[1] The Appellant has been practising dentistry in Saskatchewan since 1965. In 1967 he married a woman who had been raised on a farm and the Appellant thereafter assisted on her family farm both in its physical operation and financially. In 1973 the Appellant and his wife incorporated a company which commenced to purchase farm land and equipment. The purchases were generally financed by loans which were serviced by a combination of the Appellant's dental income, liquidation of the Appellant's RRSP's, his wife's teaching income and liquidated pension, crop income, and the proceeds from the sale of the Appellant's home in Prince Albert. After the sale of his home, the Appellant and his family lived on their farm. The farming operation consisted of the raising of crops such as wheat, peas, canola, barley, and alfalfa seed. In 1985 the Appellant purchased the company's farm machinery and 160 acres of its land, and leased the remainder of the company's land. Thus the Appellant became the new operator of the farm. At the time he did this, there had ceased to be any tax advantage in having the company own the farming business, and he thus entered the farming business personally with the expectation that there would certainly be losses in the near future.
[2] Thereafter the Appellant purchased more land and equipment and built a seed clearing plant and grain dryer.
[3] For the years 1992, 1993 and 1994, the Appellant's farm generated losses totalling $72,935, $42,345 and $86,561 respectively. The Appellant attributed the losses on the farm during these years to bad weather, weed problems, and low grain prices. During these years the farm comprised 1298 acres of workable land.
[4] The Appellant spent about 2000 hours per year on the farm operation and about 1500 hours per year on his dental practice. The Appellant sustained himself and his family during these years with income from his dental practice. Between the years 1987 and 1994 the farm always operated at a loss whereas his dental practice always produced a positive return. The details are as follows:
Schedule "B"
Farming Income vs Other Income
|
Taxation
Year
|
Gross Revenue Dentistry
|
Net Income
Dentistry
|
Gross Revenue
Farming
|
Net Income (Loss)
Farming
|
Other
Income
|
|
1987
1988
1989
1990
1991
1992
1993
1994
|
$271,371
293,502
319,191
323,690
336,510
338,699
379,216
396,488
|
$118,269
119,482
131,968
120,339
150,707
135,736
147,673
145,252
|
$97,757
89,403
98,280
99,686
129,680
92,196
153,064
146,306
|
$(91,985)
(62,404)
(53,409)
(65,353)
(47,047)
(72,935)
(42,345)
(86,561)
|
$9,857
3,107
1,401
4,043
19,810
26,379
12,555
13,989
|
[5] The Appellant sought to deduct the farm losses for the years 1992 to 1994 from his other income and the Minister disallowed these deductions. The Appellant also sought capital cost allowance for certain tractors purchased by him during the years in question. The tractors were purchased by using older tractors as down payments on the purchase price of the new ones. The Minister contended that the values attributed by the Appellant to the tractors exceeded their fair market value.
[6] The Tax Court Judge dismissed the Appellant's appeal in its entirety.
[7] On the first issue the relevant legislation is section 31(1) of the Income Tax Act:
31.(1)Losses 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 the taxpayer's loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of [...]
[8] The Courts have considered this section on a number of occasions while looking at fact situations similar to the present one. The seminal decision in Moldowan v. The Queen[1].
[9] Although the Court was dealing in that case with different facts, Dickson J., as he then was, established a test which has been followed ever since:
Whether a source of income is a taxpayer's "chief source" of income is both a relative and objective test... The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential.
[10] The Tax Court Judge, in rejecting the Appellant's appeal, adverted to these 3 considerations:
[22] While the Appellant testified that he personally spent more time farming than practising dentistry during the years in question, the fact is that his dental practice's gross income increased constantly in 1992, 1993 and 1994. The evidence indicates that he continued his occupational patterns in the same way as in the past and that dentistry predominated as his occupation. Moreover, the evidence does not indicate that in 1992, 1993 and 1994 he could anticipate an income from farming. In spite of this his personal capital investment in the farming operation (excluding his home) was about $1.30 million or 13 times his investment in his dental practice, and it continued to grow after 1994. The farming operation was subordinate to his dental practice. He relied on his dental income to support his family, to pay the interest on his farm debt and to make capital purchases for the farm. Moreover, dentistry remained the central focus of his occupational life; it provided him with his income, the expanded his practice and diverged it into preventative dentistry where the market was going, and he was active in his dental professional organization. In contrast, he continued to operate the grain farm without major change and to enlarge his investment in it despite continuing losses. There is no evidence that he was active in farm organizations.
[11] He also considered that the events which the Appellant said resulted in the farm losses, were not unusual in the farming business.
[12] The Appellant argued the that the Tax Court Judge erroneously placed too much emphasis on the actual or potential profitability of the farming enterprise, and that he placed insufficient emphasis on the other factors referred to by Dickson J. in Moldowan. We disagree as he did consider the other factors. The Tax Court Judge reviewed in some detail the facts relating to actual and potential profitability and concluded the Appellant could not reasonably anticipate an income or profit from farming.
[13] We are of the view that the Tax Court Judge properly applied the law on this point as outlined by this Court in The Queen v. Morrissey:
On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.
Leave to appeal to the Supreme Court of Canada was refused in the Morrissey case.
[14] We defer to the findings of fact of the Tax Court Judge and specifically to his finding that for the years under appeal, the Appellant's dental practice remained the focus of his occupational life and the farming operation was subordinate to his dentistry practice. He correctly considered all of the factors outlined by Dickson J. in the Moldowan case. Thus, on this first issue, we are unable to conclude that the Tax Court Judge erred.
[15] In dismissing this appeal we do not want to be taken as having no sympathy for the lot of farmers such as the Appellant. Clearly the Appellant was genuinely involved in farming. However, section 31 of the Income Tax Act and the cases which have considered that section, apply a test which may, in some cases, seem to be unfair. While we feel bound by the authorities in this Court to dismiss this appeal, we cannot help but note the many section 31 cases being brought before the Tax Court and this Court producing sometimes conflicting results. Despite the appearance of unfairness in some of those cases, where a taxpayer with a well-paying job is also seriously involved in unprofitable farming but not a "hobby farm", Parliament has not re-examined this provision which Justice Dickson in 1977 described as an "awkwardly worded and intractable section". Nor has the Supreme Court of Canada revisited this problem since 1977. Perhaps it is time to amend or at least clarify this provision to make it more suited to our time.
[16] On the second issue, section 13(33) of the Act provides that where used property has been traded in on the acquisition of a new asset, the portion of the cost attributed to the property traded in may not exceed the fair market value of the trade-in.
[17] The Appellant did not adduce any independent evidence as to the fair market value of the new or used tractors and the Tax Court Judge found that the Appellant had failed to refute the Minister's assumptions of their fair market value.
[18] We can find no palpable or overriding error on the part of the Tax Court Judge on this issue.
[19] The appeal will be dismissed with costs.
(Sgd.) "J.E. Sexton"
J.A.
March 16, 2001
Vancouver, British Columbia
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