Robert W. Currie v. Her Majesty the Queen, [1994] 2 CTC 2226

Beaubier J.T.C.C. (orally):—This matter was heard in Toronto, Ontario on March 24, 1994 pursuant to the General Procedures of this Court. The appellant was the only witness.

The appellant was reassessed pursuant to section 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") respecting farming losses he deducted in 1987 and 1988. He appealed.

The following table was reviewed by the appellant and accepted by him in cross-examination:

ROBERT W. CURRIE — EMPLOYMENT AND FARM INCOME COMPARISON

	EMPLOY	FARM	FARM	FARM
YEAR	INCOME	REVENUE	EXPENSES	PROFIT
1985	$ 68,561.05	$ 7,550.00	$ 39,050.86	($31,500.86)
1986	$113,601.10	$ 2,306.86	$ 47,225.49	($44,918.63)
1987	$122,896.83	$35,391.00	$ 99,089.00	($63,698.00)
1988	$130,667.04	$ 8,596.00	$103,537.00	($94,941.00)
1989	$110.617.78	$47,541.00	$ 78,299.00	($30,758.00)
1990	$ 28,990.00	$81,914.00	$ 63,998.00	$17,916—Profit
1991	$ 1,020.00*	$43,817.00	$ 42,285.00	$ 1,532—Profit
1992	$ 12,800.00	$32,782.00	$ 32,722.00	$	60—Profit
plus $31,700 in T4-A income from Currie Real Estate

Mr. Currie is a descendant of generations of farmers on both his mother's and father's side of the family. His father was farming when he was born in 1939 and he continued to farm until he died. The appellant was a 4H member from age 13 through 21. He has grade 11 and three classes of grade 12 including one in agriculture. He left home with $50 in his pocket.

In 1964 he bought his first farm, 125 acres near Shelburne, Ontario where he could afford the prices. His father mortgaged his farm to assist the appellant in the purchase. He married and in 1966 he bought his second 125 acres which included a house and barn. He used his equity in the first 125 acres and a Farm Credit Corp. mortgage to buy the second 125 acres. He and his wife moved into the house where they still live. He leased other land from time to time and farmed until 1980 when he sold his cattle and some machinery, leased the farm land for five years and continued to live in the house.

By 1980 the appellant had sold real estate for five years. He obtained a broker's licence in 1980 when he bought out a local realtor for approximately $2,000. He then sold real estate for his own corporation for five years and has continued to do so to this day. His real estate business has always been a one man business operated entirely by the appellant.

In 1985 the appellant decided to return to farming and he purchased 15 Hereford-Semmental cross cows. In that year he also went to Alberta and purchased 20 Saler purebred cows in calf and brought them back to his farm in Ontario. He has continued to purchase his Saler breeding stock in Alberta and has his original 20 Saler cows to this day. The farm is a Saler purebred cow-calf operation.

There weren't many sales in 1985 or 1986. By 1987 the appellant had 50 cows and had started getting rid of the Hereford crosses and calves and he was also testing and selling Saler bulls. In 1988 he only sold a few Saler bulls and steers.

In his second year in Salers he bought ten purebred Saler calves and one purebred Saler bull. The next spring he bought eight more purebred Saler calves. The following year he bought full blooded Salers.

In 1989 the appellant sold 35 cattle and in 1990 he sold 40 cattle.

Cattle sales are the source of virtually all Mr. Currie’s farm income. He grows or buys hay and only seeds grain when he rotates his hay fields every five to seven years when he may seed the field to grain for about two years.

He testified that his 1990 year was poor because of the rotation of hay fields when he had to rent pasture and buy hay for total extra disbursements of about $17,000.

In each of 1991,1992 and 1993 the Ontario Ministry of Agriculture and Food declared three of the appellant’s bulls the winners in gain tests conducted by it. To his knowledge he is the only breeder to win this three years in a row. He does not show cattle. Rather he relies on test station results and has cattle sales as his Salers leave the test station.

The evidence, both in chief and in cross-examination, is accepted by the Court that throughout the years in question and to this date the appellant spends two thirds of his time at his farm operations and one third of his time at his one man real estate brokerage. The Court finds that the centre of his interest is his farming operation, as the evidence and demeanour of the appellant has established.

His capital ratios in the years in question were $2,000 plus a car in his real estate brokerage corporation and approximately $50,000 in capital in farm equipment in 1987 and $80,000 in capital in farm equipment in 1988. There was no estimate of the capital investment in farmland. Obviously his overwhelming Capital investment is in the farm, as distinct from the real estate business.

The question of “reasonable expectation of profit", as determined by the appellate Courts, must be applied to both the real estate operation and the farm operation. In cross-examination the appellant stated that his real estate income from 1985 through 1989 was exceptional, was obtained with very little effort and that at that time “anybody that could read and talk could sell real estate". He stated that it is more difficult to sell real estate now and that he now spends more time at it than he did in 1987 and 1988. He expressed the view that his real estate income of more recent years represents the real world of real estate sales. The Court accepts his evidence on these matters.

The farm losses in the years in question represent, in large measure, cattle purchases. When sold, cattle proceeds are income to the appellant. While he would like to possibly build up to a 100 cow herd of Salers, the appellant presently has 63 cows and 45 yearlings and expects a profitable year. He has always operated the farm by himself. Given the present numbers and the table attached to this judgment, the Court would expect a net income of between $10,000 and $20,000 per year from the farm and about $20,000 to $30,000 a year from the real estate operation with occasional mild swings up or down in either business. Thus each source of income would be substantial in relation to the other.

In 1987 and 1988 the Court finds that there was a reasonable expectation of profit from the farm once the start-up purchases of a Saler herd was accomplished. It was also to be expected in those years that the euphoria of real estate sales, profits and prices would not last. Thus it was to be expected that the incomes from the two sources would be in approximate balance. Indeed, it is noted that the appellant became a real estate broker at almost exactly the right time and he may prove to have established his Saler cattle operation at exactly the right time.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, at page ??? (C.T.C. 315, D.T.C. 5216), Dickson J. said:

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.

The appellant's personal and family history and testimony about the farm operation is such that the Court finds on the evidence that once he embarked again on farming in 1985 the real estate business immediately became a sideline. He changed his occupational direction to that of a purebred Saler cattle breeder and committed his energy and capital to that. The years in question were start-up years and he is entitled to deduct the full impact of these start-up costs.

The appeal is allowed and this matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly for both 1987 and 1988.

The appellant is awarded his party-and-party costs.

Appeal allowed.