The Queen v. Connell, 88 DTC 6166, [1988] 1 CTC 247 (FCTD), aff'd 92 DTC 6134 (FCA)

Strayer, J.: —This is an appeal from a decision of the Tax Court of Canada of May 14, 1985. It concerns a reassessment made by the Minister of National Revenue of the income tax payable by Mr. Connell for the 1979 and 1980 taxation years. The Tax Court of Canada allowed his appeal from those reassessments, but gave no reasons for its conclusions.

Although Her Majesty appears in this Court as appellant it was common ground that the burden of proving that the Minister's reassessments are wrong still lay on the taxpayer. The hearing before me was conducted accordingly.

During the years in question the taxpayer was a senior public servant in the Government of Canada and operated a farm at Oxford Station, Ontario, some 40 miles from Ottawa. This farming operation, which he commenced in 1972 and still conducts, involves the production of purebred Simmental breeding stock. The Simmental is a breed of “dual purpose" cattle which are used mainly for beef production in this country. It is a breed which was developed in Switzerland and was not brought to Canada until about 1967.

Neither the taxpayer nor his wife was raised on a farm although, according to Mr. Connell, they both grew up in “semi-rural” environments. After a number of years of working in the private sector, Mr. Connell joined the public service of Canada in 1966 as Director of Personnel at the Department of National Revenue, Customs and Excise. He enjoyed rapid advancement in the public service. Within two or three years after joining it he became Deputy Secretary of the Treasury Board (Personnel Policy). In 1975 he became Deputy Minister of National Revenue (Customs and Excise) and was in that post until 1982 when he became Deputy Minister of Agriculture. He retired from the Public Service in September of 1986.

Mr. and Mrs. Connell for some time had been interested in living in the country and having a farm. They began looking seriously in 1970 and by the fall of 1971 had made an offer on the farm at Oxford Station. They moved onto the farm in 1972. Later that year they started to acquire cattle. In the early years Mr. Connell was mainly engaged in the process of upgrading (breeding non-Simmental or part-Simmental cows with Simmental bulls, thus progressively increasing the percentage of Simmental blood in his stock). By 1976 he had acquired a purebred Simmental heifer from Switzerland. From then on he bred or acquired more full-blood Simmental cattle until he now has some 42 full-blood Simmentals in his herd together with a few other head of cattle. He says that he now feels his herd is about the size he wants it and is of high quality although he is always interested in continuing to improve its quality.

During the taxation years in question, 1979 and 1980, he had approximately 24 full-blood Simmental cattle. According to the agreed figures in Exhibit 9, in those years his income, expenses and loss, were as follows:

From 1972 to 1986 the farm has always shown a loss. Since 1980 there has been no loss as great as the loss of $41,035 in that year but there have been three years in which the loss was in excess of $35,000. In 1986 while the taxpayer had a salary in the order of $107,000 his farm income was $50,861 and his farm loss was $28,892.

The evidence did not indicate precisely the amount of capital which the taxpayer has invested in his farm. The evidence does seem to confirm that he has invested as much as is required for the kind of operation he is carrying on, without any unnecessary frills. According to him, during the taxation years in question he was working at his job of Deputy Minister of National Revenue (Customs and Excise) approximately 50 hours per week and was doing work connected with the farm about 35 to 40 hours per week. He conceded that while he was Deputy Minister his employment responsibilities had to take priority over his farming although he could not recall any situation where there was a real conflict. The evidence confirms that he was and is serious about his farming: before undertaking it he had read extensively and consulted about the choice of a type of farming and then of a type of cattle; he has continued to keep abreast of developments in relation to his type of farming; he has been active in relevant farm organizations; and has the requisite facilities, and uses appropriate procedures, to maintain a healthy and high quality herd. Mr. Connell testified, and this was not disputed, that he was able during the time he devoted to farming in the relevant years to do everything that was necessary to operate the farm on the scale on which it was operated. He confirmed that even today, when he is officially retired but engaged part-time as a consultant, he is not devoting significantly more time to the farming operation.

Mr. Connell gave evidence that he believes that his herd at its present size and quality is capable of producing a profit subject to two conditions: that he reduce his debt load, which he says he is in the process of doing, so as to reduce interest costs; and that market conditions improve for purebred Simmental cattle. As to the latter, he says that commercial beef prices have gone up in 1987 and he expects a commensurate increase in the price of purebred breeding stock to follow in due course. He provided no data to substantiate his expectations with respect to the fulfilment of either of these conditions.

Since commencing to operate his farm in 1972, the taxpayer has deducted his full farm losses from his employment income in preparing his tax returns. This was allowed by the Minister of National Revenue until the taxation years 1979 and 1980. With respect to those years, the Minister reassessed and applied subsection 31(1) of the Income Tax Act so as to limit the deductible farm losses to $5,000. Subsection 31(1) provides in part as follows:

31. (1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be. . . .

There then follows a formula which in effect places a limit of $5,000 on farm losses deductible.

The leading authority on the interpretation of this section is the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. That decision presents some difficulties of interpretation and application to any given set of facts for the purposes of determining whether the taxpayer's “chief source of income" is either farming or a combination of farming and some other source of income. The key criteria from Moldowan which are frequently cited [1] are:

. . . the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. . . .

Some of the tests suggested by the Supreme Court in that decision for applying these criteria with respect to a given source of income are:

. . . the time spent, the capital committed, the profitability both actual and potential. . . .

I have held elsewhere [2] that the criteria quoted above of “reasonable expectation of income from his various revenue sources" and “his ordinary mode and habit of work" can be read disjunctively so that if a conclusion can be drawn in favour of the taxpayer in respect of either criterion this will suffice to make his farming a "chief source of income". As explained in Morrissey, it appears to me that this is more consistent with other passages in the Moldowan judgment and with, for example, the decision of the Federal Court of Appeal in Graham. [3]

Looking at the criterion of the "taxpayer's reasonable expectation of income from his various revenue sources", I find it difficult to see in the present case that the taxpayer has established a reasonable expectation of his farm income becoming his chief source, or one of his chief sources, of income. He testified that when he commenced building his herd in 1973 he expected it would take about ten years to make the operation profitable. The basis for that belief was not demonstrated. In any event, it has proven to be overly optimistic as the farm is not yet profitable some 15 years later. The taxpayer blames this in part on depressed meat prices and, for part of the period after the tax years in question, on extraordinarily high interest rates. To a certain degree these and similar problems seem to arise frequently in agriculture and any realistic forecast of profitability must take them into account. While the taxpayer says he is optimistic for the future and expects his herd to become profitable, as mentioned earlier no data and no corroborating evidence was presented on this point. While the Minister has, by applying subsection 31(1), conceded that the taxpayer's farming is “a source of income" and this implies some expectation of ultimate profitability, this is not determinative of whether the taxpayer could have a reasonable expectation that his farm income would be his chief source of income either alone or in combination with another source of income. It is hard to see how such an expectation could be entertained in the circumstances of 1979 and 1980 when he was earning a salary of respectively $61,199 and $69,510. Mr. Connell himself confirmed in his testimony that he could not conceive of his farm income exceeding his employment income. On the facts it is difficult to see how he could have had a reasonable expectation of his farm income even being significant in relation to his employment income so as to constitute one of his chief sources of income.

Looking at the other criterion identified by the Supreme Court, namely the taxpayer's “ordinary mode and habit of work" one is obliged to try to compare the taxpayer's commitment to farming to his commitment to employment. Two relevant tests suggested by the Supreme Court are the time spent and the capital committed in relation to farming. It is obvious the Supreme Court did not intend these to be the only tests and one must try from the evidence available to determine whether he is, as the Court said in Moldowan, [4] “a man whose major preoccupation is farming”. After carefully reviewing all the evidence, I am not satisfied that the taxpayer here has demonstrated — and the onus is on him to do so — that his major preoccupation during the years in question was farming. As for time spent, even accepting the rough estimates provided by the taxpayer it is clear that he spent more working hours in his employment than in farming. Further, it is hard to characterize the role of Deputy Minister in the Government of Canada as an "employment side-line". Mr. Connell agreed that he would have felt obliged to give priority to his job had there been a conflict with his farming. This is not a situation, as found in some of the cases under this section, where a person continued with his employment but declined promotions or greater responsibilities at his place of employment in order to concentrate on farming. In the present case Mr. Connell, when he purchased his farm, was a Deputy Secretary of the Treasury Board. Three years later he was promoted to the position of Deputy Minister of National Revenue, a post he occupied during the taxation years in question. It is fair to assume that he performed that role ably and with diligence as he was subsequently appointed, in 1982, to the very responsible position of Deputy Minister of Agriculture. While it is clear that throughout this period he was serious about his farming and apparently did whatever was necessary, including the outlay of capital, for an operation of its size, the evidence does not satisfy me that this should be viewed as anything other than a side-line occupation which, because of its nature, could be conveniently combined with his main preoccupation of being a Deputy Minister. The capital committed also provided the taxpayer and his family with a home and a life style that they clearly found appealing quite apart from any income-earning potential that might be involved.

Viewing the matter as a whole then I am unable to see that the taxpayer has proven that he meets either of the criteria identified in Moldowan as set out above.

The appeal is therefore allowed and the Minister’s reassessments in respect of the taxation years 1979 and 1980 are confirmed.

Appeal allowed.