E. Gordon Mackenzie v. Her Majesty the Queen, [1993] 2 CTC 92

Cullen, J.:— This is an appeal by way of declaration from a decision of the Tax Court of Canada, delivered orally on June 13, 1988, dismissing the plaintiff's appeal from notices of reassessment issued by the Minister of National Revenue (M.N.R.) in respect of the plaintiff's 1980, 1981, 1982 and 1983 taxation years. In the reassessments the M.N.R. deemed the loss from the plaintiff's farming business to be $5,000, in accordance with subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Background

The plaintiff's father and grandfather were farmers. The plaintiff was born on a ranch and while he was a member of the Royal Canadian Mounted Police his service revolved around riding and caring for horses. Needless to say the plaintiff was familiar with horses.

In 1979 the plaintiff purchased property of approximately 240 acres near Calgary, Alberta. The property allowed the plaintiff, over the years, to grow alfalfa, timothy, oat and barley crops to be used to feed horses. The plaintiff decided to purchase horses that, after care and training, could perform in equestrian jumping and show competitions and thus be sold at a profit.

During the taxation years under appeal the plaintiff worked in the Calgary office of his land-assembly business connected with the oil industry. His office was located about 35 minutes away from the farm. The plaintiff's income was made up of a shareholder's loan and taxable capital gains.

In 1980 the plaintiff spent $147,636 to purchase horses and $38,193 to train and board the animals. In 1981 he spent $55,769 to purchase horses and $89,696 to train and board the horses.

In terms of time spent on the farm, in 1980 and until the fall of 1981, the plaintiff spent about six hours a day working on the farm, however, after the fall of 1981 when the oil business began to slow down, the plaintiff only spent three or four hours in his office and the rest was spent on the farm.

At the outset the plaintiff's plan was to purchase horses aged five or six years, train them for three to five years and increase their value by building on the individual strengths of each particular animal. The business also involved showing horses at competitions in Canada and the United States. The plaintiff also involved his wife and daughter in the business as they were knowledgeable about horses in the jumper and hunter class. The plaintiff's wife and daughter took the horses to shows and displayed the animals to prospective buyers who were looking for a horse with potential to perform in major horsing events.

Unfortunately the "horse" business is not very predictable and it is very difficult at any given time to acquire a horse that really has the potential to be a star, i.e., grand prix level. Also, where one only has a small inventory of horses any serious injury or death of a horse is significantly magnified.

The plaintiff did not have much luck with the horses he purchased, as a number of horses had to be sold for considerably less than he purchased because they either became lame, were injured or were over-valued.

During the 1980, 1981, 1982 and 1983 taxation years the plaintiff reported the following income, expenses and losses:

By notices dated December 11, 1986, the M.N.R. reassessed the plaintiff’s income tax liability for the 1980, 1981, 1982 and 1983 taxation years by deeming the loss for each year from all farming business carried on by the plaintiff to be 5,000.

By notice of objection dated February 26, 1987, the plaintiff objected to the reassessment.

By notice of confirmation dated june 12, 1987, the M.N.R. confirmed the assessments for the taxation years in question.

The plaintiff appealed the reassessment to the Tax Court of Canada. The Tax Court dismissed the plaintiff's appeal and found that the M.N.R. properly restricted the plaintiff's losses to $5,000.

Plaintiffs position

The plaintiff's position is essentially that he was looking to farming as his chief source of income and that the farming operation was one to which he and his family committed a large amount of capital, time, talent and energy. As such, he was entitled to fully deduct his losses from the farming business, instead of being restricted to the $5,000 limit outlined in subsection 31(1) of the Act.

Defendant's position

The defendant maintains that neither farming nor a combination of farming and some other source of income was the plaintiff's chief source of income in the 1980, 1981, 1982 and 1983 taxation years and so the plaintiff's farm losses for those years were properly restricted by the M.N.R. in accordance with section 31 of the Act.

The defendant also submits that the notices of reassessment dated December 11, 1986 in respect of the plaintiff's 1982 and 1983 taxation years were "nil notices", i.e., these notices were not notices within the meaning of subsection 152(4) of the Act but were merely notifications in writing to the plaintiff that no tax was payable for his 1982 and 1983 taxation years. The defendant argues that under the provisions of subsection 171(1) of the Act, the Court has no jurisdiction to entertain the plaintiff's appeal for the 1982 and 1983 taxation years, as there is no assessment to be vacated, varied, or referred back to the M.N.R. for reconsideration and reassessment and therefore the appeal should be dismissed in respect of the 1982 and 1983 taxation years.

Issues

The issues in this appeal are fairly straightforward and involve a determination of whether the plaintiff is entitled to fully deduct his losses for the taxation years at issue. However, in terms of the 1982 and 1983 taxation years, a determination had to be made as to whether the plaintiff has a cause of action with respect to these taxation years. I decided at the outset of the trial that he did not have a cause of action for the reasons given below.

Discussion

It should be remembered that the present appeal, although an appeal from a decision of the Tax Court of Canada, is a trial de novo and the onus is on the plaintiff to show that the reassessments were in error.

“Nil” Assessments

The jurisprudence clearly establishes that there can be no appeal from a "nil" assessment. In this regard, I note the comments made by Muldoon, J. in Irving Oil Ltd. v. The Queen, [1988] 1 C.T.C. 263, 88 D.T.C. 6138 (F.C.T.D.), at pages 301-02 (D.T.C. 6164):

The locus classicus in this regard is the decision of this Court's Appeal Division in the case of The Queen v. Garry Bowl Ltd., [1974] C.T.C. 457, 74 D.T.C. 6401, a unanimous decision written in 1974 by the present Chief Justice Thurlow. Two brief passages from Mr. Justice Thurlow's reasons will suffice for present purposes:

In the present case as it was admitted that the respondent's appeal to the Tax Review Board was from nil assessments for the years 1967, 1968 and 1969 the question arises whether in view of the decision of the Supreme Court of Canada in Okalta Oils Ltd. v. M.N.R., [1955] S.C.R. 824, [1955] C.T.C. 271, 55 D.T.C. 1176, there is any serious or fairly arguable question of law remaining to be argued as to the respondent's right to appeal therefrom. In my opinion there is not (C.T.C. 459, D.T.C. 6402).

The Board having decided the objection in the present case and rejected it and having allowed the appeal and referred the matter back for reconsideration and reassessment it seems to me that its judgment must be regarded as a decision on an appeal under section 59 within the meaning of section 60. The Trial Division in my opinion accordingly had jurisdiction to entertain the Minister's appeal to it from the decision of the Tax Review Board and to hear and maintain the objection that the respondent had no right of appeal from the" nil assessments" (C.T.C. 460, D.T.C. 6403).

A discussion of “nil assessments" is also found in the Court of Appeal's decision in The Queen v. Bowater Mersey Paper Co., [1987] 2 C.T.C. 159, 87 D.T.C. 5382 (F.C.A.), at pages 160-62 (D.T.C. 5383-84):

In his reasons for judgment, the judge of first instance recognized the existence of a well-established rule that there can be no appeal from a “nil” assessment. He did not ignore either, the rule established in Abrahams (No.1) v. M.N.R., [1966] C.T.C. 690, 66 D.T.C. 5451, to the effect that the reassessment by the Minister of a taxpayer's total income tax for a year nullifies and replaces any previous income tax assessment for that year. He was of opinion, though, that the rule in Abrahams had no application in this case and that, as a consequence, it could not be said that the "nil" reassessments of March 6, 1984, had had the effect of replacing and nullifying the January 4,1984 reassessments.

First, it is simply untrue that the rule in Abrahams does not apply in cases where, in spite of the reassessment, the taxpayer retains an interest in the solution of an issue relating to a prior assessment. This presupposes that a taxpayer may appeal from alleged errors made by the Minister in calculating the tax owed by him. There is no such right of appeal. That right of appeal that exists is from the result of the calculation made by the Minister, not from those calculations. . . .

As to the assertion that the reassessments here in question were reassessments of a special kind, I can find no support for it in the statute. Like all reassessments, those of March 6, 1984, were made in the exercise of the power of reassessment conferred on the Minister by subsection 152(4) of the Income Tax Act. The power of reassessment conferred by that subsection is the same, whatever be the circumstances that warrant its exercise.

Finally, I see no pertinence in the fact that the Minister, after having issued the March 6, 1984, notices of reassessment, confirmed the January 4 notices. Only one inference can be drawn from that confirmation: that the Minister was of the opinion that the respondent still had the right to appeal from the January 4, 1984, reassessments. But the question that must be decided in this case is precisely whether that opinion was well founded in law. The fact that it was entertained by the Minister cannot help in answering that question.

Given the Court of Appeal's statements, I am satisfied that the assessments relating to the plaintiff's 1982 and 1983 taxation years were "nil assessments", and I have little choice but to dismiss the plaintiffs appeal with respect to the 1982 and 1983 taxation years.

Farm losses

At the time relevant to this appeal subsection 31(1) of the Act provided, in part:

31(1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming business carried on by him exceeds the aggregate of his income for the year, so determined from all such business shall be deemed the aggregate of. . . .

This was followed by a formula which in effect restricted the amount of loss claimed to $5,000.

The leading case on the interpretation of section 31 is the often-quoted decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. At pages 487-88 (C.T.C. 315, D.T.C. 5216) Dickson, J., writing for the Court, made the following comments regarding the deductibility of farm losses:

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 limitations of subsection 13(1) [currently 31(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 carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) [31(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 carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his nonbusiness farming are not deductible in any amount.

Therefore, when dealing with farm losses a taxpayer may fall into any of the these three categories. The first and third categories would seem to create little or no problems in terms of deductibility of farm losses. As such, a taxpayer who devotes all his or her time to farming and who has no other source of income may deduct all of his or her losses, while a taxpayer who does not profess to be a farmer, but keeps some acreage in the country and spends weekends in the country is not entitled to deduct any farm losses. It is a question of whether or not a taxpayer falls into the first or second category that is the subject of much discussion. Subsection 31(1) of the Act refers to a taxpayer whose chief source of income is a combination of farming and some other source of income which suggests Dickson, J.'s first category. However, as noted by Joyal, J. in Hadley v. The Queen, [1985] 1 C.T.C. 62, 85 D.T.C. 5058 (F.C.T.D.), at page 63 (D.T.C. 5059):

Where the application of section 31 creates problems is in respect of a farming operation which is run as a business but where the taxpayer has other sources of income. Such a taxpayer might fit into the first category articulated by Dickson, J., in which case, any farming losses sustained may be charged against the taxpayer's other income. In the alternative, the taxpayer might fit into the second category in which case, his farming losses are, for tax purposes, limited to $5,000 annually.

Therefore, the issue in the case before me centres on a determination of whether the plaintiff fits into the first or second category. Clearly such a determination has to be based on the circumstances of each individual case. However, Dickson, J. in Moldowan did outline certain criteria or guidelines to be used for the purposes of determining whether the taxpayer's'chief source of income’ is either farming or a combination of farming and some other source of income. Dickson, J. indicated at page 486 (C.T.C. 314, D.T.C. 5215), that in his view whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. He lists the following criteria which should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. Dickson, J. added that the list was not intended to be exhaustive and that the factors will differ with the nature and the extent of the undertaking. He also added the proviso that "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 of measurement". He then continued at page 486 (C.T.C. 314, D.T.C. 5215-16):

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 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.

In terms of applying the criteria outlined in Moldowan, supra, I agree with Strayer, J.'s comments at page 250 (D.T.C. 6167-68) of The Queen v. Connell, [1988] 1 C.T.C. 247, 88 D.T.C. 6166 (F.C.T.D.); aff'd [1992] 1 C.T.C. 182, 92 D.T.C. 6134 (F.C.A.):

That decision [Moldowan] presents some difficulties of interpretation and application to any given set of facts for the purposes of determining whether the taxpayer's "chief source of income" is either farming or a combination of farming and some other source of income. The key criteria from Moldowan which are frequently cited [footnote omitted] are "the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary habit of work. . . .” Some of the tests suggested by the Supreme Court in that decision for applying these criteria with respect to a given source of income are "the time spent, the capital committed, the profitability both actual and potential. . .”.

Strayer, J. was of the view that the criteria related to reasonable expectation of income from his various revenue sources” and” "his ordinary mode and habit of work" can be read disjunctively so that if a conclusion can be drawn in favour of the taxpayer in respect of either criterion, that will be sufficient to make his or her farming a "chief source of income”. However, the Court of Appeal did not appear to accept this approach. At page 182 (D.T.C. 6134) of Connell v. The Queen, [1992] 1 C.T.C. 182, 92 D.T.C. 6134 (F.C.A.) Marceau, J.A. stated that the trial judge analyzed the factors referred to by Dickson, J. in Moldowan in

a disjunctive way, an approach this Court did not agree with in Canada v. Morrissey, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.), at least if the phrase "disjunctively" is taken as opposed to “ cumulatively”.

MacGuigan, J.A. also commented in The Queen v. Poirier Estate, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 (F.C.A.), at page 10 (D.T.C. 6336):

The learned judge here seems to suggest that farming income can be combined with, in the sense of supplemented by, another source of income in order to constitute a chief source of income. It is clear from Moldowan v. The Queen, [1978] ! S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, at page 486 (C.T.C. 314, D.T.C. 5216) that the word combination” in subsection 31(1) is not to be read in that sense. It is also now clear that what is required for a determination that farming is a chief source of income is a favourable comparison of farming with the other source of income as to such matters as time spent, the capital committed, and the profitability, both actual and potential: The Queen v. Connell, [1988] 1 C.T.C. 247, 88 D.T.C. 6166 (F.C.T.D.) (Strayer, J.), approved on that point by this Court in [1992] 1 C.T.C. 182, D.T.C. 6134.

After a review of the jurisprudence on the question of what constitutes a "chief source of income" I agree with Strayer, J.'s observation in Connell that in making a decision as to whether farming constitutes a chief source of income one is essentially attempting to determine from the evidence whether the taxpayer is "a man whose major preoccupation is farming" (Moldowan, page 488 (C.T.C. 315, D.T.C. 5216).

Further, the onus is on the taxpayer to satisfy the judge in a civil trial that farming was his or her major preoccupation during the taxation years at issue.

Therefore, in making my decision I had to review the criteria noted in the Moldowan decision. With respect to "the taxpayer's reasonable expectation of income from his various revenue sources" I had to consider whether the plaintiff has established a reasonable expectation of his horse farm income becoming his chief source of income. This information had to come from the plaintiff himself, in the form of statements indicating when he expected his farm would become profitable. As I indicated earlier, the plaintiff did not have much luck with the training, showing and sale of horses. The plaintiff did not present any evidence to corroborate any statements made relating to expectation of profit.

I had to examine other criteria, such as the plaintiff's “ordinary mode and habit of work". To do this I attempted to compare the plaintiff's commitment to his horse farm and his commitment to his land-assembly business. The two tests suggested by the Supreme Court in Moldowan are: (1) time spent and (2) capital committed, in relation to the horse farm. In this regard, the plaintiff has devoted a considerable time to his horse farm, more so than to his business. In the end I was not satisfied, after reviewing all the evidence, that the plaintiff's major preoccupation throughout the taxation years in question was the horse farm.

This was a difficult case in that the plaintiff represented himself and proved very knowledgeable about show and jumping horses. His video "Grand Lieu” of one of the better horses was impressive, and his evidence vis-à-vis the horses purchased certainly got a sympathetic hearing, especially in the light of almost disastrous injuries to and sicknesses of four or five prime horses. In the final analysis, however, the onus was on the plaintiff to show the assessments as wrong and the plaintiff did not satisfy that onus. It was clear from the evidence and the data in the files that the plaintiff was" honest and straightforward and hard working who put a large amount of money, time and energy in pursuit of excellence in the field of jumping and competitions”.

Unfortunately, I must dismiss the action. In the circumstances there will be no order as to costs.

Appeals dismissed.