The Associate Chief Justice:—This matter, dealing with the interpretation and application of section 31 of the Income Tax Act came on for hearing at Toronto, Ontario, on November 13, 1984 and January 9 and 10, 1985.
While this matter was under consideration, a strikingly similar problem came before my colleague, Joyal, J. in Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058. At the same time, the precise questions were before the Federal Court of Appeal in The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256. When the judgment of the Federal Court of Appeal in Graham was filed, I felt obliged to grant counsel in the present case the opportunity to submit written argument, which was received a short time ago. Bearing in mind that these issues had also been exhaustively canvassed in the Supreme Court of Canada and dealt with in a most comprehensive fashion by Dickson, J. (as he then was), in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, it might be expected that the problems with the interpretation of section 31 could have been resolved, but that is far from the case. I alluded to some of them in Kasper v. The Queen, [1982] C.T.C. 178 at 179; 82 D.T.C. 6148 at 6149:
The courts have had great difficulty in the interpretation of this rather convoluted language. The leading judgment on the forerunner, subsection 13(1), is the Supreme Court of Canada decision in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, wherein Dickson, J. described it as an “awkwardly worded and intractable section and the source of much debate”. More specifically, the section appears to contain a contradiction in terms since it requires an assessment of the significance of the taxpayer’s farm income in relation to other sources, yet obviously relates only to years in which there have been losses from the farming operations. Dickson, J. put the problem as follows:
The next thing to observe with respect to subsection 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer’s chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer’s income in that year.
On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words “source of income”.
The full text of section 31 is 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 deemed to be the lesser of
(a) the amount by which the aggregate of his losses for the year otherwise determined from all farming businesses carried on by him exceeds the aggregate of his income for the year from all such businesses, and
(b) $2,500 plus the lesser of
(i) /2 of the amount by which the amount determined under paragraph (a) exceeds $2,500, and
(ii) $2,500;
and for the purposes of this Act the amount, if any, by which the amount determined under paragraph (a) exceeds the amount determined under paragraph (b) is the taxpayer's “restricted farm loss” for the year.
(2) For the purpose of this section, the Minister may determine that 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.
Subparagraphs 31(1)(a)(i) and 31 (1 )(b)(i) were amended in 1979 (to apply to taxation years ending after 1977) by S.C. 1979, c. 5 s. 9 to read:
9. (1) Subparagraph 31(1)(a)(i) of the said Act is repealed and the following substituted therefor:
“(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and''
(2) Subparagraph 31 (1 )(b)(i) of the said Act is repealed and the following substituted therefor:
“(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1" were deleted",
The decision of the majority of the Federal Court of Appeal in Graham is now binding authority, particularly since an application for leave to appeal to the Supreme Court of Canada was dismissed on July 31, 1985 [62 N.R. 103]. Nevertheless, the problems posed by the section were the subject of a very plausible dissent by Marceau, J. I refer in particular to the following at 394 (D.T.C. 5267):
The case at bar involves a man whose ability and dedication as a farmer is special and, in that sense, it is an extraordinary case, but nevertheless it presents a pattern that is certainly not unique and the question it poses goes beyond its particular facts. I think counsel for the appellant could rightly present the case as a test case. The general question raised is the following. Can a full-time employee who starts a farming operation without leaving his employment be regarded as having made farming his chief source of income, within the meaning of section 31 of the Act, before he even puts himself in a situation where he can develop an operation that can yield a profit? As I read the reasons in the Moldowan case and understand, through them, the intention of the statute, it seems to me that the answer to the question simply cannot be otherwise than in the negative.
I took care to note previously that the determination that a man is farming not only as a hobby but as a business ought not to be really influenced by the actual profitability of his farming activities, the length of time the operation he is building up may require to reach a certain maturity and the remoteness of his expectation of real profit. But I simply fail to see how the comparison between a man’s several sources of income for the purpose of determining which is the chief one amongst them could leave aside, to the same extent, their respective actual capacity to produce profit. Of course, the expectations of the man are involved but for the determination to have a certain practical meaning only expectations real and actual are relevant not mere plans and long-term goals. These expectations must be that the source will provide, not in the far future but now, at least part of the income, the man may need for his own and his family’s living needs.
It is true that the definition given by Mr. Justice Dickson of a first class farmer, in the Moldowan case, supra, would readily apply to a man for whom farming is “the centre of work routine” — regardless of the income he may expect to derive therefrom. Of course, the definition had to cover the case of a man who is dedicated totally to farming, it being his only source of income or his sole ongoing income-earning activity. But I do not think that a man who has a full-time job can be seen as having nevertheless farming as “the centre of work routine” within the meaning given to those words in the definition. Besides, in the second part of his definition, Mr. Justice Dickson emphasizes that the farmer referred to is one that “looks to farming for his livelihood” and I fail to see how a man who, while holding a full-time job, starts and carries on a farming operation can reasonably “look to farming for his livelihood” until his operation is at least capable of yielding a profit. It is also true that Mr. Justice Dickson refers to a “man's major preoccupation” but in the context in which it is used the phrase does not appear to me to refer simply to physical activities (in which case, in any event, it would be doubtful that a man can be said to have a major preoccupation other than his full-time job), but to actual income earning activities. Otherwise, it would simply mean a return to the old abandoned concept of the Income War Tax Act, that of the “chief occupation”. Finally, I am not oblivious of Mr. Justice Dickson’s last observation to the effect that a man should not be disentitled to deduct the full impact of start-up costs. But, I do not think that the concept of start-up expenses can be extended to a period reaching over several years during which the taxpayer plans to build up slowly, through gradual development, expansion and acquisition, an operation that will finally yield a significant profit.
The limit placed by section 31 on the deductibility of farming losses is extremely difficult to explain as it is obviously meant to apply not only to “hobby farmers”, who in any event would have difficulty in establishing that farming is for them a source of income, but also and even primarily to some serious and dedicated farmers engaged in farming as a business. Of course one must assume that the goal is to prevent abuses which in this area could be more difficult to detect. But it remains that no such limit appears to have been placed on the deductibility of any other type of business losses. The view I take of the nature and scope of the limit is all the more dissatisfying to me and I wish I would not have felt bound to adopt it. Unfortunately, my understanding of the meaning of the words used in the section does not allow me to support the finding of the trial judge that the provision is not applicable in this case.
Truly, the more this section is subjected to judicial analysis, the more its weaknesses are confirmed and they are many and severe. To begin with, the purpose is to establish eligibility for the deduction of farming losses from other income. Since it addresses situations in which farm income is combined with other income, there is a value only apparent to legislative draftsmen in attacking the problem from precisely the opposite direction: “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,
Secondly, since section 31 deals only with the treatment of losses from farming operation, none of these cases (and the present case is no exception) deal with the farming operation as an actual source of income. Indeed, the very purpose of the section is to deal with losses. The result is that in every one of these factual situations, the courts have been required to analyze not present income, but investment in the hope of a source of income in the future. Assuming that this comparative assessment is unavoidable, how much more suitable would it be if the relative assessments were between comparable values — if investment of time and money in the farming operation could be compared with the same kind of investment in the taxpayer's other sources of income. Instead, we are asked to embark upon not just an evaluation of investment of time and money, but the conversion of it from the start-up loss position into a source of income some years down the road. As if that were not a difficult enough exercise, a comparison is required to determine whether this imagined source of income combines with the taxpayer's other sources of income as a “chief source of income".
Finally, I am concerned that eligibility for the loss deduction in section 31 cannot be determined in relation to the farm operation, but will depend upon the extent of the taxpayer's activity and success in producing income from entirely unrelated areas. The deductions permitted Mr. Graham, whose other source of income was as a Stationary Engineer with Ontario Hydro might not have been available to Mr. Poirier in the years that he was enjoying success in his other business interests. Even more graphically in the present case at the time that Poirier embarked upon the farming enterprise, his other business endeavours were, at least on paper, quite successful. Tragically, they began to decline and ultimately were lost entirely to the recession period between 1980 and 1981. Is it not fair to ask, therefore, whether Mr. Poirier’s own ability to escape the impact of section 31 would vary as his other business interests dwindled and ultimately disappeared as sources of income?
The wisdom or the necessity of the special tax treatment for income derived from farming in combination with other income is not my concern. I take it as axiomatic, however, that tax laws should be written so that the taxpayer can not only understand them, but can plan his affairs with at least some certainty about his liability for tax. If section 31 leaves the courts in such a quandary to grapple with such nebulous concepts, what hope was there for any of these taxpayers to predict their burden of tax during the start-up period of unbroken losses from these diverse farming operations?
Having said all of this, I hasten to indicate that I have no difficulty in concluding that Mr. Poirier was eligible for the full extent of the loss allowance. Indeed, I would reach the same conclusion were I to follow the two- step approach in the dissenting judgment of Marceau, J. to which I referred earlier. The facts satisfy me that Poirier's investment of time and money was of such a magnitude that his operation was stamped from the start as a business. Furthermore, a business not only with a reasonable expectation of profit in the near future, but a profit that would compare with his other sources of income so as to be “the chief source of income for a taxation year’.
Like a great many rural Ontarians, Mr. Poirier worked for many of his younger years on a farm, but ultimately was drawn to the more lucrative hourly rated work as a truck driver. His first employment was with B & M Carriers Limited and although he left it for a short period, he returned some time prior to 1972, as a driver for them in the carriage of explosive materials. In 1972, when it appeared that the business might be closed down, he was approached by one of the major suppliers who offered to loan him the money to purchase the company. At the same time, B & M Explosives Limited, a holding company owned by the plaintiff purchased the explosive distributorship business from B & M Carriers. B & M Explosives was sold in 1979. In 1974, the plaintiff formed “Les Entreprises LGO”’ which performed trucking activities at the James Bay project in Quebec. In 1977, he purchased the shares of Armac Drilling & Blasting but limited his involvement in that business to negotiating approximately six contracts a year for a period of 12 days. Armac was a customer of B & M Explosives and the purchase was designed to enhance the existing core business. The plan was to eventually sell Armac to one of his employees. The plaintiff also bought a third interest in Por-Car Leasing, leasing moving equipment for use in quarries and moving aggregate once it had been blasted, thereby complementing the existing business. The plaintiff was not involved in the day to day management of Por-Car Leasing.
In 1979, the plaintiff bought a 50 per cent interest in a quarry, Bertpor Aggregates Limited, but was not required to spend significant amounts of time in connection with the business activity since this was conducted by the other half-owner. B & M Carriers also purchased Christie Transport whose trucks were in use during different parts of the year than those of B & M Carriers, enabling him to keep the trucks of both companies in use throughout the year.
The last acquisition made by the plaintiff was that of Brundige Construction Company Limited. In late 1978, the plaintiff had purchased 50 per cent of the Brundige stock. At that time, Brundige was a customer of Armac and was indebted to Armac in the amount of $250,000 and was on the verge of going into receivership. The plaintiff purchased the balance of the stock in order to protect B & M Holdings’ receivables. On August 31, 1979, B & M Explosives Limited sold its explosive distributorship and related assets to Powder Company Limited.
Against this background, in 1976 the plaintiff became interested in investing in purebred cattle, specifically in the breeding of Charolais cattle. In order to assess the viability of this enterprise, the plaintiff spoke with numerous breeders of various types of purebred cattle and attended several fairs. By the end of 1976, he was committed to breeding Charolais cattle and purchased his first seven head of cattle. In April of 1977 he hired a knowledgeable assistant to aid him in the development of a viable farming operation and additional Charolais were purchased. By 1978 the plaintiff had established a breeding program that would ultimately result in 40 top producing female Charolais, and by the end of that year, the total investment in cattle inventory was $197,000. Between 1978 and 1980 the plaintiff's herd grew to a peak of 86 animals.
During 1976, the plaintiff resided in a house situated on about 30 acres of land owned by his wife, adjacent to a larger parcel of several hundred acres owned by B & M Carriers. During 1976 and 1977 a further 486 acres were acquired for additional barn facilities and for pasture. Ultimately, the plaintiff's investment in land for farming purposes reached $248,644, in farm equipment, $94,000 and the total investment in the farming operation was in excess of $600,000.
I accept Mr. Poirier’s evidence that several aspects of the farming operation required his personal involvement, including investigating what cattle to buy having in mind the build-up of the herd and the type of blood lines sought; during the calving season, supervision of the cows and providing assistance where necessary; breaking new calves to halter in preparation for shows; the feeding and cleaning of the herd; arranging to show and attending with his cattle at local, regional and national shows and fairs; attending some 10 shows per year for the purpose of showing his animals and promoting his operation; meeting with breeders and potential customers; promoting the reputation of his farm by advertising in trade magazines. (Copies of these advertisements, of acknowledgments of purchases and of newspaper articles were entered in evidence.)
Although the plaintiff’s farm finances were combined with those of his non-farming businesses on a day to day basis, at year end the amounts paid out in relation to the farm were charged to the plaintiff as direct salary or bonus. Cheques issued for farm expenses were signed by the plaintiff. It also appears that although Poirier bore the ultimate responsibility for each of these companies, each division was managed by capable managers and he was not usually involved in the day to day operation of them. In acquiring each of these companies, the plaintiff’s aim was to create an enhanced business package which he would ultimately be able to sell. Since both the farming operation and the non-farming businesses were run out of the same location (an office located on the farm) the plaintiff was able to commit significant time to the development of his farm plan.
During 1980 and 1981, the plaintiff encountered financial difficulties caused in part by the acquisition of Brundige, the economic decline and the rise in interest rates. The Bank to which the plaintiff was indebted had required cross-security from all of the plaintiffs companies and a personal guarantee from the plaintiff. Ultimately, the companies were not able to meet their financial obligations and the plaintiff Clarkson Company Limited was appointed receiver. Following the liquidation of his assets, the plaintiff was forced to declare personal bankruptcy.
Income tax returns prepared by the plaintiff and filed by the defendant as exhibit D-2 indicate that for the 1977 taxation year, the plaintiffs gross income from farming amounted to $129,438 with a loss of $50,619, whereas his net employment earnings were $59,247. In 1978, gross income from farming was $85,650 with losses of $200,860, and net employment earnings amounted to $181,151. The plaintiff testified that non-farming income was used for personal living expenses and the operation of his farm. Between 1976 and 1980, the plaintiff invested $453,583 in cash and $314,763 by way of loans in the farm. It is not disputed that the plaintiff had a reasonable expectation of profit from his farming operation.
For the taxation years 1975 and 1976, the plaintiff filed income tax returns claiming a loss from his farm business as allowed by subsection 31(1) of the Income Tax Act. For the taxation years 1977 and 1978, however, the plaintiff deducted the full amount of his farming loss in computing his taxable income. By notices of reassessment dated June 6, 1980, the Minister of National Revenue reassessed the plaintiff for the 1977 and 1978 taxation years and restricted his farm losses to those allowed under subsection 31(1) of the Income Tax Act.
To repeat, the evidence satisfies me that during the years in question, Mr. Poirier embarked upon a business enterprise in the raising of Charolais cattle. The enterprise was conceived in the hope of producing a source of income and the commitment of time and money was of such a magnitude that it, in my opinion would reasonably be expected to be a source of income combined with his other sources of income to form his chief source of income in those taxation years. The appeal is therefore allowed and Benoit Poirier is entitled to deduct the full amount of his farming loss in computing his taxable income for the taxation years 1977 and 1978. The plaintiff is entitled to its costs.
Appeal allowed.