Date:
20030108
Docket:
1999-2444-IT-G
BETWEEN:
ELVIN
FERSTER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Mogan
J.
[1]
When the Appellant filed his income tax returns for the years
1991, 1992, 1993, 1994 and 1995, he reported income from a
variety of sources and, in particular, he reported in each year a
loss from his farming operation. He applied the total farm loss
against his income from other sources. The Minister of National
Revenue issued reassessments to the Appellant for all five
taxation years disallowing the deduction of the total farm loss
in each year on the basis that the Appellant's chief source
of income was neither farming nor a combination of farming and
some other source of income within the meaning of subsection
31(1) of the Income Tax Act. The Minister did, however,
allow the Appellant to deduct the restricted farm loss described
in subsection 31(1) of the Act. The Appellant has appealed
from the reassessments for all five taxation years. The only
issue before the Court is whether the Appellant's chief
source of income in each year was farming or a combination of
farming and some other source of income.
[2]
Although 1992 is a nil assessment, the parties agreed at the
commencement of the hearing that it would be regarded as a year
under appeal because the amount of the loss in 1992 could affect
the taxable income of adjoining years which are validly under
appeal. The decision in Aallcann Wood Suppliers Inc. v. The
Queen, 94 DTC 1475, supports that position. My decision will
therefore relate to all five taxation years.
[3]
The Appellant was born in 1941 and raised on a family farm of 160
acres in the Province of Saskatchewan. His family engaged in
mixed farming with about 30 milk cows; they grew their own feed
for the cattle and they also grew other crops. In 1962, he
married a woman who was also raised on a farm in the State of
Washington in the U.S.A. From 1962 to 1964, the Appellant drove a
logging truck as an employee. From 1964 to 1977, he operated a
trucking business at Quesnel, B.C. He started with only one truck
but by 1977 he had 12 or 13 trucks all operating in the logging
industry. In 1977, the Appellant sold his trucking business and
purchased a small farm in the Fraser Valley near Abbotsford, B.C.
about 80 kilometres west of Vancouver.
[4]
This farm was actually located in a small community called Mount
Lehman which has now been absorbed into Abbotsford. The farm
consisted of 12½ acres containing a house, a detached
two-car garage and a barn. There was no equipment which came with
the farm but, within two years, the Appellant had purchased a
tractor with a front-end loader, a truck and trailer to move
cattle and some seeding and hay equipment. The Appellant also put
up new fences and, because he is an experienced welder, he
purchased steel and fabricated cattle handling equipment
(corrals, chutes, etc.). When he started in 1977/1978, he
purchased about 30 steers to fatten up and sell at six months.
After the first year, he changed to what he called a cow/calf
operation with the purchase of 30 Galloway cows which he used to
breed; calve in the spring; and then raise the calves for sale or
to increase his herd.
[5]
The 12½ acres at the Mount Lehman farm were not enough for
the Appellant's 30 cows to graze and for him to grow hay and
so he obtained additional acreage close by. He started with 40
acres at Etonvale which had been used to grow strawberries. He
got it on a rent-free basis for two or three years by agreeing to
clean up the land; to seed it with his own crop; and to fence it.
When the owner reclaimed the 40 acres in Etonvale, the Appellant
obtained an additional 40 acres from Mrs. Nichols on the same
arrangement that he clean up the land from strawberries; and then
seed it and fence it. After giving up Mrs. Nichols'
land, the Appellant also took additional land over the years from
a Mrs. Hildebrand, some other land on Burgis Road and a third
parcel which was referred to as the Peters' property. On each
of these last three parcels, the Appellant was required to pay
rent but he needed the land to grow hay and other crops for his
small herd of cattle.
[6]
The Appellant was not satisfied with the cow/calf operation using
Galloway cows. After 1977, he had regularly attended the Regina
Agribition which was an annual exhibition of agricultural
products. He was looking at different breeds of beef cattle to
determine the one which he could raise to best advantage. He
finally decided on Simmental as the breed of beef cattle which he
wanted to raise. He had studied the conversion factor (feed
consumed compared to weight gained) for a number of breeds and
concluded that Simmental was the best. A one-year old Simmental
bull could easily weigh 1,500 pounds whereas a one-year old
Galloway bull would weigh approximately 1,200 pounds and a
one-year old Hereford would weigh approximately 1,000
pounds, even though they would all consume the same amount of
feed.
[7]
In the late 1980s, the Appellant purchased four full-blood
Simmental cows at a total cost of $25,000. His intention was to
develop a Simmental herd by following an embryo transplant
policy. This policy was important to the Appellant and there was
considerable evidence about the way it worked. It may be
described as follows. A purebred Simmental cow (referred to as a
"donor") would be given a hormone injection to induce
super ovulation. About eight days later, this donor cow would be
bred by artificial insemination from a purebred Simmental bull.
About eight days after the artificial insemination, there would
be a flush of the donor cow's uterus to determine if there
were any live embryos which could be transplanted. Embryos of a
certain quality could be frozen for transplant at a later date
but others would have to be transplanted immediately if they were
to live. A live embryo could be transplanted to a "host
cow" which would not be a purebred Simmental. If the
transplant were successful, the embryo would develop into a baby
calf within the host cow and, after the normal gestation period
of approximately nine months for cattle, the host cow would
deliver a calf which would be purebred Simmental.
[8]
If a significant number of live embryos could be obtained from a
single flush in the above process, and if those live embryos
could be successfully transplanted to a number of non-Simmental
host cows, it would be possible to develop a large herd of
purebred Simmental cattle in a short period using only a few
purebred Simmental donor cows. This was the Appellant's
objective with the four purebred Simmental cows which he
purchased in the late 1980s.
[9]
In order to get started, the Appellant retained the services of a
veterinarian near Abbotsford who was familiar with the embryo
transplant process. Starting in 1989, he tried the process with
the following six cows; Tanya, FerDawn, Salvita, Patches, Dimples
and Winters. Although Tanya had been a highly productive cow
using the embryo transplant process before her purchase by the
Appellant, she proved to be a real failure to the Appellant by
1990 or 1991. The next four cows also showed very poor results
from the embryo transplant process and the last cow, Winters,
produced only six live embryos around 1995 or 1996. The net
result was that the embryo transplant process was not successful
for the Appellant even though he made a genuine attempt to use it
with his purebred Simmental cows from 1989 to 1995.
[10] The
Appellant became involved in the restaurant business around 1988
and, over a period of time, it became a significant distraction
from his farming endeavours. An organization from Dallas, Texas
had started a chain of restaurants under the name "Bonanza
Restaurant" throughout the western United States. By 1986,
there were more than 200 restaurants. In 1986, some people
decided to bring the Bonanza chain into Canada. Between 1986 and
1988, the Appellant became a part owner of four Bonanza
Restaurants in the Province of British Columbia located at
Langley, Chilliwack, Clearbrook (near Abbotsford) and Prince
George. He described himself as a small passive investor and,
although he may have been at the beginning, he was anything but
passive as time passed. It appears that the Bonanza Restaurants
in both the United States and Canada were something like shooting
stars - a bright light but for a very brief time. The Appellant
stated that the parent company in Dallas and many of the
restaurants in the U.S. failed within three or four years and
there were many bankruptcies. Although there were only 15 or 20
Bonanza Restaurants in Canada, it is the Appellant's
impression that all of the owners went bankrupt except for
himself and one or two others.
[11] The Bonanza
Restaurants started to fail around 1989 or 1990. When a
particular restaurant was in financial difficulties, the
suppliers would demand cash on delivery for all goods. After the
Langley restaurant got into trouble, the Appellant's wife
took over as manager in 1990 or 1991 when all of the other owners
walked away. She ran it for about six months; she got it
operational again and then sold it. The Chilliwack restaurant
stayed open for a longer time because one of the co-owners
ran it well but it later closed down around 1992. The Appellant
had to take over the management of the Clearbrook restaurant
(near Abbotsford, close to his Mount Lehman farm) in 1991 when
the other owners walked away. He operated it for about one year
to put it back on its feet and then sold it in 1992.
[12] The real
problem which became a great burden to the Appellant was the
Bonanza Restaurant at Prince George. The Appellant had started
with only a 25 percent interest in this restaurant and he
was, at the beginning, a truly passive investor because it was
located approximately 450 miles north of his Mount Lehman farm.
He had, however, made a significant commitment to the Prince
George restaurant because he had personally guaranteed its
mortgage of $575,000. In the late summer of 1993, the Appellant
received a telephone call from Prince George stating that the
restaurant was in financial trouble. There were significant
arrears on the remittance of source deductions from the salary
and wages of staff. There were also significant arrears on the
remittance of GST to Revenue Canada. The Appellant was at risk of
being called on his guarantee of the mortgage on the Prince
George restaurant. He knew that he had to do something drastic.
He and his wife decided that they would move to Prince George
immediately and take over the management of the
restaurant.
[13] The
Appellant and his wife moved to Prince George in September 1993
and they were there until the end of 1997. He was able to retain
almost all of the staff but he replaced the manager with himself
and managed the restaurant with his wife as second in command. By
working hard, they were able to keep the restaurant out of
bankruptcy; and they worked it to a point where they could close
it down and sell it in 1997 to a group who would later open it as
a Chinese buffet.
[14] When the
Appellant and his wife moved to Prince George, he knew that he
could not continue alone his embryo transplant process with the
Simmental cows, and so he decided that he would have to join
forces with another farmer. He was well acquainted with Lyle
Galloway, a farmer in the State of Washington who lived just
across the U.S. border from the Appellant's Mount Lehman farm
in southern British Columbia. The Appellant joined forces with
Lyle Galloway. They decided that all of the Appellant's
cattle would be transferred from Mount Lehman to the Galloway
farm in the State of Washington except for a few head which would
be left behind at Mount Lehman. Effectively, the good Simmental
cows all went to the Galloway farm. Under their agreement, the
Appellant retained ownership of the cows that went to the
Galloway farm but the Appellant and Lyle Galloway shared a 50-50
joint venture interest in any calves which were born of the
Appellant's Simmental cows. They attempted to continue the
embryo transplant process but without much success.
[15] The
Appellant stated in evidence that he would drive down to the
Galloway farm about 25 or 30 times a year to help with the
farming operation; and that he would stay four or five days each
time. The distance from Prince George to the Galloway farm was
about 500 miles and that journey included crossing the U.S.
border. Driving one way would consume a day. I can understand the
Appellant making that trip for a predictable event like haying
but, having regard to calving, if a cow went into labour she
would probably deliver her calf before the Appellant could make
the 500-mile journey by highway. Although the Appellant may have
gone down to the Galloway farm for haying, and to use his welding
skills to fabricate some corrals and chutes for cattle, it would
be difficult for him in Prince George to participate in the
day-to-day operation of the farm like the decisions to select the
cow and the time for an embryo transplant process. I believe that
the Appellant made a genuine attempt to help his partner
Lyle Galloway in the operation of the Galloway farm but I
frankly doubt that he made 25 to 30 trips each year by car
staying four or five days each time. That would be more than two
trips per month. On the evidence, I am satisfied that throughout
the period September 1993 until 1997, the Appellant's primary
occupation was salvaging the Prince George restaurant in order to
escape liability on his personal guarantee of the mortgage. That
is why he and his wife moved 450 miles north to Prince
George.
[16] As in
virtually all "farm loss" cases, the Appellant reported
a loss from the operation of his farm in each year under appeal.
Indeed, the Appellant's farm lost money in each preceding
year on which there is evidence. Schedule A attached to the
Respondent's Reply to the Notice of Appeal is a comparative
statement of profit and loss as reported by the Appellant from
his farm operation for the 11-year period 1985 to 1995
inclusive. Under cross-examination, (Transcript page 202), the
Appellant acknowledged that he did not doubt the accuracy of the
amounts in Schedule A. Exhibit R-1 is a binder containing copies
of the Appellant's income tax returns for all 11 years from
1985 to 1995. A cursory review of Exhibit R-1 indicates that the
amounts in Schedule A are accurate.
[17] In the
table below, I have included only those amounts which I regard as
most relevant for the five years under appeal and the two
preceding years (1989 and 1990).
|
|
Cash Revenues *
|
Cash Expenses *
|
Resulting Loss
|
|
1989
|
$13,977
|
$24,990
|
$11,013
|
|
1990
|
15,509
|
41,324
|
25,815
|
|
1991
|
1,524
|
37,204
|
35,680
|
|
1992
|
14,485
|
34,743
|
20,258
|
|
1993
|
16,972
|
34,462
|
17,490
|
|
1994
|
16,133
|
37,255
|
21,122
|
|
1995
|
14,009
|
17,574
|
3,565
|
|
*
Omitting inventory adjustments and capital cost
allowance
|
In five of
the above seven years, the cash expenses were more than double
the cash revenues. After taking into account in each year an
inventory adjustment for cattle plus capital cost allowance
claimed only in 1994 and 1995, the Appellant reported the
following amounts as farm losses on his respective income tax
returns.
|
1989
|
$11,013
|
|
1990
|
20,815
|
|
1991
|
34,430
|
|
1992
|
11,518
|
|
1993
|
22,490
|
|
1994
|
62,127
|
|
1995
|
19,601
|
[18] Most cases
involving "chief source of income" under section 31 of
the Act review the law from the Supreme Court of Canada
decision in Moldowan v. The Queen, 77 DTC 5213. In my
view, however, the more recent law involving chief source of
income started with the decision of the Federal Court of Appeal
in The Queen v. Morrissey, 89 DTC 5080. In
Morrissey, Mahoney J.A. writing for the majority stated at
page 5084:
... In
considering s. 31(1), it seems to me that potentiality, rather
than actuality, is the question in all cases since the provision
applies only where there is a loss in a taxation year. That is
not, of course, to say that actual profitability in other years
may not be evidence of the potential for profit in years of
losses.
Moldowan suggests
that there may be a number of factors to be considered but we are
here concerned only with three: time spent, capital committed and
profitability. In defining the test as relative and not one of
pure quantum measurement, Moldowan teaches that all three
factors are to be weighed. It does not, with respect, merely
require that farming be the taxpayer's major preoccupation in
terms of available time and capital.
...
On a proper
application of the test propounded in Moldowan, when, as
here, it is found that profitability is improbable
notwithstanding all the time and capital the taxpayer is able and
willing to devote to farming, the conclusion based on the civil
burden of proof must be that farming is not a chief source of
that taxpayer's income. To be income in the context of the
Income Tax Act that which is received must be money or
money's worth. Absent actual or potential profitability,
farming cannot be a chief source of his income even though the
admission that he was farming with a reasonable expectation of
profit is tantamount to an admission which itself may not be
borne out by the evidence, namely, that it is at least a source
of income.
[19] The
emphasis which Morrissey placed on time spent, capital
committed and profitability (both actual and potential) was
reinforced by the Federal Court of Appeal in The Queen v.
Roney, 91 DTC 5148, when Desjardins J.A. writing for the
Court stated at pages 5153-5154:
The ratio
in Moldowan is that the reference, in subsection 31(1) of
the Act, to a taxpayer whose source of income is a combination of
farming and some other source, contemplates a man whose major
preoccupation is farming. It recognizes that such an individual
may have other pecuniary interests such as income from
investments or income from a sideline employment or business.
These however remain auxiliary or subsidiary to his chief source
of income. A quantum measurement of farming income, although not
alone decisive, is relevant and cannot be ignored. The
distinguishing features of "chief source of income",
i.e. the taxpayer's reasonable expectation of income from his
various revenue sources and his ordinary mode and habit of work,
are to be analyzed in the light of considerations such as the
time spent, the capital committed and the profitability both
actual and potential.
See also
comments by the Federal Court of Appeal in Connell v. The
Queen, 92 DTC 6134 and The Queen v. Poirier, 92
DTC 6335. In my opinion, it is now well established that it is
the cumulative impact of the factors time spent, capital
committed and profitability that must be considered, and not any
one factor taken disjunctively.
[20]
InThe Queen v.
Donnelly, 97 DTC 5499,
the taxpayer was a medical doctor who was also breeding and
racing standardbred horses. The taxpayer was successful at trial
but the Federal Court of Appeal allowed an appeal on behalf of
the Minister of National Revenue. Robertson J.A., writing for the
Court stated at pages 5500-5501:
A
determination as to whether farming is a taxpayer's chief
source of income requires a favourable comparison of that
occupational endeavour with the taxpayer's other income
source in terms of capital committed, time spent and
profitability, actual or potential. The test is both a relative
and objective one. It is not a pure quantum measurement. All
three factors must be weighed with no one factor being decisive.
Yet there can be no doubt that the profitability factor poses the
greatest obstacle to taxpayers seeking to persuade the courts
that farming is their chief source of income. This is so because
the evidential burden is on taxpayers to establish that the net
income that could reasonably be expected to be earned from
farming is substantial in relation to their other income source:
invariably, employment or professional income.
...
[21] And
finally, in Kroeker v. The Queen, 2002 DTC 7436, the
taxpayer and her husband were engaged in mixed farming: half
grain farming (barley and wheat) and half livestock (a cow-calf
operation). The taxpayer was also employed fulltime as the
controller of a corporation at Swift Current, Saskatchewan. When
allowing the taxpayer's appeal, the Federal Court of Appeal
referred to "certain dicta" by Robertson J.A. in
Donnelly with respect to the need for evidence of a
reasonable expectation of "substantial" profits from
farming. The Court in Kroeker seems to have been concerned
that the need to demonstrate "substantial" profits in
all circumstances would place too great a burden on all
taxpayers. Desjardins J.A. writing for the Court in
Kroeker stated at paragraph 21
(page 7440):
[21]
Donnelly, supra, must be distinguished from the case at
bar. The taxpayer in that case was involved in raising horses for
racing. It is in that context, therefore, that the demonstration
of a reasonable expectation of "substantial" profits
was deemed to be required. Moldowan, supra, itself does
not refer to such requirement. It simply states that "while
a quantum measurement of farming income is relevant, it is not
alone decisive." In Morrissey, supra, a majority of
the Court formulates the test in the following manner:
"[w]hile the determination that farming is a chief source of
income is not pure quantum measurement, it is equally not a
determination in which quantum can be ignored".
[22] I will
attempt to apply the factors of time spent, capital committed and
profitability to the evidence in this case beginning with time
spent. From and after 1977 when the Appellant sold his trucking
business and purchased a small 12½ acre farm at Mount
Lehman, he tried to spend his time at farming. In this way, he
was very different from the taxpayer in Donnelly (and
similar taxpayers) whom Robertson J.A. referred to as
"taxpayers who earn their income in the city and lose it in
the country". The Appellant made a genuine attempt at
farming fulltime but later allowed himself to be distracted by
his investments in Bonanza Restaurants.
[23] I am
satisfied that the Appellant was a fulltime farmer throughout the
1980s. By 1988, he had invested relatively nominal amounts in
four Bonanza Restaurants. By 1990, when the Bonanza chain started
to falter, the Appellant was required to spend more of his time
trying to salvage his investments in the restaurants at Langley,
Chilliwack and Clearbrook (near Abbotsford and his Mount Lehman
farm). He described an office he maintained at one of the
restaurants which he was trying to operate but also wind down in
the period 1990 to 1992. Notwithstanding the cash losses from
farming ($25,815 in 1990 and $35,680 in 1991 - see table in
paragraph 17 above), the Appellant borrowed $60,000 from a friend
in order to meet the cash needs of a Bonanza
Restaurant.
[24] When the
Appellant received word in the late summer of 1993 that the
Prince George restaurant was in serious financial trouble, he was
desperate because he had personally guaranteed a $575,000
mortgage on the restaurant. He was so desperate that he and his
wife moved to Prince George and stayed there four years. After
his time in Prince George, the Appellant did not get back to
fulltime farming until the year 2000 when he purchased a 183-acre
farm at Olds, Alberta. Although I do not doubt that the
Appellant's heart was in farming and that farming would be
his first avocation, the hard fact is that he invested in and
became involved in the Bonanza Restaurant chain. As the
restaurants started to falter, he and his wife were required to
manage two of the restaurants in southern British Columbia
through their winding-down periods. Having regard to Prince
George, it was not a case of managing the winding down of a
business but a real need to salvage and revive a business so that
(i) delinquent remittances could be made to Revenue Canada; (ii)
payments on the mortgage could be maintained; and (iii) the
goodwill of the business could be brought to a level where there
would be potential serious buyers.
[25] As events
transpired, the restaurant at Prince George had to be closed in
order to effect the sale to a group who would open a Chinese
buffet but that was only after the operation of the restaurant
itself had been stabilized. In the years 1993, 1994 and 1995, the
management and winding down of Bonanza Restaurants (in which the
Appellant owned a participating interest) occupied not less than
50% of the Appellant's working hours. In 1991 and 1992,
farming occupied not less than 50% of his working
hours.
[26] The second
factor is capital committed. The Appellant paid $150,000 for the
Mount Lehman farm comprising 12½ acres, a house, a
detached two-car garage and a barn. He paid about $65,000 for a
tractor, a truck and trailer to move cattle and some haying
equipment. He also paid approximately $100,000 for 30 head of
cattle; $40,000 for fencing and corrals; and $30,000 for a barn
extension and concrete floor. And around 1989-1990, he paid
$25,000 for four purebred Simmental cows. By 1990, the Appellant
had invested more than $400,000 in the Mount Lehman farm (less
any amount recovered on the sale of his Galloway cattle). Apart
from his small initial investments of about $10,000 or $20,000 in
three Bonanza Restaurants (he was not required to invest cash in
the fourth Bonanza Restaurant), it seems that most of the
Appellant's capital was invested in the Mount Lehman farm
throughout the 1980s. The Appellant did own a motel at Slave
Lake, Alberta in the 1980s and 1990s but there is no evidence
with respect to the value of that motel at any time.
[27] There is no
evidence that the Appellant had paid out in cash any significant
amount before 1993 for his participating interest in the Prince
George Bonanza Restaurant. He indicated that part of the problem
at the Prince George restaurant prior to September 1993 was
caused by the local manager appropriating cash to satisfy a
gambling habit. In any event, when the crunch came in September
1993, the Appellant had $575,000 at risk because he had given a
personal guarantee with respect to the mortgage on the Prince
George restaurant. It was very important to the Appellant that
the Prince George restaurant be salvaged and revived so that he
would not be called on his personal guarantee.
[28] There is no
evidence as to when the Appellant first delivered that personal
guarantee or whether there were personal guarantees from other
persons. The Bonanza Restaurant chain started to fall apart
around 1990. I shall assume that no new Bonanza Restaurants were
opening in 1991 or 1992 or any later years. As a corollary to
that assumption, I shall assume that the Appellant's personal
guarantee on the Prince George restaurant mortgage was delivered
to the mortgagee at some time prior to 1993. It is unfortunate
that I do not have more precise evidence with respect to the
Appellant's personal guarantee - when it was first delivered
- and whether the mortgage was guaranteed by any other person -
because the existence of that personal guarantee, coupled with
the near failure of the Prince George restaurant, has a
significant effect on the Appellant's capital committed
(amounts actually paid out and amounts at risk) during the
taxation years under appeal.
[29] Although
the onus of proof is on the Appellant, in this area concerning
his personal guarantee of the Prince George mortgage, I will give
him the benefit of my doubt and assume that the guarantee was not
delivered to the mortgagee until late 1992 or early 1993.
Therefore, the amount of capital which the Appellant had at risk
on the Prince George mortgage throughout 1993, 1994 and 1995 was
greater than the capital which he had directly paid out in
connection with his Mount Lehman farm. Conversely, it would
appear that the capital which he had paid out on his Mount Lehman
farm was greater in 1991 and 1992 than the capital which was paid
out or at risk in the Bonanza Restaurants.
[30] The third
factor is profitability. By allowing the Appellant the
"restricted farm loss" under section 31 in all years
under appeal, the Minister has acknowledged that the Appellant
was farming with a reasonable expectation of profit. It is a
fact, however, that in all the years from 1977 (when the
Appellant purchased the Mount Lehman farm) to 1995 (the last year
under appeal), the Appellant did not once report a profit from
farming for income tax purposes. The tables in paragraph 17 above
show his farming losses on a cash basis for the years 1989 to
1995 and the farming losses which he reported for income tax
purposes in the same seven-year period from 1989 to 1995. The
losses are consistent and significant with respect to relatively
modest farm revenues.
[31] There was
some expert evidence on the Appellant's behalf concerning the
opportunities for profit from the embryo transplant process but
that expert evidence was in connection with what the Appellant
was doing in Alberta around the year 2000, long after the years
under appeal. I do not place much weight on the expert
evidence.
[32] In
Kroeker, the Federal Court of Appeal turned away from the
statement by Robertson J.A. in Donnelly that, in all
cases, the taxpayer had a burden to prove that net farming income
would be substantial in relation to other income. That statement
now appears to be limited to those taxpayers "who earn their
income in the city and lose it in the country". In
Kroeker, the Court quoted another passage from
Donnelly in which Robertson J.A. stated at page
5503:
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 then [sic] not it is invoked
in circumstances where farmers are prepared to carry on with a
blatant indifference toward the 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 makings of
a chief source of income.
[33] The
Appellant is certainly not a "gentleman" farmer who
used substantial city income to finance his kind of farming. He
was making a genuine attempt to develop a purebred Simmental herd
of cattle in the years 1989 to 1993 when he was called away to
save his capital at risk in the Prince George restaurant. In the
years 2000 and 2001, he sold the Mount Lehman farm and purchased
a much larger farm at Olds, Alberta where he continues to farm.
The Appellant appears to have had a chance for profit in 1991 and
1992 when he was operating on his own attempting the embryo
transplant process and when he was less involved with the Bonanza
Restaurants.
[34]
Circumstances changed significantly in 1993. First, the Appellant
moved his Simmental herd to the farm of Lyle Galloway in the
State of Washington. And second, the Appellant and his wife moved
to Prince George to salvage and revive the Bonanza Restaurant in
that city. The Appellant's ability to participate in farming
and earn any kind of farming income was greatly restricted by his
business responsibilities in Prince George in the years 1993 to
1997.
[35] Considering
the three factors of time spent, capital committed and
profitability, I have no difficulty in concluding that the
Appellant's chief source of income in 1991 and 1992 was
farming. Similarly, I conclude that his chief source of income in
1994 and 1995 was neither farming nor a combination of farming
and some other source of income. The year 1993 seems more evenly
balanced. That was the year of the Appellants' big move to
Prince George and the relocation of his Simmental herd from Mount
Lehman to the Lyle Galloway farm. In 1994 and 1995, the
Appellant's daughter and her husband were living at the Mount
Lehman farm but the Appellant was not carrying on any serious
farming at that site.
[36] In his oral
testimony, the Appellant seemed to recall clearly that it was in
September 1993 when he received the telephone call from Prince
George with the bad news of the financial plight of the
restaurant. Although the Appellant and his wife decided to move
to Prince George immediately, and he transferred his Simmental
herd to the farm of Lyle Galloway, he was farming alone at Mount
Lehman for the first eight months of 1993 and for an undetermined
number of weeks into the Fall of that year until his herd went to
the Galloway farm. In my opinion, it was the combined effect of
(i) the domestic move of the Appellant and his wife to Prince
George; and (ii) the transfer of the Appellant's Simmental
cattle to the farm of Lyle Galloway which ended the
Appellant's ability to argue that farming was or could be his
chief source of income after the occurrence of those two
events.
[37] Those two
events occurred sometime in the last four months of 1993.
Therefore, for a period of time which exceeds eight months (2/3
of the calendar year), the Appellant was farming alone at Mount
Lehman and he was involved only on the side with the winding down
of Bonanza Restaurants. Because the Appellant himself was
actively farming at Mount Lehman for most of the calendar year,
and because he became the fulltime manager of the Prince George
restaurant only in the last few weeks or months of 1993, I will
find in his favour for 1993 and hold that farming was his chief
source of income for 1993.
[38] The end
result is that the appeals are allowed for the 1991, 1992 and
1993 taxation years but dismissed for the 1994 and 1995 taxation
years. The Appellant is successful in three years out of five but
a greater portion of the aggregate farm losses in dispute falls
within 1994 and 1995. Accordingly, each party will bear his/its
own costs.
Signed at
Vancouver, British Columbia, this 8th day of January,
2003.
J.T.C.C.
|
COURT FILE
NO.:
|
1999-2444(IT)G
|
|
STYLE OF
CAUSE:
|
Elvin Ferster and
Her Majesty
the
Queen
|
|
PLACE OF
HEARING
|
Vancouver, British
Columbia
|
|
DATE OF
HEARING
|
November 27 and 28,
2001
|
|
REASONS FOR
JUDGMENT BY:
|
The Honourable
Judge M.A. Mogan
|
|
DATE OF
JUDGMENT
|
January 8,
2003
|
|
Counsel for the
Appellant:
|
Leslie M. Little,
Q.C.
|
|
Counsel for the
Respondent:
|
Michael
Taylor
|
|
Name:
|
Leslie M. Little,
Q.C.
|
|
For the
Respondent:
|
Morris
Rosenberg
Deputy Attorney
General of Canada
Ottawa,
Canada
|
1999-2444(IT)G
BETWEEN:
ELVIN
FERSTER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on November 27 and 28, 2001, at Vancouver, British
Columbia, by
the
Honourable Judge M.A. Mogan
Appearances
Counsel
for the
Appellant:
Leslie M. Little, Q.C.
Counsel
for the
Respondent:
Michael Taylor
JUDGMENT
The appeals from assessments of tax made under the Income Tax
Act for the 1991, 1992 and 1993 taxation years are allowed,
without costs, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that, in each of those years, the Appellant's
chief source of income was farming.
The appeals
from assessments of tax made under the Act for the 1994
and 1995 taxation years are dismissed, without costs.
Signed at
Vancouver, British Columbia, this 8th day of January,
2003.
J.T.C.C.