Blaine Leavitt v. Her Majesty the Queen, [1994] 1 CTC 2788, 94 DTC 1449

Rip, J.T.C.C.:— Blaine Leavitt, the appellant, has appealed reassessments of tax for the 1985, 1986, 1988 and 1989 taxation years. In computing his income for 1988 and 1989 Leavitt deducted his losses from farming in the amounts of $79,898.56 and $25,796.10, respectively, and sought to carryback the losses to 1985, to the extent of $24,202, and to 1986, to the extent of $14,745. The Minister of National Revenue ("Minister") reassessed the appellant restricting his losses in each of 1988 and 1989 to $5,000 and accordingly disallowed the loss carrybacks. In the Minister's view, during the 1988 and 1989 taxation years the appellant's chief source of income was neither farming nor a combination of farming and some other source of income and therefore applied subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") to restrict the appellant’s farm losses for tax purposes.

At all relevant times Leavitt lived with his wife on a ranch of 160 acres, approximately 13 kilometres west of Cardston, Alberta. He purchased the ranch and what is now his home for $20,000. He carried on a cow-calf operation since the early 19705. Between 1981 and 1990 he acquired additional land with his brother: 80 acres in 1981 for $55,000; the next year a quarter section next to the 80 acres for $98,000 and later on two other quarter sections one for $66,000 and the other in about 1990, for $63,000. He also, from time to time, had leased land, usually two quarter sections, depending on weather conditions, for about $4,000 a year. The appellant financed his purchases from bank borrowings and at date of trial was in debt to the bank in the amount of $42,000.

The buildings on the farm, excluding the home, include a barn, hay shed, open-faced cattle shed, a quonset, a machinery shop and two granaries. The appellant estimated the cost of various buildings at $50,000. In addition, at time of trial the appellant owned equipment and machinery which he estimated cost him $250,000: three tractors, four trucks, chisel plough, double disk, baler, bale stooker, flat trailer, cattle squeeze.

Leavitt worked full-time teaching mechanics and welding at a high school in Cardston. He developed a hearing problem which affected his work in the classroom and, after 25 years of teaching, took disability leave in the fall of 1991.

Leavitt testified he generally worked on the farm from 6:00 to 8:00 in the morning and taught from nine o'clock to 3:30 in the afternoon, about 32 hours a week. Leavitt would return to the farm to work from four o’clock until night; he estimated he spent 48 to 50 hours a week on the farm. He had 12 weeks annual vacation from teaching which, except for two weeks, he spent the vacation working on the farm.

During the farm's busy seasons Leavitt would spend more time on the farm than at school. During the calving season, late February to April, he would drive home each lunch hour and, frequently, when he had a free period at school to check on the cows. Driving time between school and the farm was six minutes. Leavitt said he could foal a calf in an hour and did so many times during his lunch period. He testified he would awaken at night every two hours during calving seasons to check the cows. He estimated that during calving seasons he worked 12 to 14 hours per day on the farm. In the event of a problem on the farm his wife would telephone him at school and he would drive to the farm during the lunch hour. The farm also demanded more of Leavitt's time during seeding and in dry years when irrigation was required.

Seeding took place during the beginning of May; Leavitt was unable to estimate how long he spent preparing the land and seeding in any given year. He stated that each year he broke up one-third of the land used to grow hay for cultivation.

During slow times on the farm, Leavitt said, he worked about eight and a half hours daily in farm related works; feeding cattle, repairing the corral, repairing machinery during the winter.

At school, he would use any free period to clean the classroom. He attended staff meetings once a month.

Mrs. Leavitt took care of the books and records of the farm and worked on the farm “when I needed her", Leavitt said. In 1988 and 1989 Mrs. Leavitt worked part-time for a nursing home.

Leavitt stated that when he first purchased the ranch he intended to retire early from teaching and work full-time on the ranch. At one time he thought he could retire in 1991, when he would be 53 years of age, and in fact left teaching due to his disability in 1991. He explained the hearing disability does not affect his work on the farm; the only problem he has farming is that he cannot hear certain noises from machinery to identify a problem requiring repair.

For the years prior to 1988 Leavitt filed his tax returns on the basis he was only entitled to the restricted farm loss and deducted only $5,000 of his farm loss in computing his income. He claims that from 1988 on, farming was his chief source of income either alone or combined with his salary from teaching.

Leavitt produced his 1988 and 1989 tax returns as well as a draft financial statement for 1993. The respondent produced Leavitt’s tax returns for 1985, 1986, 1987 and 1990. Leavitt also produced a schedule of income for the years 1988 to 1993 (draft) as well as his herd size for the various years; this schedule is attached as an appendix to these reasons.

Gross incomes from teaching for 1991, 1992 and 1993 were reduced due to Leavitt receiving disability payments. The disability payments ceased in 1994 and he now receives pension payments of approximately $20,000 a year. Net farm incomes on both cash and accrual basis shown on the appendix to these reasons do not reflect any deduction for capital cost allowance. Capital cost allowance taken was:

The expenses from the farm, before capital cost allowance, reported on the cash method were as follows:

After capital cost allowance was taken Leavitt reported the following income (on the cash method) from farming:

Much of the appellant’s farm loss in 1991 was due to the purchase of a neighbour's herd or cattle in that year, the cost of which he deducted in computing income. In 1992 he testified he culled and sold off older cows and replaced them with bred heifers which cost him more than he received from the older cows. For the years 1986 to 1989 inclusive, Leavitt's farm expenses (before capital cost allowance) were approximately stable at $46,000. They increased by approximately $9,000 in 1990; gross farm income increased °Y about $10,000. In 1991 expenses before capital cost allowance increased substantially, but for good reason.

Calves increased in value in 1993 and as a result Leavitt profited from sales of cattle. The quality of his herd, he said, continued to improve and sales increased.

Leavitt generally has been fortunate in his operation. Many taxpayers in Mr. Leavitt's situation argue that but for the illness or their stock, their farm would be profitable. Leavitt has not experienced any serious financial reverses due to illness of his herd. He had some problems with disease in 1991 and did lose 22 head in 1993 due to a viral infection. These problems did not seriously affect the growth of his farm. In 1993 he will report a profit. During the years Leavitt's herd has steadily increased and shortly ought to reach the 150 head he considers ideal for his farm.

I find Leavitt's testimony that he purchased the ranch to begin a cow-calf operation which he hoped to carry-out on a full-time basis in the early 1990s credible. His teaching career did not seriously interfere with farming and by 1991 he would have taught for twenty-five years and be approaching early retirement. The growth of his herd showed a steady progress. It is not unreasonable to conclude that by the latter part of the 1980s, if not earlier, a pattern had been established by Leavitt when his gross farm income was increasing annually and his expenses were less than his income on both of the accrual and cash method of reporting income. I am satisfied that by 1988 the farm had reached a stage where one may have reasonably expected the farm to generate significant annual net income to Leavitt which would be greater than Pis income from teaching. The farm was no longer a sideline business; it was not subordinate to any other source of income: Mohl v. Canada, [1989] 1 C.T.C. 425, 89 D.T.C. 5236 (F.C.T.D.), at page 428 (D.T.C. 5238-39); White v. M.N.R., [1991] 2 C.T.C. 331, 91 D.T.C. 5598 (F.C.T.D.).

Counsel for the respondent argued that there was no change in occupational direction by Leavitt between 1987, the last year he filed a tax return claiming a restricted farm loss, and 1988, the first year he claimed a full loss from farming. In as late as his 1990 tax return Leavitt identified his occupation as teacher. Counsel appeared to suggest that a change in occupational direction must be clearly recognized as such. I do not agree. A change in occupational direction need not be accompanied by lightning and thunder. A change in occupational direction in rare cases, depending on the particular circumstances, may be gradual and almost imperceptible. The change may come about as a result of careful prior planning by the taxpayer who, at a point in time, reaches a stage in a farming operation where one may reasonably conclude the income from farming itself, or in combination with some other source of income, may be the taxpayer's chief source of income. In my view this is what transpired over the years in Leavitt's farming activities: by the late 1980s the farm had reached a level whereby it could generate income which in combination with Leavitt's income from teaching could

e reasonably regarded as his chief source of income.

Leavitt's farm had the potential to provide him with a significant income which, together with his teaching income or pension income, would be his chief source of income: see Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. The time Leavitt spent on the farm during 1988 and 1989 and earlier years was greater than the time he devoted to teaching. The gross income from farming was exceeding his other income, including teaching income. His life style was influenced by the farm. His commitment of capital to the farm over the years was well considered and substantial.

Accordingly the appeals will be allowed, with costs. The amounts of Leavitt's farm losses for 1988 and 1989 have been agreed by counsel to be $76,843 and $13,899 respectively; losses are to be carried back to 1985 and 1986.

Appeal allowed.