George Ylonen v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2970

Dubienski, D.T.C.C.J.:— This appeal was heard under the informal procedure in Winnipeg, Manitoba, on July 20, 1993.

This is an appeal of assessments made with respect to the appellants 1988, 1989 and 1990 taxation years.

The taxpayer was born on the farm, and has been associated with farmers all his life. Starting in 1958, he worked on the farm, then owned by his father, in the summers, and in the winters he worked in the bush, on construction, and in mining. Subsequently, he inherited the farm and later purchased land to a total of 279 acres. Later he went full-time mining, but operated the farm continually at the same time. Since 1954, he has lived on the farm and commuted daily to his place of work at the mine. He worked the farm by putting in hours in the evenings and every weekend. Sometimes the arrangement was that he would work two weeks on and two weeks off at the mine, giving him more time on the farm. This continued until he retired from mining in 1989, and he is now farming full-time.

Since 1968, he has always had 220 acres under cultivation, not always in crop, of course, but sometimes subject to summer fallow in accordance with good agricultural practises.

The taxpayer has a line of machinery and, albeit not new, he endeavours to keep it in repair and has done so, not ever having to resort to the hiring of custom labour or equipment. The taxpayer has chosen to continue to use his machinery subject to his own repair abilities because he does not operate a large farm, and he wishes to keep it as economical as possible.

Since his retirement, he has undertaken to farm more intensively with the result that he has commenced to use a large amount of weed killer and grass control to improve his ability to take off better crops.

He has decided that to operate as a grain farm would not be productive enough to show a profit and he is now wishing to investigate and experiment with profitable crops, namely the growth of alfalfa seed and other high- yielding cash crops.

He advises that while his farm has not shown a continued profit in the past, he has devoted almost as much time to that as to his outside work, and that he was able to keep the farm going on the basis of using the funds that he made from the outside work. Now with his retirement and full-time work on the farm, he is satisfied that he will be able to turn it around, and with the development of new crops, he expects the farm to show a profit.

An examination of the historical background of the farm operation and the losses taken shows that the taxpayer has invested a lot of money in the farm for the purposes of keeping it going. While the farm is not showing a profit, it is clear that from the expenditures that he was running a farm operation, and was anxious to sustain a family farm operation with a hopeful development now of showing a profit.

The Court viewed the evidence of the taxpayer as being of considerable enthusiasm taking all factors into account, and that the years since his retirement until to date should be looked upon as the start-up of a new episode in the development of this farm.

In reviewing the evidence, I can say that I am clearly convinced that the taxpayer did not operate the farm as a hobby. If he did so, he would clearly not be able to claim the losses under the operation of section 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The question therefore to be decided is whether or not the taxpayer should be allowed his losses as a farmer who is farming, and the bulk of his income is received from farming, or if he is entitled to restricted farm losses as provided under the Act.

That the taxpayer is a farmer is without doubt for he farms his property, and lives on it for that purpose. He is taxed by the municipality as a farmer. He maintains insurance on his crops, and holds a Wheat Board permit. He carries on the farming to the full extent that would be expected of a full-time farmer.

With regard to the future development and farming operations of the taxpayer, he was very enthusiastic about the possibility of proceeding with the growing of a new species of alfalfa, experimenting with trefil, while being able to apply full-time with his farm. He was satisfied that it would become a viable operation.

Taking into account the farming background and experience of the taxpayer, having been raised on a farm and having acquired experience during the course of his whole life, and taking into account his obvious desire to continue in the farming occupation, I have no doubt of his abilities and desires with regard to this endeavour.

It is also clear that there was a great deal of capital invested in productive facilities, and that over the years, he has devoted comparable time to his farming operation as to his outside work, with the result that he was carrying on two occupations at the same time.

It is obvious that the profit and loss experienced in the operation of the farm was disappointing on the whole, but the enthusiasm and the desires of the taxpayer were such that the he drew from his other income sufficient funds to cover the losses in the farming operation.

It is clear that instead of borrowing money to finance the operation by way of mortgage or otherwise, he financed the same through his outside income.

Amongst the other cases considered (see attached), I have, of course, considered the leading case of 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. said:

In my opinion, the Income Tax Act as a whole envisages three classes for farmers:

1. a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the center or 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 carries on farming activities as a hobby. 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 the 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 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 with the main expectation of income is not disentitled to deduct the full impact of start-up costs.

Mr. Justice Dickson goes on to say at pages 485-86 (C.T.C. 313-14, D.T.C. 5215):

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, 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. The list is not intended to be exhaustive. .. .

I am greatly impressed by the decision of Graham v. R., [1985] 1 C.T.C. 380, 85 D.T.C. 5256 (F.C.A.). In this case, the facts are remarkably similar to those of the instant case in that the taxpayer was born in the farm and always wanted to be a farmer. However, he had to take work elsewhere and after working for some years, decided to go into the farming business. During the several years in question he took the necessary steps to set up a farming operation and at no time did he show a profit, but it was quite clear that it was his intention to do so, and after careful examination, the Court came to the conclusion that the farming operations of the taxpayer were not a hobby but, in fact, was an operation that fell within the definition of class (1), and thereby ordered the allowance of the total losses to be credited to the taxpayer.

However, in the instant case I find a difference in that while the operations in both cases showed no profit, the operations of the taxpayer in the Graham case, supra, showed a considerably better record in earnings and income which leads me to the conclusion that while I would not allow in this case the taxpayer to take advantage of the total amount of losses for the farming operation, I would, however, allow him to have the restricted losses allowed under the Act.

I therefore so order and refer the matter back to the Minister of National Revenue for reassessment.

Appeal allowed in part.