Hutterian Brethren Church of Wilson v. The Queen, 79 DTC 5474, [1980] CTC 1, 79 DTC 5479 (FCA)

Pratte, J:—In support of this appeal, the appellant’s counsel reiterated all the attacks that had been made in the Trial Division against his client’s income tax assessments for the years 1967 to 1975. In my view, all those attacks were rightly rejected by the judge below and I only wish to comment briefly on two of the appellant’s contentions.

One of those contentions is that the appellant is a charitable organization which was, as such, entitled to benefit from the exemption provided for in paragraph 149(1 )(f) of the Act.* [1]

In order to dispose of this contention, it is not necessary, in my view, to determine whether part of the appellant’s income was available for the personal benefit of its members; it is not necessary, either, to determine whether the appellant’s religious purposes qualified as charitable purposes. One of the main objects for which the appellant was established was, according to its Memorandum of Association.

to engage in and carry on farming, agriculture, stock-raising, milling and all branches of these industries.

The evidence also shows that the business of farming for a profit actually was, during the years here in question, the appellant’s main activity and that most of its assets were used to buy farm land and agricultural equipment. In those circumstances, it is clear, in my view, that the appellant could not benefit from paragraph 149(1)(f) because it did not devote all its resources to charitable activities carried on by itself. The business of farming is neither a religious nor a charitable activity; it is a commercial activity. And this is so even if that business is carried on by persons believing farming to be the only activity compatible with a truly religious life and intending to use their income to assist their co-religionists. As stated by Pigeon, J in his dissenting opinion in Hofer et al v Hofer et al, [1970] SCR 958 at 980:

What is religion, what is a church in the eyes of the law does not depend on the religious beliefs of any confession, . . .

Moreover, a commercial activity like farming for a profit does not become a charitable activity within the meaning of section 149 for the sole reason that it is carried on by a charitable person with the intention of using the income derived from that business for charitable purposes.

The appellant also contended, and this is the second point with which I wish to deal, that it was, in any event, entitled to deduct, in the computation of its income, the actual value (not the cost) of the services provided to it by its members. The appellant based that contention on paragraph 69(1)(c) of the Income Tax Act under which:

(c) where a taxpayer has acquired property by way of gift, bequest or inheritance, he shall be deemed to have acquired the property at its fair market value at the time he so acquired it.

This section, however, does not help the appellant since it has acquired no property from its members and has not received anything from them by way of gift.

For those reasons, I would dismiss the appeal with costs.

Heald, J:—I have had the advantage of reading the reasons for judgment of my brother Pratte, J in this appeal. I agree with him that the appellant is not entitled to benefit from the exemption provided by paragraph 149(1 )(f) of the Income Tax Act. I also agree with his reasons for arriving at that conclusion.

I also agree with Mr Justice Pratte that the appellant is unable to bring itself within the provisions of paragraph 69(1)(c) of the Income Tax Act* [1] since it has acquired no property from its members, by gift or otherwise. Clauses 2(o) and (p) of the appellant’s memorandum of association provide:

(o) That each and every member of the Company shall give and devote all his or her time, labour, services, earnings and energies to the Company and the purposes for which it is formed, freely, voluntarily and without compensation or regard of any kind whatsoever other than hereinafter expressed;

(p) The members of the Company shall be entitled to be supported, maintained, instructed and educated by the Company according to the rules, regulations, requirements and by-laws of the Company and the Christian religion, religious teachings and beliefs promoted, engaged in and carried on by the Company during the time and so long as they are members of the Company and obey, abide by and conform to the rules, regulations, requirements and by-laws of the Company, but not otherwise howsoever;

In the case of Wipf v The Queen, 54 DLR (3d) 118 at 123; [1975] CTC 79; 75 DTC 5034 (affirmed by the Supreme Court of Canada); where the provisions of the memorandum of association were identical to clauses 2(o) and (p) supra, this court held that the memorandum of association and the articles of association constitute a contract between the company and each of its members. The following passage from the judgment of Ryan, J in the Wipf (case) (supra) applies with equal force, in my view, to the case at bar:f [2]

Extensive farming operations were conducted during the taxation years in question in each of the colonies. The actual services were performed by the appellants who are members of the companies and other members of the companies and by members of their families. In my opinion, however, the farming was done by the companies acting pursuant to the power conferred on them by cl 3 of the memorandum of association to engage in farming and related undertakings. The services provided by the appellants were provided under their covenants with the companies as set out in the memorandum of association.

It is, accordingly, in my view that the services provided by the members of the colony to the appellant were not in the nature of a gift but were rather provided pursuant to the covenants with the company as set out in the memorandum of association supra and pursuant to the contract between the appellant colony and its members. The consideration for the provision of those services is the covenant of the company to support, maintain, instruct and educate the members of the colony, their husbands, wives and children as more particularly set out in section 2(p) of the memorandum of association quoted supra. It is therefore clear, in my view, that paragraph 69(1 )(c) of the Act has no application to the situation in this case.

The only other contention of the appellant on which I wish to comment is its submission as set out in paragraph 45 of its memorandum as follows:

45. The amended returns as filed claimed that all the surplus revenue over and above expenses was a community gift to the Church. No dollar valuation was placed on the labour factor (other than food, clothing and shelter) contributed by all of the individuals of the Colony from the age of 6 years and up as indicated by the evidence. On the other hand the assessments did not allow as a deduction from income any valuation of the labour factor, which, of course, is allowed for all other commercial corporations.

The learned trial judge in dealing with this phase of the matter stated (Amended AB p 22):

The actual cost to each colony of labour, being the cost of goods and services supplied to and consumed by members of their families has been allowed. The cost of outside purchases is deducted from revenue in arriving at taxable income while the value of goods and services produced on the colony is simply ignored for both revenue and expense purposes. There is no basis for the proposition that the fair market value of donated labour should be deducted from the net profit of a colony. It is not among the deductions from income allowed to a taxpayer in the calculation of taxable income.

I agree with the learned trial judge that the appellant would not be entitled to deduct from its net profit the fair market value of donated labour if there had been donated labour. I also agree that to the extent the appellant has claimed the actual cost of labour, it has been allowed and this of itself, is sufficient to dispose of appellant’s submission so far as this appeal is concerned. However, the appellant is obligated by contract to provide to the members of the colony and their families, inter alia-, food, clothing, necessary medical, dental, optical and pharmaceutical services and housing. It seems to me that the cost of providing all of these essential items is a properly deductible expense to the appellant since it truly represents its cost of obtaining the services of its members and their families which are so necessary to the proper operation of their very extensive farming activities and which it agreed by contract to provide. Looking at the appellant’s amended tax returns for the years under review, it is obvious that appellant’s farming venture in addition to being extensive is also quite profitable and successful. The evidence establishes that the appellant owns some 8,502 acres of farm lands in the Lethbridge area of Southern Alberta; that of this total acreage, some 6,000 acres is under cultivation; that the cost of this land to the appellant was approximately $290,000 but that because of greatly increased prices of farm land in latter years, it is, at the present time, worth considerably more than the $290,000 which the appellant paid for it. Appellant’s gross profit in 1973 was $597,000; in 1974 it was $721,000; and in 1975 it was $990,000. Turning to the expenses claimed by the appellant, in 1975, for example, an item entitled “church expenses’’ in the sum of “38,256.79’’ was said to include the cost of feeding the colony members over and above the food produced on the farm plus medical and clothing costs. However, the evidence is unsatisfactory as to whether the “church expense’’ item includes all of the matters which the appellant is obligated to provide under its contract with its members. Mr J K Wurz, in giving evidence at p 115 of the transcript, states there are . . a lot of other items’’ but unfortunately those items are not specified or quantified. The evidence is that there are 110 individuals in the appellant colony for whom the appellant is responsible. To properly house them, the appellant has constructed three four-dwelling houses; has furnished and maintained those houses; has erected a community laundry with large modern laundry machines; and, has erected, equipped and maintained a modern community kitchen where the meals are prepared and served for the entire community. Since the “church expense” item is not broken down and since costs related to housing cannot be identified in the other expense items claimed and allowed, it is not possible to determine with precision whether or not all properly chargeable housing costs have been claimed. I cite housing costs only as an example. There may well be other cost items that could be claimed which have not been claimed. In perusing appellant’s financial statements, it is apparant that the “church expense” item is a very modest figure in all of the years under review when compared to the gross profit figure. As stated, it was $38,256.79 in 1975 compared to a gross profit figure over $990,000. In 1974, it was $39,128.85 compared to a gross profit figure of over $721,000. In 1973, it was $22,771.72 compared to a gross profit figure of over $597,000. When one considers the fact that there are some 110 in- dividuals covered by the appellant’s contractual obligation, these figures seem inordinately low even after having regard to the evidence the effect that the colony provides approximately one half of its own food requirements. However, as I stated earlier, the Minister of National Revenue has allowed to the appellant the amounts claimed for these items. Thus, the fact that the items may be lower than actual cost to the appellant does not assist the appellant in this appeal. The appellant is only entitled to deduct the allowable items properly claimed by it and properly authenticated by it. The onus is on a taxpayer to claim and establish properly deductible expense items, not on the Minister of National Revenue.

I make these comments by way of answer to the appellant’s submission that it is not being allowed to make deductions which are allowed for all other commercial corporations. Those corporations will likewise be allowed only those properly deductible expenses which are claimed and proven.

I also agree that the learned trial judge rightly rejected all of the other attacks made on the appellant’s income tax assessments for the years 1967 to 1975 inclusive.

For these reasons, I would dismiss the appeal with costs.

Ryan, J:—I have had the advantage of reading the reasons for judgment of Mr Justice Pratte. I agree with his conclusions and with his reasons for reaching those conclusions. I have also had the advantage of reading Mr Justice Heald’s reasons and I agree with what he says. I therefore agree with both that the appeal should be dismissed with costs.

Without limiting in any way my agreement with Mr Justice Pratte and Mr Justice Heald, I would add a comment on a matter which caused me some concern.

My concern was based on a passage from the reasons for judgment of Mr Justice Ritchie in Hofer et al v Hofer et al, [1970] SCR 958 at 968, 969, and a passage from the reasons of Mr Justice Freedman (as he then was) in the Same case when it was before the Manitoba Court of Appeal (1968), 65 DLR (2d) 607 at 609, 610, Mr Justice Ritchie said:

I am satisfied after having read a great deal of the material submitted by both sides in this case and after having considered the analysis thereof as contained in the judgments of the learned trial judge and the Court of Appeal, that the Hutterite religious faith and doctrine permeates the whole existence of the members of any Hutterite Colony and in this regard I adopt the language which the learned trial judge employed in the course of his reasons for judgment which he said:

To a Hutterian the whole life is the Church. The colony is a congregation of people in spiritual brotherhood. The tangible evidence of this spiritual community is the secondary or material community around them. They are not farming just to be farming—it is the type of livelihood that allows the greatest assurance of independence from the surrounding world. The minister is the Spiritual and temporal head of the community.

It follows in my view that, notwithstanding the fact that the Interlake Colony was a prosperous farming community, it cannot be said to have been a commercial enterprise in the sense that any of its members was entitled to participate in its profits. The Colony was merely an arm of the church and the overriding consideration governing the rights of all the Brethren was the fulfilment of their concept of Christianity. To the Hutterian Brethren the activities of the community were evidence of the living church. In this context I find it impossible to view the Interlake Colony as any form of partnership known to the law.

And Mr Justice Freedman said:

The way of life of the Hutterites is in many respects distinctive and unique. Perhaps its dominant characteristic is the interpenetration of religion into every aspect of Hutterian existence. In the secular sense Hutterites carry on life as farmers; but this pursuit has a motivation closely connected with the religious impulses which govern their life. It is because farming is a rural pursuit, enabling the members of the Colonoy conveniently to live within themselves as a religious unit, away from the disturbing and disruptive influences of urban life, that it has been selected as the avenue in which they will be gainfully employed. In that connection the learned trial Judge quotes Prof H L Trevor-Roper thus:

Each Bruderhof . .. is an agricultural family . .. but it is not only or mainly an economic organism. It is a church which has chosen this organism as a means to realize religious beliefs and a religious way of life.

The learned trial judge concluded that the Interlake Colony of Hutterian Brethren was a congregation of the Hutterian Brethren Church; and I agree.

The learned trial judge in this case said in his reasons that nothing in the evidence would lead him to a conclusion “radically different’’ from that expressed by Mr Justice Ritchie in relation to the facts in the Hofer case.* [1]

The problem which concerned me was whether, assuming that the farming which was being carried on by the corporation was being carried on as part of an overriding religious purpose, the profits from the farming could not be said to have been used solely for the purposes of that religious activity. And if one were also to assume that the religious activity had the element of public benefit essential for legal purposes to a charity, could it not be said that all of the resources of the corporation, the “organization”, were being devoted to charitable activities carried on by the organization itself.

I am satisfied, however, that the correct analysis of the evidence in this case is that the business purpose of the corporation was not merely an aspect of a single overriding religious purpose. The corporation had a business as well as a religious object—farming on a commercial basis—an activity which was pursued on a large scale and pursued profitably. The motivation of the individuals who farmed may well have been religious. But the farming itself was conducted by the corporation as a business. The business profits were not, of course, available as such to the members of the corporation. They were, however, available for the future use of the corporation in the pursuit of its objectives, religious and commercial. In these circumstances, it can hardly be said that all of the resources of the corporation were devoted to charitable activities carried on by it, even assuming that its religious objects were for legal purposes charitable.