Debra Van Loon v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 3014

Couture, C.T.C.C.J.:—This appeal was heard under the rules governed by the informal procedure.

With her income tax return for the 1991 taxation year the appellant filed an election claiming the benefit of the averaging provisions under section 119 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the taxation years 1987 to 1991 inclusive on the ground that her chief source of income was from farming.

In assessing her return the Minister refused the election for reasons stated in his reply to the notice of appeal.

Paragraph 1 of Part B of her notice of appeal reads:

1. The appellant commenced her farm operation in 1987 and selected a fiscal year end of August 31.

In paragraph 2 of section A of his reply the respondent says:

2. He admits the facts stated in paragraph 1, section B of the notice of appeal.

Paragraph 5 of the reply reads:

5. In assessing the appellant, the Minister made the following assumptions of facts:

(a) the appellant commenced her farm operation in September 1987 and the operation's first fiscal year ended on August 31, 1988, during the appellant's 1988 taxation year;

(b) the appellant’s chief source of income was not farming during 1987, one of the four years immediately preceding 1991 (the "year of averaging") for which returns of income were filed;

(c) in electing to average her income for the 1991 taxation year and the four immediately preceding years, the appellant included in the averaging calculation the average net income for the 1987 taxation year;

(d) the earliest of the four years immediately preceding the year of averaging did not end before 1988;

(e) the appellant's income from the business of farming for the 1988 taxation year is deemed to be her income from that business for the fiscal year ending in 1988;

(f) the appellant's first year of farming was 1988.

[Emphasis added.]

The evidence adduced at the hearing clearly confirmed that her farming operations did not start in September 1987 as alleged by the Minister, but in the spring of 1987 and for the period ended on August 31, she had earned income from this operation.

In support of this contention a statement of revenues and expenses, which was not challenged, for the period ending August 31, 1987 was filed showing revenues from farming of $27,832 and expenses of $14,444 leaving a net of $13,388.

In addition a copy of her income tax return for the taxation year 1987 was filed but no income from farming was reported for the 1987 fiscal period because as explained by her agent while income was earned for the period, no cash was received by her during the period. This contention was not challenged by counsel for the respondent. Subsection 28(1) of the Act provides an option to taxpayers engaged in a farming or fishing business to compute their income from such a business in accordance with what is referred to as the "cash method".

Accordingly, the income she reported on her return for the 1987 taxation year includes the following amounts only:

and after deducting an amount of $392 as employment expense her total income for the year as declared was $13,575 excluding the net income earned from her farm operations which amounted to $13,388 as mentioned before.

Section 119 deals with the averaging procedure governing farmers and fishermen. The relevant portions of this section which are of application to this appeal are subsections (1) and (4). Subsection (1) reads:

119. Averaging for farmers and fishermen.

(1) Where an individual’s chief source of income has been farming or fishing for a taxation year (in this section referred to as the "year of averaging") and the four immediately preceding years for which he has filed returns of income as required by this Part (in this section referred to as the "preceding years"), if the individual on or before the day on or before which he was required to file a return of his income for the year of averaging, or on or before the day on or before which he would have been required to file such a return if any tax had been payable by him for the year of averaging, files with the Minister an election in prescribed form, the tax payable under this Part for the year of averaging is an amount determined by the following rules:

Four basic requirements must be met by a taxpayer to be eligible for the application of this section: his/her income must have been from farming or fishing; it must have been his/her chief source of income for the taxation year referred to as the"year of averaging" and the four immediately preceding years referred to as the "preceding years"; he or she must have filed a return of income for the year of "averaging" and for each of the "preceding years" and finally he or she must have filed an election in accordance with the prescribed procedure.

Subsection 119(4) provides:

(4) Election. An election under subsection (1) is a nullity unless the earliest of the "preceding years" ended before 1988 and is one of the six years immediately preceding the year of averaging.

In the present instance the appellant has complied with all the statutory requirements of subsection (1). Subsection (4) has no application.

The wording of subsection (1) makes it clear that a taxpayer does not have to report income from farming or fishing in each of the taxation years included in the averaging period to qualify for the averaging benefit. To the extent that farming or fishing was his or her chief source of income and an income tax return was filed for the taxation years in issue, the provisions of the subsection are applicable upon filing an election.

The sole question to be determined by the Court is whether farming was her chief source of income for the taxation year 1987 only since the respondent did not raise the issue with respect to the subsequent taxation years included in the averaging formula.

As mentioned by Sarchuk, J. of this Court in Morrison v. M.N.R., [1991] 1 C.T.C. 2659, 91 D.T.C. 622, the jurisprudence is not consistent with regard to how a taxpayer's chief source of income for an averaging period should be determined. In some situations the decision has been reached on the basis of an arithmetical approach or on comparative analysis of net and gross incomes from each source. Other decisions are to the effect that other criteria may have to be considered.

In Wilfley v. The Queen, [1974] C.T.C. 510, 74 D.T.C. 6422, a decision of Collier, J. of the Federal Court-Trial Division in which he said at page 515 (D.T.C. 6425):

In my opinion, the net dollar and cents position, when viewed through five years of hindsight is not the only, or conclusive criteria, to be considered in determining the question of fact: "Has the chief source of income been farming?"

Also in Brown v. The Queen, [1975] C.T.C. 611, 75 D.T.C. 5433 Cattanach, J. of the Federal Court-Trial Division stated at page 615 (D.T.C. 5436):

It has been held in many instances that a source may be a source of income in a particular taxation year even though in that year the taxpayer suffers a loss. That being so, the simple mathematical task of comparing the net incomes from two sources is not a conclusive test for determining which of the two sources of income is the chief source. To so determine resort may be had to other criteria.

The above comments support the proposition that the mathematical comparison between two or more sources of income as a formula to determine which one may be a chief source of income is not rejected outright. They do not contest the validity of a comparison of this type, they simply add that it may not be conclusive and other criteria may have to be considered. This suggestion brings into focus the basic concept that each case must be decided upon its relevant and pertinent circumstances.

However, in a specific situation, if such a mathematical comparison of a number of sources of income may provide a conclusive answer to the question which source is the chief source of income, I see no reason for not relying on this process to arrive at a determination.

This evidence discloses that in 1987 her total income from all sources except farming was $13,575 made up of net employment income from $1,570.40, in addition to the taxable amount of dividends of $205 and interest income of $11,800, while her gross income from farming was $27,832 leaving a net after expenses of $13,388. In my opinion these data would be sufficient following a simple mathematical comparison to reach the conclusion that in fact her chief source of income for that year was farming.

However, in Morrison, supra, Sarchuk, J. at page 2666 (D.T.C. 627-28) said:

I find no valid basis upon which to depart from the principle that the determination of chief source must be made on the basis of a review of the years in issue contextually and not successively in the manner suggested by Hood v. M.N.R. (1963), 34 Tax A.B.C. 41, 63 D.T.C. 968. Therefore in order for Mr. Morrison to benefit from the provisions of section 119 he must adduce evidence to demonstrate that farming was his chief source of income for a five year period. . . .

Even though the respondent did not raise the issue of the chief source of income with respect to the taxation years following 1987, considering the appellant's situation in the light of the remarks of Sarchuk, J., the evidence shows the following results for the taxation years in question:

While her income from these three sources of employment, dividend and interest have remained somewhat constant during the period, the amounts reported from the farm operations for the same taxation years leave no doubt that of all her sources of income, her farming income was by far the most significant. The potential of the farming operations as a source of income considering the revenues generated by them as reported lead to only one conclusion that her chief source of income for the taxation year 1987 and the following taxation years was from farming. Accordingly, she was eligible to compute her tax payable for the taxation year 1991 by applying the averaging formula prescribed in subsection 119(1) of the Act.

For the above reasons the appeal is allowed and the appellant is entitled to her costs on a party-party basis.

Appeal allowed.