Dand Auto Parts Ltd. v. The Queen, 90 DTC 6533, [1990] 2 CTC 385 (FCTD)

Teitelbaum, J.:—Counsel for the plaintiffs and defendant have made a request thai both cases be heard together on common evidence. I granted this request and the herein judgment shall apply to both files.

With respect to the plaintiff known as A.J. Dand Ltd. (hereinafter referred to as AJDL) this is an appeal from reassessments of tax for its 1980 and 1981 taxation years. In these reassessments the Minister of National Revenue (M.N.R.):

(a) restricted losses incurred from the horse breeding farm to $5,000 for each of the years in question, namely 1980 and 1981 pursuant to subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) ("I.T.A.");

(b) disallowed the capital cost allowance claimed in respect of a building located on the farm property (in the 1980 taxation year); and

(c) included in Dand Ltd.'s income for its 1981 taxation year the sum of $29,300 as a taxable capital gain on the disposal of an investment in Travelsave, a partnership formed under the laws of Ontario.

With respect to the plaintiff known as Dand Auto Parts Ltd. (hereinafter referred to as DAPL), this is, as well, an appeal from reassessments of tax for its 1980 and 1981 taxation years and from assessments of tax for its 1982 taxation year. In these reassessments (including the assessment for the 1982 taxation year) the M.N.R.:

(a) restricted losses incurred from the horse breeding farm (the same farm mentioned above) to $5,000 for each taxation year (1980, 1981 and 1982) pursuant to subsection 31(1) of the I.T.A.;

(b) disallowed the capital cost allowance claimed in respect of a building located on the farm property (for the 1980, 1981 and 1982 taxation years);

(c) disallowed the non-capital losses claimed in the 1980 and 1981 taxation years; and

(d) disallowed the deduction for legal fees claimed in the 1981 taxation year.

At the commencement of the hearing, I was informed by counsel that the only issue to be decided is to determine whether AJDL and DAPL were farming or farming in combination with something else (as its principal source of income). It is agreed that if I find that the plaintiffs’ chief source of income was farming, in the taxation years in issue, then plaintiffs succeed and are entitled to deduct their full expenses.

The quantum of losses claimed by the plaintiff are agreed to. With regard to the plaintiff AJDL the loss agreed to for 1980 is the sum of $27,798 and for 1981, the agreed loss is $8,460. The farm losses for DAPL for 1980, 1981 and 1982 are respectively $108,262, $348,198 and $713,159.

At the commencement of the hearing, the parties filed an agreed partial statement of facts which states,

(a) the log cabin, located on the Alberta farm, was not used in the business of farming in the plaintiff's 1980 taxation year,

(b) the plaintiff did not incur a business loss of $58,600 in relation to Travelsave Inc. in its 1980 taxation year,

(c) the plaintiff did not realize a taxable capital gain of $29,300 in relation to Travelsave Inc. in its 1981 taxation year.

as well as a consent to judgment in relation to all of the issues with the exception of the issue as to whether or not the plaintiffs’ chief source of income was, for the relevant years, farming or a combination of farming and some other source of income within the meaning of subsection 31(1) of the Income Tax Act (I.T.A.).

Plaintiffs have filed two books of documentary evidence and with the exception of Exhibits P-7 and 14, the defendant made no objection to the filing of the documents as exhibits. Copies in lieu of originals were allowed to be filed. The two volumes of documentary evidence were filed by consent and contain Exhibits P-1 to P-34. In addition, plaintiffs filed Exhibit P-35, a letter dated July 3, 1984 addressed to a Ron Roberts of Canadian Tire Corp, sent by a D.R. Beaton of the firm of Beaton & Wills, Exhibit P-36, a letter dated December 5, 1985 addressed to a Richard Woodside of Verchere, Noël and Eddy emanating from R.B. Roberts of Canadian Tire Corp. and Exhibit P-37, a Certificate of Foal Registration of a colt named Northern Horizon. Many other exhibits were filed by plaintiffs during the course of the hearing.

Counsel for defendant objected to the production of Exhibits P-7 and 14 on the ground that these two exhibits are letters written by two individuals who will not be present to give evidence as to the statements contained in the letters.

After verifying with counsel for plaintiffs and after superficially looking at the two letters, I maintained the objection and did not allow the production, as exhibits, of the two letters. The letters contained statements as to facts and the author of the statements would not be made available for cross-examination. I ruled this evidence to be inadmissible.

Defendant also filed two grey covered books as its documentary evidence. Exhibit D-1 is the documentary evidence for DAPL and Exhibit D-2 is for AJDL. Each exhibit contains a number of tabs, each tab being part of Exhibits D-1 or D-2.

The plaintiffs called, as their witnesses, Allan J. Dand, Douglas William Inglis, Richard B. Wills, Adele Dand and, as an expert witness, Michel Richard Milburn. The defendant did not call any witnesses. To better understand this “farm loss” case, I believe it essential to review as much as necessary the evidence of each witness.

Facts

The present case involves two separate plaintiffs AJDL and DAPL. The common element between these two plaintiffs is one Allan J. Dand, the majority (98 per cent) shareholder in both companies.

AJDL is a Canadian corporation with its head office in Dartmouth, Nova Scotia. AJDL trades as a Canadian Tire corporate store in Dartmouth, Nova Scotia. Its fiscal year end is January 31.

DAPL is the continuation of W.C. Harding Ltd. whose Head Office is in Dartmouth, Nova Scotia (hereinafter referred to as "Harding Ltd."). Harding Ltd. operated a Canadian Tire corporate associate store in Port Elgin, Ontario from November 20, 1975 to December 6, 1978. Harding Ltd.'s corporate year end is December 31. Harding Ltd.'s operating assets were sold on December 6, 1978; however, the sale transaction was not finalized until January 25, 1979. On July 15, 1980, the shares of Harding Ltd. were acquired by Allan J. Dand, Adele Dand, Allan J. Dand's wife, and Douglas Inglis. On July 31, 1980 Harding Ltd. purchased the operating assets of a Canadian Tire corporate associate store in Dartmouth, Nova Scotia. It was not until October 21, 1980 that Harding Ltd. was continued under the Canadian Business Corporation Act, S.C. 1974-75-76, c. 33 (am. 1978-79, c. 19) as Dand Auto Parts Ltd. (DAPL).

It was in the spring of 1979 that AJDL acquired property near Calgary, Alberta for the purpose of establishing a horse breeding farm. During the tax years in issue AJDL was carrying on a retail business, namely, the operation of a Canadian Tire corporate associate store in Dartmouth, Nova Scotia. The land purchased by AJDL for the purpose of establishing a horse breeding farm was made up of 640 acres, two-thirds of which was allocated for crop production and one-third for buildings, paddocks and pasture for livestock.

It was in August 1980 that the farm and the Canadian Tire corporate associate store business were transferred to AJDL which carried on both operations after August 1980.

The Evidence

Allan J. Dand, who is the principal shareholder since he owns 98 per cent of the issued shares of the plaintiffs, gave as his occupation when being sworn in, farmer and storekeeper. He was born in Swift Current, Saskatchewan, married to Adele Irene Demman and has two children. His formal education consists of elementary and high school.

With regard to AJDL, he has been a shareholder of the company since May 29, 1972 and always owned 98 per cent of the issued shares together with his wife, who owned one per cent and Douglas William Inglis who owned one per cent of the issued shares (as will be seen, Inglis is the Canadian Tire corporate store manager). Mr. and Mrs. Dand have been directors of AJDL since May 1972. Inglis became a director of AJDL on November 8, 1983.

Allan J. Dand purchased, on or about May 30, 1980, all of the outstanding and issued shares of W.C. Harding Ltd. which was, at that time a company that was not operating and had no assets. The shareholders of W.C. Harding Ltd., after the purchase, were Allan J. Dand 98 per cent, Adele Dand one per cent and Douglas Inglis one per cent. W.C. Harding Ltd. became Dand Auto Parts Ltd. (DAPL) (Exhibit P-4) and has operated as such since that time. The company's financial and taxation year end is December 31. On August 1, 1980, AJDL transferred to DAPL the store and the farm business and from August 1st, 1980, DAPL carried on, and still carries on, both the Canadian Tire store business and the farm.

According to Allan Dand, Douglas Inglis is the manager of the Canadian Tire store. He is responsible for the general day to day operation of the store. Allan Dand and his wife Adele are in charge of the organizational work of both the store and the farm. As will be seen, Adele Dand may have been secretary and/or treasurer of the company but she really had little knowledge of the operation of the company. It was Allan J. Dand who was in charge. Mrs. Dand may have been receiving a salary as being a director and secretary-treasurer of the company as well as being an employee, but I believe she had little or almost nothing to do with the operation of the store or the farm. I am satisfied that Allan J. Dand made all major decisions himself. When asked as to who ran the organizations, he replied he did all by himself “with my wife’s continued help". According to Dand, his wife was to look after the books and to "act as a sounding board”. As I have stated, I believe she had little or nothing to do with the books of either the store or the farm but probably did “act as a sounding board” to her husband.

Dand stated he became interested in a ranch as a boy. He was and still is interested in outdoor physical activity and always had an interest in animals. He stated he wanted "to be my own man, have my own business, private enterprise, freedom, prosperity and following a basic desire that would keep me happy in my daily work routine". He states he became interested in owning and operating a ranch when he lived in western Canada because of his exposure to people in the horse business. He selected to be a farmer, he states, because he could obtain from this his desired lifestyle. This desire to own a ranch, to make it his “prime objective” was formulated, Allan Dand states, when "I was broke”.

Dand stated, at first, he was raised in the wheat farming business, that he considered working on a ranch but did not do so, he states he did not want "to be a poor cowboy”. He later stated his father had a fox farm and auto wrecking business. In his examination on discovery of January 10, 1986, he stated he was raised on a fox farm.

Allan Dand gave evidence that he spent every possible weekend with animals. He took a business approach to having a farm because he believed the farm had to be profitable “it had to be economically viable”. In order to obtain this goal, Dand alleges he pursued the retail business to make money to buy a farm. He states that after making sufficient moneys in his farm business, whatever "sufficient" may mean, he would dissolve the business from which he made the money to buy the farm and support its losses. To the last day of the hearing of this case, DAPL was still the owner of the "other business”, the Canadian Tire store in Dartmouth, Nova Scotia and which business continued to be most successful from a profit viewpoint.

After listening to Dand, I have a great deal of difficulty in believing that he only wanted to be a farmer and that the only reason for his going into the retail business was to make sufficient funds to purchase and operate a horse farm. It may be true that he loved to be outdoors, do physical work, to be around animals but I believe, and the evidence of same follows, that what Dand wanted was to make sufficient money to live what he would call a normal lifestyle. He eventually went into a business, a Canadian Tire associate store and due to his hard work, good organizational skills he began to earn more money than his daily needs "to live normally", he or the corporation is now earning, net before taxes, more than one million dollars per year. Having this money, he decided to go into the farm business so that, he believed, his farm losses would be deducted from the profits earned by the Canadian Tire store.

In any event, Allan Dand, after finishing high school, worked for his father's fox farming and auto wrecking business in Swift Current, Saskatchewan. He left his father's employ one year later, 1954, went to Regina, applied for a job as a game warden, could not get this job, and went to work for F.W. Woolworth's with which company he remained for 18 years.

In 1958, Dand went to Edmonton, Alberta and met, he states for the first time Allan Rodgers who, at that time was working on a ranch just outside of Edmonton raising Appaloosa horses. He claims that he visited Rodgers every weekend while living in Edmonton, where he "helped on the farm and learned about business”. I assume what he means is he learned about the "horse business”. Allan Rodgers is a relative of Dand, Rodgers married his aunt.

According to Dand, Rodgers was well thought of in the horse business, he won awards for champion mares working with Arabian horses.

It seems that Allan Rodger's expertise was with Arabian horses. His expertise, at the time Dand was visiting, was negligible when it came to thoroughbred horses. It was much later that Rodgers acquired a thoroughbred race horse and began to gain some knowledge of thoroughbred horses.

In 1958 Dand became disenchanted with his work at Woolworth's and he decided to visit a vocational psychologist where he was told that he was unsuited for his present job (at Woolworth's) and that the recommendation was that he obtain "outdoor" employment involving physical activity and working with animals. No evidence, other than Dand's testimony, was given to corroborate this fact. After receiving this advice, Dand applied with the Canadian wildlife services for work but was told he needed to complete seven more years of schooling (university) to have a “slight” chance at employment. This was in 1960 or 1961, some two years after visiting the vocational psychologist.

After first meeting Allan Rodgers in 1958, Dand kept visiting Rodgers for many years. It was Rodgers who initiated Dand to the horse breeding business, that is to the management of a horse farm. It appears that during the years 1958, 1959 and 1960 and possibly 1961 to 1964, when Dand moved to Ontario, Dand would visit with Rodgers at every opportunity.

In 1964 Dand moved to Toronto, Ontario to manage a store for Woolworth's. He then moved to Windsor, Ontario. Whenever he had holidays Dand states he would visit with Rodgers. His two-week vacation would be spent three days hunting and the balance of the time he would "work" on the ranch. Mrs. Dand would join him on most occasions. During these trips, he would visit other farms. In 1964 Rodgers was raising Arabian horses in British Columbia but would take Dand to visit thoroughbred farms, especially during foaling season. Dand would also spend time at horse sales where he would look at "horse's confirmation and pedigree". The "horse's confirmation” is its quality and physical condition. In evaluating horses one must, according to Dand, look at its confirmation, pedigree, produce record, what the mare has produced by way of foals and track record, the winning of her first dam, second dam, mother, grandmother and all yearlings she has foaled.

It appears that Dand was also interested in cattle. In the 1960s he wrote to the government of British Columbia and got information to raise cattle in British Columbia and found out that he was unable to economically purchase a cattle farm. From 1959 to 1972 Dand would visit Rodgers and would visit horse farms every year.

In 1971, after having saved $40,000, Dand decided to leave Woolworth's (Woolco). As Dand states, “because I needed more money to fulfil my objective" he looked around to find a business to make the most money possible and it was then he decided on a Canadian Tire store and he applied to obtain a store. Dand kept repeating, as if to convince me, that his intent was to make money to pursue his original objective to buy a farm and to sell the store regardless of how profitable the store was as he was unhappy in his work environment. I would add that this is 1990 and Dand still controls the company that owns the financially successful Canadian Tire store. At the hearing, Dand explained he could not have a "store" and farm to have the lifestyle he wanted. He waited before moving to his farm until the farm would be paid for and that he would be relieved of any financial problems, that is, the farm would be profitable to give him "what I need and want out of life”.

Dand states that he would be unable to keep the store and work the farm, therefore it was always his intention to work the farm after it was paid for and it could give him the security above mentioned. He states he would not be allowed to keep both the farm and store because Canadian Tire Corporation does not allow “absentee” owners and dealers. If this was the case and he supposedly spent many months of each year on the farm, how is it that he is allowed and continues to operate the Canadian Tire corporate associate store?

In 1972 Dand became a dealer of a Canadian Tire Store (Exhibit P-5 is an agreement for the 1983 year between Canadian Tire Corporation Ltd. and A.J. Dand). Dand states that the agreement of 1972 was similar to the one in 1983. The agreement was always a personal agreement. On January 3, 1983, A.J. Dand assigned all of his rights in the Canadian Tire Corporation agreement to Dand Auto Parts Ltd. (Exhibit P-5, page 33)

In 1972, the cost of the store purchase was approximately $150,000. He paid $40,000 as a down payment and borrowed the balance from a bank which bank loan was guaranteed by Canadian Tire Corporation. This store, the first one owned by Dand was in Chatham, New Brunswick. Dand operated this store in November 1972. The store was Dand's source of income for 1972 and 1973. In that this store was small, a larger store was built in Chatham, New Brunswick, which Dand kept to September 22, 1976. On October 4, 1976, AJDL which was the owner of the store in Chatham purchased the operating assets of a Dartmouth, Nova Scotia store operated by Forbes Supplies Ltd. From February 1,1976 to September 22, 1976, approximately seven months, AJDL operated the store in Chatham and sold merchandise and services for $1,412,039 and remained with net earnings of $129,951 before management salaries, changeover costs, deferred profit sharing and income taxes (Exhibit 19, page 148). The Dartmouth store which operated from October 4,1976 to January 31,1977 had sales of $1,680,731 with a loss of $15,443. The store in Dartmouth was purchased for $1,700,000 with a down payment of $127,000 or $137,000 and the balance was financed by two bank loans. In the 1976-77 year, Dand expanded the store size and purchased more inventory. In April 1977, the new enlarged store in Dartmouth officially opened.

Between 1972 and 1976, Dand was unable to go west to see Rodgers as he was busy with his business. I presume he was busy setting it up and ensuring that it would bring sufficient profits for him. In 1977, Dand states he resumed his trips to Rodgers where he stayed for a period of two weeks. During this trip, he helped Rodgers on the ranch, went to the Vancouver horse sale, visited during a one-day period four or five thoroughbred operations and became very impressed with the prices for yearlings, a horse that is approximately 18 months old and trained to run at a race track when two years old. He also took note of the sale of weanlings, current year foals. Dand states that from 1954 to 1972 he usually took his vacation in the fall to enable him to attend the sales of foals.

Dand states that he took the Dartmouth store, by January 31, 1978, from a loss position to having a substantial profit and this after taking for himself and his wife a $75,000 management salary (Exhibit P- 19, page 164).

Seeing himself making a substantial profit, by the year-end January 31, 1978, the store had sales of $5,580,691, Dand states he decided in 1978 to buy a farm. As Dand states ”. . . with the business coming along and having made enough money, I felt confident I would put [my] long desired plan into effect”. In the fall of 1978, Dand went out west to acquire a farm. He met with Rodgers, took in the thoroughbred horse sale and made a basic agreement with Rodgers to manage the ranch which Dand would purchase. In the spring of 1979, May 1, 1979, Dand purchased a farm for $456,525 (Tab 6, page 42). He had considered buying a horse ranch but was unable to do so. Therefore, he purchased a farm and spent, in his first year of operation $100,000 for bloodstock. This was the first of his many investments. The farm, as previously stated, consisted of 640 acres, 500 acres of the 640 was for crops.

After consulting with Dick Milburn, a horse expert who gave evidence, Dand's initial objective was to purchase a good broodmare immediately and to purchase a total often broodmares over a five-year period. The plan was also to purchase a stallion which would generate revenue in stud fees. Revenue was to be generated, in addition to the above, from boarding fees, breaking fees, training fees, foaling and the sale of yearlings. The sale of yearlings is the biggest source of income. According to Dand, the horse breeding ranch was not expected to make any money for the first five years (this number changed depending on who was giving evidence) and that during this period Dand states he was to supplement funds to the farm by taking the money from his Canadian Tire store and from his own personal funds. After listening to Dand for many days, I am satisfied that it was Dand's intention to leave the store only when he was ready to retire. The store had always generated so much money that Dand's statement that he would leave the store to go to live on the farm when the farm was profitable is meaningless. It was virtually impossible for me to conclude, from Dand's evidence, how profitable the farm would have to be before he would give up the store operation.

In any event, Dand's original plans were to, in the first five years, buy bloodstock, breed the mares and sell the yearlings and use this income to build the required buildings for the farm. After the five-year initial period, he believed the farm would generate $100,000 net profit per year. He was sadly disappointed.

In 1978, because Dand was not sufficiently skilled, he hired Allan Rodgers and consulted Michel Richard Milburn who Dand believed was well-qualified in the field of pedigrees and mare selection. He sought Milburn’s advice before he began to purchase the livestock. He states he wanted to invest in the farm "to enjoy life”, he states he was not interested to make money on the farm although his objective was to have money to buy the farm. He was not interested in investing in the stock market nor in Canada Savings Bonds which were paying ten to 12 per cent annual interest. This statement is one of a number of statements, all to the same effect, that contributed to my concluding that the farm was to be more of a hobby rather than a business to produce his or the corporation's principal source of income.

Dand reiterated that, in 1978, his intention was to move permanently onto the farm and farm on a full-time basis only if the farm proved profitable within five years, the meaning of profitable is a net after-tax return [of] at least $100,000 per year but this only after he had accumulated sufficient funds from his Canadian Tire store.

Therefore, Dand's intention was to operate the store as he had been doing and only go to full-time farming if the farm became “profitable”. If it never became “profitable” it was not his intention to expect farming to be his principal source of income or farming and something else (store) to be his principal source of income.

Dand states he spent more than half his time, starting in 1979, on the farm. He had high hopes for the success of his horse breeding business because the Alberta economy where the farm was situated, was excellent. This provided many buyers for yearlings which resulted in high prices for the yearlings which in turn, resulted in higher profits for breeders. Up to 1983, business was going according to plan. In 1983 the Alberta economy “bust” which resulted in fewer buyers and lower prices.

Therefore, according to Dand, his “original game plan" was:

(1) Purchase land—He did in 1979

(2) Build the required buildings

(3) Start buying mares

(4) Build more barns as more mares purchased

(5) In the third year to buy a stallion

(All of the above, Dand states, was conceived before he made the purchase of the land.)

(6) Purchase a 25 per cent interest in a second stallion Opus Dei

Both the farm operations and the store operations were reported on the income tax returns for A.J. Dand Ltd. for the year ending January 31, 1980 (Exhibit P-20, page 177). For the farm operations, the only income was the sum of $4,172. This was crop harvested by a third-party farmer who bore all the expenses except for fertilizer on the hay crop. The cost of the fertilizer was $215. It is interesting to note that the sales at the Canadian Tire Store were $7,686,304 and the net earnings before management salaries, deferred profit sharing Alberta Farm Income and income taxes was $423,388. Dand and his wife took as management salaries $191,000 and deducted $9,460 as a loss because of the farm. With these two deductions and a deduction of $33,750 for income taxes, there was a net earning for the store of $151,098.

In 1979 Dand commenced a rebuilding program. After the farm was purchased, the existing buildings, with the exception of the house, were torn down. A new barn with 12 stalls was built. This was completed in 1980. In 1980, Dand began the construction of a new log cabin to house the family. In the same year, two horse shelters were built. A total of seven shelters were built from the date of purchase. As well, a three bay garage was built, for the tractor spreader, a truck and workshop. On the farm were built hay sheds, a utility shed for equipment, three granaries each having a 3500 bushel capacity, a stallion barn with three stalls.

There is no doubt that Dand intended to establish a first class horse breeding ranch. He spent many hundreds of thousands of dollars to establish his ranch. Both Allan Rodgers and Milburn were the consulting experts who advised Dand on how and where to spend the money which Dand earned at the Canadian Tire store. Exhibit P-38, Schedule II, indicates the addition of the fixed assets to the farm business. From the year 1980 to 1987 the total value amounts to the sum of $953,634. All of this money came from AJDL and DAPL. This sum of $953,634 does not include any money spent for inventory. Before the purchase of livestock, Dand consulted with Milburn, who, according to Dand, was considered one of the best horsemen regarding pedigree determination. In 1979 Milburn was commissioned to go to Kentucky in the United States to purchase three mares, one very good one and two what Dand called "bargains". He claims he indicated to Milburn that he wanted to run a profitable ranch and that it was his desire to get into the top ten per cent of sales at the Alberta and Kentucky markets. Dand's ultimate goal, he states, was to be able to sell his horses at the top markets at Queensland, Kentucky and Saratoga, New York.

In order to reach this objective, it is necessary to buy better mares. These mares, on the average, lose one foal every three years. The carrying costs for the better class of broodmare is much higher than the normal broodmare as the cost of stud fees increase, a better class of stallion is sought and the food is slightly better. Exhibit P-39 is a production history of broodmares owned by plaintiff since 1980 to 1988. Three broodmares were purchased in 1980. Three more were purchased in 1981 for a sum of a little more than $200,000 U.S. funds. In 1982, with a budget of $200,000 U.S., three broodmares were purchased. In 1982 there was the sale of yearlings of the broodmares purchased in 1980.

Exhibit P-40 is a schedule showing the date and cost of the purchase of stallions or part of stallions. It is interesting to note that from March 1982 to May 1983 the plaintiffs paid $539,764 for both an interest in a stallion or for a Stallion.

It must be recalled that the money spent in 1982 for an interest in certain stallions or to purchase a stallion is in addition to the money being spent for broodmares and in addition to the money being spent for fixed assets.

I am satisfied from Dand's evidence as corroborated by Milburn that Dand had the intention to buy broodmares and stallions which would produce progeny of a high quality.

In 1983 plaintiff purchased Anjelico, a broodmare for $400,000 U.S. At the time of purchase, in December 1983, Anjelico was in foal as she had been bred to a stallion with a $25,000 to $30,000 U.S. stud fee. This fee indicates a lesser quality stallion. Exhibits 39 and 40 indicate purchases and sales. For a detailed review of sales, one may refer to Exhibit P-38.

Dand alleges he spent at least half his time on the farm. In the 1980 calendar year he states he spent 75 per cent of his time on the farm and 25 per cent at his store, that is, 213 days on the farm. Dand files Exhibit P-18, pages 141 to 143 which gives an indication of how much time he and his wife spent on the farm or for the working of the farm, attending horse auctions and sales. Air tickets were filed to corroborate the dates and times mentioned in Exhibit P-18, pages 141 to 143. The defendant admits that Dand was on the farm or horse buying as stated in the exhibit.

Dand spent, on farm business or on the farm or buying a total of 213 days in 1980, 143 days in 1981, 148 days in 1982, 175 days in 1983, 100 days in 1984 and 126 days in 1985. He alleges that since 1985 to the date of the present hearing, the same ratio would apply. He also claims to spend time on farm business when at his Dartmouth business, the Canadian Tire store.

From 1980 to 1983 his work for the farm consisted of participating in the actual building and planning of the ranch, assuming full financial responsibility and generally looking after the horses. As well, Dand, in 1979, hired Allan and Lois Rodgers to help him look after the farm. In 1988, Dand states his son Joseph spent up to five months per year on the farm.

Exhibit P-41 is a summary of the farm gross revenues from 1980 to 1987:

Alberta Farm Revenue Of DAPL/AJDL

AJDL (1980)
Crop sales	$4,172
AJDL (1981)
Crop sales	1,731
DAPL (1980)
Livestock (cattle)	29,750
Crop sales	8,206
Total	37,956
DAPL (1981)
Crop sales	17,400
DAPL (1982)
Horses	24,944
Racetrack winnings	139
Total	25,083
DAPL (1983)
Horses	207,255
Racetrack winnings	7,597
Crop sales	9,248
Boarding fees income	18,073
Booking fees income	12,000
Total	254,173
DAPL (1984)
Horses	555,825
Racetrack winnings	7,628
Crop sales	1,022
Breeding fees income	42,250

Boarding fees income	34,710
Booking fees income	11,250
Total	652,685
DAPL (1985)
Horses	93,920
Crop sales	1,727
Breeding fees income	70,737
Boarding fees income	39,031
Booking fees income	8,750
Total	214,165
DAPL (1986)
Horses	84,450
Racetrack winnings	7,530
Breeding fees income	71,500
Boarding fees income	32,710
Booking fees income	6,750
Total	202,940
DAPL (1987)
Horses	435,657
Racetrack winnings	410
Crop sales	6,461
Breeding fees income	99,717
Boarding fees income	17,679
Booking fees income	1,750
Total	561,674

No expenses have been deducted from the above figures.

In 1982, the farm had sales for its horses of $24,944 but after deducting expenses had a loss of $118,774. In 1983, the sale of horses brought in a revenue of $207,255 and with its other income had a gross revenue of $254,173. The farm had a loss, after deducting expenses and depreciation of $32,694 (Exhibit P-30). For year ending December 31, 1984, the farm income jumps to $652,685, sale of horses bring in $555,825 but after deducting expenses and depreciation, the farm suffered a loss of $101,998, just more than three times the previous year's loss (Exhibit P-31). For the year ending December 31, 1985, the total revenue for the farm was $214,165 and after deducting expenses and depreciation, the loss was $233,280. In the 1985 year sale of horses only brought $93,920, a drop of $461,905. As reason for this, Dand explained that a horse disease came to Canada for the first time. The disease is known as Equine Viral Arteritis (E.V.A.) and it caused nine of his mares to abort. No one would bring their mares to the farm's stallion because of the disease and as a result for 1985 and 1986, the entire farm income was affected.

Nevertheless, Dand continued to spend money on buying more mares. In 1985, he purchased four mares for a total sum of $66,800. In 1985 the farm suffered a loss of approximately $80,000 U.S. paid as a stud fee. The foal was lost and since Dand failed to obtain a guarantee of a live foal, the stud fee was lost.

It was Dand's plan, he kept repeating, that after five years of operation, the farm would commence to generate a profit. Unfortunately, the farm continued to show a loss. The excuse for the continued losses, Dand blames on many problems. He attributes the financial problems to the E.V.A. disease, the price of oil going down leaving less money for the rich to purchase horses and an over-abundance of horses for sale causing the price to drop. This only postponed Dand's plans, he states, but it did not bring it to a halt.

I can understand why it would not bring it to a halt. Dand's Canadian Tire store was thriving. It was bringing in hundreds of thousands of dollars in profits and these funds were being used to finance the farm operation.

Another reason given for the farm setback, and I believe it a novel one, is, according to Dand, he received assessments from the tax department. This he states curtailed his spending to incur expenses to buy more horses.

In any event, Dand continued to operate his horse breeding farm by buying and selling horses. As evidence of this, Dand produced Exhibit P-15, an option to purchase agreement for the sale of the farm's stallion Northern Horizon for $1,0000,000. The option agreement is not signed and has little or no validity as far as I am concerned. Dand calls this document an offer to buy. I do not agree. It is only an option to purchase. In any event, Dand at first refused to grant an option because this horse was the base of his farm operation. Dand had a change of heart. Exhibit P-16 is an option to purchase agreement drawn up by Dand's attorney and offered to Western Canadian Bloodstock Co. Nothing came of this and plaintiff still owns the stallion.

Dand is continuing to operate the horse breeding business and hopes to eventually make a profit. He hopes to be able, in 1990, to sell his Canadian Tire store because the farm should make by then a sufficient profit. At this point, Dand will be 55 but states he is not selling the store because he wishes to retire but "only because I wanted this kind of lifestyle”. He admits that the store is "performing excellently".

Exhibit P-42 is the accounting income showing the performance of the farm and store and Exhibit P-43 is the tax income.

Schedule VI

Accounting Income

Year	Farm		Store
1980 (AJDL)	$	9,460	$175,388
1981 (AJDL)	(36,031)		(10,463)
1980 (DAPL)	23,547		300,048
1981 (DAPL)	(36,523)		462,370
1982 (DAPL)	(118,774)		845 ,883
1983 (DAPL)	(32,694)		791,364
1984 (DAPL)	(101,998)		234,198
1985 (DAPL)	(233,290)		573,304
1986 (DAPL)	(64,692)		385,874
1987 (DAPL)	29,517		(67,599)
	Schedule VII
	Tax Income
Year	Farm		Store
1980 (AJDL)	$ (27,798)		$153,523
1981 (AJDL)	(8,460)		6,783
1980 (DAPL)	(108,282)		222,155
1981 (DAPL)	(348,198)		421,660
1982 (DAPL)	(713,519)		801,283
1983 (DAPL)	(575,199)		736,772
1984 (DAPL)	34,868		148,894
1985 (DAPL)	(356,353)		541,102
1986 (DAPL)	(250,832)		433,101
1987 (DAPL)	243 ,066		(58,762)

Exhibit P-46 represents the capital committed with regard to fixed assets and inventory for farm and store:

Schedule V Capital Committed

Total: Fixed Assets Plus Inventory

Year	Farm	Farm		Store	Store Total		Total
Year		Value	%	Value		%	Value	%
1980	$576,976		28	$1,448 254		72 72	$2,025,230	100
(AJDL)
1980		736,473	37	1,245,338		63	1,981,811	100
(DAPL)
1981	1,070,380		38	1,739,749		62	2,810,129	100
(DAPL)
1982	1,709,714		43	2,279,643		57	3,989,357	100
(DAPL)
1983	2,386,636		48	2,558,622		52	4,945,258	100
(DAPL)
1984	2,110,646		48	2,265,154		52	4,375,800	100
(DAPL)
1985	2,199,497		48	2,426,114		52	4,625,611	100
(DAPL)
1986	2,387,361		44	2,993,488		56	5,380,849	100
(DAPL)
1987	2,229,960		45	2,720,996		55	4,950,956	100
(DAPL)

Exhibits 44 and 45 show the capital committed for store and farm for fixed assets and inventory, but separately.

In 1987, as shown on Exhibits P-42 and 43, the store shows a loss. On Exhibit P-42 the loss shown is $67,599. and on Exhibit P-43 it is $58,762. When asked for an explanation, Dand states "this was an accounting decision made not to pay income tax". He admits the store was doing excellently although he was concerned about the store's income in the future as another store was going to be built about two miles away. In explaining the losses for the farm on Exhibits 42 and 43, Dand states this is necessary because of the continued purchase of broodmares but that in the last two years he cut back on his purchases.

The corporate organization that Dand has put into place is that there exists AJDL which is a management company. DAPL owns the farm and store and 103590 Canada Ltd. owns a warehouse which is leased to DAPL. The management company AJDL manages the store and receives a management fee for doing so. Dand and his wife Adele work for the management company and receive a salary as employees. It is Inglis who is the manager of the store. What Mr. and Mrs. Dand do for the Canadian Tire store is the basis of the management fee paid to AJDL by DAPL. It was interesting to note Dand's manner when he was asked why the above fee is paid. His reply was to the effect that he does not know why a management fee was being paid to AJDL or he did not know if it was because of his work and his wife's alleged work for the store that was the basis for the management fee payment. He states he "believes" it could be the reason. This is one of many answers given by Dand that brought his credibility into question. He was hesitant when he wanted to be and forthright when he thought this was to his benefit. AJDL manages DAPL. Mr. and Mrs. Dand are the only employees of AJDL. It is obvious there is overlapping in the functions of Mr. and Mrs. Dand with AJDL and DAPL.

Dand states that the day to day operation of the store is Inglis’ responsibility. Dand's responsibility was the overall operation of the store. Dand admits that he really feels he owns one company being both DAPL and AJDL, but "for accounting purposes are different pockets for different companies".

AJDL was incorporated on May 16,1972 (Exhibit P-1, page 1). The objects of the company when incorporated were:

(a) to manufacture, process, repair, buy, sell, import, export, exchange and generally deal in goods, wares and merchandise of all kinds or descriptions and any and all kinds of parts, accessories, utensils, hardware, apparatus, lubricants, cements, solutions and appliances and all fuel saving mechanical and electrical apparatus and devices necessary in the maintenance of automobiles and motors of all kinds, and automotive supplies, electrical appliances, clothing and sporting goods;

(b) to keep, maintain, operate and manage garages, service stations, gasoline, oil and related outlets and to operate premises and operations for the safekeeping, cleaning and repair and care generally of automobiles, boats and any and all kinds of motors and vehicles and every kind, description and class of accessories thereto.

Dand admits this describes the store and service centre.

In 1979 AJDL acquired a corporate shell, the company had no assets, W.C. Harding Ltd. and AJDL was rolled over to W.C. Harding Ltd. W.C. Harding Ltd.'s name was changed to Dand Auto Parts Ltd. (DAPL). The objects of W.C. Harding Ltd. were: “To manufacture and deal in goods, wares and merchandise of every kind and description.” (Exhibit P-3, page 10)

I do not believe the listed objects of a company are of any consequence. This only indicates that shortly before May 16,1972 Dand did not, at that time, believe he would be in a financial position to spend the many hundreds of thousands of dollars to purchase a farm and build a horse breeding ranch. It is most obvious from the exhibits filed and Dand's evidence that it was only because the store was so financially successful that he had the money to start the horse breeding ranch and I believe it was only when the store was making so much money, 1977, 1978, that Dand thought it would be nice to own a horse breeding farm.

Dand stated, in a reply to time spent at the store, that up to 1979 he spent 100 per cent of his time operating the store. This meant 60 to 70 hours per week. He states after 1980 he spent 75 per cent of his time on the farm and on farm business and subsequently he spent 60 per cent of his time on the farm and on farm business. That at this time AJDL was in place as the management company, only he and his wife were its employees and that AJDL managed the store. Dand admits to spending 25 to 40 per cent of his time to manage the store he, AJDL received a management fee for the year 1987 of $600,000 from DAPL (Exhibit P-34, page 501). For 1986, for up to 40 per cent of his time, a management fee of $500,000 was paid to AJDL by DAPL (Exhibit P-3, page 488). Dand, during his cross-examination, went on to state that AJDL did more than just manage the Canadian Tire store without being specific. When confronted with questions 69 and 70 on page 13 of his examination on discovery of January 10, 1986:

Well, as I understand, A.J. Dand Ltd. now is a management company. I take it performs certain services on behalf of Dand Auto Parts.

It—it runs the Canadian Tire store.

All right. Anything else?

No.

Dand now states he did not understand the question in his examination on discovery. He states "the question (in his examination on discovery of January 10, 1986) was beyond my understanding".

Here is an individual who built up a Canadian Tire store to do millions of dollars of sales each year, a store that, with management fees and salaries, makes a profit of well over a million dollars a year, built up a horse breeding ranch after investing millions of dollars and he now states the above question was beyond his understanding. I do not accept Dand's reply as being credible.

In any event, at the hearing Dand states that AJDL gets its $500,000 management fee (1986) for not only managing the store but also for managing the farm. When confronted with Exhibit P-33, page 494, which indicates the expenses for the farm and that no amount is shown for management services, Dand states he will have a proper set of books when he will be running the farm on a full- time basis.

Furthermore, after being shown Exhibit P-32, the tax return for DAPL for the 1985 fiscal year at page 474 where a management fee of $525,000 was paid by DAPL to AJDL and for which Dand now states it was for management services to the store and farm and yet no expense for this item is shown on page 480 of Exhibit P-32 (farm expenses), Dand states he knows nothing of this, it was his accountants who made the decisions of what to put into the tax returns.

Dand had stated, at a minimum he spent 60 per cent of his time working on the farm or on farm business. He stated that in 1980 he spent 75 per cent of his time on the farm and on farm business. Assuming he spent only 60 per cent of his time (with his wife who did nothing more than the bookkeeping, if that, or she may have been Dand's "sounding board" in 1985) then DAPL paid to AJDL as a fee for managing the farm of $300,000 yet Dand admits his time for the farm work was really only worth $7 or $8 per hour.

For the year ending December 31, 1984, a management fee was paid in the sum of $800,000 (Tab 31, page 434). No expense was recorded on the farm list of expenses (page 440) for management fees, that is, for the work allegedly performed by Dand.

Between 1980 and 1987, there were no amounts recorded as payment for management fees for the work or time that Dand states he and his wife spent doing work on or for the farm.

I am satisfied from this evidence that the management fees and management salaries paid to Mr. and Mrs. Dand or the management company was for the management of the store only. Dand was paid the following sums during 1978 to 1985 by AJDL, DAPL or 103590 Canada Ltd.

Schedule of Remuneration Paid to Allan J. Dand during 1978-1985 by A.J. Dand Ltd., Dand Auto Parts Ltd., or 103590 Canada Ltd.

Remuneration Paid to

Allan J. Dand by:

	1978	1979	1980	1981
A.J. Dand Ltd.	$30,983	60,982.92	218,982.92	67,534
Dand Auto Parts Ltd.	N/A	N/A	0	0
103590 Canada Ltd.	N/A	N/A	N/A	N/A
	$30,983	60,982.92	218,982.92	67,534
	1982	1983	1984	1985
A.]. Dand Ltd.	$30,000	105,000	3,500	345,000
Dand Auto Parts Ltd.	0	50,000	300,000	300,000
103590 Canada Ltd.	0	0	0	0
	$30,000	155,000	303,500	645,000
(Exhibit D-3)

Dand admits that there is no fixed formula to calculate the management fees paid in any one year. That the fee is paid for services rendered by Mr. and Mrs. Dand. The management fee is paid by DAPL to AJDL and is based or related to tax planning "with the small business amount. . .two hundred thousand, the small business loan, et cetera" (Examination on Discovery of January 10, 1986, questions 482 to 500).

The Canadian Tire store in Dartmouth has a total of 48,000 square feet of space, 21,400 is retail space, the balance is for offices and stock room. In 1976, when the Dartmouth store first opened, it had 40 person years. In 1986, it had grown to 80 person years and by the end of 1987, it employed 100 person years. The total number of part-time and full-time employees was 160. The store's inventory in 1976 was $1,000,000 and it grew between 1976 and 1985 to approximately $2,664,800 (Exhibit D-4). To the end of 1987, the inventory was approximately $2,700,000 and has remained stable ever since. The inventory would normally turn over approximately 5-6 times. According to Exhibit D-4, on January 1, 1986, the store started with an inventory of $2,267,915.

The net earning of the store, as of December 31, 1985, before deducting management fees of $525,000 and management salaries of $400,000 and deferred profit sharing of $140,000 was $1,404,157 (Exhibit P-32, page 474). For the year ending December 31, 1987, the sum is $1,530,828.

In addition, the numbered company 103590 Canada Ltd., also owned by Dand owns a warehouse which is leased to DAPL for $3,000 per month.

With the number of employees working for DAPL and the amount of inventory ordered per year for the store, it would appear to me that Dand would have to spend more than 40 per cent of his time on the store business. He testified to the fact that it was only himself that could make decisions on any financial aspect of the business and the ordering of inventory surely amounts to many millions of dollars per year.

It is interesting to note the expenses of the store as regards the expenses of the farm specifically referring to the wages paid. For the year ending December 31, 1982, the wages and benefits paid out by the store, excluding the service centre, amounted to $923,876 (Exhibit P-29, page 331). The farm paid out $14,385 for wages (Exhibit P-29, page 334). The earnings for the store as of December 31, 1982 were $1,027,271 (908,497 farm loss of $118,774) (Exhibit P-29, page 327). The farm lost in 1982 the sum of $118,774. In 1981, the store profit was, in round figures $727,000, the farm lost $36,000 (Exhibit P-29, page 327). It is the same for 1983 and 1984. The store is most profitable and the farm loses money. In 1983, the profit for the store is approximately $1,200,000 while the farm lost $32,000. In 1984 the profit in the store is approximately $1,400,000., the loss on the farm is $101,000. In 1984, the store sales rose to 14.1 million dollars (Exhibit P-31). In this year, Mr. and Mrs. Dand received, through various companies approximately $500,000 in management fees and approximately $450,000 in management salaries.

Dand, in speaking of the loss in 1987, states the store showed a loss but that this was done on the advice of his accountants. He was told that the company, DAPL, would allocate $600,000 for management fees and $810,000 for management salaries. It was done, according to Dand, as a tax planning matter.

Dand admits to not having any special training in horses or horse breeding. He believes one can learn, as he claims he did, by “on-the-job training”. His principal teacher prior to 1979 was Rodgers whom Dand visited on a weekly basis when Dand was living in the West. Dand claims to have been taught by "on hand experience by being involved in his regular routine" and prior to 1979, Dand claims to have learned some confirmation of horses, some breeding and pedigree. He claims not to be an expert in confirmation of horses or in the area of pedigree but is, he claims, a knowledgeable business person. He claims Rodgers gave him a "general exposure to the horse business”. He did not go to Rodgers “specifically to learn" and by 1979 Dand believes he had a “fair background in a general way".

I am satisfied that Dand had, at that time, a very minor background, if at all. I cannot accept that by having visited with Rodgers, who was not an expert in thoroughbred horse breeding, on weekends or during a vacation period that Dand gleaned any special knowledge of the horse breeding business. This is further confirmed by Dand's answers in his examination on discovery of January 10, 1986, pages 41 and 42. He had, up to the time of the purchase of his farm, no contact with horses, except as a hobby.

Have you —if I may just put it this way: have you been a farmer—

I was raised on a fox farm, but that isn't what we normally mean as farmers, but it does give you the rural existence, yes.

At the risk of trying to date you —but when did you leave the fox farm?

When I was eighteen years old.

And did you since then engage in farming as an occupation?

Not until I purchased this place here, no.

Have you had any connection with horses?

Only from a hobby point of view.

What kind of hobby?

I go big game hunting in the mountains every year, and we'd always go by horseback.

That would be pack horses and—and a western saddle?

That's right.

It is to be noted that he makes, in these answers, no mention of Rodgers. When I asked Dand why it was that he omitted mentioning Rodgers, he replied that it was his understanding that these questions were put to him as regards horses being a hobby. I believe this to be nonsense. I believe that this is a serious contradiction with his testimony where he continually stated he was with Rodgers to learn.

In referring to Exhibit P-18 at page 141, Dand admits that of the time spent on the farm, for the years 1980 to 1985, a part of the time spent on the farm was during the Easter holidays, the summer holidays of his children and Christmas holidays.

This fact, that Dand spent time on his farm or on the farm's business, does not mean that Dand is a farmer. I do not deny that this is a factor to be considered in the totality of all the facts. Can we say that an individual, who is the owner of a very successful Canadian Tire store and has what he considers a most capable manager, and who decides to spend 60 per cent or more of his time on a golf course playing golf, is a professional golfer? It surely takes more than just time spent on a farm to become a farmer and to look to the farm as the principal source of income.

In discussing the issue of profitability, Dand states that so long as the farm would be buying horses, there could be no profit. He also states that he can never say if a sale of a horse was profitable or not because the original cost of the horse was deducted as an expense in the year of purchase but if horses are continually purchased and sold, then it becomes possible to determine a profit or loss in a given year. He admits that on a per year basis he cannot state if a profit was made or not as this depends solely on horses sold and bought.

Douglas William Inglis is the manager of the Canadian Tire store operated by Dand (DAPL). He is the person whom Dand relies upon when he is not at the store. Inglis started working for Dand in 1972 in Chatham, New Brunswick. He states, in September 1988, that he will be leaving Dand's (DAPL's) employ on January 31, 1989. As of September 1989 I have not been informed that Inglis left his employment with DAPL. Dand had testified he was going to sell the store because Inglis was to quit his job. This has not happened and I am satisfied that Inglis said he was going to quit his job in order to help Dand improve his chances of convincing the Court that the farm was to become, in the immediate future, the chief or prime source of income for Dand or the corporation.

Inglis states that Dand, in 1978, when Inglis first became manager of the store, was owner of a Canadian Tire associate store in total charge of ordering merchandise for resale and in charge of all expenditures for the business. In 1978 Dand spent up to 50 hours per week at the store. After Dand purchased the farm, Inglis states Dand was “away a great deal of the time”. He states Dand would be away during the months of June, July and August, a month in the fall, a month in the spring and during the Christmas holidays. Dand would spend most of his time at his farm in Alberta. In addition, Dand would transact farm business while at the store in Nova Scotia. Inglis stated, during his testimony, that in May 1988, he gave notice to Dand that he intends to leave “because Dand is going to surrender his dealership”. Inglis then states that he is really leaving Dand's employ "because I want a dealership for myself".

Inglis also states that Dand had indicated, in 1982 he believes, that he, Dand, would be leaving his dealership in five years, that is, in 1987, although no specific date was set.

I am not convinced that Dand “is going to surrender his dealership" before he is ready to retire. I came to this conclusion because of the fact that the only evidence of Dand giving up his store is his or his wife’s or Inglis’ declarations. No objective evidence was given.

The management staff consisted of Inglis, an assistant manager, Greg Ross, six managers in the retail division and an office manager.

In September 1988, the assistant manager had been assistant manager for two years and had been an employee at least two years before that. Therefore, Ross was an employee of DAPL from at least 1984. As a result, Inglis then states it was in January or February 1988 that he decided he wanted to leave the employ of DAPL and he therefore had a year to find a replacement.

In speaking of his leaving, Inglis states that he probably would remain an employee of DAPL if he knew Dand remained with the store. I do not believe this to be necessarily accurate. Inglis states that when he commenced to work for Dand in 1972, the idea was that he would work for Dand for a minimum of five years or until he accumulated enough money to get his own dealership. Inglis states that by 1987 he had accumulated enough money. I am therefore satisfied that if Inglis now wants to leave, it is not because Dand may or may not be leaving the store, but because he now has sufficient funds to make an attempt to get his own store. It is obvious from Inglis’ answers that Dand knew what Inglis’ ultimate goal was, to get his own store. Dand knew this around 1972. I am satisfied that if Inglis leaves the employ of DAPL it has nothing to do with whether Dand gives up or does not give up his dealership. As a result, I do not accept that Dand would give up his dealership because Inglis is leaving. Inglis states that Ross is an excellent employee and is competent “in the total operation of the business”.

Surely, Dand would not be so concerned, nor would Inglis be concerned, about training Ross to take over for Inglis if it really was Dand's intention to give up the dealership in the immediate future. I have no doubt that Dand will one day retire from the store operation. He may even retire to his farm but I do not believe Dand had any serious intention to leave his dealership which is earning over one million dollars a year to go to the farm. More of this later.

Mr. Richard B. Wills was asked to give evidence on behalf of the plaintiffs. It was agreed that Wills was an expert in the field of accounting in that he is a graduate chartered accountant who has been dealing with owner operated businesses. Wills also has, as part of his clientele “many farmers located in the Niagara peninsula”. Since 1977, AJDL and DAPL became Wills' clients and since that time Wills or the firm he was part of has been the auditors and has prepared both AJDL's and DAPL's T-2 income tax returns and financial statements (Paragraph 7 of Wills' affidavit).

Wills states that Exhibits P-42 and P-43 fairly reflect the income reported for accounting purposes and tax purposes for the farm by the plaintiffs for all the years in issue.

At the time of Wills’ testimony, for the 1986 and 1987 taxation years, the income tax returns had not been filed for the farm and store businesses. The income from the farm and store for all the years in issue, for accounting purposes, was recorded on an accrual basis, that is, this method of accounting "attempts to match the revenue of the year with the costs or expenses of that year". Wills states that the accrual method was used because he believed "it is the best method to measure the profits of an organization”. For tax purposes, Exhibit P-43, the farm income was recalculated to place it on the cash basis of accounting because, in the main, of the livestock. In giving his explanation Wills states:

on the accrual basis of accounting, livestock purchased in the year, and still on hand at the end of the year, are carried on the accounting records as an asset, in this case, called the Alberta farm inventory. On the tax statement, any of those— any of that livestock purchased in that year are deducted as a cost of that year.

(Page 87, Transcript of September 30, 1988)

This method was used for the bloodstock for all of the taxation years in issue. As an example, Wills states that as of December 31, 1987, the bloodstock inventory of the farm was approximately $1,532,921 and using the accounting method for tax purposes, the total cost of the bloodstock would have been deducted in prior years or in 1987 and if this inventory were sold in 1988 and no other transactions took place, for tax purposes, there would be taxable income.

In effect, what Wills is saying is that Dand could control his tax situation. He could always show a loss by buying a horse or horses and deducting its full cost in the year of purchase to offset any income of the farm or the store.

Wills swore to an affidavit dated September 15, 1988. This affidavit, Exhibit P-50, had attached to it nine exhibits. Wills was led through the exhibits to his affidavit by counsel for plaintiff. Exhibit P-3 to Wills’ affidavit is DAPL's tax income (loss) for the farm on a cash basis. This document was prepared by Wills at the request of plaintiffs’ counsel and is for the years 1985, 1986 and 1987.

Schedule 1 Dand Auto Parts Ltd. Tax Income

	1985	1986	1987
Farm (Loss) Income Bks	(233,290)	(64,692)	29,517
Add back
Begin farm inv.	1,351,735	1,468,085	1,687,766
P.P. breeding fees	82,375	108,159	83,356
Farm a/c rec.	17,519	716	781
Farm notes payable	—	7,740	7,740
Dep'n	37,083	31,817	27,568
	1,255,422	1,551,825	1,836,728
Deductions
Farm a/c rec.	716	781	874
Ending farm inv.	1,468,085	1,687,766	1,532,922
P.P. breeding fees	108,159	83,356	27,666
C.C.A.	34,708	30,679	24,201
	107	75	259
Farm notes payable	—		7,740
Farm notes payable		—
	1,611,775	1,802,657	1,593,662
Farm (Loss) Income
For Tax Purposes	(356,353)	(250,832)	243,066

Exhibit P-9 to Wills’ affidavit is what Wills refers to as a tax income schedule for the years 1980 to 1987 inclusively.

Wills explains that in his opinion there were two main factors contributing to the losses shown on Exhibit P-9. He states they are ongoing operating expenses and the deduction of the cost of bloodstock animals as they were purchased. Each year a horse or horses would be purchased, the cost would be deducted in full and included in the farm costs. Wills states that at the beginning of the farm operation the herd was too small to provide an annual flow of saleable animals to cover the costs of the day by day operation thus necessitating the expenditure of funds to purchase livestock. This conclusion of Wills was arrived at from reviewing the financial records. Wills states that from 1980 to 1987, after examining all the financial data of the farm operation, he concluded, as an accountant, the losses occurred because there was not enough production of foals as there was insufficient bloodstock to cover the expenses of operating the farm. I take this to mean Dand had spent his money on the physical assets of the farm, that is buildings, barns, etc. and the cost of maintaining these assets exceeded the income from the sale of foals, weanlings or yearlings.

Wills agrees that Dand, DAPL, runs a major substantial business besides the farm operation unlike all of Wills’ other clients, none of whom run a major substantial business and a farm. He also agrees that the majority of the funds to operate the farm came from the Canadian Tire store. In fact, I am fully satisfied all of the funds that Dand used for the purchase of the farm, the cost of buildings, including the home, the purchase of broodmares and stallions or shares of stallions came from the profits of the store and are continuing to do so.

Wills was asked to explain, in cross-examination, the figures found in Exhibit P-8 to Wills’ affidavit which is found on page 21 of these reasons for judgment as Exhibit P-42.

Wills states that from 1980 to 1987 there were, from an accounting viewpoint, three years of profit totalling approximately $51,000 “plus or minus”. In fact, the three years where a profit on the farm is shown on this Exhibit are 1980 AJDL and DAPL and 1987 for DAPL. The amounts are $9,460, $23,547 and $29,517 for a total of $62,524. The losses for the farm, for the same period, total $624,002. In addition the farm, during the same period, accumulated assets of between two and three million dollars according to Wills (page 45, transcript of September 30, 1988). The funds to cover the losses and to accumulate the assets of the farm "came from corporate profits (the store) and they came from loans from shareholders, they came from loans from an associated company and. . .that part of the deferred income tax liability that's shown on the accounting records would. . .could be considered a source of funding”. The shareholder loans, from Mr. and Mrs. Dand were $450,226 as of December 31, 1987 for which no interest is being paid. The loan from the associated company is from AJDL, for approximately 1.2 million dollars and is non-interest bearing. If interest would be paid on the shareholders' loans and the loan from the associated company, the farm losses would be much greater.

Wills was asked to look at Exhibit P-34, page 501, which shows that for the year 1987, DAPL showed a net loss of $30,862 but paid $1,410,000, as management fees and management salaries ($600,000 and $810,000). He admits he had a large say in making the decision to pay out these sums, together with Dand. In addition, he admits that the main reason the farm shows a profit for 1987 of $192,244 is because of a depletion in the dollar value of the inventory of $154,844. This is another indication that Dand and his able accountant were and are able to determine if and when the farm would show a loss or a profit. In 1987, in order to show a "profit" on the farm operation, they simply reduced the livestock inventory.

Wills states he was consulted by Dand about planning the farm business and discussed its long-term prospects. It was understood by Dand that there would be a "start-up" period for the farm business but he did not have, in 1979, any knowledge how long a “start-up” period was contemplated. He did believe it would take years and by that he meant:

It was his intention to acquire—to establish a breeding—horse breeding operation and to acquire breeding stock and that it would take a number of years to acquire the breeding stock, to breed them, to bring on the foals and have them available for sale.

And that is what you referred to earlier. Can you assist us at all, now that you have looked at your affidavit, how many years you were speaking of for the start-up period?

It would probably be at least three years.

At least three years, I see. Is that a guess on your part now or does it refresh your memory?

Yes, it is. No, it is a guess.

(Page 10, Transcript of March 13, 1989)

and that the financing of the "start-up" costs to acquire the land and construct the permanent facilities, to buy equipment to look after the operation and to begin to build a breeding stock inventory would come from the corporation which ran the Canadian Tire store. It required a major financial commitment but it was contemplated that there would be no net return for the first three to four years. In fact, it was understood both by Wills and Dand that during the "start-up" period, the first three years, there would be no return on the capital invested and not all the operational costs would be recovered. Wills could not even say what percentage of operational costs would be recovered from revenue of the farm but agrees it would be a small percentage. After the "startup" period, three years, it was contemplated in 1979 that the farm would break even in year four and show a profit, thereafter the income would exceed the operational costs, the farm "would move from a loss position to break even, to modest profits, to increasing profits and I don't think there is a limit”. It was expected that to “break even" operating costs equalling the income, it would take approximately four years including the "start-up" period. It was hoped that after four years the farm would show a profit which would help in recovering the losses of the first four years. Wills later changed his testimony by saying that he did not recall making a cumulative calculation as to when all the money lost on the farming operation would be recovered by farming profits. Wills was asked by counsel for defendant that if, during the period 1979 to 1984, a person invested one million dollars with a bank could he have received a ten per cent return. The answer was yes. Dand (DAPL) did not receive on his investment any return for the first five years and none was contemplated. I believe that this issue is not very relevant as a person can invest in a business knowing no returns would be had for a period of time but expects much greater return at a later date. In being asked what rate of return did Dand and Wills have in mind, in 1979 when the farm was still in the planning stages, on the money to be invested is the bloodstock, the reply was "I don't remember rate of return”. I am satisfied that there was no reply by Wills other than "I don't remember. . .” because a rate of return on the investment for the bloodstock alone was, in all likelihood, never planned. This is confirmed by Wills when he states:

The planning took place in this manner; how long will it take to build up the business from scratch to where it is making an adequate annual income and that was about—somewhere, beginning after the third or fourth year, it would begin to make income and it would begin to make an adequate income thereafter. Now, after you get the operation up to that level, whatever that level is, then you can expand it, operate it, or whatever. It is no longer a drain on anybody. It is producing and, hopefully, paying its way. I don't recall us going on for another ten years to determine, you know, what rate of return, what level of inventory we would have.

What do you mean by "adequate income"?

Well, it would have to provide adequate salaries as well as rate of return.

What did you mean by "adequate income"?

Just exactly that; whatever the salaries are.

Salaries to Mr. and Mrs. Dand?

Yes.

That is all?

Oh no, you would have to make a profit after that.

What was the profit after that?

I don't remember.

What were the salaries to Mr. and Mrs. Dand?

Well, they would change after the operation became a major—perhaps even the only source of income for the corporation.

What were the salaries for Mr. and Mrs. Dand at the end of five years?

I don't remember us making that calculation.

Well, you told me that by the end of five years, there would be an adequate income and you told me that it consisted of two parts; salaries and profit. And I am asking you; how much were the salaries and how much profit was intended when you were planning this corporation?

I don't remember.

(Pages 45, 46 and 47, Transcript of March 13, 1989)

As I expressed at the time of the hearing I have serious difficulty in accepting as credible the answers given by Wills. He and Dand were planning to spend millions of dollars on the building of the farm and the purchase of bloodstock and when asked what rate of return on investment was planned or expected the reply is "I don't remember". I believe that if a businessman is going to invest millions of dollars in a business in which he expects the business to be his principal source of income, he or she would surely have planned out in detail the expected rate of return. In this case, all that was done, in this planning stage, was that after five years of operation a profit was expected to be made. There was no planning as to when the farm would be sufficiently profitable so as to give an adequate return to enable Dand to leave his Canadian Tire business.

Now, you also said that what it (profit) means is paying the salaries for Mr. and Mrs. Dand and, of course, all other expenses that you have.

Yes.

Plus a return on the initial investment. And the question is; what kind of a salary are you talking about? What kind of a return were you talking about? If you didn't figure out on any return or on any salary, just the general—well, they should be making a salary, Mr. and Mrs. Dand, then say that. But what is it? This is what I’m

My recollection is at that particular point, then Mr. and Mrs. Dand would look at moving to Alberta.

At what point?

When the operation began to be profitable, then it had to provide whatever they needed.

But you see, you are talking in generalities again. When it got profitable and profitable includes a salary for them?

Yes.

What was the salary that you were calculating, in order for them to decide to come back to the farm after five years or to go to the farm after five years?

I don't think they would have made that decision until the time came . . .

So, you didn't plan it?

No, that is right.

(Pages 48, 49 and 50, Transcript of March 13, 1989)

No notes were produced to indicate a plan had been devised before the farm start-up as to when the farm was expected to make a profit, and if a profit was to be made approximately what kind, in dollars, it was expected to be nor were any documents produced by Wills to indicate what kind of salaries the farm was expected to pay to Mr. and Mrs. Dand before they would become farmers by looking to the farm as supplying to the Dands, as Wills states, “their major or only source of income”. As I have stated, this was not planned. I am satisfied that this was not planned as it was never the intention of Dand to give up the operation of the Canadian Tire store until he was ready to retire. The farm was his hobby. He used the profits of the Canadian Tire store to finance his hobby. He would build up the farm with the corporate funds of the store and when he was ready to retire, he would sell his store and move to the farm. It therefore was not important to plan out how much money the farm would earn other than that it should at least pay its own way so that, when Dand retired, he would not have to use his capital to support the farm.

Wills was again referred to Exhibit P-8 to his affidavit. He states the accounting income shown for the store is after the salaries of Mr. and Mrs. Dand have been deducted and the management fees have been deducted. For the farm, Mr. and Mrs. Dand were not paid any salaries.

Wills was referred to Exhibit P-51. This Exhibit is the financial statements of DAPL for the year ended December 31, 1988. On page 13 of Exhibit P-51 "DAPL Schedule Of Other Income and Expenses" for year ended December 31, 1988 and referring to the farm operation, it shows net income for year $140,563 up from 1987 which showed net income for year $29,517.

On Exhibit P-51 the costs of sales of horses is shown as $127,566. for the year ending December 31, 1988 as compared to $201,554 for the year ending December 31, 1987. Wills did not prepare this exhibit but the accounting firm Beaton, Wills & Jefferson did. Exhibit P-51 came to the witness in its present form sometime before March 1989. He has no personal knowledge how the individual figures were made up except as to the principles used. In relation to the cost of sales of horses, $127,566. Wills states:

The principle used is for each horse—for each animal sold in 1988, the cost—the original cost of that animal, if it was purchased in an outside transaction or our standard cost if it was an animal born on our farm and we had—we assign a value of $1,000 to them—just an arbitrary number. So, each one of the sales would be costed in that way.

(Page 105, Transcript of March 13, 1989)

Counsel for defendant has put forth the submission that an expense should be shown if there is no return on investment. That is, if one is to invest $1,000,000 and this investment did not bring a return of at least what a bank would pay on a guaranteed certificate, then the amount of lost return should be considered an expense. I do not agree. The sum invested is a capital investment and is made with the hope that a return will eventually be made. The loss of the immediate income is not an expense in operating the farm. I agree with the reply of Wills when he states, in speaking of investing in a business:

Mr. Wills, using my friend's example; where you have an investor who has a million dollars in the bank and decides to go out and invest it in a business. For accounting purposes, in establishing profit, do you impute the cost or would you impute the cost, as my friend calls it—I would put it in quotation marks "the lost profit”. Would you deduct any cost relating to the use of that million dollars in establishing the profit of that business?

No.

For what reason, sir?

The profit of the business is the return on that investment and you may expect to make more than you would make in a less risky or risk free investment, but that is why you make the investment.

(Page 110, Transcript of March 13, 1989)

I am also satisfied that the evidence clearly shows that the corporate profits before tax made from the store operations were projected for and did in fact supply the funds for the establishment of the farm and would continue to supply funds whenever needed according to Dand's wishes. If any borrowing was required, it was minimal and is not important enough to be given serious consideration. The corporate profits before income tax went to make up for the losses of the farm up to and including 1987-1988. Although moneys were loaned to DAPL by AJDL, AJDL received the money it loaned to DAPL from DAPL as management salaries which again means the money to support the farm came from the store operation. As an example, in 1987 the associate company loaned to DAPL the sum of $1,200,000. with no interest. This money was paid to AJDL by DAPL as management fees reducing the profits of DAPL. In addition, DAPL increased its bank loan in 1979 by "roughly" $500,000 and which bank loan was secured "by a general assignment of book debts, a demand debenture and five fire insurance policies on inventory". Wills was unable to state that this money was used to finance the acquisition of the farm. I am satisfied that it was so used in that Dand gave evidence that once he found the farm, he went to the bank, borrowed the money and then purchased the farm. The interest on this loan was charged as an expense to the store operation, not the farm operation. When the issue of interest on the loan was put to Wills, he states, at page 77 of the March 14, 1989 transcript “It (the interest) is not included in Schedule II, which is the Alberta farm income for January 31, 1980”.

I asked Wills the following questions and received the following answers with regard to the funding of the farm:

And for the purchase of the Alberta farm, that money that was used, did some of that money come from the funds that was obtained by the corporation from the bank?

Yes.

Did you record the interest paid for those funds that was used for the purchase of the farm as interest as an expense of the farm?

No.

So, in effect, the store was paying for the funds that were used for the farm?

Yes.

And this store belonged, at least 98 per cent, to Mr. Dand, right? Is that correct? So, in effect, the store was making even more money?

Yes.

(Pages 78 and 79, March 14, 1989 transcript)

Adele Irene Dand was asked to give evidence on behalf of plaintiffs. Mrs. Dand graduated, in 1956, as a medical laboratory technologist and became employed at the Misericordia Hospital to 1960. She then married Dand on September 17, 1960 and then went to work at the Dauphin General Hospital in Manitoba to 1961, moved to Edmonton and worked at the Baker Clinic until 1964, then moved to Toronto at the Provincial Laboratory to 1966 when she gave up working as a technologist to begin working to raise a family. I am satisfied that Mrs. Dand's "expertise" is as a laboratory technologist. In 1972 when Dand acquired a Canadian Tire store, Mrs. Dand began "to learn bookkeeping for it, for our company". In 1979, after the acquisition of the Alberta farm Mrs. Dand states she did the "bookwork" and kept the records of the farm.

She confirms that from 1961 she and her husband spent their holidays with Allan and Lois Rodgers. They also spent their weekends with the Rodgers while the Dands lived in Edmonton. She states that Dand went with and to Allan Rodgers to pursue his interest in horses. She also confirmed that her husband spent time with Allan Rodgers on his holidays.

Mrs. Dand testified that she and her husband had discussed owning a breeding farm from the time of their marriage. I do not give much credibility to this statement. A breeding farm requires a great deal of money. Dand, from the evidence, did not have funds to even discuss owning this type of farm in 1960. She, like Dand, states that in 1979 their original plan was to settle on the farm "as soon as we could make the farm profitable where we could make a comfortable standard of living" without understanding what this was to be except that they wanted to be able to earn at a minimum $100,000 to $150,000 per year.

After listening to Mrs. Dand, I have no doubt she may have been a laboratory technologist but is not a bookkeeper. She has no formal training but is probably on the books of the company as an employee for tax purposes. She states she is consulted by her husband. I have no doubt she was consulted when they decided to buy a farm or was consulted when they decided to build a house on the farm. I might add that this house was built with before-tax dollars earned by the store in order to enable the Dands to spend their time on the farm in comfort. After being cross-examined on the financial statements, I could only conclude that Mrs. Dand is not very knowledgeable of the company's affairs notwithstanding she is a director and bookkeeper. She did understand that in 1988, as a management fee, a sum of $480,000 was paid. This, she states, was paid for management of store and farm. In addition, the Dands were paid, as management salaries $1,130,000. Therefore, in 1988, as management fees and salaries Mr. and Mrs. Dand and their management company were paid $1,610,000 by DAPL. On page 13 of Exhibit P-51 nothing is shown for management salaries or management fees for the farm operation yet on page 6 of Exhibit P-51 it shows management fees of $480,000 and management salaries of $1,130,000. Obviously, the money for management fees and salaries came from the store. I am satisfied that Mrs. Dand's role was to have discussions with her husband but that it was he who made the decisions. She was not able to recall seeing any documents before making any decision to buy the farm in 1979, neither a financial statement nor a projection. It appears clear to me and I have already stated, the main if not the only reason Mrs. Dand draws a salary from DAPL is not because of her bookkeeping skills, she appears to have none, not having any formal training and I believe, limited, at best, practical experience but to be able to have Mr. and Mrs. Dand divide in whatever portion their income to pay less income tax.

Michel Richard Milburn was asked, by plaintiffs, to give expert evidence as to the valuation of horses, the thoroughbred horse industry and on the business of owning a thoroughbred horse breeding farm. He, more particularly was asked to give evidence of the Alberta thoroughbred breeding industry. Counsel for the defendant refused to accept Milburn as an expert except as to his expertise in the field of valuation of horses. After examining Milburn's qualifications and listening to more questions and answers than were neces sary, I became satisfied that Milburn has the necessary qualifications to be considered an expert in the valuation of horses, in the operation of a thoroughbred horse business and the Alberta thoroughbred breeding industry. I qualified Milburn as an expert.

In September 1988, when the trial commenced, counsel for plaintiffs filed a 27 legal size page affidavit containing 73 paragraphs attached to which are six exhibits. The affidavit of Milburn was read into the record of the trial proceedings. The affidavit was filed as Exhibit P-55. The first 12 paragraphs of the affidavit speak of Milburn’s expertise, paragraphs 13 and 14 speak of the thoroughbred horse industry, paragraphs 15 to 30 speak of the breeding industry, paragraphs 31 and 32 speak of the Alberta thoroughbred breeding industry, paragraphs 33 to 42 speak of investment risks and paragraphs 43 to 73 speak of the farm belonging to DAPL. Counsel for the defendant objected to the production of Exhibit 3 to the affidavit saying this document should not be filed as part of the affidavit evidence but should be produced separately as the information it contains is based on the witness' (Milburn's) opinion. I refused to allow the objection and allowed its filing. Exhibit 3 is a letter signed by Milburn, on stationery of The Canadian Thoroughbred Society dated June 10, 1983 addressed To Whom it May Concern and speaks of the thoroughbred horse industry in general as an investment and its potential.

It was Milburn’s opinion that in 1977-1978, the market for thoroughbred horses was on the verge of a boom in Alberta as was indicated by the increasing rate in the average price of yearlings being sold. This was caused by the oil boom which increased the amount of disposable income. The breeder, seeing that he could sell his commodity would be inclined to increase the volume of his breeding stock. In 1978, Milburn had available to him the average sales prices achieved in Alberta by the Canadian Thoroughbred Society (Alberta Thoroughbred Horse Society) and he had a knowledge of sales as this was his professional field. Over the previous ten years, the market trend was a gradual rise in price and he concluded that in 1976-1977 there were signs that a serious market was developing in Alberta. In addition, he noticed persons from Ontario were coming to Alberta to purchase yearlings indicating a rising market in Alberta.

Up to 1979, Milburn, as a result of his experience, believed that there was a market for thoroughbred horses and that a business raising thoroughbred horses could be profitable. From 1979 Milburn advised Dand and his companies in connection with the horse breeding business, although he only spent approximately five per cent of his time doing this. He purchased for the farm the majority of the broodmares owned by the farm. He states, and I am satisfied from the evidence, that Dand's (DAPL's) long range plan was to have a farm that would not continuously lose money. As Milburn states in paragraph 44 of his affidavit, the intention or objective was "to develop an economically viable thoroughbred breeding marketing business”. I am satisfied that all that was hoped for was "an economically viable thoroughbred business" not a business which would be DAPL's principal source of income.

I am also satisfied from reading Milburn's affidavit and hearing his evidence, that Dand counted on Milburn's experience and knowledge of the thoroughbred horse breeding industry in making investments in broodmares and stallions and physical facilities for the farm.

Having said all this, I am also satisfied that notwithstanding all of Milburn's experience, he could never be sure of the farm ever becoming profitable. Milburn anticipated a start-up period of approximately seven years, not three or four or five years as did Wills or Dand. Milburn states that to launch the business a sizeable investment was required and that additional capital investments were always required. After all this took place, buying of broodmares and stallions and building of facilities, the farm kept losing money.

It is interesting to note the reasons for the continuous loss as stated by Milburn in paragraph 61 of his affidavit:

61. Horizon Farm's start-up period has been extended due to the combination of the following circumstances:

(a) in 1985, the Thoroughbred market collapsed because inter alia of the oil crashes in areas where the best bloodstock markets in Canada (Alberta) and U.S.A. (Texas and Oklahoma) were located;

(b) the market place was by 1983, oversaturated with horses for sale. Yearling buyers who had been enticed into becoming broodmare buyers (in effect breeders) had become yearling sellers thereby reducing the demand and increasing the supply in an already difficult market;

(c) the original purchase strategy of acquiring high quality broodmares that was desirable to accelerate the farm's maturity date has been affected by the potential financial burden AJD and his companies have to carry as a result of Revenue Canada's action in the instant case of disallowing the losses the business incurred in its infancy;

(d) E.V.A. (Equine Viral Arteritis) caused 9 mares to miscarry at Horizon Farm and being a contagious disease detracted people from bringing the mares for servicing by the stud;

(e) in 1984, Anjelico, the flagship of HF's broodmare band, miscarried forfeiting a non-refundable $80,000 stallion fee. Live foal insurance had been intended by HF to be placed on the mare, however with the outbreak of E.V.A., insurance companies were declining coverage on broodmares carrying their foal to term. The loss of this foal in potential yearling sales revenue was estimated at between $120,000 and $130,000 in addition to recovering the stallion fee;

(f) the market was oversaturated by 1983, a correction had to take place and the ripple effect was felt for 3 to 4 years thereafter; and

(g) the drought caused the effective destruction of Horizon Farm's hay supply

and compelled the purchase of hay, straw and oats from other sources.

Milburn gave many examples and referred to many exhibits. I have reviewed all of his evidence and verified all of the exhibits to which Milburn made reference. I believe it is not necessary for me to comment on everything he Said.

I am satisfied that Milburn’s opinion that the farm would achieve profitability cannot be given too much weight. Milburn may be an expert, and I have accepted this, on the thoroughbred industry in Alberta but with regard to the plaintiff's farm operation he was only knowledgeable in the costs of the sales or purchases of horses. He was not aware of the costs and expenses incurred by the plaintiff's operation nor did Milburn ever work out a detailed carrying cost for the farm. He never knew the day to day expenses of the farm and could not, I believe, be in a position to know if the farm could make profits of a substantial nature. Milburn, I believe, could only have stated that there was a potential for a profit and, in so doing, I believe he was not taking into consideration any return on the capital investment.

The Issue

Whether the plaintiffs (DAPL and AJDL) are entitled to deduct for tax purposes the entire amount of farming losses incurred in the 1980, 1981 and 1982 taxation years or whether the deduction should be limited to $5,000 per year pursuant to subsection 31(1) of the Income Tax Act. Most of the case law related to subsection 31(1) applies to individuals. The interesting variation in the present case is the fact that the farm is owned by a corporation. Many of the criteria suggested by the Courts seem to be more applicable to an individual rather than to a corporation (e.g., time spent or commitment to the farm).

Subsection 31(1) provides, in part:

(1) Loss from farming where chief source of income not farming. 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. . .

The formula that follows in effect places a limit of $5,000 on the amount deductible as farm losses.

The definitive judgment on the interpretation of section 31 of the I.T.A. is the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213. Dickson, J. (as he then was) at 315 (D.T.C. 5216) identified three classes of farmers:

. . .the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

Joyal, J. in Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058, at 63 (D.T.C. 5059-60) has provided an excellent summary of the guidelines (outlined in the Moldowan decision) to be applied in the determination of which category of farmer a taxpayer fits into:

Section 31 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 pretence 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 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 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 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.

However, I see no reason why I cannot apply these same criteria to the principal shareholder in this case, A.J. Dand, especially since the evidence clearly indicates that Dand was and is the driving force behind the plaintiff corporations.

I have previously stated, in the case of Buchanan Forest Products Ltd. v. The Queen, [1986] 2 C.T.C. 7; 86 D.T.C. 6282; (1986), 3 F.T.R. 305 at 21 (D.T.C. 6292; ET.R. 319):

I have applied the same criteria as did Mr. Justice Dickson in the Moldowan case notwithstanding that plaintiff is, in this case, a Corporation. The same criteria can be applied, the only difference being that it would be more difficult for a Corporation plaintiff to prove that it was its intention to change the centre of its activity.

Corporations, generally, in their normal every day business activity, attempt to “branch out", to acquire new businesses either in the same field of activity or in other fields.

I believe that in order for a corporate plaintiff to fall into class one of three classes of farmers as listed by Mr. Justice Dickson, strong proof of a change in the corporate structure would have to be shown whereby almost all of its efforts would be directed to “farming”.

As noted by Joyal, J. in the Hadley case, supra, some of the tests suggested by Dickson, J. for applying the criteria are:

(1) time spent

(2) the capital committed

(3) the profitability both actual and potential

The following factors may be considered relevant in the determination of a "reasonable expectation of profit". This list is not intended to be exhaustive.

(1) profit and loss experience in the past years (includes gross revenues for the tax years in question);

(2) the taxpayer's training;

(3) the capacity of the operation and plans for expansion, i.e., the taxpayer's intended course of action;

(4) capability of the venture to show a profit after charging capital cost allowance;

(5) start-up costs.

On December 21, 1988, the Federal Court of Appeal, in the case of Canada v. Morrissey, [1989] 2 F.C.A. 418; [1989] 1 C.T.C. 235; 89 D.T.C. 5080 at 241-42 (D.T.C. 428-29) states:

With respect, I do not agree that Moldowan suggests disjunctive consideration of pertinent factors in quite the way the learned trial judge has dealt with them. The discussion in Moldowan begins as follows:

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.

Moldowan also says, dealing with the difference between classes 1 and 2, “while a quantum measurement of farming income is relevant, it is not alone decisive". While the determination that farming is a chief source of income is not a pure quantum measurement, it is equally not a determination in which quantum can be ignored.

The appellant has admitted that the respondent was farming with a reasonable expectation of profit. That means he was farming as a business and is conclusive that he was not a class 3 farmer. It also implies that farming was a potential source of income and calls for an enquiry whether it was potentially a chief source of income either alone or in combination with another source. In considering subsection 31(1), it seems to me that potentiality, rather than actuality, is the question in all cases since the provision applies only where there is a loss in a taxation year. That is not, of course, to say that actual profitability in other years may not be evidence of the potential for profit in years of losses.

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

The evidence in the case before me indicates that Dand spent some time on his farm during the summer school holidays, Easter vacation period, Christmas holiday period and some time in the spring and fall. Whether he spent this time or not is immaterial to the operation of the farm. In the present case, the facts clearly indicate that Dand was able to spend time away from his office in Dartmouth, Nova Scotia but, nevertheless, was required, according to his agreement with Canadian Tire to be the one responsible for the general operation of the store. There is no doubt that Dand caused DAPL to commit large sums of money to the operation of the farm (horse breeding). He was spending huge profits earned by the operation of the store on a business that was continually losing money.

It is a simple matter to say that the farm would become, one day, profitable but it is for plaintiffs to prove by supporting evidence that farming was the centre of the corporation's activity and not merely a “sideline” and that the farm could reasonably be expected to provide the bulk of the corporation's income.

The evidence filed clearly indicates that the farm would never (as long as the store was owned by the corporation) provide the bulk of the corporation's income. Dand, in his evidence, states he would leave the store to be a full-time farmer when the farm could provide him with a "comfortable" income. The store in 1987-1988 brought in a profit before taxes of well over a million dollars. There is no evidence that the bulk of the corporation's income could ever come from the farm. The defendant has admitted that the farm is a business and may possibly make a profit. I am satisfied that this is not enough to conclude that because the farm may one day be profitable it is or will become the chief source of income for the corporation.

The evidence, in order for plaintiffs to succeed must establish that the corporations's major pursuit was the farming business and that its chief source of income would be the farming business. This evidence was not made and could not be made. The store, as it is admitted, is the source of all the income and that it was the store's income that supplied the funds to keep the farm in operation. The main pursuit of DAPL was and is the operation of the Canadian Tire corporate store.

Although counsel for both parties have submitted volumes of case law and legal submissions, I have concluded that a detailed review of same is not necessary. I am satisfied that there is nothing in the evidence upon which I can conclude that the corporation would ever look to the horse breeding farm as its principal source of income. It may become the principal source of income if the farm becomes its only source of income and even then I am not convinced from the evidence that the farm will be financially successful. All witnesses agree the horse breeding business is very risky. I agree with counsel for defendant that a sure way of making a profit would have been for DAPL to invest its extra profits in Government of Canada treasury bills.

Appeal dismissed.