Grant DJ:—This is an appeal by the plaintiff from a decision of The Tax Review Board delivered on September 12,1978 whereby it allowed in part an appeal from the reassessment of the defendant’s income tax returns for the year 1974 and referred the same back to the Minister of National Revenue for reassessment on the basis of such Board’s decision.
The defendant is retired from the Royal Canadian Mounted Police and is now acting as a justice of the peace in the London police courts. In that capacity he earns approximately $12,477.98. His duties in that capacity usually demand his attendance at Court 5 days a week from 9 am to 5 pm. He inherited from his father who died in 1970 a farm being parts of lots 5 and 6 in the 8th concession of Lobo Township in the County of Middlesex. It consists of 43 acres of which 20 acres are good tillable soil and the balance consists of bush and swamp which supports hardwood as well as cedar trees. Such property lies about 16 miles west of London. He lives in his home on other property which lies about 300 yards from the farm. His father had lived on the farm from 1957 until his death but because of ill health had allowed the farm to become in a run down condition with fences destroyed and the barn in a very poor state of repair.
His grandfather had owned the property until his death in 1957. As a boy the taxpayer had spend much of his time on the farm and was even then very interested in farming and had been promised the farm on his father’s death. It was natural that he should be so interested because his grandfather had been a professor of agriculture at the Ontario Agricultural College at Guelph and his father had held a responsible position with the Federal department of Agriculture. While still with the police force he studied pamphlets on farming and from that source and his actual work on the farm as a boy he acquired a good knowledge of farming. He was not represented by Counsel either before the Tax Review Board or on this appeal. I therefore asked him a number of questions as to his practise of farming and from his answers I was convinced that he knew how to rotate crops and farm economically.
It took him a number of years to get the farm back into shape that it would grow good crops and to rebuild fences and buildings. He was also without machinery and farming tools and equipment and has spent $10,000 to $12,000 in securing such necessary equipment and in restoring fences and buildings. He decided against borrowing money and purchased his farm implements only when he had the money to do so. If he had been able to acquire the necessary machinery and repair the barn sooner he would have brought his farming operations to the stage where profits were made sooner. This was prevented by some unforeseen events. He had given a part of the farm to a daughter when she was married on which to build a home. A mortgage of $25,000 was placed against the same. The marriage broke up and Zavitz found it necessary to pay off the mortgage or lose the home. The final payments will be made by him in July of 1981.
To the present time he has had to buy his cattle in the spring and sell them in the fall. With his barn repaired so that he can keep them over winter and feed them the hay grown on the premises, this part of his farming operation will be much more profitable. He also plans to grow wheat on 12 acres each year by rotating this crop from 1 field to another. This crop should yield him between 70 bushels per acre or 800 and 900 bushels of fall wheat each year. He now has a seed cleaner and a mill to grind it into flow and should be able to sell the finished product at 35¢ a pound. This should bring him at least $1,400 per acre for his wheat operation.
In 1974 he had decided to change his farming operations by growing more wheat and eventually disposing of it in the manner above indicated. As fall wheat has to be sewn in September after extensive preparation of the soil and only harvested the following year he had no returns from his wheat in that year and had no cattle to sell. The result was that in such year his proceeds from the sale of hay was minimal but it was an exceptional experience because of his change over in his mode of farming.
Another matter that should be considered in deciding whether his farming will be profitable venture or not is to examine the benefits that he realizes from his farming operations that do not actually bring him cash but which save him from having to expend moneys for living expenses. The garden can provide him with the most of the vegetables and fruit for the family. His farm statement filed in 1973 show that his cattle consisted of heifers. Fom these animals one would expect him to raise calves and also secure his milk, butter and meat. The machinery that he has purchased has greatly increased in value because of higher prices since he purchased it.
His wheat would be the source of his flour. While all marketable logs were cut from the bush 25 years ago the swamp yields cedar posts for his fencing and fallen limbs and trees will provide him with fuel. There is no estimate of the value of such benefits in the evidence but common knowledge would make it clear that it may be worth considerable.
The list of expenses for the year 1974 shown in the judgment of the Board contains items which may be classed as personal or living expenses. Mr Taylor in his well considered reasons for judgment indicates that this is the fundamental question in this appeal and I agree with him. He suggests that the percentages in the first four items of expenses should be reversed so that only 30% thereof should be changed as expenses of the business. This may be fair as far as the automobile expense of $1,230.08 is concerned because it would be difficult to calculate the actual amount used in each category. However house repairs ordinarily are a living expense and none of the same should be charged to business. In regard to power, fuel and insurance the taxpayer will be able to give the exact amount of taxes and insurance that relate to the home and that of the farm. While small tools are ordinarily treated as income expense the item of $358.14 for tools and $326.72 for machinery expense may include items properly chargeable as capital expenditures. It should be noted that the item of fertilizer $315.78 is one that may be much less in future years when cattle are kept over winter and the need to purchase so much manufactured fertilizer will not be as great. Items of accounting and legal, repairs to barn and fences will not be of a recurring nature.
When all these matters are taken into consideration particularly in the years 1973, 1975, and 1976 the taxpayers loss is not as great as these statements would indicate and they do not contain any convincing proof of the extent of loss in the operation of the farm that a first glance at them would indicate. Another matter that unduly exaggerates the annual loss is carrying forward in the statement the loss from previous years.
I agree with Mr Taylor that I did not think that the taxpayer was attempting to present an excessive allocation of the expenses with an improper purpose. I was convinced he was perfectly honest. He did not actually prepare the returns himself and enough care may not have been exercised by the one that did to differentiate between capital and income expenses or living expenses. In any event I am convinced that the taxpayer is doing everything to make his farming operations profitable and he has every right to believe that he will do so and that he will continue to improve his financial position as far as the farm is concerned. I have no hesitation in accepting his testimony.
The Crown called one Reginald Swartz, an auditor with the Department of National Revenue at the hearing before the Board. Part of his evidence is set out in the reasons of the Board. He had decided there was no reasonable expectation of profit in the enterprise. He acknowledged to the Chairman that he didn’t know the distinction between the person who qualified for restricted farm loss and the one who doesn't qualify for any farming loss. (Namely a hobby farmer). Neither he nor any other witness was called to give evidence before this Court.
The section of the Income Tax Act which is crucial to this assessment Is subsection 31(1) which reads:
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 purpose 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 incomes 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
There is no doubt that the taxpayers chief source of income in the year in question was not that of farming because his salary as a justice of the peace and his pension were far in excess thereof. The cases have referred to the ambiguity prevailing in the section by reason of the words “nor a combination of farming and some other source of income’’. The problem of interpretation thereof arises because it is drafted in the negative. In the interpretation thereof I believe the word “combination” is most important. Such word envisages some contribution of income from each of the two sources referred to. The words “other source” denote that there must be some income from farming within the exclusionary provision. The Shorter Oxford English Dictionary defines the word combination as:
(a) the action of combining two or more separate things;
(b) combined state or condition;
(c) a group of things combined into a whole.
It the taxpayer is a part-time farmer whose receipts from his farming operation do not exceed his income expenses therefrom then he has no source of income therefrom and there can be “no combination of farming and some other source”.
It follows therefore that the taxpayer is entitled to the benefit of such section for the taxation year 1974.
The Crown’s main contention herein was that the taxpayer was not engaged in the business of farming as no portion of the expenses had been made or incurred for the purpose of gaining income from a business or property. For reasons given above I am convinced that Zavitz was in the business of farming. He worked on the farm after the hours that he spent in his duties as justice of the Peace and at all times that was available to him. He had no other interests and at all times had a well justified expectation that he would shortly realize a good profit therefrom.
In W Moldowan v The Queen, [1978] S.C.R. 480 at 486; [1977] CTC 310 at 314; 77 DTC 5213 at 5215, Dickson, J stated:
One would not expect a farmer who purchased a productive going operation to suffer the start up losses as the man who begins a tree farm on raw land.
In the reasons for judgment herein at page 12 thereof it is stated:
The problem is that such an examination of the quantum and the nature of the total expense claim did not arise since all the expenses claimed were disallowed.
In the argument before this Court, counsel for the Crown adopted the Same argument and indicated that the only question to be decided was as to whether the taxpayer had any reasonable expectation of profit in the farming operations carried on by him in the year 1974. To leave the list of expenses unchallenged strengthened such submission of the Crown as it was then better evidence of the alleged improbability of any profit being made in such farming operations.
I agree with the decision of the Board that the taxpayer can claim a restricted farm loss under subsection 31(1) of the Income Tax Act. The Board in its judgment stated that the basis for the calculation of claims for expenses which had a dual applicability to the farm and to personal living expenses should be in the ratio of 70% to the taxpayer personally and 30% to farming. I agree with such division if it is limited only to such expenses in respect of which it is impossible to determine the benefit thereof accruing to each of such purposes. Such an expense might be that associated with the operation of the family motor vehicle. However, in the case of taxes it should readily be determined the amount against the home and that of the farm. The reassessment by the Minister should be directed towards ascertaining which of the expenses claimed were incurred for the purpose of gaining income from the taxpayer’s farming operations and which were personal or living expenses.
For these reasons the appeal by the plaintiff should be dismissed. The defendant was not represented by counsel and is therefore not entitled to a counsel fee but he may have other costs to wich he is entitled under subsection 178(2) of the Act. I therefore direct that the Minister should pay to the defendant all his reasonable and proper costs of this appeal, but without counsel fee.