Martin v. R., [1996] 1 CTC 2008, 96 DTC 1915

Bowman J.T.C.C.:-These appeals are from reassessments for the taxation years 1989, 1990 and 1991 and involve subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63). By those assessments the Minister of National Revenue permitted the appellant to deduct $8,750 in each year in respect of his farming losses, on the basis that his chief source of income was neither farming nor a combination of farming and some other source of income. [1]

Each of the cases involving subsection 31(1) of the Act turns on its own facts. Before I review the facts it is useful to outline briefly the basic principles upon which cases of this type must be decided. The first is that, according to the leading case of Moldowan v. R. (sub nom. Moldowan v. The Queen), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, farmers in Canada fall, for the purposes of income tax, in three categories: full time farmers, part time farmers and hobby farmers. Dickson J. put it this way at pages 487-88 (C.T.C. 315; D.T.C. 5216):

In my opinion, 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 subsection 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 subsection 13(1) in respect of farming losses.

3. the taxpayer who does not 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 subsection 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.

At page 486 (C.T.C. 314; D.T.C. 5215-16), Dickson J. also observed:

Whether a source of income is a taxpayer’s “chief source” of income is both relative and objective test. It is decidedly net 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 pent, 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.

The second rule that must be observed is that the factors mentioned by Dickson J. must be considered cumulatively, and not disjunctively. In Morrissey v. R. (sub nom. Morrissey v. The Queen), [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.), Mahoney J., speaking for the majority of the Court said at page 241-42 (D.T.C. 5084):

With respect, I do not agree that Moldowan suggests disjunctive consideration of pertinent factors in quite the way the learned trial judge has dealt with them. The discussion in Moldowan begins as follows:

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.

Moldowan also says, dealing with the difference between classes 1 and 2, “while a quantum measurement of farming income is relevant, it is not alone decisive”. While the determination that farming is a chief source of income is not a pure quantum measurement, it is equally not a determination in which quantum can be ignored.

The same view was expressed by the Federal Court of Appeal in Connell v. The Queen, [1992] 1 C.T.C. 182, 92 D.T.C. 6134 and Poirier (Trustee of) v. Canada (sub nom. Poirier Estate v. The Queen), [1992] 2 C.T.C. 9, 92 D.T.C. 6335. In the latter case the Court stated at page 10 (D.T.C. 6336):

It must be remembered that it is the cumulative impact of the various factors for determination that governs, not any one factor taken disjunctively.

From this it is clear that in determining whether a person’s chief source of income is or is not farming, no single factor — time, mode of living, profitability, capital committed — may be taken as determinative. No single factor — either its presence or its absence — can be taken as governing in isolation.

With these two principles in mind, let us now consider Mr. Martin.

He was born in 1934 on a farm near Wallenstein, Ontario, the oldest of three sons of a Mennonite family. His father raised chickens and pigs until he became a minister and the family moved to Hawkesville, Ontario. He completed Grade 10 at Elmira High School. As a youth he worked at construction in the winter and on a farm in the summer. In 1957 to 1958 he attended Emmous Bible School in Chicago. When he returned to Ontario he worked for a period in a mine at Elliott Lake. In 1959 he worked and lived on a dairy farm where he rose at 4:30 a.m. and milked 40 cows before breakfast [2] . At the same time he attended Waterloo Lutheran University and subsequently Stratford Teachers’ College where he obtained an elementary teaching certificate in 1960. He married in 1960 and he and his wife obtained teaching positions in Arnprior-Renfrew area of eastern Ontario, where he taught for 32 years.

In 1964 he bought his first farm of 100 acres for $17,000. In 1978 he bought another 100 acre farm for $80,000, of which he subsequently sold 3 acres to his daughter for $50,000. She and her husband still live there. In 1981, he bought a further 87 arable acres. Also, in the years in question and prior thereto he rented a further 100, 150 or 200 acres depending on the year. In all, in the 1980s and in the years under appeal he worked between 400 and 500 acres.

In the years that he has been farming he has invested significant amounts in equipment — upwards of $150,000.

In 1990, his barn burned down. He lost $25,000 worth of hay, $5-6,000 in straw, $5-6,000 in grain, tools worth $15,000 and a bull worth $2,000. These are his estimates and I accept them. For example, he lost 10,000 bales of hay that he would have sold to U.S. race tracks for $2.50-$3.00 per bale. The insurance proceeds of $25,000 were used to rebuild the farm, although it appears that they did not cover the entire cost. In the years 1987 to 1991 the appellant reported revenues, expenses and losses as follows:

Over the years he has engaged in a variety of agricultural activities — pig farming, cattle farming, and a cow-calf operation. He has grown wheat, oat, barley, mustard and hay. In the early 1980s he put 200 acres into canola at the suggestion of the Government of Canada who were trying to encourage the growing of canola in eastern Ontario.

He has always owed money to lending institutions in respect of the farm. The levels of debt varied with the purchases, including land, that were made. At present he owes about $120,000 to National Trust.

He has traditionally spent more time farming than teaching. The school year lasted 40 weeks per year. The farm year lasted all year round. Generally he would rise at 6:00 a.m. to do chores, except on the days when he took the hogs to the market, at which time he rose at 4:30 a.m. School started at 9:00 a.m. and went to 3:10 p.m. He would be home at 4:00 p.m. and would do chores and work from four to five hours after school. On Saturday he would work 12-14 hours on the farm. On Sunday he went to church — he impressed me as a devoted churchgoer. He did chores before and after church.

Summer, Christmas and Easter holidays were devoted entirely to the farming operation. He estimated that in summer he spent about 72 hours per week in farming. He received some help from time to time from his son or his son-in-law. He has had only one holiday since the beginning of his farming career, when he and his wife went on a school trip to Spain for two weeks in 1977 or 1978.

His income from teaching in the years in question ranged from $60,000 to $66,000 per year, a portion of which went into the farming operation. Indeed, it seems obvious that without the income from teaching he could not have afforded to carry on the extensive farming operation that he did. Now that he has retired he intends to continue farming as he has done for most of his life.

Farming has had for Mr. Martin - as, I daresay, for farmers all over Canada — its ups and downs. Drought, fire, excessive rain, fluctuating prices and escalating costs, have taken their toll. Yet still he hangs in, like so many other members of this integral part of the Canadian economic fabric.

What is the composite picture that emerges? A typical Canadian farmer. Not a wealthy professional or executive who dabbles in exotic cattle or horses with a view to enhancing his social standing but as a hard working Canadian farmer who cleans stables, harvests grain, fixes broken machinery, cares for sick cows and pigs and lives through the major and minor tragedies and heartbreaks that have beset farmers for millennia. Mr. Lockwood described him as a farmer who teaches and not a teacher who farms and I think this is an accurate characterization. The scale of his farming operation was comparable to that of persons who do nothing but farm and who do not have another job. Why is he denied his losses? Because he had another job that made it possible for him to engage in a full time farming operation. Whatever may be the type of person at whom subsection 31(1) is aimed, it is not Mr. Martin. Whatever may be the object and spirit of subsection 31(1), it is not to destroy the backbone of our farming community.

Mr. Martin’s mode of life, commitment of time, commitment of capital, and dedication to farming all point inexorably to the conclusion that Mr. Martin is a full time farmer within Class 1 of the Moldowan categories. Yet the Crown would deny him that on the basis of one factor, the lack of profitability. There are two reasons why this factor cannot determine the result in this case. In the first place although pleaded as a separate allegation, the so-called “no reasonable expectation or profit” point was not pressed by the Crown and no evidence was advanced to substantiate it. I must therefore assume, as Mr. Martin undoubtedly did, that there was a reasonable expectation of profit.

Even more importantly, to permit this factor to prevail against all of the other factors would be to ignore the principles laid down by the Federal Court of Appeal in such cases as Morrissey, Poirier, and Connell, which require that no single factor can be determinative.

In Graham v. The Queen, [1983] C.T.C. 370, 83 D.T.C. 5399 (F.C.T.D.), Cattanach J. held that even without any profits in any prior year a person who had sustained nothing but losses from a pig farming operation was entitled to deduct his full losses. At pages 379-80 (D.T.C. 5406-07) he said:

I am satisfied that subjectively the plaintiff is a dedicated farmer and that farming is his all consuming interest.

The plaintiffs every resource was invested and devoted to his farming operation. That includes all of his savings, his income from his employment and his labour.

The farming operation did generate a substantial cash flow from cereal crops and the pig farming operation but while the cash flow was substantial it was taken in the main by the start-up expenses for machinery, equipment and the acquisition of the land upon which to farm.

Here we are not concerned with a person who has decided to take up farming as a “change in occupational direction” who seeks to deduct startup costs, but one who has been a full-time farmer for most of his life.

In the Federal Court of Appeal, The Queen v. Graham, [1985] 1 C.T.C. 380, 85 D.T.C. 5256, the decision of Cattanach J. was upheld. At page 383 (D.T.C. 5259), Urie J., with whom Mahoney J. concurred, said:

All of the foregoing surely indicates that were it not for the fact that he derived income from what, for a normal person would constitute a full-time occupation, namely his employment at Ontario Hydro, the Respondent would have been considered to have been working full-time as an efficient, hardworking and knowledgeable farmer. It seems to me, therefore, that one of the issues with which the Court must deal in this appeal is whether or not it is possible, in the rather unusual circumstances of this case, for a person to have employment in two full-time occupations at the same time, the existence of one of which would not, per se, lead to the conclusion that he fell within the restrictions imposed by section 31(1) of the Income Tax Act limiting his claim for the deductibility of his farming losses to $5,000.

And at pages 387-88 (D.T.C. 5262-63):

Did the learned trial judge err in law? In determining this aspect of the appeal, it should not be overlooked that counsel for the appellant conceded that the farming operations of the respondent constituted a “business” within the meaning of the Act and that he had a reasonable expectation of deriving a profit therefrom. However, counsel said, despite this concession, in determining whether or not section 31 should be applied it was necessary (employing the language of Dickson J. in Moldowan) to decide whether the source of income — farming — was a “chief source of income on a relative and objective” basis. In appellant’s submission, on that basis “although the farming activities of the respondent were for him a way of life, they did not constitute a chief source of income” because of:

(a) the absence of profit,

(b) the comparison of employment income to farming losses, (c) the cash flow analysis over the years in issue,

(d) the optimum capacity of the respondent’s operations,

(e) the fact that the respondent made no change in his occupational direction

to demonstrate that farming provided his main expectation of income.

In counsel’s submission, although the respondent’s preoccupation with farming was subjectively to him major, objectively speaking it could not provide him with a reasonable expectation of being a chief source of income either in the taxation years in question or in subsequent years.

I do not agree, in part for the reasons given by the trial judge in disposing of the Minister’s assumptions in making the assessments in issue, which were quoted at pages 9 and 10 thereof. In addition, it seems to me that the submissions ignores what Dickson J. had to say about “chief source of income” at page 486 of the Moldowan judgment, supra, which for convenience sake, I repeat:

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 works. 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.

It would thus appear that the reasonable expectation of profit from the farming operations having been conceded (and such a concession was a proper one having regard to the evidence objectively) the next step in the determination of the “chief source of income” is to consider the taxpayer’s ’’ordinary mode and habit of work” employing tests of the kind suggested by Mr. Justice Dickson in the last two sentences of the quotation, supra. These, of course, involve a weighing of the facts objectively and relatively. It is abundantly clear from his reasons that Cattanach J. was well aware of the two-step process required for the determination of “chief source” and that it involved his objective assessment of the evidence and the relative importance of the sources of income. He did so with considerable care as is shown in the excerpts from his reasons for Judgment at pages 16 and following which are quoted in full, supra, at pages 12, 13 and 14 hereof. He found that the cumulative effect of the rather unusual circumstances disclosed by the evidence in this case was to satisfy him that the main preoccupation of the respondent “is farming but he has income from a sideline employment.” In so finding, he clearly applied principles enunciated by Dickson J. and, in so applying them to the evidence in this case, he neither proceeded on a wrong principle nor erred in his appreciation of the facts nor in his findings with respect thereto. In so saying it should not be overlooked that the trial judge had the inestimable advantage of hearing the witnesses, observing their demeanour and weighing their testimony having regard thereto. The task with which he was confronted here having been essentially a fact-finding one for the application of the appropriate law, an appellate Court should not interfere with it unless the findings of fact were unsupportable and the proper law was not applied. I am of the opinion that the findings were amply supported by the evidence, there was no “palpable and overriding error” in the assessment thereof and the learned Judge did not err in the application of the proper law thereto. Accordingly, he correctly held that the respondent fell within category 1 of the three classes of farmer contemplated by subsection 31(1) of the Act and was thus entitled to deduct all of his farming losses in the computation of his taxable income in the taxation years in issue. I do not think that in the very unusual circumstances of this case his other source of income, namely, his employment at Ontario Hydro, precluded him from doing so.

The same principles that were applied by Cattanach J. and approved by the Federal Court of Appeal apply here. It was reasonable for Mr. Martin to look to farming, as his principal preoccupation, as a means of livelihood. For him teaching was merely an adjunct to his farming.

The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction in computing the appellant’s income of the full farming losses claimed by him.

Appeal allowed.