Friberg v. The Queen, docket 2001-2212-IT-I (Informal Procedure)

Date: 20011112

Docket: 2001-2212-IT-I

BETWEEN:

BJORN FRIBERG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Porter, D.J.T.C.C.

Introduction

[1]            This appeal was heard at Saskatoon, Saskatchewan, on October 1, 2001.

[2]            The Appellant, the taxpayer, seeks to deduct from his professional income as a professor of mathematics at the University of Saskatchewan, the full amount of farming losses sustained in 1996 and 1997. In computing his income for those years, the Appellant deducted the amounts of $33,790.92 and $25,955.33 respectively as farming losses, setting those losses off against his University income of $70,826.88 and $67,750.08 respectively.

[3]            By Notices of Reassessment dated July 26, 1999, the Minister of National Revenue (the "Minister") inter alia restricted the farming losses in accordance with subsection 31(1) of the Income Tax Act (the "Act"), R.S.C. 1985 c.1 (5^th Supp.) to $8,750.00 with respect to each year.

[4]            The Appellant filed Notices of Objection to the reassessment and the Minister confirmed those reassessments on March 20, 2001 in the following terms:

Your chief source of income in the 1996 and 1997 taxation years was neither farming nor a combination of farming and some other source of income. Accordingly, under subsection 31(1), your loss for each year from the farming business you carried on was $8,750.00 in 1996 and $8,750.00 in 1997, for the purposes of sections 3 and 111.

[5]            It is from that decision that the Appellant brings this appeal.

The Law

[6]            The most recent jurisprudence on this section of the Act is contained in the decision of the Federal Court of appeal in R. v. Donnelly, 220 N.R. 392. The Appellant has expressed his disapproval of this decision. Nonetheless, it is binding on this Court and I must take my guidance from it. It is perhaps somewhat ironic that the Donnelly case, as in the case before me, involved a farm income loss for a horse breeding operation.

[7]            Robertson, J.A. speaking for the Court, said this:

According to Moldowan (Moldowan v. R. 77 DTC 5213), the taxpayer must satisfy two testes in order to succeed. First, he must establish that the farming operation gave rise to a "reasonable expectation of profit" and, second, that his "chief source of income" is farming (the so-called "full-time" farmer). If the taxpayer is unable to satisfy the first test no losses are deductible (the so-called "hobby" farmer). If he satisfies the first test but not the second then a restricted farm loss of $5,000 (now $8,500) is imposed under section 31 of the Income Tax Act (the so-called "part-time" farmer).

[8]            I think it can fairly be said that the Minister, as in Donnelly, has in the case at hand, conceded that the farming operation gave rise to a reasonable expectation of profit, or else he would have disallowed the losses completely.

[9]            Robertson, J.A. went on as follows:

...The Minister now argues that the court below was in error in making that determination. I agree. In my respectful view, the Tax Court Judge failed to appreciate the distinction between the test to be applied when determining whether farming is a taxpayer's chief source of income and that which is applicable when assessing whether a taxpayer has a reasonable expectation of profit. When the issue is placed in this perspective it is not difficult to understand why the Minister was willing to concede the latter point. As is explained below, the legal test for establishing farming as a chief source of income is, on an evidential level, a more onerous one.

And

...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 in 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. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act. The extent to which the evidential burden regarding the profitability factor or test differs from the one governing the reasonable expectation of profit requirement is a matter which I will address more fully below.

In summary, the cumulative factors of capital committed, time spent and profitability will determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. These guiding principles flow from the following decisions: Moldowan (supra), Timpson v. Minister of National Revenue (1993), 93 D.T.C. 5281 (Fed. C.A.), Poirier (Trustee of) v. Canada (1992, 92 D.T.C. 6335 (Fed. C.A.), Connell v. Minister of National Revenue (1992), 92 D.T.C. 6134 (Fed. C.A.), Roney v. Minister of National Revenue (1991), 91 D.T.C. 5148 (Fed. C.A.), Morrissey v. R. (1988), 89 D.T.C. 5080 (Fed. C.A.), Gordon v. R. (1986), 86 D.T.C. 6426 (Fed. T.D.), Mott v. R. (1988), 88 D.T.C. 6359 (Fed T.D.) and Mohl v. R. (1989), 89 D.T.C. 5236 (Fed. T.D.).

[10]          He continued:

This leads inexorably to my third point: the taxpayer acknowledged that he required his medical income to live off and fund the purchase of new horses and other aspects of the horse operations... Under these circumstances, it is difficult to see how he can be described as having changed his occupational direction. It cannot be denied that the time devoted to horse farming was significant, but this quantitative factor alone does not accurately reflect the reality that the taxpayer was financially dependent upon his medical practice and primary income-earning occupation.

Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming.

[11]          He went on:

While there is no doubt that the loss of Mr. Rankin, and the changes in American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.

[12]          Finally, he said this:

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 Morrisey v. R, supra at 5081-82. More often then 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.

It may well be that in tax law a distinction is to be drawn between the country person who goes to the city and the city person who goes to the country. In future, those insisting on obtaining tax relief in circumstances approaching those under consideration should do so through legislative channels and not through the Tax Court of Canada. The judicial system can no longer afford to encourage taxpayers or their counsel to pursue such litigation in the expectation that hope will triumph over experience.

To summarize, a determination as to whether farming is the chief source of income is dependent upon the cumulative effect of three key factors: capital committed, time spent and profitability. In my respectful opinion, the Tax Court Judge erred in his assessment of the evidence (inferences drawn from accepted facts) presented both in terms of the taxpayer's occupational direction and the potential profitability of the horse-farming business. Having regard to the fact that no one factor is decisive and to the primary findings of fact made by the Tax Court Judge, I conclude that the taxpayer's chief source of income for the years in question came from his medical practice. The horse-farming activity was merely a sideline business. Accordingly, I would allow the appeal with costs here, and in the court below, set aside the judgment of the Tax Court Judge and affirm the Minister's reassessments for the taxation years in question.

[13]          In summary, I must apply my mind to the "capital committed, time spent and profitability". To some extent, I might say that it is a matter of common sense, when taking all of the factors into account and standing back and looking at the situation, where one detaches oneself from the individual trees and looks at the forest as a whole, whether one can say the chief source of income is the farm income or the professional income.

[14]          One final point; the Appellant argued that the gross income of the farm operation should be compared to the gross professional income. It is clear that this is not so and it is the net farm income that has to be considered.

The Facts

[15]          The Minister, in arriving at his decision, relied on the following assumptions of fact:

(a)            at all material times the Appellant was employed full time with the University of Saskatchewan as a Professor of Mathematics;

(b)            the Appellant teaches 9 hours per week and, including the teaching time, spends 15-20 hours per week performing employment activities;

(c)            the Appellant earned the following amounts from employment during the 1996 and 1997 Taxation Years respectively:

                                   Taxation Year                        Employment Income

                                                1996                                                         $70,826.88

                                                1997                                                         67,750.08

(d)            at all material times, the Appellant's income has been substantially from employment income;

(e)            the Appellant is in a cow/horse operation (the "Farming Activity");

(f)             the Farm Activity commenced in 1977;

(g)            the Appellant has resided on the farm since 1981;

(h)            the farm consists of:

(i)             376 acres of land of which 60 acres are cultivated for wheat and hay and the remainder is pasture; and

(ii)            131 acres of leased land;

(i)             the year end values of livestock for the 1995, 1996 and 1997 Taxation Years for the Farming Activity are as follows:

                                                1995                        1996                                       1997

                                        #             Value                  #       Value                      #             Value

Horses ($2,000)              16           $32,000              19         $38,000                19             $38,000

Bulls ($1,500)                 1            1,500                1          1,500                  1              1,500

Cows ($1,000)                16           16,000               12         12,000                 0                  0

Feeders ($700)               12           8,400                11         7,000                  12             8,400

Foals ($3,000)                 0                0                    0               0                      3              9,000

                                                      $57,900                          $59,200                                $56,900

(j)             since the commencement of the Farming Activity in 1977 the Appellant has claimed restricted farm losses up to and including the 1994 Taxation Year;

(k)            the Appellant reported farm losses during the 1987 through 1995 Taxation Years as follows:

                Taxation         Gross                    Net                Allowable             Restricted

                      Year          Income        Loss Farm Loss      Farm Loss

                1987                 $24,150        ( 6,610)    ( 4,555)                                (2,055)

                1988                 no farm loss reported

                1989                 no farm loss reported

                1990                 23,809         (14,483) ( 8,491)                                (5,992)

                1991                 35,514         (13,615) ( 8,057)                                (5,558)

                1992                 32,361         (14,980) ( 8,740)                                (6,240)

                1993                 51,550         ( 6,267)    ( 4,383)                                (1,884)

                1994                 55,279         (18,304) ( 8,750)                                (9,554)

                1995                 74,091         (17,824) (17,824)                                 0

(l)             the Appellant reported farming losses during the 1996 and 1997 Taxation Years as follows (as detailed in Schedule A attached to the Reply to the Notice of Appeal):

                Taxation                       Gross                                                              Net

                      Year                        Income                    Expenses                    Loss

                1996                           $86,058.22             $119,849.14                     (33,790.92)

                1997                           87,642.98              113,598.31                      (25,955.33)

(m)           included in the Gross Income and Expenses of the farm losses were amounts for optional value of livestock and for the value of deceased livestock as follows:

                Taxation         Optional Value of Livestock Deceased Livestock

                      Year          Income        Expense                  Income                  Expense

                1996                 $59,200        $57,900                    $4,000                    $4,000

                1997                 56,900         59,200                     4,000                       4,000

(n)            the Appellant's Farming Activity did not provide and may not reasonably be expected to provide the bulk of income or livelihood for the Appellant;

(o)            the Appellant's Farming Activity was not the central focus, major preoccupation or center of the Appellant's life or work routine;

(p)            the Appellant's Farming Activity, since its commencement in 1977, has been in a net loss situation; and

(q)            the Appellant's chief source of income during the 1996 and 1997 Taxation Years was neither farming nor a combination of farming and some other source of income.

[16]          On the whole, the Appellant agreed with the majority of these assumptions of fact, except as follows:

(a)            Items (a) and (b): He thought it was misleading to say that he was employed full-time as a professor of the University of Saskatchewan. Whilst he held some tenure, he explained that he did not carry a full professorial load and worked some 15 to 20 hours per week for 6 ½ months of the year. The rest of the time, he devoted to his farm.

                There is no doubt in my mind that the Appellant "lived and breathed" his life for his farm and spent far more time on his farming operation than he did in his teaching duties. If it was time and effort alone, which were the criteria, he would have no difficulty in succeeding in this appeal.

(b)            Item (e): In 1996, the operation changed from substantially a cattle operation to substantially a horse breeding operation.

(c)            Item (j): The Appellant took issue with this item to the extent that he had not claimed such losses in each and every year. It is clear from the evidence that he had not done so in every year and I read the assumptions of fact accordingly.

(d)            Item (n): The Appellant took issue with this assumption as he felt that in a few years he would be retiring and would have expected to live on a modest income of about $20,000.00 to be generated from the farm. At that time, the farm income would be his sole income and means of livelihood. There was no clear evidence before me as to how this would be, and in fact, due to intervening events it is now unlikely to occur.

(e)            Item (o): The Appellant took issue with this assumption of the Minister that the farming activity was not the central focus of his life. It is clear to me from the evidence that it was in fact so in terms of effort and time expended. As I say, he "lived and breathed" for his farm and there is no doubt about this. It is clear that the Minister is incorrect in this assumption.

(f)             Item (p): There were losses claimed in 1988 or 1989.

(g)            Item (q): This, of course, was the issue for decision in this appeal.

[17]          The Appellant is undoubtedly a hardworking individual. He presented himself as a respectful hardworking person with many fine qualities. I have no doubt as to his effort to make this farm work. However, he seemed to experience one setback or difficulty after the next. The only constant was that his income from the University remained intact over the years and was used to support himself and the farm. The farm revenue remained constantly in a loss situation, save for 1988 and 1989.

[18]          In 1996 when he changed from a cattle operation to a horse breeding operation, the Appellant incurred further capital costs, both in relation to the farm immovable assets, which had to be built and developed, and his breeding stock. In particular, he purchased a stallion for $20,000.00 upon which he placed great stock. The stallion produced three foals for the ensuing year 1997 and seven foals during 1998 before it was injured. It also produced a few more foals for his own breeding stock before it died in 1999. Thus, any anticipated or hoped-for revenue in the future died with the stallion. There have been no profits since and the Appellant is now winding down his operation in view of the difficulties which he has encountered.

[19]          I must, however, look at this situation from the perspective of 1996 and 1997. The Appellant explained to me his optimism in those years for future profits. He felt the stallion could produce stud fees of $19,000.00 per year, which it did not, and that he would have had a gross income of $129,000.00 and $149,000.00 for each of the years in question, mostly arising from stock he would breed and raise himself. He produced no data to show how that gross income would be generated and nothing to show what the expenses would be. In my mind, it was pure conjecture and wishful thinking on his part. There was, with the greatest respect to him, nothing in the evidence which he presented which could reasonably lead me to the conclusion, that his figures would ever have become reality. As we know, in fact, they never did.

[20]          Whilst it is clear that from the points of view of capital committed and time and effort expended, the major focus of the life of the Appellant over the years in question was his farm operation, and whilst the Minister has accepted that there was a reasonable expectation of profit by allowing the restricted losses and thus not placing the Appellant into the category of a hobby-farmer, the factor with regard to profitability, in my view, is lacking. The "reasonable expectation of profit" test is not the same as "expectation of reasonable profits" that I must consider under subsection 31(1) of the Act. There was, in my view, nothing in the evidence, however earnestly the Appellant argued his case, which would enable me to objectively compare any potential farm income with the income he was actually receiving from the University. As the Federal Court of Appeal said, I must find evidence to support a finding of reasonable expectation of "substantial" profits from the farming operation, such that I might say that they had become the chief source of income of the Appellant. Such was not forthcoming in my view, and I am unable to make that finding. The whole history is of his needing his University income to support the farm operation.

Conclusion

[21]          In my view, the "chief source of income" of the Appellant for the years in question, 1996 and 1997, was his University income and not his farming income, or a combination of farming or other income. The Minister, in my opinion, was correct in restricting the losses under section 31(1) of the Act and the appeals are accordingly dismissed.

Signed at Calgary, Alberta, this 12th day of November 2001.

"Michael H. Porter"

D.J.T.C.C.

COURT FILE NO.:                                                 2001-2212(IT)I

STYLE OF CAUSE:                                               Bjorn Friberg and Her Majesty the Queen

PLACE OF HEARING:                                         Saskatoon, Saskatchewan

DATE OF HEARING:                                           October 1, 2001

REASONS FOR JUDGMENT BY:                      the Honourable Deputy Judge

Michael H. Porter

DATE OF JUDGMENT:                                       November 12, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

For the Respondent:                             Raj Sharma (Student-at-Law)

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-2212(IT)I

BETWEEN:

BJORN FRIBERG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on October 1, 2001 at Saskatoon Saskatchewan, by

the Honourable Deputy Judge Michael H. Porter

Appearances

For the Appellant:                                         The Appellant himself

For the Respondent:                                      Raj Sharma (Student-at-Law)

JUDGMENT

          The appeal from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years is dismissed in accordance with the attached Reasons for Judgment.

Signed at Calgary, Alberta, this 12th day of November 2001.

"Michael H. Porter"

D.J.T.C.C.