The Queen v. Demers, 90 DTC 6216, [1990] 1 CTC 317 (FCTD)

Addy, J.:—These are appeals by the Minister of National Revenue from a decision of the Tax Court of Canada allowing an appeal by the taxpayers from the Minister’s assessment which disallowed restrictive farm losses of $5,000 for farming operations of the defendant taxpayers for the taxation years of 1981 and 1982, according to the provisions of section 31 of the Income Tax Act.

The defendants are husband and wife and are conducting farming operations in a partnership as a sideline business on a property known as Westside Farm. Since the business was so operated by both parties the cases are being heard together.

The farm has been operating at a loss. The defendant taxpayers had originally claimed full deductions for all farming losses and had furnished further financial statements covering their farming operation with that in mind. They subsequently reduced their claim to $5,000 for restricted farm losses during each of the two years.

The Westside property consisting of six acres of land and a fairly modern house was purchased in July 1981 for the sum of $250,000 of which $75,000 was paid in cash and the balance of $175,000 was secured by mortgage. It has since then been reduced to some $41,740. The property is within the city of Kamloops but is zoned for agricultural use only and is subject to an easement at the rear of the property for a trans-mountain oil pipeline which would preclude any subdivision.

When the property was purchased the grounds had been neglected for some time by the former owner who apparently was engaged in a trucking business. The land itself was covered with a large overgrowth of weeds and thistles and had to be thoroughly ploughed, harrowed and seeded in order to make it suitable for any proposed agricultural use. Considerable repairs were required to fences and to the barn. The property had to be freed of litter and various parts of trucks and machinery. It was really unusable as a farming property in the condition that it was at the time of purchase.

The husband, who has been employed throughout as a schoolteacher, has been devoting all of his spare time to farming operations. I accept fully the evidence to the effect that during the winter months and during the school year generally he spends approximately one to one and a half hours per day and approximately four (4) or five (5) hours per day during weekends working about the farm. During the school holidays he spends most of his time there also. The wife, who until recently had been employed in the Parks Department of the Province of British Columbia, similarly has been spending most of her spare time carrying out the various farming chores. She and her husband were also assisted by their two children who were spending approximately one-half of their spare time on farm work. Recently, the wife has resigned from her employment and will be devoting her entire time to the home and the farm.

There seems to be no doubt whatsoever that a considerable amount of time and work has throughout the years since 1981 been devoted to the farming activities by all members of the family. Their last vacation as a family was taken about 14 years ago. -

Farming, as conducted by the defendants, was undoubtedly a sideline occupation. It falls into the second category of farmers described by Dickson, J., as he then was, in the case of Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213.

It is now settled law, that in order for an undertaking to be considered a source of income, the taxpayer must have realized a profit or have a reasonable expectation of profit from the undertaking [Dorfman v. M.N.R., [1972] C.T.C. 151; 72 D.T.C. 6131]. What is reasonable of course depends on all of the circumstances of each case. The expectation, however, is not to be considered as limited to that of an immediate profit. A start up period is to be taken into account and the reasonableness of the time to be allowed for same must be judged also having regard to all of the circumstances which of course vary with each case. The A.C.J. in The Queen v. Gorjup, [1987] 2 C.T.C. 129; 87 D.T.C. 5348 (F.C.T.D.) held that in the particular circumstances of that case which was also a cattle raising operation, ten years was not to be considered an unreasonable length of time to experience start up costs.

The defendants in the present case had planned to pay off the $175,000 mortgage remaining from the original purchase price within ten years and, from the income and figures furnished at trial, it appears quite evident that the farming operation would be a paying proposition once the mortgage is paid off.

The Westside property had been purchased following an unsuccessful attempt to farm some 160 acres purchased in 1976 at Red River. The project was abandoned mainly because of the distance required to commute from Kamloops and the time which the children would have to spend each day on the bus. The Red River farm property is still owned by them and is practically paid off. It is presently rented and the lessee raises some 60 head of cattle there. It is practically impossible for the defendants to personally develop that property while living at Westside farm as it is situated 33 miles away, largely uphill and secondary gravel roads. They had been living previously in Port Alberni on a property which they had purchased. That property was sold but, after the purchase of the Westside property, considerable legal difficulties were en- countered regarding some $60,000 remaining on the sale price of the Port Alberni property.

Following the purchase of the Westside property in 1981, it took about two years to really get the land in proper shape for farming. It was seeded in the Spring of 1982 and the first cut was made in June. The evidence indicates however that 1984 was the first year of full operation after the farm had been completely reclaimed from the wild as it were. When they first arrived there, they were raising rabbits. They subsequently engaged in cattle raising and purchased a registered bull, four heifers and one cow in 1983. At that time, they also purchased chickens in order to sell eggs. They were limited, however, to 200 chickens because of the controls imposed on egg production by the Marketing Board.

As a result of an audit by National Revenue in 1984, they were obliged to sell all of the cattle in order to pay some $15,000 then claimed by the Department. Because sheep are easier to raise, involve less risk and are less expensive, they then decided to limit their operations for the time being, to selling eggs and raising sheep and rabbits. The original tentative intention was to engage in cattle farming combined with the raising of some sheep but, once they were obliged to sell the cattle in 1984, they chose to concentrate on sheep.

The difficulties arising regarding the sale of the Fort Alberni property involved an unexpected loss of revenue of some $625 per month and at the same time obliged the defendants to engage in some interim financing. Until the forced sale of the cattle herd in 1984, they had been carrying out what is termed the cow-calf operation, that is the raising of cattle for later resale. They originally had a five-year plan to grow hay at the rear of the property for cattle with the intention of keeping ten to twelve head of cattle each year throughout the winter. They are now engaged in a cattle feed operation pursuant to which cattle are purchased in January and later sold in August or September for beef. Their cattle holding was re-established in 1989, for a cattle feed operation by purchasing five head of cattle.

They undoubtedly both entertained a genuine expectation of profit and nobody can doubt their commitment to that goal. Although this does not constitute direct evidence that the expectation was a reasonable one, it at least distinguishes the case from those where the occupation might be considered either a mere sport, hobby or interesting sideline such as happens so frequently in certain instances of horse breeding and other similar part-time agricultural undertakings.

The evidence clearly shows that the primary financial goals of the defendants always was and remains the complete liquidation of the mortgage. No part of their salaries contributed to the farming operation expense, all spare moneys having been used to reduce the mortgage debt.

The accounting figures indicate that with all adjustments made, including interest on mortgage, 1989 would probably represent a net loss of some $2,200. On the other hand, when one considers 1988 when the defendants were engaged only in sheep farming and the raising of hens and rabbits, if one includes the capital cost allowance but excludes interest on the mortgage, a cash profit of some $500 would result from these figures.

As often happens in small agricultural holdings, having regard to the Westside property's limited acreage, a comparatively large portion of the cost and thus of the mortgage debt was attributable to the residence. In considering whether there exists a reasonable expectation of profit from farming activities carried on merely as a sideline operation or to supplement the income of the taxpayer from his or her other profession, trade or occupation, it is not proper to debit against the farming, the entire burden of the interest on the capital debt or expenses attributable to the residence which serves not only for farming but for housing persons engaged in other revenue producing activities.

One must conclude that, had it not been for the totally unexpected requirement of disposing of the herd in 1984, coupled with the legal and financial difficulties resulting from the sale of the Port Alberni property, the farming operation would, even when taking into account the total debt on the property including the residence, have commenced to show an operational profit within three or four years after the farm became completely operational in the Spring of 1984. I cannot, in the light of these conclusions, come to any decision other than that the defendants in 1981 and 1982 were engaging in a farming operation which showed a reasonable expectation of profit. At the same time it would be completely unreasonable for one to find that they should have foreseen the two events which contributed to the setback.

My dismissing of the appeals of the defendants and my concurrence with the result reached by the Tax Court (reference [1987] 2 C.T.C. 2247) is not to be taken as an approval of the final conclusion reached by that Court namely, that, notwithstanding that it had not been demonstrated that the Demers were moving towards a situation that could produce a profit, they were nevertheless entitled to deductions claimed. I entertain some serious doubts as to that being a proper expression of what constitutes a reasonable expectation of profit. However, I make no finding on this legal issue. The evidence before me apparently differed to a considerable degree from that adduced before the Tax Court as there was, as previously stated, ample evidence that the operation will be producing a profit and that it probably would have done so some time ago had the unforeseen setbacks not occurred.

The plaintiff's claim will therefore be dismissed with costs.

Appeals dismissed.