The Queen v. Graham, 85 DTC 5256, [1985] 1 CTC 388, [1985] 1 CTC 380 (FCA)

Urie, J:—The sole issue in this appeal from a judgment of Cattanach, J in the Trial Division is whether the respondent was entitled to claim, in the computation of his taxable income for the taxation years 1977, 1978 and 1979, losses incurred in the carrying out of a farming operation or whether the claim for the deductibility of such losses was to be restricted in each year to the sum of $5,000 as prescribed by section 31 of the Income Tax Act (“the Act”).

As it was argued, the resolution of this issue was dependent upon whether or not the respondent fell within category 1 of the three classes of farmers which Dickson, J (as he then was) envisaged under the Act in the judgment of the Supreme Court of Canada in Moldowan v The Queen, [1978] 1 S.C.R. 480 at 487- 88; [1977] CTC 310 at 315, as the respondent urged, or under category 2 of such classes as counsel for the appellant submitted. The learned trial judge found that respondent fell within category 1 so that he was entitled to deduct his farming losses in their entirety from the combination of his two sources of income, namely, from his “major preoccupation”, farming and his employment, his “subsidiary interest”.

I turn now to the facts which, as will be seen, must be reviewed in some detail in order to best appreciate the basis upon which the trial judge concluded that the respondent fell within category 1.

The respondent, who was born in 1942, was the son of a farmer. Due to his father’s serious illness it was necessary to sell the family farm in 1960. In 1962 the respondent became employed by Ontario Hydro and trained as a stationary engineer at Port Credit, Ontario. By the early 1970s he had become a Class IV Stationary Engineer at which time he was employed by Ontario Hydro at a generating station near Sarnia, Ontario. He had moved there in 1968 when he had applied for and received a transfer to that location. At that time he bought a nine-acre farm in Lambton County, of which Sarnia is the county town, upon which there was a house and a concrete block barn. He did so because, as the trial judge found, the respondent had always harboured the dream of returning to farming as a means of livelihood. In furtherance of this dream he had applied for the transfer to the new generating station in Lambton County, which is a rural area.

During the first two and one-half years of ownership he remodelled both the house and the barns and installed therein equipment essential for the hog farming operation which he proposed to undertake. He did all the work himself. In 1973 the respondent purchased a further five acres of land abutting his original acquisition.

In 1975 and 1976 the respondent began, in earnest, the hog farming operation which he had planned, although by the first part of 1975 he already had acquired nine sows. In 1976 he had nine sows, two boars and five feeder pigs. By 1979 his herd had grown to 28 sows, two boars, 148 feeders and 73 weanlings. During that year he had sold 210 pigs.

Throughout the whole period he continued to be employed by Ontario Hydro. In commenting upon this the learned trial judge summarized the evidence relating to the respondent’s employment, accurately, as follows:

The plaintiff had a very accommodating employer.

The plaintiff was on a 28-day, 8-hour shift cycle. In every 28 working days he gets 7 days off.

The busy farm times are in the spring and fall, that 1s, seeding in May and June and harvesting in October and November. He arranged for his holidays at those times. He also got time off without pay and he arranged exchanges of times with fellow employees.

Out of the 24 hours in a day the plaintiff slept five hours, worked eight hours at Ontario Hydro and spent the remaining 11 hours on the farm with minimal time off for breakfast, supper and personal needs.

Mrs Graham, the plaintiff's wife, with the help of their sixteen year old son was quite capable of handling matters which might arise during the plaintiffs absence at work with Ontario Hydro but in the event of an emergency arising beyond her competence the plaintiff was available, with the concurrence of his employer, upon being summoned by telephone. Those occasions were rare.

To illustrate the progression of the hog operation the following table is useful:

By purchases and rentals, the respondent had under cultivation 75 acres of land by 1979, of which he owned 61 and rented 14. In fact, he had cultivated in the two preceding years larger acreage which had been reduced because of changes of ownership in the rented land. The following table shows the number of acres cultivated by the respondent during the relevant period:

The hog handling capacity of the farm owned by the respondent in the taxation years under review was 40 sows. In those years he had not reached that capacity. The maximum number he had was 39. As the learned trial judge observed:

That number and those he owned previously did not support the standard of living that the plaintiff wished to provide for his family. To reach that standard he considered it expedient to continue in his employment at Ontario Hydro having reached the capacity of 40 sows on the home place expropriated in 1982 and to achieve the objective of 64 sows on the new farm.

To establish the quality of the respondent as a farmer, his counsel called William Richard de Mars who was the Deputy Reeve of the Township of Sombra in which Mr Graham’s farm is located and who was engaged in the same type of farming operation as the respondent. The following excerpt from his testimony at trial supports the respondent’s evidence and the submission of his counsel that he is a dedicated, efficient, progressive and innovative farmer:

Q. In your relationship with Mr Graham, have you had an opportunity to observe his work habits?

A. Yes, I have.

Q. You were in court today while Mr Graham described an average day in his life. Is that exaggerated in any way?

A. No, it is not.

Q. What can you tell his lordship about Mr Graham’s work habits?

A. He is a compulsive worker. I find myself, in our daily endeavours, our mutual enterprises, that I never have to hold his end up because he is working in Ontario Hydro. He is there and has scheduled his time off, planting, harvesting season, and he is very capable of holding his end up, his end of the partnership up, plus look after his own work.

Q. Are you familiar with his hog operation?

A. Yes, I am.

Q. You have visited the site and so on?

A. Right.

Q. How would you describe his efficiency?

A. Other than the fact that his personal records are really none of my business, looking at the livestock, he has a very good breeding line. I might add, one of the first ways that I got to know Mr Graham was the fact that he was one of the first ones in our part of the county to take an artificial insemination course and just out of curiosity, the bus stopped at our place and wanted to know where they could deliver these vials of semen for Mr Graham, and to my knowledge, that was a very new technique then and not practised by very many swinemen. In fact, it was after that that I went and took the course and found it to be too time consuming, but it was certainly a good way of introducing some new blood lines to your herd without introducing disease. And he was the first one in our area that I am aware of to use that particular method.

Q. And what can you say about the results that he has obtained? Are you in a position to comment?

A. That is the computer printout that the Ontario Pork Producer, the Ontario Pork Producers’ Marketing Board sends each producer, in about February, for the preceding sales for the year, and Mr Graham and I often compare results. Oftentimes farmers do not do that, they kind of live on a little island, but Mr Graham and I compare results. His I believe, in 1982, was 104.7; mine was 104.9. Previous to those two years . . . THE COURT: You were the top man?

THE WITNESS: Well, I was the one that placed eighth in the county, my lord. THE COURT: Yes.

THE WITNESS: Previous to that his index was higher than mine by at least two points, and it was through some advice that he had given me at some of the seminars that he had time to attend, or had taken the time to attend, that I should be weighing my hogs. And as soon as I bought a set of scales and followed his suggestion that I possibly should weigh my pigs instead of just guessing how much they weigh, my index went up a point and a half in 60 days.

Q. So you leapfrogged over him?

A. Yes.

All of the foregoing surely indicates that were it not for the fact that he derived income from what, for a normal person would constitute a full-time occupation, namely his employment at Ontario Hydro, the respondent would have been considered to have been working full-time as an efficient, hard-working and knowledgeable farmer. It seems to me, therefore, that one of the issues with which the Court must deal in this appeal is whether or not it is possible, in the rather unusual circumstances of this case, for a person to have employment in two full-time occupations at the same time, the existence of one of which would not, per se, lead to the conclusion that he fell within the restrictions imposed by subsection 31(1) of the Income Tax Act limiting his claim for the deductibility of his farming losses to $5,000.

Before examining this issue, I should make reference to the following evidence. As commented upon earlier, the respondent continued during the whole of the period to work for Ontario Hydro, his duties being both of an operational and managerial character. During the taxation years 1977, 1978 and 1979 his earnings therefrom were $29,605, $30,400, and $33,374 respectively.

The income from that source, his limited savings and borrowings, as well as his income from cash crops were all utilized in the hog farming operations. As the respondent testified, he had committed all of his resources to the farm.

In his reasons for judgment, the learned trial judge included the following schedule which formed part of the Minister’s assumptions as set forth in the statement of defence, infra, showing the respondent’s income from his two sources of income, employment and farming, in the years 1975 to 1979 inclusive.

In assessing the respondent for income tax for the taxation years 1977, 1978 and 1979, the appellant purported to do so on the authority of subsection 31(1) of the Act and in doing so made the following assumptions, as stated in her statement of defence:

(a) the Plaintiff [Respondent], at all material times, was employed as a turbine boiler operator on a full-time basis;

(b) the Plaintiff [Respondent] farmed during his spare time;

(c) the Plaintiffs [Respondent’s] income from employment and farming during the period 1975 to 1979 were as shown in the following schedule:

(See above)

(d) the Plaintiff's [Respondent’s] chief source of income was neither farming nor a combination of farming and some other source of income.

Subsection 31(1) reads as follows:

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 aggregate of

(a) the lesser of

(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

(11) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (1) exceeds $2,500 and

(B) $2,500, and

(b) the amount, if any, by which

(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,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) 1s the taxpayer’s “restricted farm loss” for the year.

The trial judge, having lumped assumptions 3 and 4 together, dealt with all four as follows:

The first two assumptions are, in actuality, predicated upon semantics.

Of course the plaintiff is employed full time at Ontario Hydro. He works an 8-hour shift in a cyclical 28 days. That 28 days is reduced by seven days to 21 days for time allowed off. Therefore in a cycle he works 168 hours.

The second assumption is that the plaintiff works the farm during his spare time.

That too is so. But in a 28-day cycle that spare time represents 11 hours per day for 21 days for 231 hours plus 19 hours per day for seven days which equals 133 hours for a total of 364 hours spare time. The plaintiff testified he slept but five hours in 24.

Therefore the spare time is more than double the time spent in his employment and would be still greater in a calendar year when account must be taken of the plaintiffs spring and fall holidays, time off without pay, exchanges of time and overtime.

If need be I would say that those two assumptions have been rebutted. The matter turns on the third assumption.

The initial words of subsection 31(1) of the Income Tax Act are:

“31. (1) [sic] 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, his income . .

It is now authoritatively established in Moldowan v The Queen (supra) that in order to have a “source of income’’ the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business. Farming is a business but unlike other businesses it is the only business in which losses incurred in the conduct thereof are not deductible in their entirety but are subjected to limitation in instances which might fall within section 31. That, however, is a matter of policy and as such is not of judicial concern except as it might effect the interpretation of the language of the section.

It is equally now well established in the Moldowan case that whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. It is a finding of fact to be made taking into consideration the criteria mentioned in the Moldowan case but the criteria mentioned were not intended to be exhaustive. (Emphasis added.)

I turn now to the definitive judgment on the subject of farming losses, viz, the Moldowan case, supra. At 487 and following (CTC 315) of the report, Dickson, J said:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

The reference in s 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a side-line employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income 1s relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source’’ to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs. (Emphasis added.)

The reference to the test being “both relative and objective’’ is to an earlier passage in the judgment at 485 (CTC 313) reading as follows:

The next thing to observe with respect to s 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.’’

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v MNR, [[1972] CTC 151]. See also s 139(l)(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews [(1974), 74 DTC 6193]. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Whether a source of income is a taxpayer’s “chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. 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. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances. (Emphasis added.)

The learned trial judge very clearly had in mind these principles in reaching the following conclusions at pages 16 and following in his reasons:

In the circumstances of these appeals I do not accept the premise predicated upon the evidence that the plaintiff might not reasonably expect his farming operations to “provide the bulk of his income” and it most certainly is “the centre of work routine”.

The substance of the evidence given in this respect by the plaintiff was that the acreage and facilities he owned in the taxation years was capable of supporting 34 sows (the maximum he achieved there was 28) and that 40 sows would provide a reasonable standard of living. But it is my understanding that the plaintiff was not satisfied with that standard and that his ultimate objective on increased holdings was 60 sows. Meanwhile the salary from his employment was utilized to supplement the plaintiffs standard of living and to achieve his ultimate objective.

He was precluded from becoming a farmer in his youth by adverse circumstances and was diverted to employment with Ontario Hydro where by application and dedication he achieved a position of responsibility but his ambition to farm was never forsaken.

In my view the plaintiff changed his occupational direction when he applied for transfer to and was transferred to a rural area in his employment. He did that with the ultimate objective of farming in view in 1968.

In that year he invested all his available capital in farm land, buildings and residence.

By prodigious labour, without outside help, he restored a dilapidated house in two and a half years and in a further two years readied barns for a pig rearing operation by installing the necessary equipment at expense and effort.

The schedule of gross revenue in the taxation years in question is relevant.

In the three taxation years under review the plaintiffs gross farming revenue exceeded his employment income.

In 1977 the farm receipts exceeded the plaintiff's employment [sic] by about $500.00, in 1978 by about $10,900.00 and in 1979 by not quite $10,000.00.

While this 1s so the expenses were consistently high, and substantially higher than the plaintiffs farming income. In his 1977, 1978 and 1979 taxation years he suffered farming losses of $10,725.00, $10,017.00 and $12,702.00 respectively and all of which exceed $5,000.00.

In the light of Mr Justice Dickson’s remark that a farmer, “is not disentitled to deduct the full impact of start-up costs’’, it must be borne in mind that the plaintiff started his farming operation from scratch in 1968. From that time he expended his physical labour to restoring a house and barns and it was not until 1975-76 that he was able to embark upon the pig farming operation he had planned to the extent he had envisioned.

Notoriously the initial expenses of such a farming operation will be extraordinarily high but that does not detract from the validity and necessity of these expenditures to reach the ultimate objective.

The plaintiffs every resource was invested and devoted to his farming operation. That includes all of his savings, his income from his employment and his labour.

The farming operation did generate a substantial cash flow from cereal crops and the pig farming operation but while the cash flow was substantial it was taken in the main by the start-up expenses for machinery, equipment and the acquisition of the land upon which to farm.

There is no question that his personal involvement was dedicated to farming to the maximum.

On the other hand the plaintif did not give up his employment and begin farming on borrowed capital but rather devoted his employment income to the same end that Mr DeMars devoted borrowed capital.

From the cumulative effect of the foregoing circumstances I am satisfied that the main preoccupation of the plaintiff is farming but he has income from a sideline employment.

In my respectful opinion, the foregoing findings of fact find ample support in the evidence. Much of that support comes from the evidence of independent witnesses. As well, the respondent testified at length and it is crystal clear both in his reasons for judgment and his comments during the course of the respondent’s evidence, that the trial judge had no doubts whatsoever as to the respondent’s credibility. He accepted without reservation the viva voce testimony of all the witnesses and drew supportable, proper inferences therefrom. His findings should not, therefore, be disturbed.

Did the learned trial judge err in law? In determining this aspect of the appeal, it should not be overlooked that counsel for the appellant conceded that the farming operations of the respondent constituted a “business” within the meaning of the Act and that he had a reasonable expectation of deriving a profit therefrom. However, counsel said, despite this concession, in determining whether or not section 1 should be applied it was necessary (employing the language of Dickson, J in Moldowan) to decide whether the source of income — farming — was a “chief source of income on a relative and objective” basis. In appellant’s submission, on that basis “although the farming activities of the respondent were for him a way of life, they did not constitute a chief source of income” because of:

(a) the absence of profit,

(b) the comparison of employment income to farming losses,

(c) the cash flow analysis over the years in issue,

(d) the optimum capacity of the respondent’s operations,

(e) the fact that the respondent made no change in his occupational direction to demonstrate that farming provided his main expectation of income.

In counsel’s submission, although the respondent’s preoccupation with farming was subjectively to him major, objectively speaking it could not provide him with a reasonable expectation of being a chief source of income either in the taxation years in question or in subsequent years.

I do not agree, in part for the reasons given by the trial judge in disposing of the Minister’s assumptions in making the assessments in issue, which were quoted at pages 9 and 10 hereof. In addition, it seems to me that the submission ignores what Dickson, J had to say about “chief source of income’’ at 486 (CTC 314) of the Moldowan judgment, supra, which, for convenience sake, I repeat:

... The distinguishing features of “chief source” are the taxpayers reasonable expectation of income from his various revenue sources and his ordinary mode and habit of works. 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. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

It would thus appear that the reasonable expectation of profit from the farming operations having been conceded (and such a concession was a proper one having regard to the evidence objectively) the next step in the determination of the “chief source of income” is to consider the taxpayer’s “ordinary mode and habit of work” employing tests of the kind suggested by Mr Justice Dickson in the last two sentences of the quotation, supra. These, of course, involve a weighting of the facts objectively and relatively. It is abundantly clear from his reasons that Cattanach, J was well aware of the of the two-step process required for the determination of “chief source” and that it involved his objective assessment of the evidence and the relative importance of the sources of income. He did so with considerable care as is shown in the excerpts from his reasons for judgment at pages 16 and following which are quoted in full, supra, at pages 12, 13 and 14 hereof. He found that the cumulative effect of the rather unusual circumstances disclosed by the evidence in this case was to satisfy him that the main preoccupation of the respondent “is farming but he has income from a sideline employment.” In so finding, he clearly applied principles enunciated by Dickson, J and, in so applying them to the evidence of this case, he neither proceeded on a wrong principle nor erred in his appreciation of the facts nor in his findings with respect thereto. In so saying it should not be overlooked that the trial judge had the inestimable advantage of hearing the witnesses, observing their demeanour and weighing their testimony having regard thereto. The task with which he was confronted here having been essentially a fact-finding one for the application of the appropriate law, an appellate Court court should not interfere with it unless the findings of fact were unsupportable and the proper law was not applied.*[1] I am of the opinion that the findings were amply supported by the evidence, there was no “palpable and overriding error” in the assessment thereof and the learned judge did not err in the application of the proper law thereto. Accordingly, he correctly held that the respondent fell within category I of the three classes of farmer contemplated by subsection 31(1) of the Act and was thus entitled to deduct all of his farming losses in the computation of his taxable income in the taxation years in issue. I do not think that in the very unusual circumstances of this case his other source of income, namely, his employment at Ontario Hydro, precluded him from doing so.

I would dismiss the appeal, therefore, with costs.

Mahoney, J concurs with Urie, J.

Marceau, J (dissenting):—Section 31 of the Income Tax Act, which 1s concerned with the right of a taxpayer engaged in farming to deduct for tax purposes the farm losses he may sustain, has been a main feature of our income tax legislation for quite some time (it was formerly section 13 of the Income Tax Act RSC 1952, c 148 as amended). Its construction has given rise to much debate in the casebooks and many decisions in the case law. And finally, in 1978, it was the subject of a thorough analysis by Mr Justice Dickson, (as he then was) in the well known case of Moldowan v The Queen, [1978] 1 S.C.R. 480; [1977] CTC 310. One would have thought that, after such a long process, its exact meaning would have been fully clarified and its provision made easily applicable. Yet it is not so to me, since my understanding of the rule in the light of the decision of the Supreme Court does not lead me to the same result as my brothers Urie and Mahoney, JJ when applied to the clearly established facts of this case; accordingly, I feel obliged to respectfully dissociate myself from their conclusion that this appeal has no merit. Let it be emphasized that my disagreement is not due to a different perception of the facts. I may not give to each of the different aspects of those facts the same relative importance as that presupposed by the judgment a quo, but I accept all the basic findings of the trial judge. If I considered that this appeal raised a mere question of fact, I certainly would not have felt obliged to register this dissent. My disagreement is essentially due, at least as I see it, to a different perception of the law, and this is why I feel compelled to express it.

The facts are set forth in great detail in the reasons of the trial judge, and they are carefully reviewed by Mr Justice Urie. A further complete account would of course serve no purpose. I need however to underline again the highlights of the evidence, from which a proper formulation of the issue, as I see it, can be drawn.

During the years 1977, 1978 and 1979 the respondent was a full-time employee of Ontario Hydro. He had been with Ontario Hydro for nearly 20 years, and the 1st class stationary engineer certificate he had acquired through training and studies had allowed him to assume responsibilities that were both operational and managerial in nature. During those years 1977, 1978 and 1979, the respondent was also involved in farming operations. Son of a farmer, he had always had the dream of returning to farming. In furtherance of that dream he had obtained from his employer, in 1966, a transfer to a rural district in 1966, where two years later he purchased a property on which he could start and carry on the hogproducing operation he wished to undertake. The house and the barns on the property needed remodelling and he wanted to do the work himself; in addition some equipment had to be purchased, which he wanted to do only with the money he could save from his salary; so he had to delay his project but, in 1977, the operation was definitely on its feet.

There may be some discussion about the exact amount of time the respondent was required to devote to his hog operation from the time it was started, but the evidence he gave remains to the effect that, in the crop season during which he could be relieved from his duties at Ontario Hydro, he spent most of his time at farming; the rest of the year, in spite of his regular work on a three eight-hour rotational shift at Ontario Hydro, he managed to spend a considerable amount of his time at it in the early morning and at night. The seriousness and good faith of the respondent in his resolve to build up a genuine and sound operation, his dedication and efficiency as a farmer and his exceptional capacity to work are, on the evidence, simply beyond doubt.

During the years 1977, 1978 and 1979, the respondent incurred losses in carrying out his farming operation much in excess of $5,000, since they were in the amounts of $10,727, $10,017 and $12,702 respectively. The exact figures are, of course, of no particular importance, but it is, in my opinion, absolutely fundamental to bear in mind that, on the evidence, those losses were totally unavoidable. It was indeed established: (a) that the respondent’s livestock at January 1st of each of the three relevant years was 13, 18 and 28 sows and the maximum he ever had was 31 (p 57 of the transcript); (b) that the ultimate capacity of his barns during the whole period was 40 sows and the barns could not be expanded; (c) that even brought up to its full potential, his operation in those years would have been unable to yield any significant profit, he himself acknowledging that a 40-sow operation is “probably not’’ even viable (page 146 of the transcript). The learned trial judge, in the course of his reasons, after having spoken of a peak of 39 sows reached by the applicant, went on to say (at page 8):

That number and those he owned previously did not support the standard of living that the plaintiff wished to provide for his family. To reach that standard he considered it expedient to continue in his employment at Ontario Hydro having reached the capacity of 40 sows on the home place expropriated in 1982 and to achieve the objective of 64 sows on the new farm.

At the time of trial in September 1983, the respondent was installed on a new location with much greater capacity than the one he had initially which had been expropriated in 1982, and I suppose the learned judge’s observation was meant to describe the intention of the respondent on a long-term basis and for a period of his life extending way beyond 1979. As applied to the relevant years 1977, 1978 and 1979, the observation would definitely be misleading. As I appreciate the evidence, during that period, the respondent could, in no way, expect any profit from his operation.

A summary of these three paragraphs in which I have restated the facts focuses on, in my view, the three components of the factual situations that will have to be applied to the law. During the years in question, the respondent was still holding the full-time job he had been holding for many years at Ontario Hydro but he had also become seriously involved in farming activities. His intention was to go slowly, but with his capacity and his experience he was determined to build up, over the years, a genuine and profitable operation. However, in those years, not only could he not expect a profit from the operation as then developed, but, even at full maturity and fully exploited, the operation his set-up permitted was not capable of yielding any significant profit.

I turn now to the law.

Section 31 of the Act (on which the Deputy Minister had based the assessment set aside by the judgment under appeal) is clear enough as to its purpose and general meaning. It provides that in certain circumstances a taxpayer engaged in the business of farming will not be allowed to deduct, in the computation of his taxable income for a year, the whole of the farming loss that he may have incurred during that year. He will then be entitled to deduct a maximum of $5,000 and his only possibility with respect to the portion of the loss not absorbed will be to carry it back one year and forward five years for it to be deducted from his farming income during those years. The problem with the section is to see clearly how it fits into the scheme of the legislation and to understand in what circumstances it was meant to be applicable, the words used therein being simply:

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 section 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be . . .

It should here be recalled that the law respecting the right of a taxpayer, in computing his taxable income for a year, to deduct the losses he may have sus- tained during the year was completely changed in 1952. Prior to 1952, to be deductible, the losses had to be directly related to or “connected with” what was referred to until 1948 as the taxpayer’s “chief position, occupation, trade, business or calling”, and after 1948, as the taxpayer’s “chief source of income”. Since 1952, the deductibility of losses is subject to no such general condition. Section 3 of the Act now prescribes that the income of the taxpayer shall be his total income from all sources, whether business, employment, property or other, and his taxable income shall be this total income less the losses he may have sustained from all his sources. It obviously follows from this that, in the scheme of the Act as it is today, a source of income remains for a taxpayer a source of income in spite of the fact that he may have sustained a loss therefrom during a year. So, if farming is a taxpayer’s source of income, the losses he may sustain from farming should normally be fully and unconditionally deductible. And farming obviously will be a source of income for a taxpayer if it is for him a business so as to make it impossible to categorize the expenses he may incur in doing it as non-deductible “personal or living expenses” within the meaning given to that expression in the light of the interpretation subsection 248(1) of the Act which reads in part:

“personal or living expenses”.—“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

On the basis of the principle established by section 3 of the Act, therefore, people involved in farming activities should normally come into two groups only: those for whom farming is not a business but a hobby, who do not expect profit from their farming activities and whose expenses in farming must simply be treated as non-deductible “personal or living expenses” and the others whose loss sustained in carrying on their farming activities would be deductible from their total income as any other business loss. Section 31 is obviously aimed at departing somewhat from the general rule of deductibility in the case of farm losses sustained by taxpayers for whom farming is a source of income, but not the only one. The group of “real farmers”, that is to say those involved in farming not for leisure but for actual or eventual profit, will have to be further divided into those for whom farming or a combination of farming and some other source of income is the “chief source of income” and those for whom it is not.

So, two successive determinations are required to know whether the farm losses of a taxpayer will be non-deductible, partially deductible or fully deductible against other sources of income. With reference to the first determination, based on the notions of business and expectation of profit, Mr Justice Dickson, in the Moldowan case, supra, had this to say at 485-86 [CTC 313-14]:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.

A determination that requires the consideration of so many factors 1s bound to be difficult at times but it remains, it seems to me, a basic one having to be made in relation to two quite disparate groups, that is to say those who farm as a pastime and for their leisure and those who do it seriously with a view to gain from it a profit. The characteristics of the two groups are so distinct that the role of each factor in the determination will be simplified. For instance, the plan followed by an individual in building up a farming operation, including the length of time he gives himself to fulfil his expectation of profit, can have no bearing in determining in which group he belongs unless the plan is formulated in such a way as to doubt his statement that he is not farming as a hobby or a pastime. I do not suppose anyone apprised of the facts would have any difficulty in our case to realize that the respondent was certainly not farming as a hobby. It is obviously the second determination required by section 31 that raises the real problem, not so much because it concerns a further decision, but for the obvious enough reason that the criteria given by Parliament is ill-defined. What makes a source of income the chief one among the several that a taxpayer may have and what meaning is to be given to the word “combination”?

In addressing these two questions in the Mo Ido wan case, supra, Mr Justice Dickson opens his remarks thus (at 486 [CTC 314]):

Whether a source of income is a taxpayer’s “chief source’’ of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. 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. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

And at 487 (CTC 314), after having made reference to the law as it was framed under the Income War Tax Act of 1917, he went on as follows:

The word “connected” is not found in s 13 of the present Act. As Thorson P said, obiter, in Simpson v Minister of National Revenue, [1961] CTC 174 there is no reason why there must be such a limitation. I share this view. See also Dorfman v Minister of National Revenue, supra, at p 154 and Bert James v Minister of National Revenue, [1973] CTC 457, at p 464.

It is clear that “combination” in s 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think s 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

But exactly what constituted a “chief source” and what was meant by the word “combination” remained to be clarified. It is at this point that the learned Chief Justice gave his definition of the three classes of farmers envisaged by the Income Tax Act as a whole, namely (at 487-88 [CTC 315]):

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

And then he wrote:

The reference in s 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum of measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

The case at bar involves a man whose ability and dedication as a farmer 1s 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 Mo/do- wan 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 1s 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 1s 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 disen- titled 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.

I would therefore grant the appeal, quash the judgment of the trial division and restore the reassessments of the Minister.

Appeal dismissed.