White v. The Queen, 91 DTC 5598, [1991] 2 CTC 331 (FCTD)

Rouleau, J.:—This is an appeal by way of trial de novo from a decision of the Tax Court of Canada.

The plaintiff, a physician and surgeon by profession, sought to deduct all losses which he incurred in his farming endeavour from his income from other sources for the taxation years 1980-1983. The Minister of National Revenue restricted his deductions to $5,000 per year under section 31 of the Income Tax Act R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), on the basis that his chief source of income was not farming, either alone or in combination with any other source.

The complex nature of section 31 has been the subject of a great deal of judicial comment and review. I will not set out the exact statutory wording. Suffice it to say that a full-time farmer may deduct all farming losses in much the same manner as any other businessman; a hobby farmer must bear all of his or her losses; some farmers who fall within section 31 are permitted to deduct only a limited portion of their loss, i.e., $5,000. The section applies to a class of taxpayer who is defined chiefly by what he is not: he is not a full-time farmer; he is a hobby farmer; and, in the wording of the Act, his "chief source of income" is not from farming or a combination of farming and some other source.

The classic judicial pronouncement on section 31 and the one most often referred to was written by former Chief Justice Dickson of the Supreme Court of Canada, in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, and it bears repeating:

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) [now 31(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 carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) [31(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 carried 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 debate in this case centres around whether the plaintiff comes within the first or second category as set out in Moldowan; does he look to farming for his livelihood and is it the centre of his work routine with his medical practice being a subordinate source of income; or does he carry on farming merely as a sideline business.

The defendant submits that the plaintiff is only entitled to deduct $5,000 per year, as provided in section 31 of the Act, since he was at all material times a full-time physician; farming was not the centre of his work routine nor was it his chief source of income for the years under appeal. The plaintiff argues that in 1979 he changed his occupational direction from the practice of medicine to concentrate his efforts on farming as a chief expectation of income and as a result he ought to be able to deduct the entire amount of his farming losses and should be considered a full-time farmer free from any limitation.

It is important at this stage to briefly review the taxpayer's background. As a young boy, the plaintiff lived with his parents on a grain farm south of Regina, Saskatchewan. The family moved to Victoria, B.C., when he was about eight years of age. His first involvement in farming came about when as a teenager ne worked summers on his uncle's farm growing grains and raising purebred Hereford cattle. Over the years the plaintiff continued to visit and maintained an interest in cattle which greatly influenced his ultimate decision to begin raising Simmental cattle soon after their introduction to Canada in 1967.

The plaintiff graduated in medicine from the University of British Columbia in 1971. Following his internship in London, Ontario, he began practising medicine at a clinic in Dawson Creek, B.C. as a general practitioner. During this period he gained considerable skill in obstetrics, which remained the focus of his practice. He became highly proficient in administering anaesthesia and was the only general practitioner or obstetrician in Dawson Creek who was able to administer epidurals, used for the reduction of pain in labour. It will be seen that he put these skills to other uses later in life when he focused his efforts on developing a purebred Simmental cattle business.

Dawson Creek is primarily an agricultural community. The plaintiff continued his association with people in the cattle business and as a result furthered his continuing interest in farming. He attended cattle shows and spent leisure time at the local agricultural research farm. While in Dawson Creek, he even attempted to purchase a half section of land to begin farming; this did not materialize.

In 1975, he, along with his family, moved to Nanaimo, B.C., and looked to acquire a farm property and eventually settled into a run-down house on a 10- acre farm just north of the city which was referred to as the Brickyard Road. The purchase price was approximately $90,000. He also rented five acres of adjoining land, and attempted to lease a neighbouring 17-acre parcel but without success. On this farm he raised a number of grade cows, hogs and poultry; however, his interest in Simmental cattle was increasing, and in 1978 he began examining herds with a view to purchasing. During this period, the plaintiff had continued to practise medicine in partnership with two others, spending an estimated 80 hours per week at his practice between the years 1976 and 1980.

Full blood Simmental cattle were introduced into Canada from Europe around 1967, the first were imported from four different countries. Mr. Rodney James, an expert in the Simmental cattle breeding business and who conducts Simmental auctions across the country, testified at trial. His evidence was that as a result of Canada having accessed these various genetic pools from Europe, the Simmentals bred in Canada are considered to be the best in the world. They have quickly graduated to be considered a top breed in the beef industry in the country, second only to Herefords. The average selling price of a purebred Simmental is two to three times greater than other commercial cattle; prized animals did command and several sold during 1991 for between $20,000 and $30,000; the average cow selling for approximately $3,000. As an expert, Mr. James explained the difference between "full blood” and "purebred" Simmentals: full blood are direct descendants of the European imports not having been inter-bred with other species. Pure-breds are a result of an "upbreeding" program; a Simmental is bred to another breed and the resulting offspring subsequently bred within the breed. The fourth generation cow offspring ( /sths) produced from this "upbreeding" program is considered "purebred".

After examining the animals, the plaintiff acquired a small herd of full-blood Simmental cattle in the fall of 1979 spending a little over $65,000; it consisted of ten bred cows (i.e., with calf), one open heifer (not yet bred) and three young bulls. His goal at that time was “to become one of the most respected breeders of Simmental cattle in this country". After hearing the unchallenged testimony of the two expert witnesses, called on the plaintiff's behalf, it would appear that by the mid-1980s, despite certain financial setbacks, the plaintiff had almost attained this goal; or, at least, was well on his way to doing so. Their testimony will be referred to in more detail later.

When the plaintiff commenced his purebred operation in 1979, he envisioned that he would achieve what he termed a “level of success" within five to six years. A projection prepared at this time and filed forecast modest profits from the year 1981 forward, based on 1979 average selling prices. Unfortunately, these prices plummeted to less than half over the next few years, and this, combined with rising interest rates and high feed costs, conspired to delay the profitability of his enterprise for several years. Despite these difficulties, the plaintiff came within $5,000 of meeting his forecasted sales of $60,000 for the 1980-83 period.

By 1982, Dr. White began looking for a larger property to grow his own grain in order to reduce costs; this would also enable him to expand his herd to his projected goal of 100 cow-calf units. Although the evidence indicated that the size of the business has no direct correlation to one’s success as a breeder, the plaintiff calculated that 100 cow-calf units would be optimal for his purposes.

After two unsuccessful offers on parcels in 1982 and 1983, the plaintiff finally acquired an 80-acre farm ten miles from Nanaimo in the spring of 1984 for $310,000. The purchase price consisted of $110,000 cash plus a trade of his original 10-acre farm valued at $200,000. A further nearby 50-acre section of dike-protected land accompanied this package, which he was allowed to use in return for maintaining the dike system. He also leased other adjacent lands, so that at his peak, in 1986-87, he owned or leased over 450 acres, had just over 200 head of cattle, 100 of which were productive cows. Until 1986, his investment totalled $750,000; from 1980 to 1990 he estimates his total investment at $1.7 million. As early as 1983, in a letter to Revenue Canada the plaintiff indicated that his investment in the farm was more than three times his investment in his medical practice.

During the period when the plaintiff was building up his Simmental breeding operation, he began reducing his commitment to his medical practice, so that by 1983 he was spending equal time at both; by 1987, if not earlier, he had reduced his time practising medicine from a high of 80 hours a week to approximately 28-30 hours per week, while spending 40-45 hours per week at farm duties. From 1980-1982, he allocated Wednesdays and weekends to farming; spent two to three hours working on the farm each morning prior to going into the office, and again in the evening after returning home. From the outset he consistently spent six to seven weeks per year, and some years ten weeks, entirely away from his medical practice in order to put in 15-16 hour days on the farm during the busy season. This resulted in a total hourly commitment of 2,300 to 2,400 hours per year to farming, and 1,300 to 1,400 hours practising medicine.

It has been the plaintiff's goal since as early as 1986 to spend a maximum of six months of the year exclusively farming, and spend the remaining six months combining his medical practice with farming in the same manner as he does now. For financial reasons this remains impossible.

It is of utmost importance to note that the plaintiff performs virtually all of his farm chores himself, including feeding, cleaning, grooming and preparing the animals for shows; chores related to breeding and calving, health care measures which do not require a veterinarian; preparing and seeding the land, harvesting, and so on. He has hired extra help only occasionally during the extremely busy season and has had help from students on Saturdays to assist in cleaning the barns. He hired one man part-time in 1985 who eventually worked full-time for two years in 1986-87, but laid him off in 1988 in order to reduce costs.

During 1982 the plaintiff also began reducing his involvement in the highly demanding field of obstetrics and by the end of 1987 he was performing only 15 deliveries per year; at the beginning of 1988 he discontinued taking new obstetrical patients and performed his last delivery at the end of 1988.

Once having purchased the Simmental cattle, there is no doubt that the plaintiff devoted most of his energies, time and capital to his breeding operation to a degree far exceeding his involvement in his medical practice; though he continued to practise medicine as a very lucrative sideline which was absolutely necessary income to carry the bank, etc.

I heard evidence that the plaintiff has been at the forefront of new technology as a Simmental breeder. In order to take advantage of the genetics of outstanding Simmentals, while keeping costs as low as possible, breeders are now relying on technology permitting them to “flush” embryos from a cow, then transplant the best into donor commercial cows who will bear and mother them. This permits a single Simmental cow to have as many as 20-30 progeny per year, rather than the usual one. As well, semen from outstanding Simmental bulls can be purchased for the purpose of artificial insemination.

The plaintiff took a course in artificial insemination in 1981, and since that time has been doing all of his own artificial insemination. He also began doing embryo transplants shortly thereafter; in 1982 he purchased a one-third interest in a cow for the purpose of embryo transplants. This has enabled him to utilize cheaper commercial cattle to produce purebred Simmental cattle with excellent genetics.

The plaintiff has pioneered in health care programs for his cattle, such as immunization schedules; he also has taken the unusual step, in the cattle business, of having autopsies performed in order to determine causes of death, and to institute prevention practices. He has had his silage analyzed for nutritional content, his soil tested and adopted methods that more than doubled the yield of the land which he is farming. He has renovated barns to suit a beef cattle operation. As evidence of his farming expertise, a letter dated September 17, 1985 was produced indicating that the plaintiff was providing another breeder with detailed advice on cattle, nutrition and health care. It was evident to me that the plaintiff is a veritable farmer; that from the outset he applied himself not only to learn the basics but to excel at farming; that he continued his medical expertise and modern technology to the best advantage in breeding and caring for cattle, to the point of even performing a caesarean birth when necessary. I also find as a fact that he performed all farm chores himself, with some help from his family and very little from hired hands, contrary to most cases.

The two expert witnesses, Rodney James and Kenneth Lewis, both involved in the Simmental industry and personally familiar with the plaintiff and his operation, testified that it requires from 5 to 15 years to attain a sufficient reputation in the purebred Simmental breeding business in order to achieve success. They were both of the view that the plaintiff had established and achieved excellence in the field of Simmental breeding in Western Canada; that he was serious and dedicated in his efforts to develop his operation, and that he has approached the entire operation in a realistic manner with reasonable and achievable expectations of success.

In his evidence, Mr. James indicated that developing a viable Simmental breeding operation is similar to establishing a law practice: it takes time to build clientele, to gain the respect in the industry, to establish a track record of successful showings, and finally selling at a premium. Consistency is essential to success. He testified that among the Simmental community the plaintiff is not known for his work as a medical practitioner, but is primarily respected as a knowledgeable, approachable, hard-working farmer and breeder. He went on that the plaintiff was totally involved in his operation, unlike most professionals and was as knowledgeable as any full-time farmer; that because of his calling and expertise he was able to go beyond what most farmers were able to handle in the latest technology, in terms of health care, immunizations, vitamin supplements, blood tests, feed analysis and soil tests, and other related activities. Performing his own artificial insemination and embryo transplants indicated a great initiative when considering that these innovations are fast becoming essential to success in today’s breeding operations.

Both Mr. James and the plaintiff testified that the business of breeding Simmentals is a "hands-on" business and it does not lend itself to absenteeownership. Mr. James endorsed the plaintiff's approach to the business, that of starting off small and building slowly; investing excessively at the outset would only lead to more costly errors, and could not assist in building a credible reputation which is essential to success.

All of the evidence indicates that the plaintiff approached the business in a logical and determined manner. He began small, learning the most advanced breeding technology to produce top quality Simmental cattle. This has been reflected in the solid reputation which ne has built in the business, and in the excellent results which he has obtained in the showings.

The plaintiff began showing at cattle exhibitions in 1980, and was successful from the outset. By himself he prepared and transported his livestock. In a bull-testing program in 1984-85, he produced one of the top performers. In 1989, he, along with two other breeders, introduced the "Pacific Pride” sale in Abbotsford, B.C., which has become an annual event. His production sales were successful and his average selling price was nearly double that of other B.C. Simmental sales.

I am satisfied that in terms of reputation, Mr. White had established himself in the Simmental industry by the mid-19805. He achieved this by hard work, long hours, innovative practices and a willingness to learn and apply himself. Unfortunately, he did not meet his expectations of profitability. I am convinced that this was due to no lack of wisdom or diligence on his part. He could have done no more. Were it not for the fact that ne operates a profitable medical practice on a part-time basis, there is no doubt but that he would be considered a full-time farmer; he did all that any farmer does, and more.

As discussed earlier, the plaintiff's early profit projections were not realized. Although they were based on the best information which he had available to him, the market price for Simmental cattle dropped drastically in the early 1980s, to less than half of what it had been in the late 19705. This decline affected everyone in the business. Mr. James, who spent his working hours marketing cattle, switched his company to Simmentals in 1980, so convinced was he that they would prosper.

When the prices dropped, he was forced to leave the business. The largest drop in prices occurred between 1980 and 1985; since that time, the prices have been steadily increasing. As well, high interest rates in the early 1980s affected the plaintiff as they did everyone; since approximately 1983 his estimations of interest costs have been borne out in reality. Had it not been for these unforeseen factors, I am satisfied that the plaintiff would have turned a profit in the years under review, since he was producing excellent quality animals and commanding good sales, even though his feed costs were much higher than he had anticipated. He made a wise choice in 1982 to overcome this cost by looking for a large enough farm on which he could grow his own feed. Once he purchased the farm, the yields which he obtained were first-rate.

The plaintiff's 1986 projection, showing losses of $100,000 for 1986 and 1987, followed by a profit of $17,900 in 1988, soaring to $213,000 by 1995, would in all likelihood have been realized, had it not been for the refusal of the Minister to permit full farming loss deductions. This resulted in the bank refusing him any further loans, which he required to purchase further breeding stock. A letter from the bank in 1988 states:

The Bank remains concerned with respect to the ongoing claim by Revenue Canada and would not be receptive to providing additional advances until this matter is resolved.

As a result, he was unable to increase the size of his herd, and in 1988, in order to reduce costs, he was forced to sell off much of his commercial herd. His purebred stock has also been reduced due to the production sales which have been held; at the same time, he must hold these sales to maintain his reputation in the business. The 1986 projection was based on a conservative $2,500 average sale price; in fact, prices have increased somewhat above this. If it had not been for the setbacks caused by his inability to obtain financing, directly due to the actions of the Minister in refusing his deductions, his expectations of profitability would have been realized: his reputation as a breeder was by that time solidly established, enabling him to obtain top dollar for his animals; he had learned the ropes and had brought his farm to a point of such efficient operation that all he would have had do was to make the final transition to an entirely purebred herd.

The plaintiff's actual income and expenses, for the decade 1979 to 1989, are shown in the table below.

It is apparent that throughout the years in issue in this appeal, the plaintiff's losses were steadily decreasing, despite the serious market difficulties at that time. I am satisfied that his predictions of profitability for those years were reasonable. The subsequent increase in losses in 1984 could be expected due to the purchase of the larger farm, which enabled him to lower his costs and increase his efficiency. However, by 1987 his losses were again decreasing; I am satisfied from the evidence that had it not been for his inability to deduct his losses, and his consequent inability to obtain financing, the plaintiff would have been successful in turning a profit as forecast by the end of the decade- only ten years after he first started in the business. As mentioned earlier, in the purebred industry it is not unusual to take up to 15 years to establish oneself; the plaintiff has done so in less time despite financial setbacks. Start-up costs may therefore be permitted for a longer period in such an operation, as was held in Timpson v. The Queen, [1987] 1 C.T.C. 389; 87 D.T.C. 5266.

Turning now to the question of whether, for taxation years 1980-1983, farming can be considered the plaintiff's "chief source of income”, a perusal of Moldowan v. The Queen, supra, must be the starting point for any analysis under section 31 of the Income Tax Act. In that case, a businessman became engaged in the training, boarding and racing of horses for himself and others; he sought to deduct the full amount of the losses which he suffered in those activities from his income from all sources. The Minister restricted these losses to $5,000 per year under the former subsection 13(1); this was upheld at all levels. The Supreme Court of Canada agreed that the taxpayer's chief source of income was neither farming nor a combination of farming and some other source of income: the horse-racing operation was not a business carried on for profit or with a reasonable expectation of profit; further, it consumed only a few hours per day for only a part of the year, compared to the considerable amount of time which the taxpayer devoted to his other business ventures.

In the course of its reasons, the Court remarked that, in order to have a "source of income" as contemplated by former subsection 13(1), the taxpayer must have a reasonable expectation of profit; it is only then that his operation can be considered a business rather than merely a personal hobby. The Court went on to say that whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts, and considering the following criteria: profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, and finally the capability of the venture as capitalized to show a profit after charging capital cost allowance. It noted that this list was not intended to be exhaustive; the factors will differ with the nature and extent of the undertaking (ref. The Queen v. Matthews, [1974] C.T.C. 230, 74 D.T.C. 6193).

The Court went on:

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 Court then set out its classic statement of the three classes of farmers envisaged by the Act, and remarked that “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.” It concluded as follows:

In the instant case, it is common ground that the appellant was farming and that his farming constituted a source of income: There are concurrent findings below that farming was not his chief source of income. I would not disturb those findings. Additionally, I do not think it can fairly be said that appellant was a person whose chief source of income was a combination of farming, and some other source of income in the sense I have indicated. He devoted considerable effort towards launching new ventures. Horseracing consumed only several hours of his day and that for part of the year only. His commitment of capital was cautious. The nature of the enterprise is risky. It is difficult reasonably to plan to devote energies to it principally in the expectation of a steady living. He suffered constant and increasing losses with the exception of two years in which minor profits were made. Although none of the above is alone determinative, together they suggest only one business venture of several, with nothing distinguishing in the way of "a chief source of income”.

Counsel for the plaintiff submitted that, following the tests laid down by the Supreme Court of Canada, the taxpayer can be considered as coming within the first class of farmers, able to deduct full farming losses. He submits that the plaintiff has spent more time farming than at his medical practice; that his capital commitment to farming is far greater than that committed to his medical practice and finally, that although the farm has not yet turned a profit, his potential for profitability is excellent and is forecasted to exceed his medical income. Counsel argues that this case is distinguishable from Moldowan on the facts: farming is not just one of several of the plaintiff's ventures, but is the focus of his efforts; it consumes far more hours than his medical practice; his commitment of capital has been unrestricted; the nature of the enterprise, unlike horse racing, is not risky; one can expect a steady income once established; and finally his losses have been moderate despite severe setbacks.

Counsel for the plaintiff also relied upon a subsequent decision of the Federal Court of Appeal in The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (leave to appeal to the Supreme Court of Canada denied July 31, 1985, 62 N.R. 103), where the issue was the same as here. There, the taxpayer was employed full time at Ontario Hydro, working 28-day, 8-hour shift cycles, with seven days off between cycles. He requested a transfer to a rural area in 1968; he then purchased a small farm and, after doing the requisite renovations, commenced a hog farming operation in 1975-1976. While on duty at Ontario Hydro, he would spend 8 hours working, 11 hours on the farm, and 5 hours sleeping; he took his holidays when the farm was busiest, and arranged exchanges of times with other employees. A witness called by the plaintiff confirmed him to be a “dedicated, efficient, progressive and innovative farmer", he was one of the first in the area to practise artificial insemination.

The Court of Appeal framed the issue in the following way:

. . . 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 section 31(1) of the Income Tax Act limiting his claim for the deductibility of his farming losses to $5,000.

The trial judge noted that the plaintiff spent far more time farming than he did at his regular “full-time” employment, thereby rebutting the Crown's assumption that he farmed in his “spare time". After a consideration of the principles in Moldowan, on the basis of the evidence, he rejected the Crown's position that the plaintiff could not reasonably expect his farming operations to "provide the bulk of income". On the contrary, he found that farming was most certainly "the centre of [the taxpayer's] work routine".

The trial judge concluded that the plaintiff had changed his occupational direction when he obtained a transfer to a rural area with the objective of farming in 1968; he also noted that in the three taxation years under review the plaintiff's gross farming revenue exceeded his employment income, even though his start-up expenses offset these returns. The trial judge considered the start-up expenses to cover a 10-year period, from the time the plaintiff originally purchased the land in 1968, renovated the buildings, and commenced farming in 1975-76, continuing to 1979. He noted that the plaintiff's every resource was invested and devoted to his farming operation including all of his savings, his income from his employment and his labour:

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

On the other hand the plaintiff 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 [a witness] 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.

The Court of Appeal agreed that the trial judge's findings were amply supported by the evidence, including the testimony of independent witnesses, and concluded that in the "very unusual circumstances" of the case the taxpayer's employment at Ontario Hydro did not preclude him from falling within the first of the three classes set out in Moldowan.

Counsel for the Crown relied on a subsequent decision of the Federal Court of Appeal in Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080. In Morrissey, as in so many other farm loss cases, including Graham, the taxpayer was raised on a farm, but sought other employment as an adult, in this case with Great Lakes Shipping. Subsequently, he and his wife purchased a 178-acre farm, and in 1969 they commenced a cattle breeding operation. The respondent worked as a chief engineer six to seven months per year, and spent the rest of his time working on the farm; he was also able to take time off when necessary to be on the farm. The respondent had taken pertinent courses and had been a director of the Canadian Cattlemen's Association for about five years.

As in Graham, the Crown admitted that the farm was being carried on with a reasonable expectation of profit. However, the trial judge found as a fact that the farm was not, and was not likely to become, profitable. Nevertheless, he was of the view that the factors set out in Moldowan, time spent, capital committed, and profitability, must be considered disjunctively: each are factors to be taken into account, but none is an absolute requirement. He concluded that profitability is not an essential requirement; that the taxpayer showed a substantial commitment to farming in relation to the factors of time spent and capital committed, even though it was not actually or potentially profitable. As a result, he allowed the taxpayer to deduct full farming losses.

The Court of Appeal disagreed, stating that while the determination that farming is a chief source of income is not a pure quantum measurement, quantum cannot be ignored. Because a reasonable expectation of profit had been admitted, the question was whether the taxpayer came within the first or second class, that is, whether the farm was potentially a chief source of income either alone or in combination with another source. The Court noted that the enquiry will always be concerned with potentiality rather than actuality, since the provision applies only where there is a loss in a taxation year. The Court of Appeal distinguished its earlier decision in Graham on the basis that, unlike here, in that case the trial judge had determined that the farm could reasonably be expected to provide the bulk of the taxpayer's income. It concluded that where it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion must be that farming is not a chief source of that taxpayer's income: “absent actual or potential profitability, farming cannot be a chief source of his income

In Roney v. Canada, [1991] 1 C.T.C. 280; 91 D.T.C. 5149, the Court of Appeal's most recent consideration of section 31, the Court has further interpreted the rationale in Moldowan as referring to a man whose major preoccupation is farming: a taxpayer's other sources of income must remain auxiliary or subsidiary to his chief source, so that a quantum measurement of farming income, although not alone decisive, is relevant and cannot be ignored.

The taxpayer, who had developed a Simmental breeding operation, had called an expert witness who averred that the taxpayer had a reasonable expectation of profit for the years in question, although that expectation was not realized. He noted however that, unlike the case at bar, the taxpayer was not a knowledgeable breeder, he did not have time to establish his reputation as a breeder and he had not established market outlet or a program for merchandising the production of the breeding herd. As well, the taxpayer had spent only a third of his time on his farming activities.

The Court of Appeal distinguished Graham in the following words:

I do not consider the case at bar to be comparable in any way to the circumstances set out in The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.). In Graham, the taxpayer was precluded from becoming a farmer in his youth by adverse circumstances and became employed by Ontario Hydro where, by application and dedication, he achieved a position of responsibility, but his ambition to farm was never forsaken. He had changed his occupational direction when, in 1968, with the ultimate objective of farming in view, he applied for transfer, and was transferred to a rural area. He then invested all of his available capital in farm land, building and residence. He was in the habit of sleeping five hours, working eight hours at Ontario Hydro and spending the remaining eleven hours on the farm with minimal time off for breakfast, supper and personal needs. He was able to adjust his working days with his employer so as to meet the needs of his hog farming operation. It was established at trial that he was a progressive and innovative farmer. During the relevant taxation years, the acreage and facilities he owned were capable of providing a reasonable standard of living, but the taxpayer was not satisfied with that standard and his ultimate objective was an increased holding in his animal farm. The salary from his employment was utilised to supplement his standard of living and to achieve his ultimate goal. The trial judge made the finding that the taxpayer might reasonably expect his farming operation to "provide the bulk of income”, and that it was most certainly “the centre of work routine” and allowed his losses in full. He was sustained on appeal.

The combined result of Moldowan, Morrissey and Roney, therefore, is that once it is accepted that the farm is being run as a business (i.e., there is a reasonable expectation of profit), in order for a taxpayer to exempt himself from the constraints of section 31 he must prove that farming is a “chief source" of income. Factors to be taken into account in this determination are time spent, capital committed and profitability, both actual and potential; furthermore, it is essential to establish the potential of the farm income to constitute the bulk of the taxpayer's income, with other sources remaining subsidiary. At the same time, there will be a difficulty in proving this, since the inquiry will always be concerned with potentiality; the provisions come into play only where there is a loss in a taxation year. It seems that the Court of Appeal's interpretation of Moldowan necessitates unusual circumstances, such as those which existed in Graham, where evidence is led not only of hard work, time committed and capital outlay, but also the likelihood of the farm turning a profit. This imposes a heavy burden on the taxpayer who has two sources or income to prove the reasonableness of his predicted profitability. Strayer, J. summarizes the present state of the law in Mohl v. Canada, [1989] 1 C.T.C. 425; 89 D.T.C. 5236 as follows:

It now appears clear from the Supreme Court décision in Moldowan as recently interpreted by the Federal Court of Appeal in Canada v. Morrissey, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term "significantly profitable" because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a “sideline business” to which the restriction on losses will apply in accordance with subsection 31(1).

Here, there is no question that the plaintiff was not farming merely as a sideline business. The time devoted to farming, capital invested in the farm and cattle together with the plaintiff's involvement in technological advances in Simmental breeding and his excellent reputation in the farming business indicate that he has changed his occupational direction from medicine to farming. As I stated earlier, despite the plaintiff's reasoned approach to Simmental breeding, due to circumstances entirely beyond his control such as the decrease in Simmental prices, high interest rates and his inability to obtain further financing, he was unable to realize a profit. Had it not been for these intervening events I am satisfied that the plaintiff's Simmental cattle business would have been significantly profitable in relation to his medical practice. The experts who testified on behalf of Dr. White and whose evidence was not shaken or contradicted satisfied me that the expectations of profit were reasonable. The sole reason for the substantial increase in income from the medical practice after the years in question was the necessity to generate funds to maintain the farm.

Accordingly, for the taxation years 1980-83 the plaintiff's chief source of income was a combination of farming and his medical practice and therefore, the restricted farm loss provisions in section 31 are not applicable.

It should be noted that when this matter went before the Tax Court of Canada the evidence lasted some 4 /2 hours and arguments approximately 3 hours. The expert testimony which was adduced at this trial was absent in the previous proceeding and this undoubtedly was of extreme importance and assistance to the Court in reaching its determination.

The appeal by way of trial de novo is allowed and the reassessments for the taxation years 1980 to 1983 inclusively are hereby referred back to the Minister for reconsideration and reassessment.

Costs to the plaintiff.

Appeal allowed.