John Gunderson v. Minister of National Revenue, 91 DTC 523, [1991] 1 CTC 2616 (TCC)

Margeson, T.C.J. [Orally]:—This is an appeal by the appellant from an assessment of income tax for the 1987 taxation year. The sole question for determination is whether or not the appellant was entitled for the year 1987 and the preceding four years to average his income under subsection 119(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). To be so entitled, I must find that he was an individual whose chief source of income has been farming or fishing during the year of averaging and the four immediately preceding years for which he has filed returns of income required by the Act.

Facts

The facts disclose that on May 3, 1983, the appellant entered into a farm lease (share of crop) agreement with Mr. Russell Tasa which provided for the leasing of his farmland as set out in the agreement for two years from April 1, 1983 to April 1, 1985. This agreement was extended by the parties to be in effect during the years under appeal.

By the terms of the agreement, the appellant received a one-third interest in all crops and the lessee two-thirds. Under the lease, the lessee took care of all the lands and used the storage facilities. The parties consulted in cropping and fertilizing. All day-to-day farming was done by the lessee.

The appellant devoted time to marketing his own grain although it was hauled by Mr. Tasa. The decision as to when to sell the appellants crop was made by him. According to him, he might spend as much as one week of eight hour days there once a year. He also had to travel down there from his home in Prince Albert. In 1983, the lease covered five quarters and in 1985 three quarters.

His income tax returns were done by Mr. John Morrow, a public accountant who testified before me. In the returns, the appellant said that where it refers to rental income, it actually means share of the crop. He says he inquired of Revenue Canada as to whether or not he was entitled to average his income in the years in question and he was told his farm income qualified. His accountant had testified that the operation did as well, under his generally understood knowledge of such transactions, and in accordance with his experience in this type of return. He identified Exhibit A-6, which was scheduled "A" in the Minister's reply as his reported income for the years 1983 to 1987 and he testified it was correct.

In 1983, the appellant purchased a store at Springside, 150 miles from his farmland and moved there. He sold his farm equipment and machinery and used the money for the store and inventory. He also sold two quarters of his land for $130,000 and used the money for the store. He sold all his farm equipment except a truck which he used in the store business. His evidence was that he went from 8:00 a.m. to 6:00 p.m. every day in the store, six days a week and put in extra time as well. He estimated that he spent 55 to 60 hours per week at the store. He took little time off. In 1985, he built a new store through a contractor and put more time into it. He kept it for four years and in 1987 he sold it.

Mr. Morrow, the accountant for the appellant had 16 years’ experience and filed the notice of election for the appellant to block average his income. He felt that according to his practice, if a person's net income from farming was greater than his net income from the store, then he qualified to average his income.

The Appellant's Position

The appellant argues that the Minister was determining the chief source of income of the appellant on the basis of gross sales. He says it should have been net sales of the store and net income from farming or gross margin of the store, as opposed to gross income from the farm. He says that by both methods of calculation his chief source of income was farming. He says it is clear from Exhibit A-6 that there was more farming income than there was from the store.

He refers to Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213; James A. Wilfley v. The Queen, [1974] C.T.C. 510; 74 D.T.C. 6422; and Morrisseys The Queen, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 and he dismisses them summarily by saying that these cases only apply to a factual situation where you are dealing with losses. He says the clear issue here is determining the chief source of income and you need not go the further step to determine if the considerations in those cases are relevant.

Minister's Position

The respondent argues that under subsection 119(1) of the Act, the appellant must show that his chief source of income was farming during the relevant years and he has not done so. The respondent says you must consider the same factors as under subsection 31(1) of the Act because the terms are exactly the same,"chief source of income".

The respondent refers to Israel v. The Queen, [1979] C.T.C. 468; 79 D.T.C. 5418; Moldowan v. The Queen, supra; Morrissey v. The Queen, supra, and Wilfley v. The Queen, supra and points out that net dollars and cents alone are not the only considerations, and that the appellant, by his own evidence, has put in 50 to 60 hours a week at the store, that he physically dedicated himself to the store as his work and that it was full-time.

From the capital aspect, the respondent says that he sold all of his equipment from his farm and three quarters of his land to build a new store. She says that the terms "gross sales”, "net sales", "gross margin” have no application here. Furthermore, she says there was a greater money flow through the store than through his farm income source and that he looked to the store as his gross source of income. Mr. Morrow's understanding of what is required, she says, is not conclusive. She argues that the appellant's restrictive approach to Moldowan and the other cases which she referred to and cited is not justified.

Analysis and Decision

As indicated at the beginning of this decision, the only question before me in the end result is the determination of the appellant's chief source of income during the relevant years. The parties have agreed that we are dealing here with the appellant's income from farming and the reference to rental income in the pleadings is a misnomer and that the income from the crop-sharing agreement does qualify for income averaging in the years under appeal if it was the appellant's chief source of income.

The history of this section is clear and it was to allow fishermen and farmers who are particularly vulnerable to the vigours [sic] of nature and the resulting unpredictable fluctuations in their income from year to year, to induce a measure of stability in the level of tax rates, by allowing them to average their income over five year blocks. The important term here is "chief source of income". The determination of the individual's chief source of income is extensively considered with reference to section 31 of the Act, but unlike subsection 31(2), which gives the Minister a discretionary power to make such a determination, section 119 of the Act left the determination of question of fact to be decided by the Court.

The reported cases dealing with the appellant's chief source of income for the averaging period and how it should be determined does not follow a consistent pattern. It is clear, however, that the determination must be made on the basis of all five years taken together.

It is not sufficient that farming or fishing should constitute the largest single source of income when compared with his other sources of income, see Matthews v. M.N.R. (1963), 30 Tax A.B.C. 358; 63 D.T.C. 42 or that the farming or fishing constitute the only source of income, see Lawrence v. M.N.R. (1954), 10 Tax A.B.C. 140; 54 D.T.C. 138.

As I read Wilfley v. M.N.R., supra, the Federal Court held that in its opinion the net dollar and cents position, when viewed through the five years of insight is not the only or conclusive criteria to be considered in determining the question of fact. Has the chief source of income been farming? If the mathematical considerations alone apply, then you must look at the dollar and cent flow and not just the dollar and cent result.

As in Dorfman v. M.N.R., [1972] C.T.C. 151; 72 D.T.C. 6131, there may be sources of income even though in those years there may have been no net profit.

In the Wilfley case, supra, the Court was impressed by the fact that the whole direction of the plaintiff's activities was directed towards farming as his sole occupation and probable chief source of income for the future and there was a gradual investment in land and other assets in the development of the whole operation. The Court found that farming was his chief source of income.

As referred to in Moldowan v. The Queen, supra: ” In seeking an answer, gross income, net income, capital investment, cost flow, personal involvement and other factors may be relevant considerations”.

In Murray v. M.N.R., [1987] 2 C.T.C. 2284; 87 D.T.C. 559, the Court found that the appellant was engaged in fishing as his chief source of income where he spent 90 per cent of his time fishing and it was his major preoccupation and the centre of his work routine. The Court also held that it provided him with more than half of his income. It is interesting to note that profitability here was only one consideration, but it also pointed to fishing as his chief source of income.

As indicated above, I find that the principles set out in Moldowan, supra, are important in determining the question of "chief source of income" even though the essential question in that case was a determination under the now subsection 31(1) and dealt with the question of reasonable expectation of profit, and ultimately established three different classes or levels of farming. The Court held in Moldowan that the answer to the question here is both a relative and objective test. It decided that it was not a purely quantum measurement. The appellants reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work are important.

It seems to me that for the appellant's argument to succeed in the case at bar, one would be left to consider the quantum factors only, and further, one would be restricted to considering profit, net income, gross margin. The cases make it clear that we must consider much more than that. All the factors as referred to in the above cases must be considered.

The most striking factors which seem to have been left unaccounted for in the simplistic theory of Mr. Morrow and in the argument of the appellant, are the facts, that the appellant gave up his farming operation in 1983 except for the right under the lease, sold his equipment, sold his land or the majority of it, took his resources and his efforts, his time and his dedication from the pursuit of farming and put it into the store operation and from that point on, his chief source of income was the store operation. It may not have been his chief source of profit or net income, but it certainly was the largest source of gross income, of dollar and cent flow. It certainly was a source of income, although it did not produce a net profit and surely the whole direction of the appellant's activities was directed towards the store operation as his probable chief source of income in the future, surely the investment was there in the development of the whole operation and the personal involvement.

After a proper consideration of all the relevant factors, the Court has come to the conclusion, in light of Moldowan, supra, and other cases referred to above, that the appellant's chief source of income during the relevant years was not farming and consequently he is not entitled to average his income under subsection 119(1) of the Act.

Accordingly on this basis, the appeal is dismissed.

Appeal dismissed.