Date: 20110121
Docket: A-20-10
A-19-10
Citation: 2011 FCA 22
CORAM: EVANS
J.A.
DAWSON J.A.
STRATAS
J.A.
BETWEEN:
HER MAJESTY
THE QUEEN
Appellant
and
JOHN H. CRAIG
Respondent
REASONS FOR
JUDGMENT
EVANS J.A.
Introduction
[1]
The
Minister of National Revenue (Minister) appeals from a decision of the Tax
Court of Canada (2009 TCC 617), in which Justice Hershfield (Judge) allowed an
appeal by John H. Craig against the Minister’s reassessments of his income tax
liability for the 2000 and 2001 taxation years. These reasons apply to the
appeals in respect of both years, and a copy will be inserted in Court File No.
A-19-10.
[2]
While
earning most of his income in the taxation years 2000 and 2001 as a partner of
a Toronto law firm, Mr
Craig also had employment and investment income. In addition, he conducted a
business comprising the buying, selling, breeding, and racing of standardbred
horses. The Minister disallowed the losses deducted by Mr Craig in those years
in respect of the horse business.
[3]
Relying
on subsection 31(1) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.),
the Minister restricted Mr Craig’s allowable deductions from horse operation to
$8,750 for each year. As relevant to this appeal, subsection 31(1) provides 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 the taxpayer’s loss, if any, for the year from all
farming businesses carried on by the taxpayer shall be deemed to be the total
of
…
|
(1) Lorsque
le revenu d’un contribuable, pour une année d’imposition, ne provient
principalement ni de l’agriculture ni d’une combinaison de l’agriculture et
de quelque autre source, pour l’application des articles 3 et 111, ses
pertes pour l’année, provenant de toutes les entreprises agricoles exploitées
par lui, sont réputées être le total des montants suivants :
[…]
|
[4]
It
is agreed that Mr Craig’s horse activities constitute “farming” for the purpose
of section 31, and are a business and a source of income for tax purposes as
defined by Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645. It is
equally evident that, considered in isolation, the horse business was not Mr
Craig’s “chief source of income” in the taxation years in question.
[5]
The
issue in dispute in this appeal is whether “a combination of farming and some other
source of income” (in this case, Mr Craig’s law practice) constituted his
“chief source of income”. If they did, section 31 does not apply, and he is not
subject to the restrictions imposed by section 31 on the losses that a taxpayer
may deduct from farming.
[6]
The
Minister bases his appeal on two grounds: first, the Judge applied the wrong
legal test to determining whether Mr Craig’s farm income could be combined with
his law practice income; second, if the Judge did not err in his formulation of
the relevant legal test, he misapplied it to the facts. For the reasons that
follow, the Judge in my view erred in neither respect. Accordingly, I would
dismiss the appeal.
Issue 1: Is this Court
bound by Gunn?
[7]
Counsel
for the Minister says that the Judge erred in law in relying on Gunn v. Canada,
2006 FCA 281, [2007] 3 F.C.R. 57 (Gunn), as the primary basis for his
conclusion that Mr Craig’s chief source of income was a combination of the
income from his farm and his law practice, regardless of whether the income
from his law practice was subordinate to that from his horse operation. Counsel
argued that Gunn is inconsistent with the decision of the Supreme Court
of Canada in Moldowan v. Canada, [1978] 1 S.C.R. 480 (Moldowan),
where it was held that a taxpayer can only combine farming income and some other,
subordinate source of income in order to escape from section 31.
[8]
Counsel
for the Minister submitted that, in permitting a taxpayer to avoid the effect
of section 31 by combining farming and non-farming income, even when the
farming income was subordinate to the other, the Court in Gunn failed to
follow Moldowan. This, counsel said, breached the principle of stare
decisis that stipulates that an intermediate appellate court is bound by
decisions of the Supreme Court of Canada. Accordingly, Gunn was wrongly
decided, and should not be followed. I do not agree.
[9]
First,
the argument that we should not follow Gunn does not fall within any of
the exceptions to the general principle formulated in Miller v. Canada
(Attorney General), 2002 FCA 370, 220 D.L.R. (4th) 149 (Miller),
that, in the interests of jurisprudential stability and certainty in the law, a
panel of this Court is normally bound by its previous decisions.
[10]
The
Court in Miller (at para. 10) stated that the general principle does not
apply when a previous decision of the Court was made without regard to a
decision that it ought to have followed. In my view, this exception refers to a
per incuriam decision by the Court. This is not the case here.
[11]
Writing
for the Court in Gunn, Justice Sharlow considered Moldowan at
length and largely adopted its analytical framework. However, she departed from
the aspect of Moldowan in question here. She held that farming may be combined
with some other source of income so as to constitute a taxpayer’s chief source
of income for the purpose of section 31, even though, as between the two,
farming was the subordinate source of income.
[12]
Justice
Sharlow justified her decision in Gunn on the basis of her analysis of
the shortcomings of Moldowan’s requirement that farming be the
predominant source of income before it may be combined with another. She
grounded her criticisms of this aspect of the decision in the history and
objectives of section 31, the difficulties of applying it, its tendency to
produce arbitrary results, and critical commentary by judges and others.
[13]
In
addition, Justice Sharlow relied on post-Moldowan pronouncements by the
Supreme Court of Canada on statutory interpretation, particularly warnings
against reading words into a statutory text (in this case, the requirements
that farming must be the “major preoccupation” of the taxpayer, and that the other
income must be from a “subordinate” source), and failing to give the words of a
taxation statute their straightforward meaning (“a combination of farming and
some other source of income”).
[14]
Gunn was thus
anything but a per incuriam decision: relevant precedents were not
“overlooked”. Similarly, the Court in Miller (at paras. 11- 17) rejected
the argument that the decision of a previous panel of the Court was not binding
because it had failed to take account of previous jurisprudence of the Supreme
Court of Canada. This Court pointed out that the previous panel clearly had
considered that jurisprudence; the appellant’s essential complaint was about the
way in which this Court had applied it.
[15]
Second,
counsel for the Minister relied on the statement by Lord Greene M.R. in Young
v. Bristol Aeroplane Co. Ltd., [1944] K.B. 718 (Eng. C.A.) at 729, that the
English Court of Appeal is not bound by a decision of its own that “cannot
stand with a decision of the House of Lords”. However, it is clear from
a statement earlier in the judgment (at 725) that Lord Greene was referring to
a decision of the House of Lords subsequent to the impugned decision of
the Court of Appeal: see also T. Prime and G. Scanlan, “Stare Decisis
and the Court of Appeal: Judicial Confusion and Judicial Reform?” (2004), 23 Civil
Justice Quarterly 212 at 213; and see Rupert Cross and J.W. Harris, Precedent
in English Law, 4th edn. (Oxford: Clarendon Press, 1991) at 145-48, noting,
however, that some judges have extended Lord Greene’s exception to include inconsistency
with prior decisions of the House of Lords.
[16]
Since
Moldowan was decided before Gunn, we are not at liberty to depart
from Gunn on the ground that it has been overruled by the Supreme Court
of Canada.
[17]
Third,
a decision by a panel of this Court on the precedential effect of a prior
decision by the Supreme Court of Canada deserves as much respect from a
subsequent panel of this Court as a decision by a previous panel on any other
question of law. It was stated in Miller (at para. 22) that a previous
decision by a panel of this Court on the interpretation of the Canadian
Charter of Rights and Freedoms should be no more readily reversed than a
decision concerning some other aspect of the law. I can think of no reason why Gunn,
a decision of this Court dealing with a previous decision of the Supreme Court
of Canada in a non-Charter case, should be treated as having less precedential effect
than a case dealing with the Charter. The interests of certainty and stability
in the law are equally applicable here.
[18]
Fourth,
on the assumption that this Court may depart from its previous decisions that
it believes to be manifestly wrong in a sense not itemized in Miller, I
am not persuaded for the reasons given by Justice Sharlow that Gunn is
such a decision. Indeed, before us, counsel for the Minister paid tribute to
what she called the “brilliant analysis” of Justice Sharlow in Gunn. Counsel
also conceded in her memorandum of fact and law (at para. 46) that, in view of
subsequent decisions from the Supreme Court of Canada on the interpretation of
taxation statutes, the aspect of Moldowan in question here might be
decided differently today.
[19]
Counsel’s
principal complaint was that reassessing Moldowan was exclusively the
responsibility of the Supreme Court of Canada. In effect, Gunn
anticipated the reversal by the Supreme Court of Canada of one of its prior
decisions, even though there may be little room, if any, for an intermediate
appellate court to engage in anticipatory reversal of the court of last resort:
see, for example, Debra Parkes, “Precedent Unbound? Contemporary Approaches to
Precedent in Canada” (2007), 32 Man. L.J. 135 at 144-46; see, however,
Bradley Scott Shannon, “Overruled by Implication” (2009), 33 Seattle
University L. Rev. 151, doubting an appellate court’s duty to follow a
Supreme Court decision which it concludes that the Supreme Court has impliedly
overruled.
[20]
Fifth,
judge-made rules relating to precedent are not like other legal rules, in the
sense that the Supreme Court of Canada does not reverse the decision of an
intermediate appellate court on the ground that it failed to follow the
principle of stare decisis. Rather, when the Supreme Court grants leave
to appeal, the question before the Court will be whether the lower court’s
decision is consistent with substantive law, including extant decisions of the
Supreme Court, or whether the Supreme Court should modify its own jurisprudence
on the point.
[21]
In
Phoenix Bulk Carriers Ltd. v. Kremikovtzi Trade, 2007 SCC 588, [2007] 1
S.C.R. 588, the Supreme Court chose to express no opinion on the merits of the
practice whereby this Court normally regards itself bound by one of its prior
decisions, even though it would have reached a different result. The Supreme
Court allowed the appeal on the substantive ground that the earlier decision of
this Court had been wrongly decided.
[22]
To
summarize, I am not persuaded that the Judge made any error of law in applying
the somewhat more flexible and generous test in Gunn for determining the
circumstances in which section 31 permits farming and non-farming income to be
combined so that farming is a taxpayer’s chief source of income.
[23]
I
would only add that, if it had been material to the decision, I doubt if I
would have agreed with the Judge’s conclusion that, even on the strict Moldowan
test, Mr Craig’s income from his horse business when combined with that from
his law practice constituted his chief source of income in 2000 and 2001.
Issue 2: Did the Judge
misapply Gunn?
[24]
On
the assumption that the Judge correctly identified Gunn as the legal
test, the Minister argues that he erred in concluding that the facts of the
present case satisfied it. I do not agree.
[25]
In
extensive reasons, the Judge carefully considered the facts of the present case
(which are fully set out in his reasons for decision, are not in dispute, and
need not be repeated here), and compared them with those of other cases to
which counsel directed him. He concluded on the basis of the factors and
analytical framework set out in Gunn that farming constituted a
significant part of Mr Craig’s income in 2000 and 2001, and was more than a
“sideline business”. Hence, section 31 did not apply.
[26]
The
facts of this case may be fairly close to the line, and I might not have made
the same decision as the Judge. However, I cannot say that his decision is
based on a palpable and overriding error warranting the intervention of this
Court.
[27]
Counsel
for the Minister essentially sought to reargue before us the case that she had
lost at trial and to invite us to reweigh the factors considered by the Judge.
However, the Supreme Court of Canada made clear in Housen v. Nikolaisen,
2002 SCC 33, [2002] 3 S.C.R. 235 at paras. 28-36, that it is not normally the
function of an appellate court to second guess a trial judge’s application of
the law to the facts. Thus, in the absence of a palpable and overriding error in
the application of the test, or of an error of law in formulating it, neither
of which the Minister has demonstrated is present here, there is no basis for
the Court to intervene.
Conclusion
[28]
For
these reasons, I would dismiss the appeal with costs.
“John M. Evans”
“I
agree
Eleanor
R. Dawson J.A.”
“I
agree
David
Stratas J.A.”
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