The Queen v. Kuhl, 74 DTC 6024, [1973] CTC 846 (FCTD)

Walsh, J:—These two cases were heard together since the facts are identical save for certain differences in the amounts of the earnings of each of the defendants from their personal farming operations and in the amounts they received as remuneration from the Southern Manitoba Potato Company Limited which do not affect the issue involved. The proof revealed that both taxpayers are farmers. They are brothers, and a third person not involved in the present litigation, namely David Bueckert, is a brother-in-law. Each owns large farms located close together, John W Kuhl having 800 acres, Henry H Kuhl 1,100 and David Bueckert 1,800 acres. They grow grain, sugar beets and potatoes. Up until 1960 they all carried on their farming operations as individuals but in that year decided to pool their resources for the growing of potatoes used for the manufacture of potato chips which require specialized growing and storage. By this means they could obtain better bank financing and build a common storage building and jointly purchase the necessary equipment for this type of farming. They decided to incorporate the Southern Manitoba Potato Company Limited in which each of them took an equal one-third interest, investing $10 each in share capital. Thereafter their potato farming operations were carried on by the company but they continued as individuals to carry on their other farming activities. The company rented from each of them the portion of their farms used for growing potatoes and paid them for this on what was referred to as a custom farming basis. In addition, the company also rented additional land for potato farming activities. They continued to work not only on raising their own crops but on the portions of their farms used for growing potatoes as well as on the potato-growing land rented by the company. They had no contract of employment with the company and did not charge it for their own time but kept track of the time used by their own employees on the company-owned land and charged it the regular rate of pay for what they paid to these employees. Potatoes are a rotation crop so that at any given time the company might also be growing some cash crops on its land. They all worked as needed on the various areas of the combined farms and company land, keeping in touch with each other by two-way radios and apparently each had full confidence in the other to pull his own weight so that all the company profits would eventually accrue to them equally. The company’s services were not available to anyone else and it never paid a dividend, but instead of dividing the profits each year they let the company build up its reserves. They were all officers and directors of the company but received no fees or remuneration as such.

The litigation arises out of their intent to apply the averaging provisions of section 42 of the former Income Tax Act, RSC 1952, c 148, in the 1969 taxation year so as to average their income in that year with the four preceding years. In order to apply this section, the taxpayers’ chief source of income must have been farming or fishing during the taxation year in question and the four immediately preceding years. The Minister refused to permit this claiming that their “chief source of income” was not from farming or fishing during each of the years in question but rather from employment by the Southern Manitoba Potato Company Limited even admitting that that company’s own business consisted of farming, and relied on the definitions in paragraphs 139(1 )(e), (m) and (p) of the said former Income Tax Act which read as follows:

139. (1) In this Act,

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

(m) “employment” means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person holding such a position;

(p) “farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

It is admitted that Mr John W Kuhl’s income tax returns for the five years in question showed the following:

Mr Henry H Kuhl’s figures for the same years were as follows:

It is thus apparent that what was designated in the taxpayers’ returns as “income from employment” exceeded what was designated as “selfemployment—farming income” in each of the years in question. It was stated that the same did not apply to Mr Bueckert who had a substantially larger farm with more cash income so that he at all times earned more from his personal farming endeavours than ‘he received by way of remuneration from the company and, hence, was permitted to average his income.

While the income from the Southern Manitoba Potato Company Limited is not an issue in these appeals by plaintiff from a judgment of the Tax Review Board dated October 11, 1972, allowing the appeals of the two defendants from the assessments made by the Minister in respect of their 1969 taxation year, it is of interest to note that the financial statements of the company show assets of $186,752.27 and undistributed earnings of $60,280.12 as of the end of its fiscal year on April 30, 1965 and assets of $441,734.67 and surplus of $209,734.80 as of April 30, 1969. Taxable income for the fiscal period ending on April 30, 1965 was shown as $39,828.95 with a notation “election to average”, for April 30, 1966 it was shown as $10,781.56, for 1967 $5,280.47, for 1968 $30,988.84 and for 1969 $36,634.44. Mr Thomas Sill, CA the company’s auditor, who prepared the financial and tax returns not only for the company but also for the three individuals concerned, testified that although a calculation had been made in 1965 and an election to average income prepared, this was never signed and filed so the company itself had never elected to average income. He also testified that the reason why their returns showed “income from employment” from Southern Manitoba Potato Company Limited was that there was no other way that this could be shown on the T4 slip which, at that time, did not have any box in which to show “other income” which is now possible with T4A returns. He had discussed with the Department as to whether they could pay on an instalment basis as farmers and was told that all money received from the company must be reported either on a T4 return as remuneration and tax deducted at the source on same, or on a T5 return as a dividend. The remuneration paid could not be called partnership drawings in a corporation form of organization. When they first decided to amalgamate their potato growing operations he had considered the partnership form of carrying on the business but had rejected this because of complications in the signature on documents which would have to be signed by all three of them in many cases. Originally they had planned to withdraw all the earnings of the company each year but later decided to leave some in and build up the company’s surplus. With the remuneration paid to the two Messrs Kuhl and Mr Bueckert, the company’s annual taxable income was always below or at most slightly over $35,000 so that it was in the 21% bracket.* [1]

It was also brought out in evidence that although the company’s business was undoubtedly potato farming and marketing, it did have some investments in stock of other companies and made some loans and advances on which it received some income. Defendants contend that the company’s profits were entirely the product of the labour and resources of the three individual farmer shareholders. Mr John W Kuhl estimated that he spent about two-thirds of his time on his own farm and one-third of his time on farm work for the company. His wife received a small salary of $300 for working as secretary of the company and he received some interest income on his loans to the company, for example, $711.82 in 1965 as appears from the T5 slip for this amount. The same applied in other years in varying amounts and this was also true of Mr Henry H Kuhl, since the company’s statements indicate that both he and John W Kuhl advanced money to it.

The attention of the Court was directed by counsel for both parties to a considerable volume of jurisprudence much of which, however, merely establishes certain conclusions which indisputably must be drawn from the facts of this case and does not settle the main issue. Many of the cases referred to, while they may throw some light on the issue, must be distinguished or applied with extreme caution to the facts of this case. This is especially true of the cases discussing what creates a relationship of “master” and “servant” or “employer” and “employee”, or the distinction between a contract “of services” and “for services” which are often decided in the context of other statutes or on the interpretation of certain contracts, whereas in the present case there was no contract between the company and the taxpayers. Other cases deal with situations where the company has been found to be a mere “sham or simulacrum” to cloak the activities of the shareholders who wholly own it, or with the application of section 137 of the Act relating to tax evasion which is not an issue here. This case must be decided on the basis of the wording of the specific sections of the Income Tax Act on which it is based.

Certain conclusions can be drawn which are either admitted by the parties or which I find to be beyond dispute. The company was a subsisting corporation actively carrying on the business of potato farm- ing. The fact that it derived some incidental income from investments or interest on loans did not affect the nature of its business. It is normal that any available funds surplus to its immediate requirements should be invested so as to derive income therefrom but this was strictly incidental to its business and there is no doubt that the company was a “person engaged in the business of farming” within the meaning of the definition of “farming” in paragraph 139(1)(p) (Supra)*. [2]

There is also no doubt that the defendants herein were also persons engaged in the business of farming. They carried on their own personal farming operations independently of the company and devoted the majority of their time to this, and even the portions of their time which they devoted to the company consisted primarily of doing farming work for the company. Such administrative work as they may have done as officers and directors of the company was strictly incidental, the elaborate bookkeeping and accounting involved being done by their bookkeeper and auditor. They received no remuneration specifically attributable to any services which they may have rendered to the company as officers and directors and there is no doubt that at all times they were persons engaged in the business of farming.

It is also indisputable that the company had a corporate personality separate and distinct from the taxpayers’ who owned all its shares and fully controlled its operations. See for example the leading case of Salomon v Salomon, [1897] AC 22, where Lord Macnaghten stated the basic principle at page 51 :

The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.

The company is not an agent of the owners—see The Gramophone and Typewriter, Limited v Stanley, [1908] 2 KB 89, where it is held at page 99:

.. . I am of opinion that the acquisition of the whole of the shares of a corporation by one individual does not of itself alter the nature of his relationship to the corporation. His de facto control when he possesses 98 per cent is probably complete from a practical point of view, and although it is no doubt rendered more complete in theory when he possesses himself of the whole of the shares, it is still of the nature of a control exercised by corporators over the corporation, and does not make him and the corporation in any sense identical. The directors of the corporation do not become his agents.

We find the same holding in the case of Rainham Chemical Works, Limited (In Liquidation), and Others v Belvedere Fish Guano Company, Limited, [1921] 2 AC 465, in which Lord Parmoor states at page 488:

Directors of a company, which has been bona fide established, cannot be regarded as principals for whom the company act as agents.

See also Army and Navy Department Store Limited v MNR, [1953] SCR 496; [1953] CTC 293; 53 DTC 1185, which held at page 511 [308, 1193]:

... I do not think that shareholders, either individually or collectively, have any ownership direct or indirect in the property of the company in which they hold shares.

and also Denison Mines Limited v MNR, [1971] CTC 640 at 662: 71 DTC 5375 at 5389, where it is stated:

Con-Ell was carrying on business and it is important to bear in mind that limited companies that carry on businesses are separate taxable persons and the profits of their respective businesses are separate taxable profits whether or not one be the subsidiary of the other. Any attempt to erode this principle must be based upon clear and unequivocable facts leading to the irrefutable conclusion that one legal entity is acting as the agent of another and that legal entity is really doing the business of the other and not its own at all.

The case of Tunstall v Steigmann, [1962] 2 WLR 1045, discussed the Salomon v Salomon and The Gramophone cases (supra) and followed them. It dealt with a landlord who had incorporated her business holding all the shares in the company except two which were held by her nominees. A dispute arose over the right of a tenant to renew the lease. In discussing the relationship of the landlord to the company she had formed, Ormerod, LJ stated at page 1050:

It is to be assumed that the landlord in this case assigned her business to the limited company for some good reason which she considered to be of an advantage to her. She cannot say that in a case of this kind she is entitled to take the benefit of any advantages that the formation of a company gave to her, without at the same time accepting the liabilities arising therefrom. She cannot say that she is carrying on the business or intends to carry on the business in the sense intended by paragraph (g) of the sub-section and at the same time say that her liability is limited as provided by the Companies Act.

The learned Lord Justice discussed various departures which had been made from the principle Salomon v Salomon (supra) and concluded at pages 1050-51:

Whilst it may be argued that in the above circumstances the courts have departed from a strict observance of the principle laid down in Salomon v Salomon & Co Ltd, ([1897] AC 22) it is true to say that any departure, if indeed any of the instances given can be treated as a departure, has been made to deal with special circumstances when a limited company might well be a facade concealing the real facts. Counsel was unable to point to any Special circumstances in this case other than that the landlord has complete control of the company. In my judgment that is not enough.

In the present case it is clear that the company was not formed with a view to tax evasion even if certain advantages may have accrued to the taxpayers as a result thereof, and plaintiff does not so contend. It was formed for a perfectly legitimate purpose and as a more convenient way of carrying on the potato farming operations of the two Messrs Kuhl and Mr Bueckert and constituted a pooling of a portion of their farms, resources, and time devoted to this part of their operations. It carried on a bona fide and prosperous business and its operations were certainly not a “sham or simulacrum”. The findings in such cases as Susan Hosiery Limited v MNR, [1969] 2 Ex CR 408; [1969] CTC 533; 69 DTC 5346; Isaac Shulman v MNR, [1961] Ex CR 410; [1961] CTC 385; 61 DTC 1213; and The Cattermole-Trethewey Contractors Ltd v MNR, [1970] CTC 619; 71 DTC 5010, are not applicable here. Instead the cases of James A Cameron v MNR, [1971] CTC 97; 71 DTC 5068, confirmed in the Supreme Court, [1972] CTC 380; 72 DTC 6325, and Ralph J Sazio v MNR, [1969] 1 Ex CR 373; [1968] CTC 579; 69 DTC 5001, have more application. In rendering judgment in the latter case, Cattanach, J stated at page 383 [588, 5007]:

Ever since the Salomon case, [1897] AC 22, it has been a well settled principle, which has been jealously maintained, that a company is an entirely different entity from its shareholders. Its assets are not their assets, and its debts are not their debts. It is only upon evidence forbidding any other conclusion can it be held that acts done in the name of the company are not its acts or that profits shown in its accounts do not belong to it. The fact that a company may have been formed to serve the interests of a particular person is not sufficient to establish the relationship of principal and agent between that person and the company. In order to hold otherwise it must be found that the company is a “mere sham, simulacrum or cloak’’.

in that case a football coach formed a company controlled by him and his wife, which company received a salary which he would otherwise have received personally as a football coach. The company also carried on some other business and employed him as general manager at a lower salary. It was held that he should be taxed only on the lower Salary which he received from the company as the salary which the company received resulting from his services as a football coach belonged to the company and entered into its income, all the agreements entered into between the appellant, the company and the club being bona fide commercial transactions in furtherance of the company’s legitimate objects.

Defendants rely on various cases such as Re Performing Rights Society Limited v Mitchell and Booker (Palais de Danse), Limited, [1924] 1 KB 762, Ryan v Wills, 43 OLR 624, and Westall Richardson Ld v Roulson, [1954] 1 WLR 905, as establishing that the defendant taxpayers were not employees of the company as the company had no control over their work. Distinguishing between an employee and an independent contractor in the Performing Rights Society Limited case (supra) McCardie, J has this to say at pages 767-8:

It seems, however, reasonably clear that the final test, if there be a final test, and certainly the test to be generally applied, lies in the nature and degree of detailed control over the person alleged to be a servant. This circumstance is, Of Course, one only of several to be considered, but it is usually of vital importance. The point is put well in Pollock on Torts, 12th ed, pp 79, 80: “The relation of master and servant exists only between persons of whom the one has the order and control of the work done by the other. A master is one who not only prescribes to the workman the end of his work, but directs or at any moment may direct the means also, or, as it has been put, ‘retains the power of controlling the work’: see per Crompton J. in Sadler v Henlock. (4 E & B 570, 578.) A servant is a person subject to the command of his master as to the manner in which he shall do his work: see per Bramwell LJ in Yewens v Noakes ((1880) 6 QBD 530, 532), and the master is liable for his acts, neglects and defaults, to the extent to be specified. An independent contractor is one who undertakes to produce a given result, but so that in the actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified beforehand.” The rule is stated in much the same way in Salmond’s Law of Torts, 6th ed, p 96, where that able jurist says: “A servant is an agent who works under the supervision and direction of his employer; an independent contractor is one who Is his own master”; . . .

Certainly, the taxpayers here were not employees or servants of the company in the generally accepted sense of the term. Their work was not supervised nor their hours controlled in any way by the company, but, on the contrary, it was they who controlled and directed the operations of the company. There was no contract between them and the company providing for their employment or setting out the terms and conditions of it, and there is no indication that they even ever formally met as directors of the company and adopted a resolution providing for the amount of remuneration they should receive from the company in any given year, all such discussions having apparently taken place informally between them. In practice, they seem to have been only responsible to each other for doing their fair share of the work.

Defendants also rely on two Tax Appeal Board cases, namely that of Dr George Karpati v MNR, [1970] Tax ABC 1189; 70 DTC 1773, and No 129 v MNR, 9 Tax ABC 287; 53 DTC 451, and on the Exchequer Court case of Dr William H Alexander v MNR, [1969] CTC 715; 70 DTC 6006, all of which distinguished between employment under a contract “of service” and employment under a contract “for services”. Case No 129 (supra) dealt with a practising lawyer who was also the administrator of a certain association, which position he accepted on the express condition that he would be at liberty to pursue his other activities, administer the affairs of the association in his own way, and would not come under anyone’s control regarding the methods to be followed. He claimed deduction for certain expenses as necessarily spent to earn his income, which deductions the Minister disallowed contending that he derived his income from employment and therefore no deduction would be allowed. After a very lengthy review of the jurisprudence and authorities both in this country, in Britain and in France, it was concluded that he was not a servant as he received no direction as to what work was to be done or how it was to be done but that he was an independent contractor and was absolute master of the methods and means of doing his job; hence his contract was a contract “for services” and not “of service”. The Karpati case dealt with a doctor who had received a salary of $3,500 from a hospital which provided him with an office and his duties included those of being an assistant professor at a university. He was still able to carry on his private practice and contended that he was carrying on a business and not an employee so that the $3,500 salary should be included with his other professional or business income and taxed accordingly in his fiscal year. He considered himself an independent physician carrying on his private practice in his speciality of neurology in the hospital as well as looking after indigent patients referred to him by it, and that he fully controlled every detail of his own work, including his hours of work. It was held that he was carrying on a business within the meaning of paragraph 139(1)(e) (supra) and not an employee so the normal relationship of employer and employee did not exist between him and the hospital. This judgment referred to the Alexander case (supra) which also dealt with a doctor working as a radiologist under contract to a hospital, which contract provided for him to assume administrative responsibilities of the department as well as providing professional services for which he was paid by the hospital on a professional services basis. The question of deductibility of expenses again arose and Jackett, P, as he then was, found, although there was a written contract of employment in this case, that, on analysis of the contract, it should be concluded that in view of several provisions which obligated the appellant to provide coverage for the professional radiological work of the hospital whether or not he was able to do it personally and regardless of its volume, he was working under a contract “for services” and was therefore not an employee or servant so that his remuneration was revenue from a business enabling him to deduct expenses of earning his income. In rendering judgment, Jackett, P stated at page 724 [6011]:

On the one hand, a contract of service is a contract under which one party, the servant or employee, agrees, for either a period of time or indefinitely, and either full time or part time, to work for the other party, the master or the employer. On the other hand, a contract for services is a contract under which the one party agrees that certain specified work will be done for the other. A contract of service does not normally envisage the accomplishment of a specified amount of work but does normally contemplate the servant putting his personal services at the disposal of the master during some period of time. A contract for services does normally envisage the accomplishment of a specified job or task and normally does not require that the contractor do anything personally.

Dealing with the argument that the functions performed by Dr Alexander as administrative head of his department pointed very strongly to his being a senior employee, he concluded that similar functions are performed in other departments by medical chiefs who are practising doctors and not employees and he states at page 725 [6012]:

[In any event, it would seem that part of his duties is something that is added on to the obligation of providing the professional services, which Obligation is the main obligation of the contract and the one in respect of which the remuneration is paid.]

The same could be said with respect to whatever administrative work defendants in the present case did for the company in addition to their main obligation in working for it as farmers. Both case No 129 and the Karpati case were relied on by the Tax Review Board in its decision in the present case in favour of defendants.

In the Supreme Court case of Her Majesty the Queen v Scheer Limited in which judgment was rendered on March 30, 1972*, [3] reference is made to the dual meaning of the word “employment” and it is stated:

... the word “employment” has two alternative meanings: either (a) a contract of service, or (b) the occupation, business or trade in which a person is engaged. It is the contention of the respondent, a contention which was successful in the Exchequer Court, that only the former meaning should be adopted in construing the Unemployment Insurance Act; it is, however, the contention of the Commission that the word has been used in the sense of business, trade or occupation.

The said judgment also held:

. . . the meaning of the word “employment” must be gathered from the survey of the statute and the intention of Parliament in using the language employed determined having regard to the context in which it is used. I, therefore, stress that from 1946 on, when s 14A as it was then known was enacted, the Statute has included in it a situation where no contract of service has been in effect and has used the word “employment” to designate that situation as well as the situation when a contract of service was in existence.

That case dealt with the Unemployment Insurance Act, and it is evident, as I stated earlier in these reasons, that in this case we must deal with the use of the word “employment” in the Income Tax Act. The definition of employment as set out in paragraph 139(1)(m) (Supra) clearly requires a master and servant relationship. The defendants were therefore not in “employment” with it within the meaning of this definition. Although they were also officers and directors of the company, the remuneration they received was not paid for their services in this capacity. “Office” is defined in paragraph 139(1)(ab) of the Act in part as follows:

139. (1) In this Act,

(ab) “office” means the position of an individual entitling him to a fixed or ascertainable stipend or remuneration ... and also includes the position of a corporation director;

The defendants herein were not, as stated, entitled to any fixed or ascertainable stipend or remuneration. They had no contract of employment and if the company had suffered a loss would have received no remuneration (although, at the same time, benefiting from the separate existence of the corporation, they would not have been responsible for its debts). I do not believe, therefore, that they come within the exclusion of paragraph 139(1)(e) of the Act (supra) which excludes “an office or employment” from the definition of “business”. It can be concluded therefore that they were independent businessmen carrying on the business of farming. At most their relationship with the company was one of an implied contract “for services” rather than a contract “of service”.

This brings us to the definition of “farming” in paragraph 139(1)(p) (supra) which excludes “an office or employment under a person engaged in the business of farming”. While the company itself, as previously stated, was a person engaged in the business of farming, the exclusion does not apply to defendants since i have reached the conclusion that they do not come within the definition of persons in “an office or employment’. They are therefore independent contractors engaged in the business of farming for whose services the company has contracted. In cases such as Alexander and Karpati (supra) the fact that the doctors received a remuneration from a corporation did not prevent their being considered as independent businessmen and I see no reason to make any distinction between those cases where their remuneration was received from a corporation over which they had no control, and the present case where they wholly owned the corporation, bearing in mind that the corporation has a separate legal existence and that I have reached the conclusion that it is not a sham or simulacrum.

I believe that the Tax Appeal Board case of Ernest Illingworth v MNR, 41 Tax ABC 105; 66 DTC 354, referred to by counsel for plaintiff can be distinguished. That case dealt with exemption from gift tax on property given to a child if it is used in farming operations by the child or the child and the donor. Instead of making the gift directly, the donor made it to a corporation of which he was president and his son secretarytreasurer. There were no employees and the farm was operated by the new company. It was held that the exemption could not be claimed because the donor and his son, by becoming officers of the corporation which operated the farm instead of themselves, had brought themselves within the exclusion of paragraph 139(1 )(p) and could not be considered as engaged in “farming”. However, there was nothing in that case to indicate that they had any farming operations independent of the company or the nature of the remuneration they received from the company, which led me to conclude in the present case that defendants do not come within the said exclusion.

If the defendants had devoted their full time to working for the company, which was not the case, instead of at the same time carrying on independent farming operations, it might have been more difficult to conclude that they were independent contractors and not in ‘‘an office or employment under a person engaged in the business of farming” but since they carried on farming on their own and devoted the majority of their time to it, they were clearly engaged in the business of farming even if I had reached the conclusion that for the part of the time they devoted to the company’s business they were in “an office or employment under a person engaged in the business of farming”.

Plaintiff contends, however, that even if the remuneration they received from the company was for an implied contract for services, this does not mean that their “chief source of income has been farming” for the years in question within the meaning of subsection 42(1) of the Act which is the section in issue. It is argued that the money cannot be considered as flowing through the company, and while it may be received by the company as income from farming, when it is paid by the company to them, it must be either salary, dividend or distribution of surplus in some other manner, and that it is not the nature of defendants’ principal business which is in issue in the present case but their principal source of income. It is further contended that subsection 42(1) of the Act, being a rule of exception, must be strictly interpreted. As authority for this reference is made to the case of MNR v Arthur Topham, [1954] CTC 54; 54 DTC 1027.

There is no doubt that subsection 42(1) must be strictly interpreted and that to benefit by the averaging provisions set out therein the taxpayer must come fully within the wording of the section. There does not appear to have been any consideration given in any of the jurisprudence to which I was referred to the meaning of the word “source”. Among the meanings given in Webster's Encyclopedic Dictionary of the English Language we find it defined as:

. . . The place from which anything comes or is obtained; anything from which something proceeds or arises;... an originating cause or ground; an origin; ...

In The Shorter Oxford English Dictionary I find, among others, the following definition:

... the originating cause or substance of some material thing or physical agency.

It appears to me that these definitions are broad enough to encompass either the immediate source of the income which was the payments received from the company and designated for want of some better designation as “income from employment” or the origin of this income which was from the farming operations carried out by defendants for the company.

It is evident that the intent of section 42 is to enable bona fide farmers or fishermen who do not have other sources of income greater than their income from farming or fishing, and whose income from farming or fishing operations is subject to wide fluctuations from year to year, to average their incomes over a reasonable period of time in order to avoid wide fluctuations in their liability for income tax. They are not necessarily disqualified from this averaging merely because of the manner in which they carry out their farming operations. Certainly they could carry on in partnership although in this case, as plaintiff’s counsel pointed out, they would be deemed to receive in any given year their full share of the taxable income of the partnership for that year and be assessed on same rather than on the amounts they drew from it. This would not prevent income from the partnership being considered as farming income, however. There are clearly more risks involved in incorporating their farming business. As was pointed out in the case of Tunstall v Steigmann (supra) they cannot claim the advantages of incorporating their business without at the same time accepting any liabilities that may arise therefrom. Certainly, if the company had diversified to the extent that its principal source of income was no longer farming operations, it would be difficult to say, even on the broader interpretation that I have given to the words “source of income”, that the source of the remuneration they received from the company was farming irrespective of the manner in which the company paid it to them.

In the final analysis, each case must depend on its own facts and I believe it does no injustice to the intent of subsection 42(1) of the Act, and is in accordance with the facts in this case to give a broad meaning to the words “source of income” in the said subsection 42(1) by concluding that it originated from farming, even though some of this income may have been channeled to defendants through a corporation which has an independent existence. I therefore dismiss plaintiff’s appeal with costs. As a result of this dismissal, the assessments are referred back to the Minister for reassessment accordingly.

My attention was directed to subsection 178(2) of the present Income Tax Act (RSC 1952, c 148, as amended by SC 1970-71-72, c 63) which provides that whenever, on an appeal by the Minister from a decision of the Tax Review Board, the amount of tax that is in controversy does not exceed $2,500, the Federal Court, in delivering judgment, shall order the Minister to pay “all reasonable and proper costs of the taxpayer in connection therewith”. This applies whatever may be the outcome of the appeal. It is common ground that in the present case less than $2,500 in tax is in controversy. In rendering judgment in the case of Her Majesty the Queen v Romeo Lavigueur, [1973] CTC 773; 73 DTC 5538, I stated in commenting on this section:

I should have thought that in the present case if subsection 178(2) is to be applied, the reasonable and proper costs of the taxpayer should be limited to those which would be reasonable in an action involving a tax of under $2,500. While in view of the difficulty of the issue these reasonable and proper costs would be more than the mere taxable costs allowed in a Class I action into which category this action would fall, they must nevertheless be kept in moderation and not exceed proper solicitor and client fees which the defendant might reasonably be expected to pay himself but for subsection 178(2) in an action in which the amount in issue did not exceed $2,500.

In the present case counsel for the parties agreed that the sum of $1,000 inclusive of disbursements would constitute “reasonable and proper costs” within the meaning of subsection 178(2) and I agree with this and award costs to defendants accordingly.