McKinnon v. The Queen, docket 1999-2735-IT-I (Informal Procedure)

Date: 20000725

Docket: 1999-2735-IT-I; 1999-2736-IT-I

BETWEEN:

JOAN McKINNON, WESLEY McKINNON,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1]            These appeals were heard on common evidence at Winnipeg, Manitoba on June 20, 2000. Testimony was given by the two Appellants and by Stanley Marcinyshyn, the Appellants' Chartered Accountant. Numerous Exhibits were filed.

ISSUE:

[2]            The issue is whether in the 1995, 1996 and 1997 years the Appellants' chief source of income was farming or a combination of farming and some other source of income or were the Appellants' restricted to the restricted farming losses provided for by subsection 31(1) of the Income Tax Act ("Act").

FACTS:

[3]            Wesley McKinnon was introduced to farming at age 14 and has continued to be involved in farming to the present time. He is a member of several farming-related associations and has received various awards as more fully set forth in Exhibit A-1. Exhibit A-1 also describes various farming-related courses which Wesley McKinnon has taken. The first piece of land comprising the farm was purchased in 1991 and the Appellants moved an already built home on to that site and have continued to live in that home since that time. The Appellants also made considerable improvements to the property including fencing 320 acres, building housing sheds and barns and moving other buildings on to the property, such as granaries. The farm is situated approximately eight and one-half miles south of Dauphin, Manitoba.

[4]            As of 1997 the farm comprised 428 acres of owned land and 300 acres of leased land. As of the year 2000, the total acreage of owned and leased land was approximately 1,155 acres.

[5]            The farm operation consists of a cow/calf activity and growing of crops. The Appellants operated the farm as a 50/50 partnership. As of January, 1996 there were on the farm 45 owned cows, 55 leased cows, four bulls and three heifers and those numbers continued to increase from 1996 to 2000.

[6]            The value of the farm assets, including the buildings and other installations thereon and farm equipment and livestock, as of 1996 was approximately $370,000 and the total of farm liabilities was $162,000 (Exhibit A-3).

[7]            During the years in question Wesley McKinnon was employed with the Government of Manitoba as a Corrections Officer and Joan McKinnon was employed full-time with Manitoba Public Insurance Corporation. From 1994 though 1997 Joan's employment earnings ranged from $40,000 to $43,000 and Wesley's earnings ranged from $35,000 to $36,000. Joan's employment hours were approximately 40 hours per week. Wesley's employment hours were two 12-hour day shifts and two 12-hour night shifts in an 8-day cycle period thus leaving him six days in that cycle to work on the farm, which he did. Also, Wesley intends to leave his employment in the year 2001 enabling him to devote further time to the farm. Joan's farming activities involve approximately three to four hours per day during the busy season and approximately one to two hours during non-busy periods, plus weekends. Her farming work consisted of, amongst other things, bailing, ordering parts, picking up parts, secretarial duties, including paying bills, deposits, GST filings, taking hay/straw orders, arranging deliveries and preparing monthly financial statements.

[8]            The Appellants have always, since 1991, lived on the farm. The Appellants each claimed respective losses of $12,256 in 1995, $18,870 in 1996 and $16,088 in 1997 made up as follows:

TAXATION YEAR	GROSS PARTNERSHIP INCOME	PARTNERSHIP EXPENSES	NET PARTNERSHIP (LOSS)	50% NET LOSS
1995	35,063	59,575	(24,512)	(12,256)
1996	57,044	94,784	(37,740)	(18,870)
1997	63,541	95,717	(32,176)	(16,088)

Further, the Appellants have claimed full farm losses during the 1991 to 1994 years as follows:

TAXATION YEAR	GROSS PARTNERSHIP INCOME	PARTNERSHIP EXPENSES	NET PARTNERSHIP (LOSS)	50% NET LOSS
1991	$25,340	$35,340	(10,000)	( 5,000)
1992	24,854	53,854	(29,000)	(14,500)
1993	20,833	44,227	(23,394)	(11,697)
1994	50,013	70,297	(20,284)	(10,142)

[9]            The Appellants prepared a Farm Income and Expense Projection for the years 1998 to 2002 (see Exhibit R-1) which indicates income of $21,150 for 1999 escalating to $47,750 for 2002.

[10]          The purchase of the farm property, machinery and equipment was basically financed by the Farm Credit Corporation. One of its requirements for making the loans was that the Appellants retain their employment positions.

APPELLANTS' SUBMISSIONS:

[11]          Counsel for the Appellants submit that they both qualify as Class One farmers within the meaning set forth by the Supreme Court in Moldowan v. Her Majesty the Queen 77 DTC 5213. Counsel submits further that, at any rate, the Appellants qualify as Class One farmers because the employment income, to a large extent, went to assist in paying the farming expenses with the result that there was a combination of farming and the Appellants' respective employments so that the farm losses are not to be restricted under subsection 31(1) of the Act.

RESPONDENT'S SUBMISSIONS:

[12]          The Respondent submits that the time devoted by the Appellants to the farming activities was not sufficient when compared with the time devoted to their employment activities. He also points to the history of losses and that the years in question do not qualify as start-up years. He states further that the projections in R-1 are flawed and that the profit projections are largely a result of the mandatory inventory adjustment contemplated in paragraph 28(1)(c) of the Act.

ANALYSIS AND DECISION:

[13]          Considering the following, namely,

1.              The time spent on the farming activities by both Appellants;

2.              The large acreage owned and leased;

3.              The improvements made;

4.              The large investment in land, buildings, equipment and stock;

5.              The fact that the Appellants live on the farm;

6.             The fact that Farm Credit Corporation in financing the purchase of the farm assets made it a condition that the Appellants retain their employment positions;

7.              The projections of profitability from 1998 through 2002 (Exhibit R-1);

8.              The fact that in 2001 Wesley is to retire, thus enabling him to devote all of his time to the farm;

9.              The farming background, education and awards re Wesley;

10.            The energies put in and the devotion of the Appellants to the farming operation.

[14]          I am of the opinion, that the Appellants were clearly Class One farmers under the criteria established in Moldowan. Their chief source of income was farming or, at the very least, a combination of farming and some other source of income (their employment income) in the years in question.

[15]          Consequently, the appeals are allowed with costs.

                Signed at Ottawa, Canada, this 25th day of July, 2000.

"T. P. O'Connor"

J.T.C.C.