2012 TCC 248
Date: 20120712
Docket: 2011‑580(IT)I
BETWEEN:
PETER CURTIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
The issue in these
appeals concerns whether the section 31 restricted farm loss rules of the Income
Tax Act (the “Act”) applied to Mr. Curtis’s 2005 to 2007 farm
losses.
[2]
Farming is a particular
type of activity. At times it may be difficult to discern if one’s activity
constitutes a business. If one’s farming activity does constitute a source of business
income, then losses will be restricted by section 31 of the Act unless
farming, at least in part, constitutes a chief source of income for the
taxpayer that year.
[3]
In this case, the
Respondent has not denied that the taxpayer’s farming activities constituted a
business. Nor has the Respondent disputed the business expenses claimed by the
taxpayer. Thus, the only issue is whether the restricted farm loss rules in
section 31 of the Act apply to Mr. Curtis’s farming losses.
This will be determined by deciding whether or not farming, or a combination of
farming and some other source of income, was his chief source of income in the
years in question.
I. Facts
[4]
Mr. Peter Curtis
grew up in the Cornish countryside. He always loved farming and working with
animals. His parents were not farmers but his neighbours were. When he played
with his friends who lived on nearby farms, he naturally ended up helping out
with farm chores. In his youth, he was a member of the Young Farmers’ Club (“YFC”),
a British equivalent of sorts to 4‑H Clubs. At YFC, he enjoyed
farming demonstrations including one on sheep shearing. His association with
farms started when he was 8 years old and continued until he immigrated to
Canada when he was 16 in 1962. When he was 16 and arrived in Canada, he worked for about a year on a dairy farm in Southern Ontario.
[5]
Mr. Curtis trained
as a mechanic, having apprenticed with Mercedes‑Benz. He worked for a
time as a mechanic at Mazda and Toyota dealerships. In 1976, he started working
with CP Air as a ground equipment worker, and worked as a mechanic on gas
and diesel engines and electric motors. This employment continued full time
under Air Canada until Mr. Curtis retired in 2008.
[6]
In 1994, while employed
full time at Air Canada, he purchased a 230‑acre farm in Dundalk, Ontario. Of this, about 150 acres were arable, though the farm had not been active
and the fields had not been in production for some years. He described it as
rundown at that time. Mr. Curtis and his family lived in a substantial
brick farmhouse on the property.
[7]
The farm was about
100 km from his place of employment at Pearson Airport in Mississauga. He
estimated this took over an hour each way to drive during his workday commutes.
[8]
It was Mr. Curtis’s
intention to run a cow‑calf beef operation. No formal business plan was thought
through or prepared. In his words, it had been his dream since childhood to
have his own farm. He aimed to build it up to have 40 cows and to harvest
crops sufficient to feed them and their calves until sold. He hoped, estimated
or expected that 40 cows would produce about 32 to 35 calves annually
which could be sold for about $700 when raised to about 700 lbs which
would take 12 to 18 months. That is, when fully developed, the gross revenues
from his cow‑calf operations would be in the range from $22,500 to
$24,500. He did not expect to regularly produce excess hay or feed to sell, and
expected that the occasional bumper crop year would yield him a small bonus
revenue.
[9]
He never did build his
operations up to his target level, although in 1996 and 1999 his calf sales
revenues were in or near his desired range.
[10]
He suffered several
unanticipated and unforeseeable setbacks that affected his farm operations. His
old original barns burnt down in 1996 due to an electrical failure. Without
barns or stored feed, he had to liquidate his herd. He rebuilt new barns with
his insurance proceeds.
[11]
Later in 1996 or early
in 1997, he had a substantial accident which left him unable to work on the
farm for a year or longer.
[12]
His cow‑calf
operations only returned to normal after the barns were rebuilt and he had
recovered from his accident. In the interim approximate two years, he was
able to sell more of his crops and his crop sales revenues increased as he had
fewer cattle to feed. His cow‑calf sales resumed in 1999 and had amongst
its best years revenue wise.
[13]
In 2003, the adverse
effects of Mad Cow Disease set in and significantly wiped out the beef market
prices through 2007. Calf prices were a fraction of what they had been previously.
Market prices started to pick up in 2008 and 2009 and are now back to where
they used to be.
[14]
Each year,
Mr. Curtis’s farming operations have resulted in a loss. In 2005, 2006 and
2007, his losses were approximately $15,500, $28,000 and $104,000 respectively.
He stopped operating the farm business in 2010, having concluded that the tax
reassessments effectively precluded him from continuing. He has put his farm
property up for sale and anticipates a capital gain which will exceed his
business losses.
[15]
In addition to his farm
business income, two wind turbines were built on his farm on arable parts of
the land. It is not clear when they were built or when land leases were signed.
They were not operational until 2008. Mr. Curtis had been in discussion
with the operators in the years in question. He now receives rental income of
approximately $18,000 annually from the operation.
[16]
Throughout his farming
years, Mr. Curtis worked full time at Air Canada. His employment
income in the three years in question was a base annual salary of
approximately $60,000, but was significantly higher with overtime and was
approximately $75,000 in 2006 and $100,000 in 2007. During these years, he
worked full-time hours over a four‑day work shift followed by
four days off. His four shifts worked in eight days is the equivalent
of five eight‑hour days worked every seven days in the traditional five‑workday
seven‑day week.
[17]
Mr. Curtis’s
evidence of the time spent working on the farm is not entirely satisfactory. In
his original Canada Revenue Agency (“CRA”) farming questionnaire, he chose not
to estimate the time spent working on the farm where that question was
specifically asked. He simply said that after returning home from work, he
would feed, bed and tend to the animals as necessary, that on weekends he would
at times clean out the barn or walk the fence line, and that he would spend his
entire five‑week vacation haying.
[18]
Mr. Curtis updated
his questionnaire shortly before the trial and it appeared clear from his
testimony that he did this with input from his accountant representative. He
estimated then that he spent 14 hours each day, seven days a week,
for five straight weeks of vacation haying. I believe this to be somewhat
heavy and unreliable based upon his description of what he actually did,
weather requirements, etc. He also estimated that in the spring and fall, he
spent four hours a day five days a week, and eight hours a day
twice a week, for 27 days, tending to the cattle, mucking out the barn,
and attending to the electric fence. In the winter, he estimated 14 hours
per week for 20 weeks tending to the cattle inside the barn and mucking it
out. Based upon his testimony of what he did, especially in cross‑examination,
I suspect his estimates are somewhat heavy and unreliable for the spring
and fall as well. I do not accept as reasonable his explanation that he
must have forgotten his calving time in coming up with his detailed estimates,
or the estimates in testimony of the time he spent at calving. It would be an
odd thing to forget in a cow‑calf business. Also, he had earlier
testified that no one needed to be in attendance for calving, and it often
occurred, while he was away at work or sleeping in bed. I suspect it is
not a coincidence that his new estimates totalled 1,742 hours worked on
the farm compared with 1,739 hours worked at Air Canada (which excludes his significant commute time). As discussed below, I am not
deciding this case based upon the issue of whether the hours actually spent
working on the farm were or were not as estimated. Family farming in Canada is a labour-intensive process, often involving very long hours for little financial
reward. I accept that Mr. Curtis spent many long hours working on his
farm, but on balance I find it would have been significantly less than the
time he spent working at and commuting to and from his Air Canada
employment.
[19]
Mr. Curtis needed
farm equipment to operate the farm, in particular for his haying. He purchased
two tractors ($39,000), a skid steer ($8,000), a hay baler ($18,500), a
hay binder ($5,000), and a hay rake and hay wagon ($1,000) as well as a manure
spreader ($2,500). This totals almost $75,000.
[20]
In addition, he
expensed his farm use of his pickup truck (totalling over $25,000 in the three years
in question), and also made use of an all-terrain vehicle (“ATV”) on the farm.
[21]
His average expenses
included annual interest of approximately $7,500 in the years in question,
insurance of approximately $2,000 to $3,000, property taxes of approximately
$1,500, and electricity approaching $2,000. These four operating costs are
relatively fixed and predictable and alone significantly exceeded his aggregate
farm revenues in the three years in question. These average 2005 through
2007 amounts alone would also have exceeded his cattle sales in all but three
of his 17 years of operations. There were, of course, all of the other
expenses of operating a farm which I need not itemize.
[22]
While the amount of
expenses deducted in computing the losses have not been challenged, I must
observe that Mr. Curtis had difficulty recalling and explaining the
nature, characterization, and amounts involved.
[23]
Mr. Curtis’s tax
return described the farming operation as a partnership with his wife. He
claimed 100% of the losses in the years in question — sometimes described as
99.99%. According to Mr. Curtis, his wife did not ever work on the farm;
she only worked part‑time at her employment. He said she had loaned him
an unspecified amount of money to be used on the farm. Mr. Curtis was the
only witness; his wife did not testify. He described the partnership
nonetheless as fifty‑fifty. He was candid in saying that the losses were
allocated between them based upon tax decisions taken by his tax return
preparer for tax purposes. In the years in question, he claimed all of the
losses. In some of the other years, they were shared fifty-fifty. In any event,
the Respondent does not challenge the existence of the partnership or the
reasonableness of the loss allocation between the partners.
II. Law
[24]
The leading decision on
restricted farm losses is that of the Supreme Court of Canada in Moldowan v.
The Queen
in 1978. In that case, one of the things the Supreme Court of Canada had to
consider was when a source of income would constitute a “chief source” of
income, and what was required for a person’s chief source of income, if not
farming, to be a “combination of farming and some other source of income”.
[25]
On the meaning of “chief
source” of income, the Supreme Court of Canada wrote:
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.
[26]
It is clear in
Mr. Curtis’s case that farming was not his chief source of income and this
argument was not advanced.
[27]
The question to be
decided in Mr. Curtis’s case is whether his chief source of income was a
combination of his farming activities and his Air Canada employment.
[28]
On this issue, the
Supreme Court of Canada in Moldowan wrote:
It is clear that “combination” in s. 13 cannot mean simple
addition of two sources of income for any taxpayer. That would lead to the
result that a taxpayer could combine his farming loss with his most important
other source of income, thereby constituting his chief source. I do not think
s. 13(1) can be properly so construed. Such a construction would mean that
the limitation of the section would never apply and, in every case, the
taxpayer could deduct the full amount of farming losses.
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 carries 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 carries on
some farming activities as a hobby. The losses sustained by such a taxpayer on
his non-business farming are not deductible in any amount.
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.
[Emphasis added.]
[29]
There is some
uncertainty currently regarding the Supreme Court of Canada’s analysis in Moldowan
of the meaning of the phrase combination of farming and other source of income
as a result of the Federal Court of Appeal’s decision in Gunn v. Canada and more
recently in Canada v. Craig.
The Supreme Court of Canada has granted leave to appeal the Craig decision
and that final appeal remains pending. The section 31 issue before the
courts in Gunn and Craig is whether the combination question
necessarily means a combination of sources of income in which farming
predominates.
[30]
The Federal Court of
Appeal in Gunn wrote:
83 In
my view, the combination question should be interpreted to require only an
examination of the cumulative effect of the aggregate of the capital invested
in farming and a second source of income, the aggregate of the income derived
from farming and a second source of income, and the aggregate of the time spent
on farming and on the second source of income, considered in the light of the
taxpayer’s ordinary mode of living, farming history, and future intentions and
expectations. This would avoid the judge-made test that requires farming to be
the predominant element in the combination of farming with the second source of
income, which in my view is a test that cannot stand with subsequent
jurisprudence. It would result in a positive answer to the combination question
if, for example, the taxpayer has invested significant capital in a farming
enterprise, the taxpayer spends virtually all of his or her working time on a
combination of farming and the other principal income earning activity, and the
taxpayer’s day to day activities are a combination of farming and the other
income earning activity, in which the time spent in each is significant.
[31]
In Craig v. The
Queen,
Justice Hershfield in the Tax Court of Canada wrote:
53 The
challenge in Gunn is to assess how material the farming source
contribution must be to the aggregation formula. Other authorities suggest that
the contribution need not be quantitatively substantial (as held in Taylor
v. Canada and Kroeker). However, in my view, it is implicit in Gunn
that the farming source must make a meaningful contribution to the aggregation
formula so as to suggest that farming is or has the potential to be a chief
source.
[Footnotes omitted.]
[32]
The Federal Court of
Appeal in Craig dealt only with the issues of whether the Tax Court
Judge should have applied the Gunn decision as it is arguably
inconsistent with the decision of the Supreme Court of Canada in Moldowan,
and whether the Tax Court Judge misapplied Gunn in Mr. Craig’s
particular facts.
[33]
Regardless of the
outcome of the issue of whether farming must be a predominant and not a
subordinate source of income in a combination of income restricted farm loss
case, I am of the opinion that Mr. Curtis’s appeals cannot succeed.
If it is required that farming income predominate in a combination,
Mr. Curtis fails this test each year. If it is not a requirement that
Mr. Curtis’s farming income predominate, as detailed below, I am
satisfied on facts in evidence and described above that, once the factors
enumerated in Moldowan and in Gunn of reasonable expectation of
income, ordinary mode and habit of work, time spent, capital committed, actual
and potential profitability, ordinary mode of living, farming history, and
future intentions and expectations, are considered and applied, Mr. Curtis
is subject to the restricted farm loss rules in section 31 of the Act
as he is not a person whose chief source of income is farming or whose chief
source of income is from a combination of his farming activities and another
source.
[34]
In order to be part of
one’s chief source of income, profitability remains one of the significant
considerations throughout the Moldowan, Gunn and Craig
analysis of the appellate courts.
[35]
In this case, in
considering the Moldowan and Gunn sideline farming considerations,
it is apparent that Mr. Curtis invested a significant amount of capital in
his farming operations, his mode of living revolved around a farm on which he
lived and involved time spent regularly on his farming activities. All of this,
notwithstanding that his farming history until starting his farm in Dundalk was light. However, Mr. Curtis fails the chief source of income test based
upon intentions and expectations, actual income derived from his activities,
and profitability, actual and potential.
[36]
As quoted above in Moldowan,
the actual and potential profitability of one’s farming activities is relevant
to determining one’s chief source of income and whether a source of income can
be part of a combination of incomes that together are one’s chief source of
income.
[37]
Similarly, in Gunn,
the Federal Court of Appeal turned its mind to the potential to be profitable
in determining one’s chief source of income. In paragraphs 85 and 86,
Justice Sharlow wrote:
85 The
Judge’s answer to the principal question is based on the Moldowan principles
for determining a taxpayer’s chief source of income, combined with the comment
from Morrissey v. Canada (cited above) to the effect that if it is
unlikely that the taxpayer’s farming operations will ever be profitable, notwithstanding
all the time and capital the taxpayer is willing and able to devote to farming,
the conclusion must be that farming is not a chief source of the taxpayer’s
income.
86 In
my view, Morrissey is not an apt precedent for the case of Mr. Gunn.
The statement in Morrissey referred to above was made in the context of
a case in which the taxpayer’s own evidence indicated that he doubted the
future profitability of his farm. Mr. Gunn’s evidence was that he
anticipated that his farm had a potential for profit. The Crown adduced no
evidence to the contrary, and in fact admitted the potential for future profit.
I can find in the record no evidentiary support for the Judge’s conclusion
that Mr. Gunn’s farming operations showed no potential for profit. That is
a sufficient basis for setting aside the Tax Court judgment. However, there is
also a second reason.
[38]
Mr. Curtis testified
that, in his own mind, entirely subjectively, he always thought his farm could
be profitable. However, his testimony overall, in particular as it relates to
his stated intended maximum of 40 cows, clearly made that economically
unattainable notwithstanding his unanticipated setbacks of farm fires, personal
health and Mad Cow Disease. It is clear to me from his evidence that his farming
activities never had a potential in fact to be economically profitable. Further,
his accountant/representative acknowledged it would be difficult to ever be
profitable if one undertakes farm operations without any plans to have more
than 40 cows and selling 32 to 35 calves annually.
[39]
In Craig v. The
Queen,
Hershfield J. also addressed potential profitability:
52 My
reading of this formulation of the combination test is that it requires that
the chief source factors being examined in respect of farming, including
potential profitability, be considered relative to the chief source factors
being examined in respect of the second source being included in the
combination. This is consistent with the directive in Moldowan that
profitability be assessed relatively.
53 The
challenge in Gunn is to assess how material the farming source contribution
must be to the aggregation formula. Other authorities suggest that the
contribution need not be quantitatively substantial (as held in Taylor v.
Canada and Kroeker). However, in my view, it is implicit in Gunn
that the farming source must make a meaningful contribution to the aggregation
formula so as to suggest that farming is or has the potential to be a chief
source.
. . .
72 I am
suggesting then that the test is whether the taxpayer’s mode of operation has
sufficient commitment and commerciality and profit potential to be recognized
as a chief source applying the Moldowan commitment and profitability
criteria. Looking at time spent, capital invested, and a meaningful profit
potential arising from a dedication to profitability, the question of whether
the taxpayer is recognizable as a committed, viable commercial player in a
genuine economic sector of the economy should be readily answered. Such a test
will not put recreational farmers in an advantaged position.
[Footnotes omitted.]
[40]
The Federal Court of
Appeal also addressed the significance of potential profitability in Watt v.
Canada.
In paragraphs 12 and 13 of its decision, the Federal Court of Appeal
wrote:
12 The
Appellant argued the that the [sic] Tax Court Judge erroneously placed
too much emphasis on the actual or potential profitability of the farming
enterprise, and that he placed insufficient emphasis on the other factors
referred to by Dickson, J. in Moldowan. We disagree as he did
consider the other factors. The Tax Court Judge reviewed in some detail the
facts relating to actual and potential profitability and concluded the
Appellant could not reasonably anticipate an income or profit from farming.
13 We
are of the view that the Tax Court Judge properly applied the law on this point
as outlined by this Court in The Queen v. Morrissey:
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.
Leave
to appeal to the Supreme Court of Canada was refused in the Morrissey
case.
[41]
Upon a proper
consideration of the factors and following the analytical framework set out in
section 31 of the Act, the Moldowan decision and the Gunn
decision, and regardless or whether or not Craig is upheld in the
Supreme Court of Canada on the issue of whether one’s farming income has the
potential to predominate, on the facts of this particular case Mr. Curtis’s
appeals must be dismissed for the reasons set out above. One of the significant
considerations is the absence in this case of even potential profitability of
Mr. Curtis’s farming activities. This remains a key consideration to
determining when a source of income can be part of one’s chief source of income
regardless of the ultimate outcome in Craig. Neither Mad Cow Disease nor
the fire nor his injuries caused the unprofitability. It was unprofitable
before these developments and continued to be so thereafter. In his best case
scenario of size of herd, sales and prices, his farming activities could never
be profitable as carried out by him or planned to be carried out by him.
[42]
For these reasons
Mr. Curtis’s appeals for 2005, 2006 and 2007 are dismissed.
Signed at Kelowna, British Columbia, this 12th day of July 2012.
"Patrick Boyle"
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