Citation: 2009TCC383
Date: 20090804
Docket: 2008-3557(IT)I
BETWEEN:
KATHLEEN JOHNSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in this
Appeal is whether the losses incurred by the Appellant in carrying on her
farming business in 2005 are subject to the restrictions contained in section
31 of the Income Tax Act.
[2]
The Appellant grew up on a farm
located near Truro, Nova Scotia. Her father was a beef farmer. He worked hard and
struggled to make a living. Unfortunately her family was unable to keep the
farm and her mother had to sell it.
[3]
The Appellant attended the Nova Scotia
Agricultural College in Truro and received a diploma in agricultural engineering.
She later obtained her engineering degree.
[4]
She had always wanted to farm. She
and her spouse purchased a 110 acre farm property in 1997 near Denmark, Nova Scotia.
The property required a significant amount of work as it had not been farmed
for 15 to 20 years before they acquired it.
[5]
In 2005 the Appellant’s farming
business generated revenue from the sale of goat milk soap, beef and lamb. The
Appellant also indicated that she raised free range turkeys. The beef herd was
small as she only had 5 head of cattle in 2005. The herd has now grown to 15
head of cattle.
[6]
Her husband did not participate in
farming to the same extent as the Appellant. He would work in the forestry part
of the business on a seasonal basis. After the Appellant’s son died in 2004,
her spouse lost interest in working on the farm and the Appellant did all of
the work herself. In the earlier years she would allocate a portion of the loss
to him based on the work he did in the forestry part of the business.
[7]
The Appellant worked off the farm
for the Province of Nova Scotia. In 2002 the Appellant became a full time employee as
an engineer. Prior to that time she worked as an inspector.
[8]
The Appellant worked at an office
in New Glasgow, Nova Scotia. Prior to driving to work in the mornings she would
spend approximately one hour doing chores on the farm which would include
feeding the animals and making sure that they had water. On the way to her work
she would make deliveries to customers. On lunch breaks she would run errands
in relation to the farm business. In the evenings after she returned home, she
would also work on the farm.
[9]
She was the only one involved in
the soap making operation. It would take 4 to 5 hours to make one batch of soap
and she would make soap one day per week.
[10]
She arranged her working time with
the Province so that she would have every second Friday off. She would spend
these Fridays working on the farm. She also spent her weekends and vacation
time working on the farm. It is her estimate that she would spend 38 to 52
hours per week working on the farm. Using the low number of 38, this would mean
that she would spend at least 1,976 hours per year working on the farm. This
would mean that she spent more hours working on the farm than she did working
for the Province. Her total employment hours per year would be approximately
1,715 hours.
[11]
She continually invested in the
farm. She was buying new equipment and animals and fixing the buildings. The
income from her employment was being used to invest in the farm.
[12]
Her intentions are clearly to make
a profit and hopefully some day to be able to live off the income that the farm
will generate. She has a long family history of farming.
[13]
In Moldowan v. The Queen
[1978] 1 S.C.R. 480, Justice Dickson stated that:
13. Whether a source of income
is a taxpayer "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 income from farming because
he unexpectedly wins a lottery. The distinguishing features "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 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 question of fact in the circumstances.
…
15 It is clear that
"combination" in s. 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.
16 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 carries 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 carries 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.
17 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.
[14]
The Respondent in this case
emphasized the case of Bhagwandin v. The Queen 2001 DTC 357,
[2001] 2 C.T.C. 2527. In that case Justice Lamarre, relying on the decision of
the Federal Court of Appeal in The Queen v. Donnelly 97 DTC 5499,
[1998] 1 C.T.C. 23, held that the losses were restricted for the taxpayer’s
small farming operation that could not be operated profitably at the level he
was operating it at.
[15]
However, the decisions in Bhagwandin
and Donnelly were both rendered before the decision of the Federal Court
of Appeal in Gunn v. The Queen 2006 DTC 6544, [2006] 5 C.T.C.
191. In Gunn, Justice Sharlow completed a thorough review of section 31
and in particular the “combination question” referred to in Moldowan.
The combination question arises because section 31 refers to:
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
(emphasis
added)
[16]
In Gunn, Justice Sharlow
stated as follows:
82 This
caution should not preclude the application of the Johns-Manville
principle in relation to the combination question in section 31 of the Income
Tax Act, because that aspect of section 31 is not “reasonably clear”. It is
capable of bearing the meaning that Justice Dickson gave it in Moldowan,
in which the combination question must be answered in the negative unless
farming predominates as a source of income. However, the combination question
is also capable of bearing a more straightforward meaning, in which it is not
necessary for the farmer to propose a combination of sources of income in which
farming predominates.
83 In
my view, the combination question should be interpreted to require only an
examination of the cumulative effect of the aggregate of the capital invested
in farming and a second source of income, the aggregate of the income derived
from farming and a second source of income, and the aggregate of the time spent
on farming and on the second source of income, considered in the light of the
taxpayer's ordinary mode of living, farming history, and future intentions and
expectations. This would avoid the judge-made test that requires farming to be
the predominant element in the combination of farming with the second source of
income, which in my view is a test that cannot stand with subsequent
jurisprudence. It would result in a positive answer to the combination
question if, for example, the taxpayer has invested significant capital in a
farming enterprise, the taxpayer spends virtually all of his or her working
time on a combination of farming and the other principal income earning
activity, and the taxpayer's day to day activities are a combination of farming
and the other income earning activity, in which the time spent in each is
significant.
(emphasis
added)
[17]
The decision of the Federal Court
of Appeal in Gunn is binding on me.
The principle of stare decisis is very clear. Justice
Rothstein (as he then was) in Commissioner of Competition v. Superior
Propane Inc. et al. (2003), 223 D.L.R. (4th) 55 described this
principle as follows:
[54] The
principle of stare decisis is, of course, well known to lawyers and
judges. Lower courts must follow the law as interpreted by a higher coordinate
court. They cannot refuse to follow it: Re Canada Temperance Act; Re
Constitutional Questions Act; Re Consolidated Rules of Practice, [1939] 4
D.L.R. 14 (Ont. C.A.) at 33, affirmed [1946] 2 D.L.R. 1 (P.C.); Woods
Manufacturing Co. v. Canada (Attorney General), [1951] S.C.R. 504
at 515, [1951] 2 D.L.R. 465.
[18]
In this case the Appellant has
invested significant capital in the farm. She invested what she could afford to
invest and funded the investment from her employment earnings. The initial
purchase of the farm represented an investment of $50,000 in the farm equipment
and the farm property (excluding the house). She also subsequently acquired a
tractor ($27,000), livestock, fencing, two trucks, and various pieces of
machinery and equipment. The amount annually invested in the farm (which was
determined using the biweekly payments for the tractor, the monthly payments
for the Suzuki truck for two years and the bi-weekly payments for the Dodge
truck) and her employment income were as follows:
|
Year
|
Amount Invested
|
Employment Income
|
Amount Invested as a Percentage of Employment Income
|
|
1999
|
$17,719
|
$17,481
|
101%
|
|
2000
|
$15,081
|
$37,273
|
40%
|
|
2001
|
$17,163
|
$41,719
|
41%
|
|
2002
|
$27,522
|
$49,633
|
55%
|
|
2003
|
$29,025
|
$53,735
|
54%
|
|
2004
|
$22,515
|
$37,180
|
61%
|
|
2005
|
$27,081
|
$58,820
|
46%
|
[19]
The amount invested in the farm
was significant ranging from 40% of her employment income to 101% of her
employment income. She spends virtually all of her working time on the farming
activity and her job as an engineer. Her day to day activities are clearly a combination
of farming and her employment and the time spent in each activity is
significant.
[20]
As a result, the appeal is
allowed, with costs, and the matter is referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that the
losses realized by the Appellant in 2005 from her farming business are not
subject to the restrictions contained in section 31 of the Income Tax Act.
Signed at Halifax,
Nova Scotia, this 4th day of August 2009.
“Wyman W. Webb”
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