Ferster v. The Queen, docket 1999-2444-IT-G

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.

"M.A. Mogan"

J.T.C.C.

CITATION:

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

APPEARANCES:

Counsel for the Appellant:

Leslie M. Little, Q.C.

Counsel for the Respondent:

Michael Taylor

COUNSEL OF RECORD:

For the Appellant:

Name:

Leslie M. Little, Q.C.

Firm:

Thorsteinssons

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.

"M.A. Mogan"

J.T.C.C.