Date: 19991221
Docket: 98-2945-IT-I
BETWEEN:
BENJAMIN LEVIT RIVEROS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] Mr. Riveros appeals from income tax assessments for 1994,
1995 and 1996 in which the Minister of National Revenue
("Minister") concluded that neither farming nor a
combination of farming and some other source of income was his
chief source of income in those years and, therefore, according
to subsection 31(1) of the Income Tax Act
("ITA"), the loss from farming in each year is
restricted to $8,750.00. The appellant's position is that he
farmed for many years before he obtained employment with Chrysler
Canada Ltd. ("Chrysler") in November 1992 and continued
the same farm operation once employed; therefore, his chief
source of income in the years under appeal was from a combination
of farming and employment.
[2] The appellant and his family immigrated from Chile to
Canada in 1975. His parents and grandparents farmed in Chile and
he learned to appreciate the agricultural lifestyle. He
originally trained in Chile as a teacher but eventually graduated
as an agricultural engineer from the University of Chile.
[3] Mr. Riveros says he was attracted to Canada from
information available at the Canadian Embassy in Santiago
promoting farmland and technology available to farms in Canada.
The embassy suggested he reside near London, Ontario since this
was close to the University of Guelph, an institution with a high
reputation for agricultural studies and research. In 1978 he took
three courses in land economics at the University of Guelph and
in 1980 enrolled in a post-graduate program in economics at the
University of Western Ontario.
[4] When he first arrived in Canada, Mr. Riveros sought and
obtained employment on a dairy farm in Woodstock, Ontario, near
London. In 1978 he began looking to purchase a farm of his own.
He was attracted to a dairy farm owned by a person ready to
retire. The farm consisted of 120 acres with 18 milking cows, a
milk quota and a licence for a gravel pit exploitation. He
negotiated an agreement with a construction company for the
gravel pit, received a recommendation from the Ontario Ministry
of Agriculture, Food and Rural Affairs ("OMAF") for
credit with the Canadian Credit Corporation and a favourable
reaction from the latter corporation for a loan. However he could
not obtain financing from an institutional lender, the manager of
one lender telling him, he testified, that banks were reticent to
lend money to recent immigrants. The plan to purchase this farm
was aborted.
[5] Mr. Riveros continued to work and to save his capital. His
wife was also employed. By 1983 they saved $22,000.00 and began
again to look for a farm. This time he was more successful and in
1985 Mr. and Mrs. Riveros acquired a 100 acre farm in
Wingham in Southwestern Ontario for $100,000.00. He began this
farm operation in September 1985 and up to the time of trial has
farmed various crops, a Hereford and Red Angus cow-calf operation
and eggs.
[6] Mr. Riveros received financing for the acquisition of the
farm from the Royal Bank of Canada, secured by a mortgage on the
farm. He also received funds as a participant in the Beginning
Farmer Assistance Program ("BFAP"), a program in which
OMAF provided funds to new "bona fide" farmers;
Mr. Riveros repaid the loan after five years.
[7] Mr. Riveros said the farm property consisted of a
comfortable dwelling but had a dilapidated barn set aside for
dairy cows and a shed. There was a complete lack of any
machinery. The previous owner had rented the land to a neighbour
for the two years before the purchase. The house on the farm had
been rented to a couple who was using the barn for boarding
horses. The horses were boarded in the upper part of the barn and
the horses' waste was dumped onto the lower part of the barn
and not subsequently removed. At the time Mr. Riveros
acquired the farm the accumulation filled, according to his
estimates, about two-thirds of the lower part of the barn and had
to be cleared out.
[8] In Mr. Riveros' view, however, the land was
"good" and there was room for improvement once it was
cleared, levelled and drained, which he has undertaken and
continues to do to the present time.
[9] Once he actually started farming the property in 1986,
Mr. Riveros cancelled the lease of the land and planted
feeding grain corn which, at the time, was a high revenue crop.
He hired his neighbour to do the initial seeding and
combining.
[10] Any income Mr. Riveros received from the farm was applied
to make credit payments to buy basic farm equipment, building
materials and livestock of mixed breed. Mr. Riveros
acknowledged that he realized from the very beginning that since
the enterprise lacked capital he would have to establish a good
reputation to obtain credit. This has continued to be his
"economic strategy" and, he says, has allowed him to
increase his capital investment in the farm. He has supplemented
his cash flow by producing approximately 300 dozen eggs per
week.
[11] By 1988, after renovating his home, the house and its
contents burned. There was no insurance on the house. Mr.
Riveros' neighbour offered to lease him an empty house. Mr.
Riveros and his family lived in that house and he worked on his
own farm everyday attending to its ongoing business, feeding and
tending the livestock and building a new home. The fire,
Mr. Riveros stated, "put back my start-up of the
farming business". Notwithstanding the fire, however, Mr.
Riveros increased the farm's gross income from about
$16,000.00 in 1988 to about $39,000.00 in 1991. He credits the
increase in farm income to the acquisition of farm equipment, a
new grain storage facility, reconditioning of silage and hay
facilities, and the "practice of personal techniques of
cultivation given by my professional agricultural
background". Mr. Riveros is convinced he is in control of
farm expenses and uses his credit to increase his capital
investment in the farm.
[12] When Mr. Riveros was injured in an accident he received
$25,000.00 in damages and purchased bonds with the money. He used
the bonds as collateral for farm loans.
[13] In 1992 Mr. Riveros was concerned about the general
depression in the price of farm product commodities as compared
to farm commodities subject to managed supply, such as poultry
and milk. He discussed this matter with an OMAF officer in charge
of planning and developing. From this conversation he reassessed
his farm operation and concluded that it should be redirected to
milk production. However the acquisition of milk quota was beyond
his financial capability and he is also of the view that quota
will become obsolete in the near future. The most feasible
alternative in the circumstances, he surmised, was the production
of goat milk which is not subject to quota. Goats are small in
size and easy to manage. The cost of maintaining goats is low. He
determined that the minimum profitable size of herd for his farm
was 100 units. Once goat milk production was running normally, he
could supplement milk production with mild or feta fresh cheese
to generate a stable income. In the meantime, he would continue
with a cow-calf operation of Lemousin cattle.
[14] To put his plans into effect he required additional
money. As a BFAP participant he was bound by its regulations and
accordingly asked an OMAF officer if there would be any objection
by the Ministry to him securing employment outside the farm; he
would apply the income from employment to the farm. The OMAF
officer advised him that employment is permitted.
[15] Mr. Riveros set several guidelines for any prospective
employment outside the farm: any employment would have to have a
flexible schedule and that he obtain the best remuneration for
the least time allocated to it. In December 1992 he found
employment at a Chrysler assembly plant in Bramalea, Ontario,
approximately one hour travel time from his farm.
[16] The Chrysler assembly plant divides its 4,500 employees
into three shifts of 7½ hours each. An employee, according
to Mr. Riveros, has the ability to change shifts inside the same
department if the change is required for any personal business of
the employee. His shift work therefore was flexible and met the
needs of the farm.
[17] Mr. Riveros stated that the standard work schedule at
Chrysler is 1,560 hours per year with a possibility of having it
reduced to 780 hours per year at the employee's request under
a program for temporary part-time students. In the meantime, he
said, he works at the farm approximately 2,600 hours a year, and
probably more. He stated he realized when he commenced employment
at Chrysler that he had only eight years available to him for
employment before being compelled to retire at a pension not to
exceed $600.00 per month. This, he declared, is a
"cold" reality that he has been aware of since he
bought the farm; the whole purpose of employment was to subsidize
the farm.
[18] In 1993 Mr. Riveros acquired a new tractor and commenced
making structure modifications to the barn for the purpose of
adding housing for milking goats. The next year he built a grain
storage bin and facilities for processing feed for cows and
goats. In 1995 he designed a steel structure measuring 360 square
metres and six metres in height. He was able to take advantage of
his employment to discuss his drawings and calculations with
mechanical engineers working at Chrysler.
[19] Unfortunately, in 1996 a fire destroyed the barn, grain
storage, feed processor, skid steer and all of its contents. The
heat of the fire also damaged part of the house. The barn was not
insured. Mr. Riveros and his son then started to build a new
steel shed having an estimated cost of $60,000.00. He stated that
his time and attention was devoted to the farm and bringing the
business plan he designed in 1992 to fruition.
[20] Mr. Riveros also designed a new barn with a milking
parlour, cheese parlour, refrigerated storage, feed processor
with goat pens and cow and calf confinements.
[21] During the years 1993 to 1996 Mr. Riveros earned the
following employment income from Chrysler:
Taxation Year Income
1993 $45,145.00
1994 $48,807.00
1995 $40,322.00
1996 $45,457.00
[22] Mr. Riveros recorded farming income and losses during the
years 1987 to 1996 as follows:
Taxation Gross Net
Year Income Expenses Income
(Loss)
1987 $ 8,246.00 $31,407.00 ($23,161.00)
1988 $16,273.00 $44,715.00 ($28,442.00)
1989 $19,412.00 $50,091.00 ($30,679.00)
1990 $23,328.00 $52,228.00 ($28,900.00)
1991 $38,669.00 $65,359.00 ($26,690.00)
1992 $28,228.00 $57,300.00 ($29,072.00)
1993 $39,029.00 $66,857.00 ($27,828.00)
1994 $36,145.00 $68,956.00 ($32,811.00)
1995 $27,803.00 $56,935.00 ($29,132.00)
1996 $31,876.00 $60,618.00 ($27,742.00)
[23] The Minister pleaded, and Mr. Riveros acknowledged, that
from 1987 to 1992 inclusive, Mrs. Riveros claimed the losses from
the farm. He acknowledged at trial that both he and Mrs. Riveros
paid for the farm, Mrs. Riveros making the mortgage
payments. The Minister, however, in his pleadings, did not take
issue with the fact that Mr. Riveros claimed all losses incurred
in the farm business in 1994, 1995 and 1996 even though the
business appears to have been owned by both him and his wife. The
Minister's only allegation with respect to
Mr. Riveros' claim of losses was that certain expenses
such as goods and services tax refunds expensed, insurance
expenses, accounting expenses and electricity expenses that were
personal are not deductible in computing farm income and
therefore his losses should be reduced. I agree the Minister was
correct to reduce the farm losses in 1994, 1995 and 1996 to
$28,964.58, $25,044.90 and $23,973.27 respectively. I have
considered these appeals on the issues raised in the pleadings.
That Mr. Riveros may be entitled to only one-half of the losses
claimed, since he and his wife may have owned the farm business
in equal interests, is not before me.
[24] Mr. Riveros claims that the farm is the centre of his
activity where he can devote his professional training and
realize the objectives of his desires. However, he is aware that
to fulfil such ambitions he must acquire funds from elsewhere and
these funds were available by means of being employed at
Chrysler. His employment and the farm business are financially
independent.
[25] Each case involving subsection 31(1) of the ITA turns on
its own facts. The guidelines to be used in determining whether a
subsection 31(1) assessment is a good assessment are found in the
Supreme Court judgment of Moldowan v. The Queen, 77 DTC
5213, and other decisions of appellate courts. At p. 5216,
Dickson J. (as he then was) opined that:
... the Income Tax Act as a whole envisages three
classes of farmers:
(1) a taxpayer, for whom farming may reasonably be expected to
provide the bulk of income or the centre of work routine. Such a
taxpayer, who looks to farming for his livelihood, is free of the
limitation of s. 13(1) in those years in which he sustains a
farming loss.
(2) the taxpayer who does not look to farming, or to farming
and some subordinate source of income, for his livelihood but
carried on farming as a sideline business. Such a taxpayer is
entitled to the deductions spelled out in s. 13(1) in respect of
farming losses.
(3) the taxpayer who does not lot look to farming, or to
farming and some subordinate source of income, for his livelihood
and who carried on some farming activities as a hobby. The losses
sustained by such a taxpayer on his non-business farming are not
deductible in any amount.
The reference in s. 13(1) to a taxpayer whose source of income
is a combination of farming and some other source of income is a
reference to class (1). It contemplates a man whose major
preoccupation is farming, but it recognizes that such a man may
have other pecuniary interests as well, such as income from
investments, or income from a sideline employment or business.
The section provides that these subsidiary interests will not
place the taxpayer in class (2) and thereby limit the
deductibility of any loss which may be suffered to $5,000. While
a quantum measurement of farming income is relevant, it is not
alone decisive. The test is again both relative and objective,
and one may employ the criteria indicative of "chief
source" to distinguish whether or not the interest is
auxiliary. A man who has farmed all of his life does not become
disentitled to class (1) classification simply because he comes
into an inheritance. On the other hand, a man who changes
occupational direction and commits his energies and capital to
farming as a main expectation of income is not disentitled to
deduct the full impact of start-up costs.
[26] The parties agree that Mr. Riveros carried on the
business of farming. The issue between the parties is whether his
chief source of income was from a combination of farming and his
employment entitling him to be described as a class (1)
farmer. At pp. 5215-5216, Dickson J. observed:
Whether a source of income is a taxpayer's "chief
source" of income is both a relative and objective test. It
is decidedly not a pure quantum measurement. A man who has farmed
all of his life does not cease to have his chief source of income
from farming because he unexpectedly wins a lottery. The
distinguishing features of "chief source" are the
taxpayer's reasonable expectation of income from his various
revenue sources and his ordinary mode and habit of work. These
may be tested by considering, inter alia in relation to a
source of income, the time spent, the capital committed, the
profitability, both actual and potential. A change in the
taxpayer's mode and habit of work or reasonable expectations
may signify a change in the chief source, but that is a question
of fact in the circumstances.
[27] The factors referred to by Dickson J. are not to be
considered disjunctively, but are to be considered cumulatively:
The Queen v. Morrissey, 89 DTC 5080, per Mahoney J.A.
at p. 5084.[1] All
relevant factors, taken together, are to be used in considering
the class of farmer to which the taxpayer belongs.
[28] Mr. Riveros immigrated to Canada to farm, among other
reasons. His family background was in farming. Immediately on
entering Canada he worked on a farm. There was no doubt in his
mind that he would farm. He knew life would be tough and he and
his family would have to sacrifice. His wife's income from
employment was applied to the family's personal needs, of
course, but the
remainder was applied in the early years to saving money to
purchase a farm, and in later years to pay the mortgage on the
farm. And the evidence is clear that the only reason
Mr. Riveros sought employment was for farming purposes.
[29] Mr. Riveros' mode of life, commitment of time
and capital, and dedication to farming all confirm his position
that he is, and was, a full-time farmer who, on taking up farming
in Canada, reasonably expected the farm to provide the bulk of
his income or the centre of his work routine. Mr. Riveros
altered the farm's direction in 1992 and obtained employment
to finance this new direction. He has had his problems over the
years with fires and damages that were not insured. He was quick
to repair the damages. My appreciation of Mr. Riveros is
that he will succeed in his endeavours and the farm will generate
the bulk of his income.
[30] The farming activities of Mr. Riveros were planned
with caution and reason. Mr. Riveros knew what he was up against.
He discussed plans with Ontario government agricultural
officials. He had his own background in agriculture as a
reference. He took courses in agriculture and economics. His
whole economic activity was directed to farming during the years
in appeal.
[31] Chrysler permitted Mr. Riveros to absent himself
from the assembly line if his presence was necessary on the farm.
The ability to free himself from his employment was an important
factor in Mr. Riveros choosing employment at Chrysler. His
employment was for the benefit of, and subject to, the farm
business. As in Miller[2] and in Hover v. M.N.R.,[3] Mr. Riveros' farming
activity was not a sideline or subordinate in any way to his
employment. He is not in the category of those who "earned
their income in the city and lost it in the country".[4] On the contrary
Mr. Riveros has gone to the city to ensure he can survive in
the country.
[32] The appeals are allowed with costs, if any. Of course, he
is not allowed to deduct personal expenses in computing his farm
income and his farm losses will be reduced from those he
claimed.
Signed at Ottawa, Canada, this 21st day of December 1999.
"G.J. Rip"
J.T.C.C.
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