Date:
20020730
Docket:
2001-3241-IT-I
BETWEEN:
MAURICE G.
SYLVAIN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasonsfor Judgment
McArthur
J.
[1]
The issue in these appeals is whether the Appellant may deduct
farm losses in excess of the $8,500 and $8,750 allowed by the
Minister of National Revenue for his 1997 and 1998 taxation
years, respectively, with respect to a horse breeding business.
The Appellant's submissions were focused on the phrase
"combination of farming and some other source of
income" as set out in subsection 31(1) of the Income Tax
Act. It reads in part as follows:
Legislation
[2]
The "chief source of income" test is set out in
subsection 31(1) of the Act as follows:
31(1) Where a
taxpayer's chief source of income for a taxation year is
neither farming nor a combination of farming and some other
source of income, for the purposes of sections 3 and 111 the
taxpayer's loss, if any, for the year from all farming
businesses carried on by the taxpayer shall be deemed to be the
total of
(a)
the lesser of ... (a formula follows)
[3]
The Appellant has a PhD. in the field of science and works
fulltime with Health Canada in Ottawa. Since 1991, he and his
wife have been equal partners in a thoroughbred horse breeding
business. During the
relevant period, the Appellant's wife also worked for Health
Canada. From 1991 to 1998, he reported farming income losses as
follows:
|
|
Gross Revenue
|
Farming Loss
|
Appellant's Farm Loss
|
Restricted Farm Loss
Carry-forward
|
|
1991
|
$0
|
$(23,176)
|
$(7,044)
|
$(4,544)
|
|
1992
|
5,500
|
(30,000)
|
(8,750)
|
(6,250)
|
|
1993
|
1,070
|
(45,000)
|
(8,750)
|
(6,250)
|
|
1994
|
2,500
|
(52,182)
|
(26,091)
|
0
|
|
1995
|
20,855
|
(57,274)
|
(28,637)
|
0
|
|
1996
|
0
|
(55,158)
|
(27,579)
|
0
|
|
1997
|
20,000
|
(35,628)
|
(17,814)
|
0
|
|
1998
|
0
|
(48,550)
|
(24,275)
|
0
|
|
Total
|
$49,925
|
$(346,968)
|
$(148,940)
|
$(17,044)
|
[4]
Both the Appellant and his wife are
knowledgeable about horses. In 1991, they bought land which
included a house and cow barn in Oxford Township, Ontario. They
renovated the barn to make it suitable for breeding and raising
horses. The house became their home.
[5]
The Appellant is 40 years of age and apparently has no intention
of giving up his fulltime employment. His average earnings
between 1991 and 1998 were approximately $60,000. Presently, he
earns approximately $95,000. The Appellant's Health and
Welfare employment consumed about 45 hours of his time weekly. He
spent much of his spare time farming through difficult times.
From one brood mare in 1992, they have had four since 1995. One
of the four mares was diagnosed with an unusual medical condition
preventing her from conceiving. From 1992 to 1998, the farm
operation had 17 breeding attempts resulting in 10 births with
only one sale for $20,000 in 1997. They have no farm vehicles or
significant machinery and their animals are boarded at outside
facilities for breeding and foaling. The operation was not a
hobby for the Appellant who stated he did not like horses and had
never ridden one. It would appear that his wife's passion for
the business was his motivation.
Position
of the Appellant
[6]
The Appellant advances that his losses should not be restricted
by subsection 31(1) of the Income Tax Act. The
Appellant's comprehensive and ably prepared submissions
centre on the interpretation of the phrase "combination of
farming and some other source". He believes that the
Court's interpretation of the phrase, starting from
Moldowan v. Canada, 1 S.C.R. 480, is incomplete. He
concludes that "combination of farming and some other
source" includes all possible combinations and there is no
requirement for farming to be the primary source. He submits that
had Parliament intended this requirement it would have clearly
said so. He stated that all that is necessary is that there be
another source of income in addition to farming, without regard
to the significance of the farming activity.
Position
of the Respondent
[7]
The Appellant's losses are restricted by subsection 31(1) of
the Act because his chief source of income during the 1997
and 1998 taxation years was neither farming nor a combination of
farming and some other source of income.
Analysis
[8]
The Appellant's submissions were very articulate and
comprehensive. He reviewed the development of the farm loss
provisions and the modern approach to statutory interpretation.
Unfortunately, he ignored the interpretation of "combination
of farming and some other source" as found by the Supreme
Court of Canada and the Federal Court of Appeal. I cannot do so.
Following the jurisprudence, it is clear that the Appellant's
argument must fail.
[9]
The Appellant states that the Court's interpretation of the
"combination of farming and some other source" renders
the words meaningless. This submission does not withstand close
scrutiny. To follow the Appellant's reasoning, as long as
taxpayers have some income from farming together with another
source, they can always deduct their farming loss without any
regard to the significance of the farming operation. This
interpretation renders section 31(1) meaningless.
[10] The
Appellant appears to have misunderstood the purpose of section
31. It applies to those for whom farming is not a chief source of
income. The section tries to protect a fulltime farmer who
obtains a subordinate source of income to sustain his farming
activity. His farming losses are not restricted. Dickson J. in
Moldowan, supra, clearly states the purpose of section 31
(formerly section 13) at page 5216 as follows:
It is clear
that "combination" in section 13 cannot mean simple addition of
two sources of income for any taxpayer. That would lead to the
result that a taxpayer could combine his farming loss with his
most important other source of income, thereby constituting his
chief source. I do not think s. 13(1) can be properly so
construed. Such a construction would mean that the limitation of
the section would never apply and, in every case, the taxpayer
could deduct the full amount of farming losses.
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) 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) 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
reference in s. 13(1) to a taxpayer whose source of income is a
combination of farming and some other source of income is a
reference to class (1). It contemplates a man whose major
preoccupation is farming, but it recognizes that such a man may
have other pecuniary interests as well, such as income from
investments, or income from a sideline employment or business.
The section provides that these subsidiary interests will not
place the taxpayer in class (2) and thereby limit the
deductibility of any loss which may be suffered to $5,000. While
a quantum measurement of farming income is relevant, it is not
alone decisive. The test is again both relative and objective,
and one may employ the criteria indicative of "chief
source" to distinguish whether or not the interest is
auxiliary, A man who has farmed all of his life does not become
disentitled to class (1) classification simply because he comes
into an inheritance. On the other hand, 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.
[11] Contrary to
the Appellant's interpretation of section 31, in order to
have a chief source of income from farming and some other source
of income, the farming activity must be the primary source. There is a
wealth of jurisprudence on the "chief source of income"
test. The factors of (i) capital committed; (ii) time spent; and
(iii) profitability will determine whether farming will be
regarded as a secondary business to which the restricted farm
loss provisions apply. These guidelines are found in
Moldowan and a host of subsequent cases. Applying these
tests to the Appellant, I found the following:
(i)
Capital Committed
A $5,000
down payment was advanced to purchase the original land and
buildings, $10,500 expended to convert the cow barn to a horse
stable and to make the business operational. No evidence with
respect to the cost of mares was submitted but the farm never had
more than five. I believe Mrs. Sylvain purchased a brood
mare in 1988 for $1,000. None have been purchased since 1995. The
mares had to be boarded at outside facilities during breeding.
Hay and other feed had to be purchased from outside
producers.
(ii)
Time Spent
The
Appellant spent between 40 and 50 hours a week in relation to his
Health Canada position and 14 hours weekly on farming activity
during the months September to April and approximately 28 hours
per week from May 1 to August 30. Obviously, farming was not
his primary activity. He indicated he has no plans to retire from
Health Canada for at least 20 years.
(iii)
Profitability
Total gross
revenue from the farm from 1991 to 1998 was approximately
$50,000 compared to
his income from Health Canada of approximately $500,000. Total
farm losses were $346,000 of which $173,000 was the
Appellant's share. In 1997 and 1998, the farm lost $35,628
and $48,550. Accepting the Appellant's most optimistic
estimates, the farm's future gross revenue could be
$90,000. Total
expenses, taking into account mandatory inventory adjustment,
were estimated at $55,000, leaving a potential net profit of
$35,000. This optional amount is only 40% of his present income.
It was incumbent upon the Appellant to demonstrate that he might
have earned a profit but for the setbacks, namely, the unusual
and unexpected death of several foals. It was not enough for him
to speak in generalities of what profits might have been. To meet
his onus, extraneous evidence to support his position should have
been provided. I was left unconvinced that his business could
ever make a profit as it existed in 1997 and 1998. The Appellant
failed to appreciate the onus on him.
[12] This quote
from Robertson J.A. in The Queen v. Donnelly, 97 DTC 5499,
applies equally to the present case:
As is well known, section 31 of the Act is aimed at
preventing "gentlemen" farmers who enjoy substantial
income from claiming full farming losses; see The Queen v.
Morrisey, supra, at 5081-82. More often than not, it is
invoked in circumstances where farmers are prepared to carry on
with a blatant indifference toward their losses being incurred.
The practical and legal reality is that these farmers are hobby
farmers, but the Minister allows them the limited deduction under
section 31 of the Act. Such cases almost always involve
horse farmers who are engaged in purchasing or breeding horses
for racing. In truth, there is rarely even a reasonable
expectation of profit in such endeavours, much less the making of
a chief source of income.
The facts in
the Donnelly case are similar to those in this appeal and
the analysis of Robertson J. has been of great assistance. The
following lengthy quote from pages 5500 and 5501 is a helpful
summary of the test facing the Appellant:
...
According to Moldowan, the taxpayer must satisfy two tests
in order to succeed. First, he must establish that the farming
operation gave rise to a "reasonable expectation of
profit" and, second, that his "chief source of
income" is farming (the so-called "full-time"
farmer). If the taxpayer is unable to satisfy the first test no
losses are deductible (the so-called "hobby" farmer).
If he satisfies the first test but not the second then a
restricted farm loss of $5,000 (now $8,500) is imposed under
section 31 of the Income Tax Act (the so-called
"part-time" farmer).
In the
present appeal the Minister of National Revenue conceded that the
farming operation gave rise to a reasonable expectation of
profit. That concession was made with full knowledge that the
taxpayer's farming endeavour had not generated a profit in
twenty-one years (1972-1992). With respect to the Minister's
contention that farming was not the taxpayer's chief source
of income, ... the legal test for establishing farming as a
chief source of income is, on an evidential level, a more onerous
one.
...
In the
present case, it was incumbent on the taxpayer to establish what
he might have reasonably earned but for the two setbacks which
gave rise to the loss: namely the death of Mr. Rankin and the
decline in horse prices. ... It was not enough for the
taxpayer to claim that he might have earned a profit. He should
have provided sufficient evidence to enable the Tax Court Judge
to estimate quantitatively what that profit might have
been.
...
The Tax
Court Judge did not engage in an analysis of what profit might
have been earned by the taxpayer in each of the three taxation
years in question. No doubt this gap was occasioned in part by
the taxpayer's failure to adduce the necessary evidence as
reflected in the testimony of Dr. McCarthy. His evidence was
directed at whether the horse-farming operation gave rise to a
reasonable expectation of profit. He admitted that he had never
reviewed the taxpayer's books nor compared the business'
revenue and expenses [see Appeal Book, Appendix 1 at 20 and
79-80]. He could offer no opinion on the potential profitability
of the horse-farming business.
...
Once again, there is a failure to appreciate the onus that was on
the taxpayer to satisfy the judge below that he would have or
could have reasonably earned a profit of "X" dollars
but for the unforeseen setbacks. This the taxpayer did not do and
it is improbable that he could have met the evidential burden. I
say this because the documentary evidence reveals that in those
taxation years where the taxpayer was about to earn a profit, he
would simply purchase a horse or two with the result that the
farming operation incurred a loss.
[13] None of the
three factors are determinative alone. Taken as a whole, it is
clear that the Appellant's chief source of income was not a
combination of farming and some other source. Section 31 applies
and the Appellant is restricted in the amount he can deduct in
calculating his 1997 and 1998 taxable income.
[14] The appeals
are dismissed.
Signed at
Ottawa, Canada, this 30th day of July, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-3241(IT)I
STYLE OF
CAUSE:
Maurice G. Sylvain and
Her Majesty
the Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
March 6 and 7, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
July 30, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
George Boyd Aitken
COUNSEL OF
RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3241(IT)I
BETWEEN:
MAURICE G.
SYLVAIN,
Appellant,
nd
HER MAJESTY THE
QUEEN,
Respondent.
Appeals heard on March
6 and 7, 2002, at Ottawa, Ontario, by
the Honourable Judge
C.H. McArthur
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent: George Boyd Aitken
JUDGMENT
The appeals from assessments of tax made under the Income Tax
Act for the 1997 and 1998 taxation years are
dismissed.
Signed at Ottawa, Canada,
this 30th day of July, 2002.
J.T.C.C.
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