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Citation: 2004TCC45
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Date: 20040127
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Docket: 2003-830(IT)I
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BETWEEN:
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CAROL A. KELLY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.
[1] The issue in this appeal is
whether the Appellant's farm losses in the years 1998 and
1999 are fully deductible or as contended by the Minister of
National Revenue ("Minister"), limited to the amount
provided for in section 31 of the Income Tax Act.
[2] Initially there was considerable
disagreement between the Appellant and the Respondent on the
amounts of the various expenses disallowed or varied. There were
three different businesses carried on by the Appellant and the
expenses and income related thereto are shown on the 1998 and
1999 farm income statements, the 1998 and 1999 greenhouse rental
statements and the 1999 bookkeeping/tax statement all of
which form part of these Reasons for Judgment and appear at the
end of the Reasons. As counsel for the Respondent explained at
the hearing of this appeal I need not be concerned with analysing
all of these figures because the Minister will be able to
calculate the exact amounts of the income or losses of the three
businesses based upon the said annexed statements which evidence
the agreement of the parties on the various amounts. For example,
taking the 1998 Farm Income Statement, wherever there is a
checkmark beside a disallowed farm expense the Minister has now
conceded that that amount is to be allowed in addition to the
amount allowed at the objection stage. So in the 1998 Farm Income
Statement the first checkmark is beside the figure $2,447.26 for
Feed, etc. This means the Appellant is allowed the expense of
$2,447.26 in addition to the $1,873.53 for a total amount allowed
of $4,320.79.
[3] Where an amount is struck out, for
example the $247.80 for supplies, the Appellant has agreed that
that amount has been correctly disallowed.
[4] Where there is a checkmark and a
new number entered, for example the $2,023.10 for Motor vehicle
the Minister has conceded that $2,023.10 is the amount to be
allowed.
[5] The foregoing comments apply to
all of the annexed statements.
[6] Since all amounts have been agreed
to the only issue in this appeal, as mentioned, is whether the
farm losses in the years 1998 and 1999 to be calculated from the
annexed 1998 and 1999 Farm Income Statements are fully deductible
or limited to the section 31 amounts.
[7] I find the principal facts to be
as follows:
a) During 1998 the
Appellant was employed as a chief financial officer by the Cheam
Indian Band earning a salary of $41,743.00. In 1999 for health
reasons she took a lesser position as an Accounting Supervisor at
a reduced salary of $36,080. Her hours of work were essentially 8
a.m. to 4 p.m.
b) Originally the Appellant and
her husband owned a 43 and a half acre farm
used principally for the breeding and care of Simmental cows. In
November 1997, the Appellant and her husband sold that first farm
principally because of serious health problems affecting the
Appellant and they subsequently acquired a smaller farm near
Chillawack, British Columbia having 2.28 acres upon which
were located their residence, a barn, some greenhouses and some
pasture.
c) For the first
three years with respect to the smaller farm the Appellant
states "I had tremendous expenses ... on the farm because it
had to be ... fences built. It had to be laid out for the
animals. We boarded the animals out while we did all the work
that had to be done. As you can see from 1998 to 2002 the losses
were quite high the first three years and then the next two they
started to come in line.
d) The exact loss figures are
set out in the Appellant's Counter Reply and are as
follows:
1998 - $20,032.00
1999 - $22,000.00
2000 - $20,125.82
2001 - $3,063.63 Separate Statements Farm portion
2002 - $471.26 Separate Statements Farm portion
e) The Appellant further
states: "...and so like I say, I've always been a
full-time farmer, I've worked out, of course to support the
farm, my family but I've always considered the farm - I had
always hoped the farm would provide an income, a living, at some
point. I was getting to the breakeven point in 2002 ..."
f) The Appellant produced
a diagram of the smaller farm. It contained the principal
residence. Also the Appellant and her husband put a fence in and
a paddock cement down for the animals. There was a barn at the
back of the house, in essence a big workshop, three greenhouses
and stalls for the animals. The Appellant also stated "...
we had two tractors. We had a trailer for hauling the animals. We
had a manure spreader, a chopper, a - two hay wagons. When -
you've perhaps seen them, bale lifters that put the - you put
the bales right on. You drag it behind. The baler, we had all
those things, and ...".
g) In 1998 and 1999 the
Appellant and her husband had approximately 6 to
8 Simmentals on the smaller farm. In 1997 and prior years
they had on the larger farm approximately two to three times that
number of cattle. The smaller farm was sold in July of 2003.
h) With respect to time
spent in farm activities the Appellant indicated that morning and
evening feedings would take three to four hours a day and she
spent further time in the evening on bookwork for the farm. The
bull calves were sold for breeding stock to beef farmers, the
females would be sold to other breeders. All animals were
purebred registered animals.
j) The sale income
in 1998 was approximately $7,000 and in 1999 approximately
$6,000.
k) The Appellant and her
husband also attended fairs and in particular the Pacific
National Exhibition ("PNE") fair where they would show
their Simmentals. There were approximately three small fairs of
approximately two to three days each in 1998 and 1999 and the big
fair, the PNE fair which lasted six days each year.
Submissions
[10] The Appellant submits that during the
relevant years her primary source of income was a combination of
farming and some other source namely her employment income which
was used to acquire farm assets and pay farm expenses. Therefore
her losses should not be restricted. She points to the
three basic hectors of capital employed, time spent and
profitability, both actual and potential. Counsel for the
Respondent points to the low amount of income, the considerable
losses in the years in question, the health problems of the
Appellant which prevented her from any serious physical work on
the farm and concludes that the losses should be restricted as
provided for in section 31 of the Act.
Analysis and Decision
[11] The term "farming" is defined
in subsection 248(1) of the Act as follows:
"Farming" - "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;
[12] The leading case on the question raised
in this appeal is the Supreme Court decision in Moldowan
v. The Queen, 77 DTC 5213. It is useful to quote Dickson
J. at page 5215 et seq in commenting on subsection 13(1)
(now section 31):
The next thing to observe with respect to s. 13(1) is that it
comes into play only when the taxpayer has had a farming
loss for the year. That being so, it may seem strange that the
section should speak of farming as the taxpayer's chief
source of income for the taxation year; if in a taxation year the
taxpayer suffers a loss on his farming operations it is manifest
that farming would not make any contribution to the
taxpayer's income in that year. On a literal reading of the
section, no taxpayer could ever claim more than the maximum
$5,000 deduction which the section contemplates; the only way in
which the section can have meaning is to place emphasis on the
words 'source of income'.
Although originally disputed, it is now accepted that in order
to have a `source of income' the taxpayer must have a profit
or a reasonable expectation of profit. Source of income, thus, is
an equivalent term to business: Dorfman v. M.N.R. [72 DTC
6131], [1972] C.T.C. 151. ...
There is a vast case literature on what reasonable expectation
of profit means and it is by no means entirely consistent. In my
view, whether a taxpayer has a reasonable expectation of profit
is an objective determination to be made from all of the facts.
The following criteria should be considered: the profit and loss
experience in past years, the taxpayer's training, the
taxpayer's intended course of action, the capability of the
venture as capitalized to show a profit after charging capital
cost allowance. The list is not intended to be exhaustive. The
factors will differ with the nature and extent of the
undertaking: The Queen v. Matthews (1974),
28 DTC 6193. ...
Whether a source of income is a taxpayer's `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 of income
from farming because he unexpectedly wins a lottery. The
distinguishing features of `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 in 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 a question
of fact in the circumstances.
...
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
replace 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.
[13] The principal criteria set out by the
Supreme Court in Moldowan in relation to a chief source of
income are therefore:
(i) time spent;
(ii) capital committed;
(iii) the profitability both actual and
potential.
These, as noted, are not the only criteria, because the
Supreme Court clearly indicated that they are "inter
alia". Before analyzing these criteria I must say that I
accept absolutely the credibility of the Appellant.
Time Spent
I conclude that the Appellant satisfied this criterion. The
evidence reveals that she spent a fair amount of time in the farm
operations not only the three to four hours of feeding time, but
also the bookwork, arranging sales and purchases of supplies and
attendance at the fairs and the PNE. Moreover, she lived with her
husband in the residence on the farm.
Capital Committed
Once again I have concluded that the Appellant meets this
criterion. Monies were invested in the acquisition of the farms,
the construction of fences and other farm structures and the
acquisition of equipment and livestock. Farming was clearly not a
hobby.
[14] I adopt, with approval, the analysis of
Joyal, J. in Hadley v. The Queen, 1985 DTC 5058 at pages
5063-4:
The findings I have made with respect to the Plaintiff's
farming operations must be viewed within the framework of
intentions and expectations. While it is true that the
operations, as financially unsuccessful as they were, might
indicate prima facie that the Plaintiff should come within
the second category of `sideline' operators as articulated by
Dickson, J. in the Moldowan case, the Plaintiff's
intentions and expectations are, in my view, material to the
conclusions I have drawn. To a great extent, in reviewing
past history, a trier of facts must adopt something akin to an
armchair approach as that expression is used in the
interpretation of testamentary instruments. The intentions
and expectations must be analyzed in the light of the
taxpayer's activities and of the economic situation relating
to beef farming which existed at that time.
...
Furthermore, as I have found earlier in these reasons, the
Plaintiff is not the type of person who would gladly risk a
million dollars in an operation on the simple expectation that in
the event of losses, half of them would be absorbed by deductions
from his other income.
...
It is my view therefore that the conclusion I have reached is
on the basis of a factual situation which has unique and
distinguishing features. Numerous precedents cited to me by
Counsel on both sides might be relevant or persuasive but I would
doubt that any one of them would be conclusive. I prefer to
be guided by the principles enunciated in the Moldowan
decision. I think that my conclusion is in conformity with
these principles and in keeping with the legislative intent of
section 31.
Profitability - Actual or Potential
[15] The farm did not show a profit in 1998
to 2002. The question becomes therefore, was there a reasonable
expectation of profit? There is ample authority to the effect
that in assessing pursuant to section 31 of the Act, the
Respondent is tacitly admitting that the Appellant was operating
a business and not indulging in a mere hobby but the question
remains, was there a reasonable expectation of profit? There were
losses in the years in question, but they were not large
considering the nature of the operation and they were being
considerably reduced from 1998 to 2002 and can reasonably be
considered as start up.
Start-up costs
[16] Concerning the start-up costs, it was
held in Moldowan, supra, that the permissible
amount to be deducted depends on the class the taxpayer finds
himself in. Dickson, J. stated referring to the class (1) farmer
at p. 5216:
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.
Combinations of Income as a Chief Source of Income
[17] Bowman, J. in Hover v. M.N.R. 93 DTC
98 ( at pp. 107-108) commented on sources of income as
follows:
The Act does not specifically require that the other source of
income be either subordinate or sideline. It would seem that if
farming can be combined with another source of income, connected
or unconnected, it can as readily be combined with a substantial
employment or business as with a sideline employment or business.
Indeed, if the other source were merely subordinate or sideline
it would not prevent farming alone from being itself the
taxpayer's chief source of income without combining it with
some other unrelated subordinate source.
Given the amount of income that the dental practice produced
and the amount of cash it contributed to the farming operation it
cannot be described as either subordinate to farming, in terms of
the revenue that it produced, or a sideline business. It was an
essential adjunct and complement to the farming operation.
Without it the farming operation could not have been commenced
nor could the substantial capital expenditures and start-up costs
have been incurred. In this sense it formed an integral part of
the combination. While I am of course bound to follow the
principles enunciated by Dickson, J., I must attempt to apply
them to the facts before me and I must conclude, if I am to give
effect to the word "combination", that by
"subordinate" he intended to include a source of income
that although substantial is integral to the very existence of
the farming operation.
And at page 110:
I have therefore concluded on the evidence that the
appellant's chief source of income was a combination of
farming and dentistry and that section 31 does not apply to the
determination of his income for the 1984, 1985 and 1986 taxation
years.
In so deciding, Bowman, J. held that an interrelation existed
between the two sources that permitted the combination. The
interrelation was a provision of financing from dentistry to
farming in the sense that the other business formed an integral
part of the combination. I have come to the same conclusion in
this case.
[18] In conclusion, in my opinion, the
criteria to establish a chief source of income as being farming
or a combination of farming and another source of income have
been met. Section 31 was not applicable to the Appellant and the
Appellant is entitled to the total of the farming losses claimed
for the two years in question. Thus, the appeals are allowed,
without costs, and the matter is referred back to the Minister
for reconsideration and reassessment on the foregoing basis.
CAROL A KELLY
1998 FARM INCOME STATEMENT
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Claimed by Appellant
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Allowed at objection stage
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Disallowed farm expenses
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Farm Income
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$7,259.16
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$7,259.16
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EXPENSES
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Supplies
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1,463.21
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1,215.41
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247.80
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Feed, supplements, straw, bedding
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4,320.79
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1,873.53
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2,447.26√
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Veterinary, medicines
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487.84
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487.84
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0
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Macinery repairs/insurance
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1,846.90
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1,495.83
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351.07√
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Fence/building repairs
|
5,462.33
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4,595.00
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867.33√
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Custom Work & machinery rental
|
2,396.95
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0
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2,396.95√
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Electricity
|
360.00
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360.00
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0
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Office
|
387.81
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0
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387.81√
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Property Tax
|
388.97
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388.97
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0
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Small Tools
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341.20
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341.20
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0
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Advertising
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92.88
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92.88
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0
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Motor vehicle
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5,300.08
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891.94
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2,023.10 4,408.14√
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Telephone
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741.48
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185.37
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334.03 556.11√
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Janitor/Garbage
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1,104.18
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500.70
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102.78 603.48√
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Travel/Promotion
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1,687.62
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1,687.62
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0
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Total expenses
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26,382.24
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14,116.29
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12,265.95
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Farm Loss
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($19,123.08)
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($6,857.13)*
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Farm Loss Allowed
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($4,678.57)*
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*Restricted farm loss allowed as follows:
$2,500.00 plu 50% (6,857.13 - 2,500.00)
CAROL A KELLY
1999 FARM INCOME STATEMENT
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Claimed by Appellant
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Allowed at objection stage
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Disallowed farm expenses
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Farm Income
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$5,649.69
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$5,649.69
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EXPENSES
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Supplies
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391.79
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1,127.51
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$(735.72)
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Feed
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4,924.03
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3,643.17
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1,280.86√
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Livestock purchases
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1,577.84
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0
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1,577.84√
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Veterinary, medicines
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870.42
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695.62
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174.80
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Machinery repairs/insurance
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2,389.42
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1,969.72
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419.70√
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Fence/building repairs
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400.20
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400.20
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0
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Burn permit
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25.00
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25.00
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0
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Electricity
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360.00
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360.00
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0
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Advertising
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102.00
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102.00
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0
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Garbage
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64.20
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0
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64.20√
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Other Insurance
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245.75
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245.75
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0
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Interest
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241.28
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0
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241.28√
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Office Expense
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841.21
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0
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591.21 841.21√
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Fees
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102.00
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0
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102.00√
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Property Tax
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376.54
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376.54
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0
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Hauling
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30.00
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0
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30.00√
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Motor vehicle
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3,135.43
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653.99
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1,227.73 2,481.44√
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Small Tools
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109.54
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0
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109.94√
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Maintenance/repairs
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364.65
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364.65
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0
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Hoof trimming
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115.80
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115.80
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0
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Mobility/cell phone
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1,045.07
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261.27
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783.80√
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Sawdust
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293.00
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179.76
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113.24√
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Promotion
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1,334.47
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1,334.47
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0
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Janitor
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672.00
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0
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672.00√
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Total expenses
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$20,012.04
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$11,855.45
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$8,156.59
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Farm Loss
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(14,362.35)
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($6,205.76)
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Farm Loss Allowed
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($4,352.88)*
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*Restricted farm loss allowed as follows: $2,500.00 plus
50% (6,205.76-2,500.00)
CAROL A KELLY
1998 GREENHOUSE RENTAL STATEMENT
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Claimed by appellant
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Allowed on objection
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Disallowed Rental Expenses
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Rental Income
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$3,482.94
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$3,482.94
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|
|
|
|
|
|
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EXPENSES
|
|
|
|
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Insurance
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$427.00
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$427.00
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$0
|
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Interest
|
3,913.82
|
978.46
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2,935.36
|
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Maintenance/repairs
|
1,261.69
|
1,188.46
|
73.23
|
|
Motor vehicle
|
3,144.61
|
165.26
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2,979.35
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|
Office
|
347.80
|
70.34
|
277.46
|
|
Property Tax
|
388.97
|
388.97
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0
|
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Utilities
|
902.94
|
758.96
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143.98√
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Custom work
K. Kelly
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2,396.95
|
|
$500 2,396.95√
|
|
|
|
|
|
|
Total Expenses
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$12,783.76
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$3,977.45
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$8,806.31
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Net Rental (loss) income
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($9,300.82)
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($494.41)
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CAROL A KELLY
1999 GREENHOUSE RENTAL STATEMENT
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Claimed by appellant
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Allowed on objection
|
Disallowed Rental Expenses
|
|
Rental Income
|
$6,077.90
|
$6,077.90
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
Insurance
|
$245.75
|
245.75
|
0
|
|
Interest
|
3,217.33
|
804.33
|
2,413.00
|
|
Maintenance/repairs
|
1,198.08
|
600.41
|
597.64
|
|
Motor vehicle
|
2,607.62
|
521.52
|
2,086.10
|
|
Office
|
383.43
|
383.43
|
0
|
|
Property Tax
|
376.54
|
376.54
|
0
|
|
Utilities
|
1,631.70
|
759.55
|
872.15√
|
|
Garbage
|
60.00
|
0
|
60.00√
|
|
Janitor
|
684.00
|
0
|
$342.00 684.00√
|
|
Total Expenses
|
$10,404.42
|
$3,691.53
|
$6,712.89
|
|
|
|
|
|
|
Net Rental (loss) income
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($4,326.52)
|
$2,386.37
|
|
CAROL A KELLY
1999 BOOKKEEPING/TAX STATEMENT
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Claimed by appellant
|
Allowed on objection
|
Disallowed Business Expenses
|
|
Bookkeeping Business Income
|
$2,500.00
|
$2,500.00
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Business tax/licence
|
$100.00
|
$100.00
|
0
|
|
Insurance
|
100.00
|
49.15
|
50.85
|
|
Motor vehicle
|
311.30
|
311.30
|
0
|
|
Office
|
1,410.75
|
542.21
|
868.54√
|
|
Propeerty Tax
|
379.59
|
75.31
|
304.28
|
|
Telephone/Utilities
|
660.00
|
439.68
|
220.32
|
|
Garbage
|
64.20
|
0
|
64.20√
|
|
|
|
|
|
|
Total Expenses
|
$3,025.84
|
$1,517.65
|
$1,508.19
|
|
|
|
|
|
|
Net Business (loss) income
|
($525.84)
|
$982.35
|
|
Signed at Ottawa, Canada, this 27th day of January 2004.
O'Connor, J.
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