Turgeon v. The Queen, docket 1999-1680-IT-I (Informal Procedure)

Date: 19991026

Docket: 1999-1680-IT-I

BETWEEN:

NOEL TURGEON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rowe, D.J.T.C.C.

[1] The appellant appeals from an assessment of income tax for the 1996 taxation year whereby the Minister of National Revenue (the "Minister") disallowed total losses in the sum of $18,632.64 resulting from the business of farming on the basis the appellant's chief source of income in the taxation year was neither farming nor a combination of farming and some other source of income. Pursuant to subsection 31(1) of the Income Tax Act (the "Act"), the Minister restricted the appellant's loss to the sum of $8,750.00.

[2] The parties agreed to file - as Exhibit A-1 - a Book of Exhibits tabbed 1 to 16, inclusive and mention of a specific tab number will refer to documents in Exhibit A-1. The appellant testified he is a farmer residing in Leoville, Saskatchewan. Leoville is a small village - about 350 people - situated midway between Saskatoon and Meadow Lake. He stated he had worked for the Village of Leoville - as Maintenance Foreman - since 1977 until his retirement on September 1, 1999. A schedule setting forth his salary received from the Village was filed as Exhibit A-2. As maintenance foreman, his duties encompassed garbage pickup, management of water and sewer and street maintenance. He worked 7 hours a day, 5 days a week plus one hour every Saturday and Sunday in connection with duties requiring his attendance at the pumphouse. On July 27, 1999, the Village Council accepted his resignation, effective September 1. As a result of retiring early, he had to accept a reduced pension and, although he has not received his first cheque, expects it to be approximately $800.00 per month. The appellant had considered retiring in 1995 but remained on the job based on discussions with his accountant who had pointed out the cash flow from the farm was not sufficient to meet the expenses of the farming operation. The appellant relied on that advice, stayed on the job, and earned the sum of $26,460.00. The appellant was born on a farm in the Leoville district and until he left school in 1970 - after completing Grade 12 - had helped his father work the farm. In 1970, the appellant purchased three quarter-sections of land from his father, purchased some cattle, and carried on a farming operation until 1974 when a major flood caused damage to the house. At the same time, interests rates were very high and the appellant sold the three parcels of land he had purchased from his father but retained a section of pasture land he had purchased from his brother, late in 1970. The pasture land was rented out and the appellant worked as a carpenter until - in 1977 - he took up his position as Maintenance Foreman with the Village of Leoville. In 1988, he decided he wanted to return to farming - in the form of raising elk - and he submitted an application dated September 7, 1988 to the Métis Economic Development of Saskatchewan Inc., an entity participating in a northern economic development program with the Province of Saskatchewan and the federal government. The application and related documents were filed as Exhibit A-4. The covering letter referred to various documents prepared in support of the application referring to income, cash flow, capital cost allowance schedules, calculations pertaining to the ability to make mortgage payments and other material relating to the viability of the proposed project. The appellant had enlisted the aid of an accountant in putting together the material in support of the grant application. The appellant intended to devote a substantial amount of time to the elk-raising activity. The grant was not forthcoming and, since it was integral to the viability of the proposal, the appellant could not proceed. In the rejection letter dated September 22, 1988 - Exhibit A-5 - the Chairpersons of the Secretariat indicated the proposed elk farm appeared to be only a small family business with little or no regional benefit. By letter dated October 14, 1988 - Exhibit A-6 - the Leoville Savings & Credit Union Limited also indicated it was not prepared to lend the appellant sufficient funds to enable him to purchase a basic elk herd - comprised of 14 cows and one bull - together with other amounts required to install the appropriate fencing and to make changes to the existing farm. One of the reasons given by the manager of the credit union for not approving the loan was that recent provincial legislation severely restricted the ability of a lending institution to realize on a security involving land defined as a Home Quarter. In 1990, the appellant was living in the village of Leoville and he purchased one-half section of land - with a house - situated 3 kilometres from the village, only a few minutes from his worksite. He borrowed $100,000 - the entire amount of the purchase price - from the credit union in order to buy the land. He bought a cow and heifer calf but decided not to undertake any additional borrowing in order to acquire more livestock. He had retained some equipment from his previous farming ventures and later that year added capital assets valued at $17,961 to his operation. A summary of farm income and depreciable capital additions from 1990 to 1998, inclusive, was filed as Exhibit A-7. In 1991, the appellant purchased a newer tractor at a cost of $14,550.00. In 1992, he added a bale feeder and front-end loader - both used - as he did not want to borrow more money to purchase new equipment. Capital additions in the sum of $11,521.00 - during 1993 - were comprised of a stone picker, a 1/2 ton truck and fencing material. In 1994, he had to install a new casing for the well and a 1990 Topaz car was purchased for Mrs. Turgeon in order for her to commute to her job. Further capital expenditures in the sum of $3,972.00 were made in 1995 and, in 1996, the appellant purchased a baler and installed a new motor in a tractor for a total of $18,500.00. In 1997, the only addition to capital assets was a hay tester in the modest amount of $295.00 and 1998 expenditures on depreciable assets were in the amount of $5,600.00. No loans were ever taken out by the appellant or his wife for capital purchases except for the replacement of the motor in the tractor in 1996 due to the large amount involved. The herd of cattle grew between 1992 and 1998 and the numbers and categories of animals were set out on a sheet - Exhibit A-8. The plan followed by the appellant was to retain cows in order to grow the herd. Cows bear only one calf per year and 50% are heifers and the remainder are bulls. The yearlings retained included heifers and some steers - young bulls who had undergone a specific surgical procedure. The appellant's course of action was to multiply the herd internally or on a share basis with others pursuant to an arrangement whereby cows were brought to his farm so that he would provide feed, care and pasture in return for 50% of the value of the offspring produced by the pastured cows. At a later stage, the appellant increased his share of the split of calf revenue so that 60% went to him and 40% to the owner of the cows. The appellant retained - as part of his share - all heifers in accordance with his plan to build up his own herd even though steers brought an extra 10 cents a pound at market and were - on average - 50 pounds heavier than heifers. By 1996, the appellant had one bull, 26 cows and 39 calves - all heifers - but only 92% of breeding females calve each year and there is a certain mortality rate - calving losses - which must be taken into account. In 1998, the heifers of 1996 had graduated - as a consequence of the ageing process - to become cows and the appellant's herd had 58 cows - of which 4 had little value - and 56 calves. In 1996, the appellant did not sell any animals and retained all of the heifers. At that time, the market price of a cow was about $1,000.00 while calves sold for $500.00 and a bull brought in about $1,200.00. In 1997, the appellant had 40 yearlings in the herd ranging in value from $500.00 to $1,000.00 - in the case of a bred heifer - as beef cattle at age 2 can bear a calf. The appellant's stated plan - at present - is to sell some heifers in order to retain a basic herd of 60 which is appropriate for the amount of land he owns. The appellant's description of the work involved in caring for all the cattle was that "it makes for a pretty long day, feeding animals morning and night". An especially hectic time is calving season which occupies his time 3 hours a day, 7 days a week including throughout the night as the cows must be checked regularly to see if delivery is imminent. Due to the proximity of his farm to his work for the Village of Leoville, he could return to the farm during his lunch hour in order to inspect the animals and carry out other duties. During 1996, the appellant boarded 50 cows on his farm and in addition to his own animals was responsible for a total of 76. The offspring of the pastured 50 cows was the subject of a 60-40 split in favour of the appellant. The appellant used his three weeks annual vacation from his job by taking two weeks for haying and one week for making straw bales. In 1999, the appellant no longer boards other people's cattle and has started to raise elk which has had the effect of reducing the demands on his time. In order to commence raising elk, the appellant borrowed $110,000.00 from the credit union to purchase 11 females. His intention is to be in a position to sell the elk calves within four to five years. In the meantime, he is renting a bull and has researched the market which is mainly comprised of selling the velvet - taken from the antlers - to pharmaceutical companies. The marketing of elk meat for general public consumption has not been well developed to present. The appellant agreed he had sustained losses from 1990 continuing to 1998. In 1996, his gross farm income was only $2,808.99 because he chose to retain heifers for his own breeding purposes in order to further build up his herd. By comparison, his gross revenue for 1998 was $36,122.00. In order to claim certain expenses for the 1996 taxation year, he had retained all appropriate records and receipts and then took "the shoebox to the accountant and let him go at it". Revenue Canada disallowed certain expenses pertaining to use of automobile, telephone expense and electricity relating to the heating of water bowls for the cattle which use a lot of power in addition to plugging in the tractor every day during cold weather. In 1995, Revenue Canada also restricted the loss arising from his farming operation, although in previous years full farm losses had been allowed.

[3] Prior to commencing cross-examination, Counsel for the respondent stated the Minister had conceded that the appellant had a reasonable expectation of profit and had devoted an extensive amount of time and effort to the cattle farming operation. During cross-examination, the appellant agreed that between 1970 and 1974 he had build up a herd of 60 cattle, all of which were repossessed by the lending institution in 1975 as the result of a bankruptcy by a feeder co-operative of which he had been a member. In 1975, he sold his operational farm land but retained the pasture quarter sections which he rented out. In the course of his work for the Village of Leoville, he was solely responsible for water and sewer and all other maintenance. Referring to tab 13 - the appellant's tax return for the 1995 taxation year - the appellant's accountant had filed the return on the basis of claiming a restricted farming loss in the sum of $5,591.43 and an assessment was issued accordingly. Later, the appellant signed a Notice of Objection - Exhibit R-1 - requesting the Minister allow full farm losses. However, the assessment was confirmed and the appellant chose not to appeal, although he had retained the services of Graham Holm, a Chartered Accountant, to write a letter dated July 31, 1997 - Exhibit R-2 - on his behalf to Revenue Canada seeking redress in the form of a reassessment allowing full farm losses for both the 1995 and 1996 taxation years. The appellant's opinion is that although 60 head was the optimum size for his land, it still permitted - in his view - the potential for profit during the 1997 taxation year. He put as much time and effort as he could into the farming operation and his wife worked as a homecare worker for the past 18 years and her income was "pretty handy to have coming into the household". On September 24, 1997, the appellant's accountant wrote another letter - Exhibit R-3 - to Revenue Canada in which additional information was provided concerning previous farming efforts by the appellant. The appellant agreed it was necessary for him to have employment income in order to sustain his farming operation. A photocopy of a Certificate of Title indicated the appellant and his wife, Doris, were joint tenants of the property on which the farming operation was carried out. The purchase price of the property - including the house and barn - was $100,000.00 and they paid an additional $10,000.00 for watering bowls and other small equipment. In 1990, the mortgage balance was approximately $69,000.00 and in 1998 it was $130,240.92. In 1998, the assessed value - for municipal purposes - of the one-half section was $68,000.00. Of the 320 acres owned by the appellant and his wife, 35 acres were seeded for oats, 110 were used for pasture, another 110 were hayfields and the balance was comprised of bush and slough. The appellant's concept of a sustainable cow-calf operation is to have 60 head of cows plus the calves - 55 to 57 - until they are sold. Some heifers would be retained as replacement for breeding stock as other passed beyond the breeding age which varies from 10 and 14 years. The appellant agreed he was required by the credit union in Leoville to keep working until the farm was self-sufficient and the projected date for his retirement had been the month of July, 2000. He retired earlier as - in his view - he was able to make the required payments on the loans and believed the financial burdens could be satisfied. He purchased a used 1979 tractor in 1991 and it required a new engine - in 1996 - at a considerable cost. In the course of submissions made by his accountant to Revenue Canada, he had not provided the material contained in his 1988 application for a grant in order to start up an elk farm. When he was able to begin elk farming in 1998, the loan was granted on the basis the elk were pledged as collateral. The appellant agreed the list of assets utilized for capital cost allowance during the years 1989 through 1998 - Exhibit R-5 - indicated an increase of $88,425.00 in capital assets. The barn had existed at time of purchase and was used only for calving. The major purchases were a tractor in 1991 at a cost of $12,500.00 and the installation of a new engine in 1996 together with the acquisition of a baler. In 1997, according to the appellant's tax return - at tab 15 - he sold about 24 calves for the sum of $11,738.00 or $490.00 per animal, on average. In that year, there had been some losses due to death. In 1998, the appellant had 56 cows and the tax return - tab 16 - for that taxation year indicated he sold 56 cattle - which he had raised from birth - and received a total of $34,298.00. The appellant agreed with the suggestion of Counsel for the respondent that the sale of 56 calves in any year would be near the maximum permitted by the scope of his operation based on a basic herd of 60. In 1999, the appellant has 6 elk calves and 7 elk cows and 4 bred heifers, all of which are kept inside a fenced 6-acre parcel. There are other farmers in his area who are involved in raising elk and the market for antlers - including the velvet - can be quite volatile. The appellant intends to sell the velvet through a broker and the product is taken to a processing plant in Unity, Saskatchewan. The appellant owns his own swather and is able to use his brother's combine in exchange for storing it on his farm, thereby making it possible for him to grow his own feed.

[4] Graham Holm testified he is a Chartered Accountant practising in Battleford, Saskatchewan with a sub-office in Spiritwood about 24 kilometres from Leoville. His firm did the accounting for the appellant from 1990 to present and that included preparation of income tax returns. Full farm losses were claimed every year on the basis of the appellant's commitment in terms of time and capital and the growth of the inventory. In preparing the tax return for the 1995 taxation year, his office undertook the calculations on the basis of claiming full farm losses in the sum of $13,682.87. Under subsection 31(1) of the Act, the maximum restricted loss available was in the sum of $8,750.00. The relevant schedule was prepared on the basis of a restricted loss due to an error in the course of using some new software but a full reading of the return would have made it clear a full farm loss was being claimed. He received a letter - Exhibit A-10 - dated May 12, 1997 from Revenue Canada acknowledging the appellant's 1995 return had been filed claiming a total farm loss and also a restricted farm loss calculated in the sum of $8,091.44. Holm received a letter dated November 17, 1997 - Exhibit A-11 - from Revenue Canada indicating the 1995 and 1996 farming losses would be restricted pursuant to subsection 31(1) of the Act. In December, 1997 Graham Holm filed Notices of Objection - Exhibit A-12 - to the assessments for each of the 1995 and 1996 taxation years, therein requesting the appellant be permitted full farm losses. Holm received a letter from Revenue Canada - Exhibit A-13 - dated January 2, 1998 advising the 1995 loss - on a restricted basis - would be further reduced to $5,996.00 from the original amount of $8,091.00. He later received a letter from Revenue Canada - Exhibit A-14 - dated January 12, 1998 refusing to extend the time for filing an objection for the 1994 taxation year and acknowledging receipt of the objections for the 1995 and 1996 taxation years. Holm stated although he does not recall specifically having discussions with the appellant about appealing the 1995 assessment, he believes the amount in dispute was not sufficiently large to be worth pursuing it by way of appeal to the Tax Court of Canada. Holm prepared a working paper - Exhibit A-15 - in which he took into consideration the growth in inventory throughout the years. He prepared an analysis - Exhibit A-16 - in which he set forth various methods of examining the revenue and expenses and illustrating the effect of using optional inventory and/or ignoring that method for purposes of analysis. In actual filing of tax returns, the appellant always claimed the optional inventory as it was a method of permitting him to increase income for a particular year and for that amount to then appear as an expense in the next year. Holm's analysis is based on an accrual basis even though the reporting of income was done on a cash basis at all relevant times. On the spreadsheet - Exhibit A-16 - Holm inserted a column entitled: Net Income (Loss) Adjusted For Inventory Accrual. By using that method, Holm's figures produced profits of $5167.00, $3556.00 and $3,634.00 in the taxation years 1996, 1997 and 1998, respectively. Holm's explanation of the use of the optional inventory method was that it was utilized in order to avoid massive amounts of revenue in the event all cattle were sold in one year. As an example, if the appellant had sold the entire herd in 1996 he would have had revenue of approximately $57,500.00, thereby producing a substantial profit. Holm prepared a working paper - Exhibit A-17 - while analyzing the potential for the appellant to retire from his job with the Village of Leoville. In Holm's opinion, the appellant had to keep on working because he needed the cash flow to support the farming operation. Holm referred to Exhibit A-9 - a statement of adjustments - pertaining to certain expense items disallowed by the Minister. Holm stated he had claimed 75% of the premium on the house insurance because that represented the business use of the dwelling. Although the appellant had not maintained any automobile log so as to distinguish between business and personal use of the vehicles, Holm had claimed two-thirds of all automobile expenses as being related to the business. He had also claimed 50% of the telephone and electricity costs as pertaining to the business due to the fact the house was very small and the major demand on the electrical power was heating the watering tanks.

[5] In cross-examination, Holm agreed Revenue Canada had allowed 25% of the home insurance as an expense. Holm was referred to Exhibit R-6 - an analysis of salary and farm losses - which indicated there had been an actual loss in every year from 1990 to 1998, inclusive. In 1996, the sum of $5,000.00 was subtracted from income and $20,000.00 was added in the course of making the optional inventory adjustment relating to the livestock. In 1997, the sum of $20,000.00 came back out and the sum of $29,200.00 was added. In Holm's view, the appellant's situation was somewhat unusual in that he was in the process of building up his herd. Because he was engaged in that process, the only way - in Holm's opinion - the appellant could have made a profit in the 1996 taxation year was to have sold his entire herd and, as a result, to receive a large amount of income. Holm explained the inventory is valued as of December 31 in each year and there will be a substantial amount of feed on hand at that time which will then be used up in the new year. The lender credit union was provided with financial information on an accrual basis but income tax returns were filed on a cash basis. Based on the return of income for 1996, the appellant sold no animals that year and the income was derived from patronage dividends, gasoline tax rebate, other subsidies and some insurance proceeds.

[6] In re-examination, Holm stated that - in 1996 - the appellant had 66 animals, of which 26 were cows. The 39 calves were available for breeding the following year and there is a gestation period of approximately 265 days.

[7] Counsel for the appellant submitted the facts were in accord with the wealth of jurisprudence to the effect that from the standpoint of time spent, capital committed and profitability, both actual and potential, the appellant was a Class 1 farmer, as categorized in the decision of Dickson J. (as he then was) in Moldowan v. The Queen, 77 DTC 5213 and therefore entitled to deduct full farming losses. In Counsel's submission the tests are both relative and objective tests rather than being a pure quantum measurement so that all three factors must be regarded in a global sense without undue weight being given to any particular test. As an example, the evidence demonstrated the appellant decided - in 1996 - to retain heifers with a view to potential profitability. In terms of expenses, they were extremely high that year due to the need to install a rebuilt engine in a tractor at a cost of over $16,000.00. During 1996, the appellant boarded cows for others and took an increased share of the calf crop for his efforts. Since the appellant had been looking towards retirement since 1994, the competing source of income has to be taken into account as well as the fact an inventory of considerable value had accumulated over the years between 1990 and 1998. As for the disallowed expenses, Counsel submitted the evidence substantiated the additional expenses and the appellant should receive the deductions as claimed.

[8] Counsel for the respondent pointed out the Minister had - throughout - conceded profitability as well as the appellant's serious attentions and devotion of time and effort to his farming business. However, in Counsel's submission, the evidence did not substantiate a finding the appellant could look to farming as his chief source of income in accord with the jurisprudence. The appellant, having farmed between 1970 and 1974, abandoned the activity and took up full-time employment, including his position with the Village of Leoville which lasted for 22 years. The unclaimed capital cost at the end of 1998 was $34,000.00 and even if all the cattle had been sold in 1996 the revenue would not have exceeded accumulated losses to that point. Counsel's view of the evidence pertaining to profitability was that it illustrated the maximum number of calves available for sale in a given year would produce - at best - a profit of approximately $2,000.00. In 1996, the appellant claimed no capital cost allowance and had no potential for profit during that year capable of elevating him into a Class 1 category when compared with his salary of $26,460.00 from employment.

[9] In the case of The Queen v. Donnelly (1997) 97 DTC 5499, the Federal Court of Appeal considered the situation of a medical practitioner who had purchased a farm and operated a horse-farming business, resulting in an unbroken string of losses over a 21-year period. Robertson, J.A. - writing for the Court - began his judgment as follows:

"Though it has been twenty years since Moldowan v. The Queen [1978] 1 S.C.R. 480 was decided, we continue to hear appeals involving taxpayers who earn their income in the city and lose it in the country. In this appeal, the respondent taxpayer, a medical practitioner, sought to deduct from his professional income the full amount of farming losses incurred in the 1986, 1987 and 1988 taxation years. According to Moldowan, the taxpayer must satisfy two tests 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)."

[10] At page 5500 and following, Robertson, J.A. continued:

"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. Were the law otherwise there would be no basis on which the Tax Court could made 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), The Queen v. Timpson 93 DTC 5281 (F.C.A.), The Queen v. Poirier 92 DTC 6335 (F.C.A.), Connell v. The Queen 92 DTC 6134 (F.C.A.), The Queen v. Roney 91 DTC 5148 (F.C.A.), The Queen v. Morrissey 89 DTC 5080 (F.C.A.), Gordon v. The Queen 89 DTC 6426 (F.C.T.D.), Mott v. The Queen 88 DTC 6359 (F.C.T.D.) and Mohl v. The Queen 89 DTC 5237 (F.C.T.D.).

There is no question in this case that the taxpayer committed significant capital investment to the horse-farming activity. As noted earlier his losses were approaching the $2 million mark. This factor is in his favour. It is the two remaining elements of time spent and profitability which are more problematic for the taxpayer.

With respect to time spent, I am not persuaded that the taxpayer changed occupational direction in 1980 such that medicine became a sideline to his farming endeavour. I reach that conclusion for three reasons. Firstly, the taxpayer's shift in focus from thoroughbred to standardbred horses in 1980 represents a business decision, not a change in occupational direction. From the time he purchased his first horse in 1972, the taxpayer's farming activities focused on the purchase and breeding of horses. Secondly, the evidence indicates that the taxpayer entered into his current medical partnership arrangement in 1970. While he may have endeavoured to reduce his workload or take more vacation time, the record does not indicate any appreciable change in the taxpayer's medical practice. during the three years in question, the taxpayer continued to see approximately 74 patients a week at his clinic [Appeal Book, Appendix l, at 197]. In 1988, he performed 612 surgeries [supra at 196]. As of 1993, the taxpayer was still taking on approximately 18 new patients per week [supra at 201]. There is no indication he was phasing out the medical practice. 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 [supra at 216]. 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.

In the present case, it was incumbent on the taxpayer to establish what he might have reasonably earned but for the two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. 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."

[11] In Hover v. Minister of National Revenue (1992) 93 DTC 98, the Honourable Judge Bowman of the Tax Court of Canada allowed a dentist-farmer to deduct full farming losses over a three-year period and - at pages 107 and 108 of his judgment - stated:

"The Act does not specifically require that the other source of income be either subordinate or sideline. It would seem that if farming can be combined with another source of income, connected or unconnected, it can as readily be combined with a substantial employment or business as with a sideline employment or business. Indeed, if the other source were merely subordinate or sideline it would not prevent farming alone from being itself the taxpayer's chief source of income without combining it with some other unrelated subordinate source."

[12] In the case of Spengler v. The Queen, 99 DTC 484, the Honourable Judge Mogan, Tax Court of Canada allowed full farm losses for the 1990-1993, inclusive, taxation years to a taxpayer who had a herd of Limousin cattle which he had build up over the years while operating a consulting business as a drilling supervisor. In that case, there had been an actual profit in the sum of $303.14 in the 1996 taxation year and the evidence was that the farm would be profitable once the herd was increased to 200 within four or five years even though that growth would require the purchase of additional land. The taxpayer in Spengler lived on the farm all the time and was absent about one-third of the time in connection with his drilling business. His wife was available to do everything required on the farm. In concluding, Judge Mogan, after referring to Donnelly, supra, stated:

"The passage from Donnelly ... states that the test of capital committed, time spent and profitability is both relative and objective; not a pure quantum measurement; and all three factors must be weighed with no one factor being decisive. Capital committed and time spent strongly support the Appellant. With respect to profitability, the farm has lost money but the object of section 31 is to permit the deduction of farm losses in certain circumstances. Having regard to the Appellant's pattern of living and the three factors comprising the test, I find that the Appellant's chief source of income for 1990, 1991 and 1992 was farming or a combination of farming and some other source of income. To hold otherwise would permit profitability to dominate capital committed and time spent."

[13] The appellant in the within appeal was born and raised in the Leoville district. He lived on a farm all his life and he turned to farming as soon as he finished highschool. Due to a combination of factors he was forced to abandon his farming activity and worked as a carpenter until 1977 when he became Maintenance Foreman for the Village of Leoville, a job he held for the next 22 years. When the appellant returned to farming in 1990, he purchased land located only 3 kilometres away from the village so that he was only a few minutes from work and could return home over lunch hour to attend to the animals. There is no question but that the appellant is not a taxpayer who earned income in the city and lost it in the country, as noted by Robertson, J.A. in the opening line of his judgment in Donnelly, supra. Rather, he was an individual with deep roots in that area, with previous farming experience including raising cattle. The time spent on the farming activity was considerable and conceded by the Minister to have been sufficient having regard to the scope of the operation. As such, there was no need for the appellant to have made any change in occupational direction. In fact, his job with the Village took him away from the farm for only one hour on each Saturday and Sunday when he had to drive to the village for the purpose of checking the pumphouse. He co-ordinated his annual holidays so that he could bale hay and straw. The connection between his employment and farming operation from the standpoint of time available to be committed to each pursuit provided a nearly ideal context in which to operate. The capital committed to his farming business was modest over the years mainly due to the fact the appellant did not want to borrow additional funds for the purpose of buying additional livestock or new - and extremely expensive - machinery. He had borrowed the entire purchase price of the property and was not in a position to service extra debt even though his wife was working full time. The position taken by the Minister was that the appellant had boxed himself into a corner by limiting the size of his herd to 60 - a decision made necessary by the amount of land available - and that even in a good year without expensive repairs or excessive calf mortality the potential for profit - when examined in relation to his employment income - was not substantial. Countering for the appellant, his counsel pointed out the potential for profit in the 1996 taxation year should be considered in the context of a modest pension income of approximately $800.00 per month which the appellant knew he would be receiving upon his retirement in 1999, thereby creating an entirely different situation than the more common one where a taxpayer had been earning a six-figure income from a professional practice or business which was then available to offset large losses.

[14] The appellant reported gross income in the sum of $2,808.99 during the 1996 taxation year and claimed expenses in the sum of $21,441.63 resulting in a net loss of $18,632.64. Earlier revenue and net farm losses were as follows:

Taxation year     Gross Income Net Farm Loss

1990         $ 5,304.95    (11,116.37)

1991         10,322.56    (18,034.34)

1992          7,494.09 (10,992.04)

1993         15,545.06 (20,335.92)

1994          29,205.97 (12,555.41)

1995          19,284.54 (13,682.87)

[15] In the 1997 taxation year, the appellant had gross farm income in the sum of $11,738.00 and expenses totalling $41,099.00. In the 1998 taxation year, the appellant sold $34,298.00 in cattle he had raised from birth but had expenses in the sum of $43,134.00. His situation was also affected by the purchase of elk cows which cost him $90,000.00 together with other costs associated with their purchase and making certain adjustments to the fencing on the property. The evidence suggests that - without the introduction of the elk into the mix - the revenue from the sale of cows exceeded the expenses of $33,429.00 attributable to them by approximately $2,693.00, creating a small profit but one that would be looked at in the context of modest income of $26,460.00 from employment. It is usually helpful to examine the profit and/or loss experience in the years leading up to the ones forming the subject of an appeal and, if possible, to have evidence pertaining to years of operation beyond the ones bracketed by the Minister for reassessment. By choosing to embark on the elk-raising venture, the appellant has blurred the picture of his farming operation and it is not appropriate when attempting to determine profitability, actual or potential, to fiddle with the methodology or to tickle out certain expenses or purchases or to file returns on a cash basis while making a case for profitability on an accrual basis. With usual fecundity and mortality rates, a herd of 60 cows could be reasonably expected to produce 52 calves a year. Some heifers will be retained for breeding and some cows - past their breeding prime - will be sold. The average price for calves is about $500.00 and a cow will sell for double that amount while a bull can be sold for $1,200.00. It is apparent the gross revenue - without diminishing the basic herd - is not going to exceed $30,000.00 per year provided no exceptional expenses are incurred. The amount of expenses incurred from 1992 to 1996 were as follows:

1992 - $28,486.13

1993 - 48,380.98

1994 - 46,761.38

1995 - 37,967.41

1996 - 41,441.63 (without any CCA)

[16] The ability of the appellant to earn a modest profit in 1996 - leaving aside for the moment the expensive repairs to the tractor - was non-existent because he chose not to sell any animals. That decision must be regarded in the context of his overall plan to retain his own heifers for the purpose of building up a viable basic herd which could then be seen as a source of income sufficient to elevate him into the category of a full-time farmer. There was no profit generated in 1997 and the 1998 taxation year is overwhelmed by the appellant's purchase of the elk as part of the same farming operation which led to even more expenses and a larger loss. It seems the appellant decided the cattle were not capable of providing a sufficient amount of income to sustain the farming operation and he pursued an earlier dream to raise elk for profit. Excluding for the moment - for purposes of demonstration - the impact of the elk purchase on the profit picture in 1998, the maximum profit that could have been realized strictly from the cattle would have been about $2,700.00. In that year, the appellant's income from employment was nearly 10 times that amount. In the event the decisions taken in 1996 could be regarded as reasonably capable of leading to a potential profit in later years, then an argument can be made that the amount of the future profit would then be compared with the appellant's now greatly reduced income from a small pension and, taken in combination, would move nearer to qualifying as a chief source. However, the earlier losses from 1990 onwards cannot be ignored and there has to be cogent evidence of an objective opportunity to interrupt the cycle and to point to an expectation of profit in an amount significant in relation to his employment income - which continued until September 1, 1999 - and not to be measured solely against his reduced pension income. Otherwise, a person with a substantial income could write off massive losses from farming over the course of several years on the basis those large expenditures had been made with a view to producing a modest profit which, although small in relation to the accumulated cost to produce it, now looked pretty good in comparison to other sources because the taxpayer had ceased the activity which had previously generated the larger amounts of income. In effect, the process by which the gap between farm income and off-farm income would be narrowed is not by increasing farm revenue but by reducing - disproportionately - the non-farm source of income. That is not the same thing as a person who has farmed all his life suddenly winning a lottery. The huge amount of interest thereafter generated, although swamping the farm income, would not disentitle that individual from continuing to be classified as a full-time farmer (See: Moldowan, supra at p.5215). The reduced income of the appellant in 1999 may serve him in any litigation arising out of future assessments for taxation years subsequent to the one under appeal but I do not see it as particularly significant when considering the 1996 taxation year other than as discussed above.

[17] In the case of The Queen v. Morrissey, 89 DTC 5080, the Federal Court of Appeal considered the appeal of a taxpayer who sought to deduct all of his farm losses against other income. At p. 5084 of his judgment, Mahoney J. stated:

"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."

[18] As I see it, the point of the judgments in Morrissey and Donnelly, supra, is this: quantum matters. While it is important there be sufficient evidence before the court to estimate the amount of the potential profit, the facts must be analyzed on a rational basis without excluding the ordinary highs and lows occurring over a normal business cycle. Potential for profit cannot be based on a best-case scenario where no livestock ever becomes dead stock, the tractor's old engine never skips a beat, the baler blissfully bales, the pump perpetually pumps and the price of calves rises with each glorious new day. Regrettably, sometimes one's best efforts within a framework of a modest commitment of capital are insufficient to satisfy the test established by the jurisprudence because of varying degrees of influence imposed by external factors combined with the limited scale of the operation itself. Unlike taxpayers in many of these cases, the appellant was most certainly not a hobby farmer and was well equipped - from the standpoint of personal skills - to undertake the task at hand. Having said that, upon reviewing all of the evidence and considering the capable submissions of Counsel, I cannot find the Minister was incorrect in restricting the farming losses of the appellant - during the 1996 taxation year - pursuant to subsection 31(1) of the Act. Further, I am not persuaded the Minister's disallowance of certain expenses - at issue in the within appeal, as earlier noted - is incorrect and the evidence does not persuade me that I would have made any adjustment even if the result had been to allow full farm losses.

[19] The appeal is dismissed.

Signed at Toronto, Ontario, this 26th day of October 1999.

"D.W. Rowe"

D.J.T.C.C.