Emil Misik v. Minister of National Revenue, [1993] 1 CTC 2360, 93 DTC 172

Margeson, T.C.C.J.:—During the taxation years 1986, 1987 and 1988, the appellant incurred losses from his farming operations and deducted such losses in compiling his income for those years. The Minister reassessed the appellant for those years on the basis that his chief source of income was neither farming nor a combination of farming and some other source of income and permitted only restricted farm losses on the basis 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 assessments were confirmed and the appellant appealed therefrom.

Background

At the hearing of the appeals evidence was given that the appellant was 48 years of age and was born in Alberta, 50 miles east of Edmonton at Vegreville where the predominant industry was farming. At the age of ten, his family moved to Mannville, Alberta, where they had a mixed farming operation. He worked at farming as a helper until he was 19 years of age.

He obtained grade 12 education, worked as a labourer for two years and then became involved in the heating business. In this business he acted as a salesperson of heating and air conditioning products and after 13 years became general manager of Ecco Heating Products Ltd. In 1972 the appellant acquired his first piece of farmland of about 40 acres. It was uncultivated and the appellant cleared off stones and weeds in 1973-74, planted barley and hay on it, built a house, barn, fences, corrals, cattle shed and other smaller buildings. He also purchased some cattle in 1974-75, approximately 15 in number and sold them in the fall. There were about 25 acres of cleared land on this farm.

In 1979, the appellant purchased an additional 80 acres of land about 14 miles away from his initial holdings. This property contained no buildings, had no fencing and had approximately 45 acres of cleared land. He put in a crop the first year, then hay and by 1984 had constructed sheds, fences and corrals on the property.

In 1980, the appellant started to breed cattle. He purchased one bull and 15 to 20 cows. He started keeping them over winter and made use of both the 40 and 80 acre parcels of land, moving the cattle from one to the other by means of a trailer, depending upon the grass conditions.

Between 1980 and 1984, the appellant had about 30 head of cattle, selling 10 to 15 before winter and keeping 10 to 20, breeding roughly 15. He owned one bull only.

Between 1972 and 1983, the appellant reported restricted farm losses because he felt he was a part-time farmer. In 1984, he reported a profit on his income tax return of $8,932. In 1980, the appellant started a company known as "Gemco Fireplaces Ltd.” (hereinafter referred to as “Gemco”) with one Glen Lesmeister on a 50/50 basis. The appellant devoted 50 hours a week to his company as salesperson, president and director. The company employed approximately 30 persons by that time. The number of hours that he devoted to the company decreased from 60 to 40 by 1985 and he did the farming on weekends and after hours. The appellant indicated that he spent about 20 hours per week on his farming in 1982, 1983 and 1984, and he owned approximately 30 head of cattle in the summertime and in the winter approximately 15 to 20.

The appellant testified that he wanted to go into farming on a full-time basis and his partner wanted to retire so on April 1, 1986, they promoted two of their employees, Jeff Helm and Barry Sittler to manage the business and this was set out in Exhibit A-9, which he referred to as an agreement, but which is entitled "Yearly Understanding" and it set out what was expected of the employees and what services would be provided by the two owners.

Of special significance is the reference in the document to the number of hours per month that the appellant would devote to the company's business and this was given as 32 until such time as it was deemed to be unnecessary. According to the appellant, thereafter he provided eight hours a week to the company and the rest of his time he spent on the farm.

In 1990, his co-owner decided to retire and the appellant became the sole owner through E. Misik Holdings Ltd. At the time of the hearing the appellant stated that he was spending about eight hours a week on the company's business and went into the office now and again.

After April 1, 1986, the appellant said his farming activities changed and he "got more heavily involved in animals and in spending more time out there". He felt “that by getting more animals and looking after them better and being there to give them attention when they needed it”, he could make money. His projection was that he could sell 100 head of cattle per year. He would have 130 in the summer and 30 in the winter time, selling approximately 100 animals per year at a price of $250 to $300 per animal to a value of $30,000.

The appellant calculated that it would take him three to four years to reach this level of sales after 1986. Exhibit A-5 sets out the level of his purchases, sales, the cost and value of sales for the years 1986, 1987 and 1988. In each of those years the value of sales exceeded the cost by an average of approximately $10,000. He also expanded his breeder operation during that period of time but was unable to turn a profit on the overall operation.

The reasons the appellant gave for his failure to make a profit during the years in question were the poor quality of the soil, the fact that his two pieces of land were 14 miles apart, he was using poor used equipment, he was duplicating equipment, his own absence, repair costs, transportation costs, fertilizer costs and high feed purchase costs. Consequently the operation showed losses of $29,591.36, $29,990.86 and $12,662.76 in the years 1986, 1987 and 1988 respectively.

A further problematic factor was that even though the appellant was trying to make a profit, he bought cheap animals, particularly unproven bulls, resulting in a loss of approximately /3 of his crop at birth. He was aware of the danger but took the chance because the animals were cheaper to purchase.

In the summer of 1989, the appellant sold off his herd and his two properties and by the fall of 1989 bought a new property consisting of 160 acres. This property consisted mostly of #1 soil and a small portion of #2 soil. He constructed a house, machine shop, hay shed and two barns upon the property. He moved into the house on July 15, 1990.

The appellant intended from the beginning of the new operation to go into purebred cattle and expected to run 45 cows and sell 45 calves. He purchased a new hay bind, a large tractor and a bailer and intended to make his own feed. He planted 50 acres of hay and kept 105 acres of pasture land. His position was that he could get more money from purebred animals and calving would not be a problem.

The evidence suggested that his new farmland would support 100 head of cattle but his buildings had capacity for 200 head if he wished to expand his herd. He was using the extra barn area for storage in the early years.

In the years 1986, 1987 and 1988, the appellant earned $75,000, $202,000 and $72,000 respectively from "Gemco" and at the time of trial he expected that to rise to $500,000 per year.

The appellant disagreed with the Minister's presumptions during the years in question that he only spent 20 hours per week on farming and most of the working day at“ Gemco”. He further disagreed that only one acre of his 40 acre parcel of land was fenced and said that the whole parcel was fenced and crossfenced. He added that he felt he could make as much from farming as from "Gemco" and disagreed that he could not count on his farm to provide the bulk of his income nor for it to be significantly profitable.

In cross-examination the appellant admitted that he owned 99 per cent of the shares of E. Misik Holdings Ltd. during the years in question and his wife owned one per cent. In turn, the holding company owned all the shares in "Gemco". He further admitted that he took no courses in livestock generally and subscribed to no literature on the subject during the years under appeal. He knew very little about the farming operations around him and when he purchased the land in question here he had no plan on paper or otherwise except to "run a few cows or calves or whatever he could that would eat the grass and try to make some money out of it”.

The appellant knew that the soil was of poor quality, that he would have to incur extra expenses because of it, that one half an acre was under water, 15 acres had bush on it and the remainder was pasture with the exception of the area around his house and garden which was for his own personal use. He used the quonset partly for storage of his all-terrain vehicle and motor home as well as for equipment storage.

The barn could accommodate up to 30 head of cattle and was also used for the sheltering of two horses which were for the personal use of the appellant and his family.

With respect to the 80 acre parcel of land, four to five acres were under water, 45 acres were pasture and 30 acres were in bush.

The appellant admitted that he made no financial forecast as to when he might break even or as to what that operation might entail, even though he did say he must have factored in the additional costs of purchasing feed, additional costs resulting from the separation of the two parcels of land and extra costs of repair to machinery. In spite of this he stated that he felt he could create a profit.

It was admitted in cross-examination that the appellant worked more than six hours a week at “Gemco” during the early months of 1986, organizing and familiarizing the new managers with "Gemco's" affairs, though he indicated in direct examination it was only six hours.

With respect to the breeding operations in general, the appellant said that he intended to sell the marketable calves and bulls in the fall, retain the cows and possibly keep some of the feeders through part of the winter, fatten them up and then sell them. He anticipated increasing his breeding stock from within his own herd and buying others as well.

In the year 1986, some cattle were wintered on the 40 acre parcel although the appellant did not know how many. He said that the 80 acre parcel could possibly have accommodated the 35 head of cattle that he maintained but not his whole breeding stock. He agreed that he was running a feeder lot operation as well as a cow/calf operation in 1987, but was quite uncertain about the number of cows or calves he had in the operation or the number of calving deaths in 1987 and 1988. In spite of the losses he incurred in the breeding operation he did not seek advice as to how to curb these losses. The appellant concurred with the suggestion that the adverse conditions that gave rise to the losses would continue, that he was going the wrong way, that he had to change his ways, but that was around the spring of 1989 and the best thing to do was to dispose of the property.

The appellant called Mr. Donald Lester Hoover who had been retained to prepare a report on his farming operation and determine the profitability of the farm operation in the years 1986, 1987 and 1988. Mr. Hoover was qualified as an expert entitled to give expert testimony as an agronomist and an expert in farm economics. He indicated that an agronomist deals with the areas of plant science, soil science, economics and animal science.

Mr. Hoover visited the appellant's farm operation prior to the preparation of his report and took various photographs of the properties including the pre-1989 operation and the current operation. The only observation he made of the pre-1989 operation was from the roadway.

The report was admitted into evidence by agreement as Exhibit A-10. It contained a profitability analysis for a typical 100 cow/calf operation in the Province of Alberta, in the Edmonton area for the period 1981 to 1990 and he made use of commonly accepted financial data and research data publications. No exceptions were raised by the respondent with respect to these sources.

The witness concluded that in 1986, 1987 and 1988 a typical farming operation in Alberta having 100 cows would show a profit of $14,851; $28,434; and $25,711 respectively computed in 1990 dollars. Correspondingly, if they were computed in 1986, 1987 and 1988 dollars, the figures would have been $12,534; $24,851 and $23,346 respectively.

In direct evidence he indicated that in the years 1986, 1987 and 1988 there was a loss in backgrounding for a typical operation in the Edmonton region based on the 10-year period. Further, there were falling cattle prices and there was not a net return when you took all costs in account. He indicated that the average herd size in the Edmonton area in a cow/calf operation is a 35 to 40 cow unit (35 to 40 cows, 35 to 40 calves). In a backgrounding operation in the Edmonton area, the typical herd size was 100 to 150 head.

Mr. Hoover also did an analysis during the 1986, 1987 and 1988 years for a typical operation on a 40 cow unit. He also adjusted the actual expense figures of the appellants operation in the years in question to what he considered to be the typical industry average at that time. He was trying to look at what would be produced from the cow/calf operation on the appellant's farm during the relevant years and therefore deducted purchases from off the farm operation and deducted the value of sales from other than the farm operation. The reconstructed figures would have produced a loss of $4,017.80 in 1986; a profit of $2,779.34 in 1987; and a profit of $7,416.86 in 1988. It was admitted that some of the appellant's expenses were not typical of a typical operation.

The witness reiterated the problem areas of the appellant's operation and they were a confirmation of those related by the appellant himself in his testimony. He said a normal cow/calf operation would have a three- to five-year start-up period. He felt that the appellant's present operation could support either a 40 cow/calf operation with a net income of $12,000 annually or a 100 cow operation, requiring rented pasture and purchased feed and that it could produce a net profit of $30,000 annually.

The witness pointed out that a normal calving operation would produce a 90 per cent calf crop and there would be a one to two per cent mortality rate after that. If a backgrounding operation was carried on there would be a further one per cent mortality rate to finishing.

In cross-examination the witness admitted that the source of any information about the appellant's operation in 1986, 1987 and 1988 was verbal information given to him by the appellant, basically from his memory and financial statements supplied by the appellant from which the witness tried to determine the number of cattle that he had in each year.

According to the witness a typical 160 acre farm would contain 120 acres of forage crop, the soil would be #2 to #3, the farmer's residence would be located on the 160 acre site, 5 to 10 acres would be personal living space, it would contain a heater for watering, a barn with a heater, a mix of new and old machinery would have been running for about 10 years and there would be no salaries for hired help. The operation would contain 40 cows, 36 calves, six replacements and two bulls.

It was brought out that the reconstructed models for the years in question did not contain an item for fertilizer and lime, that the figure for feed, straw and bedding was incorrect, that the interest cost related only to variable expenses and contained no calculation for any mortgage interest, no expenses for labour other than the owner, no expenses for rented pasture and no depreciation (except for repairs to buildings and equipment). The witness candidly admitted that the appellant was not operating a typical 40 cow/calf operation on 160 acres of land during the years in question. He also said he did not include expenses for a background operation in the years in question, which the appellant was carrying on, but he did not think that this would change the final picture that much except for a small amount of interest which would have to be included. He also felt that the equipment that the appellant had in 1986, 1987 and 1988 was not in as good condition as the equipment he saw on the present operation.

In the typical operation, the witness conceded that there would have to be typical management which would include such things as background knowledge of land, whether fertilizer would be needed, knowledge of stock, a good quality stock would be used and sound breeding principles would be practised.

The appellant called Dr. Peter Denooy, a veterinarian who performed services for him at his farm on September 25, 1989, and produced his office invoice, a copy of a rewrite system in confirmation of the date of the visit to the appellants farm.

Mr. Barry Francis Sittler was called by the appellant who was the manager of "Gemco". He confirmed the contents of Exhibit A-9 and said that before its incorporation the appellant spent a regular day at” Gemco” and afterwards an average of 6 to 10 hours per week.

The respondent called Mr. Stanley Sewlal, a senior business auditor with Revenue Canada, Taxation. He was assigned the Gemco” file for an audit and in the course of his audit looked at the files of E. Misik Holdings Ltd. and Emil Misik personally.

He also spoke to the appellant and visited his operations including the farm in question here. He considered the 80 acres to be undeveloped land. On his visit to the farm he noticed approximately 40 head of cattle, 28 cows and 12 calves. There were no permanent structures on the property according to him except for a small corral which appeared to be a recent construction.

The witness noticed that there were some calves in the corral being attended to and others that he referred to as "free range cattle” standing around bales of hay. There were two groups of such cattle. He also noticed two tractors, two small garden sheds and some bales of hay. He said there were no developed roads, there was a dirt clearing covered with gravel for about 30 feet, he noticed a small portable hay feeder and some barbwire fencing. He noticed the appellant there with three other persons who appeared to be from a veterinarian clinic.

The witness also visited the 40-acre location where he noticed the principal residence on approximately three acres of landscaped area which was fenced. There was a storage shed containing a motor home, an all-terrain vehicle and some other small items.

He noticed another smaller shed containing a small tractor with fork-lift attachment and some smaller items. He noted that there were no cattle there nor any evidence of farming except for two horses. He also arranged to meet the appellant later on at the office of“ "Gemco" on June 20, 1989.

The appellant was questioned about his farming operation and the witness said the appellant was not aware of income tax bulletins nor was he interested in them. He concluded from his conversation that the appellant was merely trying to improve his property for retirement purposes, that he had no plans to expand his farming operations, he was not going to get into a feeder operation and that he was told by the appellant the property would hold a few hundred head.

The appellant was not able to provide any records but he said that his herd consisted of /3 steers, /3 cows and /3 calves and the only type of farming activity in which he was involved was the raising and keeping of beef cattle. He indicated that he spent 20 hours a week working on the farm on occasion.

The witness was somewhat confused about interpreting his notes and the chronology of events thereafter although nothing particularly significant transpired.

Following the trial the Court granted an order permitting additional evidence to be admitted confirming that Mr. Stanley Sewlal visited the appellants farm on June 15, 1989; confirming that Dr. Peter Denooy was at the appellants farm on June 15, 1989, and that he saw Mr. Sewlal there. Further, the Court admitted a document showing a schedule of livestock purchases and sales for 1989, the cost of purchases and value of sales.

Appellant's position

The appellant takes the position that between 1972 and 1984 his main commitment was to his employment with "Ecco" and “Gemco” and farming only consumed 10 to 12 hours per week. Further, during this period of time his financial resources were limited and he could only afford lower quality properties. However, by late 1985 and 1986, he was only spending 8 to 10 hours per week at“ Gemco” and 40 hours per week on the farm.

The appellant argues that there was a change in occupational direction after the new arrangements were put in place at "Gemco" under the terms of Exhibit A-9, that he became a full-time farmer and that he should no longer be restricted to claiming limited farm losses as he had claimed in the past. He believed that by increasing the size of his herd and spending more time there (which he said he did), he would be able to realize a profit of $25,000 to $30,000 per year after a five-year start-up period. This range of salary, he argued, was comparable to his salary from "Gemco" during 1982, 1983 and 1984 which averaged $32,576.75.

The appellant refers to certain factors which frustrated his efforts on the 40 acre and 80 acre parcels and says that they were beyond his control. Further he says that even though some of them were foreseeable his limited financial resources and the limited time available for farming prevented him from taking "proactive steps to avoid them".

It is argued that the evidence of the expert witness confirms that the appellant acted in a reasonable and businesslike way in an attempt to realize his profit projection made in 1986 when he first became a full-time farmer. Here he includes the decision to sell his 40 acre and 80 acre properties and reestablish the operation on the 160 acres where the expert's opinion was that the annual profits could be in the range of $12,000 per year for a 40 head operation and $30,000 per year for a 100 head operation. "A taxpayer should not be expected to have operated in a manner which is only apparent with hindsight”, he says. It is emphasized by the appellant that the sale of the 40 acre and 80 acre parcels and the acquisition of the 160 acres was not an admission that farming was not his chief source of income in combination with his salary from "Gemco", but this was just a proactive step taken by him to continue his plan to become a full-time farmer which started when he changed occupational directions in 1986.

The appellant looked upon the change of farming locations as having taken place during a reasonable start-up period and confirmed his intention to become a full-time farmer commencing in 1986 and to operate a profitable farm.

The appellant pointed out that his budget for family and personal expenses was $1,800 a month or $21,600 per year and that the level of profitability of the farm operation was within a range that could support such a lifestyle.

Given the three to four-year start-up period expected by the appellant, the three to five-year start-up period estimated by the expert, given the change in the occupational direction in 1986, given the excellent prospects for farm profits in the near future in combination with the lifestyle and spending habits of the appellant and his family in the years in question, it was submitted that farming could be regarded as his chief source of income in combination with his “Gemco” salary.

The appellant referred to many of the most commonly cited authorities including Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213; The Queen v. Morrissey, [1989]1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.); Mohl v. Canada, [1989] 1 C.T.C. 425, 89 D.T.C. 5236 (F.C.T.D.) as well as Twigg v. M.N.R., [1991] 2 C.T.C. 2112, 91 D.T.C. 1059 and Cocks v. M.N.R., [1991] 2 C.T.C. 2023, 91 D.T.C. 688, where the Court had to consider these cases as well as others, in the context of those particular factual situations in deciding that the appellants were not restricted to the formula amounts allowed by subsection 31(1) of the Income Tax Act.

In considering the above-referred to cases the appellant here argues that where a person enters into a farming operation with a reasonable expectation of profit which subsequently is frustrated by factors beyond his control, it is then necessary to determine if the taxpayer acted in the businesslike manner to overcome these contingencies and then continued to proceed in a like manner to realize the farm's profit potentiality. It is not sufficient to argue that if there is $200,000 of non-farming income that the farm must show a potential profitability of $200,000 and it is not sufficient to make a mathematical comparison between the two forms of income.

The appellant argues that because he had non-farming income of $486,910 in 1991 that does not mean that his farm profit potential need be that amount to entitle him to claim the full losses.

In rebuttal the appellant argued that the respondent did not produce any expert evidence to indicate the amount of time required to properly operate a successful cattle operation of the size involved here and therefore the argument made that the operation was not of such a size as to require close daily maintenance is without foundation. Further that the numerical data provided together with the appellant's testimony on this point supports the position that the 1986, 1987, 1988 operation required significantly more time than the pre-1986 operation and that his own evidence, that of the witness Barry Sittler and Exhibit A-9 (Yearly Understanding) all confirm that the appellant had the necessary time available to pursue his farming on a full-time basis.

The appellant says that the expert's testimony should be given considerable weight and is based upon facts established in evidence, that the purpose of the reconstructed income expense statements for 1986, 1987 and 1988 is to show that “but for" the unforeseeable factors the appellant would have shown a profit before capital cost allowance in the years under appeal. This he argues is significant considering that only nominal profits would have been attainable in a typical cow/calf operation during the years under appeal and losses would have been reported in a typical backgrounding operation. Further, the expert's report projecting profits on the 160 acre operation have not been disputed by the respondent thus admitting that the corrective steps taken by the appellant to turn his cattle farming operation into a profitable business have been accepted by the respondent, and the evidence shows significant profitability potential for the combined operation.

It is also pointed out by the appellant that if the optional livestock election under section 28 had not been made in 1984, the 1985 year would have shown a profit of $6,357 instead of a loss of $29,400.

The appellant opines that he had a reasonable and honest belief in 1986, when he decided to become a full-time farmer that an increase in the number of cattle could compensate for the negative factors already enumerated. That only after he became a full-time farmer did he realize otherwise and he should not be penalized retroactively for these poor business conditions only then realized. He argued that the respondent focuses on such factors instead of on the proactive steps taken by the appellant to turn his cattle farming operation into a profitable business in a short start-up period.

Respondent's position

The respondent takes the position that the appellant has failed to show that his farming income, either in combination with his non-farming income or his farming income alone were his chief source of income in 1986, 1987 and 1988. It is argued that the appellant exaggerated the amount of time spent on his farm during the relevant years, that the evidence has failed to show that the operation during the relevant years was capable of profitability and that in any event the evidence failed to establish that the farm operation as it existed in those years was capable of producing a significant profit in comparison to his nonfarm income.

The respondent has referred to the ruling cases in this area and says that the main criteria to be considered are: (a) capital committed; (b) time spent; (c) profitability. The test according to the respondent is relative and not one of pure quantum measurement and all these factors must be measured. See Moldowan, supra; Morrissey, supra, and The Queen v. Poirier, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 (F.C.A.).

The respondent submits that the appellant did not spend 40 hours per week on the farming operation during 1986, 1987 and 1988. Further, that the operation was not of the size or nature that required that time commitment, that the breeding operation and the backgrounding operation was small and did not involve any sophisticated breeding program. During the winter months only feeding was involved, no travelling was necessary and permanent structures were already in place.

The respondent refers to various portions of the evidence in pointing out that the amount of time spent on the farm was given variously as 20 hours per week, occasionally, 30 hours per week and 40 hours per week. There were no time records maintained and the evidence was based on recollection and often the recollections were contradictory as were certain pieces of documentary evidence, particularly with respect to the amount of time spent on the farm and at” Gemco”. The respondent suggests that up to 20 hours per week on the farm is more likely than 40 and that 8 to 16 hours a week at“ Gemco” was more likely in light of the duties the appellant maintained.

It is pointed out that some of the time spent on the farm was likely committed to caring for the appellant's horses, his house, his garden and other personal matters and not just on farm duties.

The position of the respondent is that even though the Minister has allowed a restricted deduction, the Court must still analyze the facts to determine if the potential for profit is reasonable. See Morrissey, supra, at page 241-42 (D.T.C. 5084).

The respondent argues that there was no objective plan of profitability disclosed. The projected income was no more than a guess and was only based upon gross sales and not profit. This is also reflected in the expert's report because it is obvious from that report that an expected profit of $600 per head was not realistic. Further, it is argued that in the same report it would be unrealistic to expect the sales price of $600 per head as indicated by the appellant nor a profit of $150 per animal in the backgrounding operation.

The respondent refers to Robinson v. Canada, [1991] 1 C.T.C. 156, 91 D.T.C. 5302 (F.C.T.D.), in support of the contention that it is the “net income” that must be looked at and not the "gross income”. If you look at the gross income in the years in question you get a misleading picture of business activity because many of the sales were from inventory of the backgrounding operation and this did not mean that the amount of farming activity was progressing yearly.

Referring to the transcript, the respondent says that there was no supporting data to show how a profit could be realized after factoring in expenses related to the problematic areas of the operation, but even if these were factored in, it is obvious that the actual operation as it existed in 1986, 1987 and 1988 did not follow through with the appellant's own plan i.e.: he envisaged 35 cows in his breeding operation but averaged only 20 and thus reduced the potential calf crop and sales for the year. There was no explanation as to why he did not follow his original plan and there is no evidence that he expanded his breeding operation and that position put forward by the appellant in argument is disputed by the respondent, referring to the appropriate portions of the transcript.

The respondent suggests that very little weight be given to the expert's opinion since the facts upon which it is based have not been proven. Interest is not claimed in the years in question, current expenses only are taken into account and not depreciation, the backgrounding operation was not considered and the opinion was based upon a 30 cow/calf operation and that does not exist here. There were no records to support the information given to the expert by the appellant, the report is based upon a typical 40 cow/calf operation on 160 acres of land and then makes adjustments to reflect expenses within the range of a typical cow/calf operation of the size operated by the appellant. The reconstructed income and expense statements in the expert's report presume the existence of conditions which do not exist here. Indeed the respondent argues that the evidence of the appellant contradicts the very facts upon which the expert bases his opinion and which facts he deemed to exist, including good farm management.

It is argued that the 13 year operation between 1972 and 1985, excepting 1984, showed losses and it would have been reasonable to conclude that hope for profits were not going to be realized without some logical plan for change and there was none. Further, the appellant told the auditor that he did not intend to expand his operations and it was for his retirement and only after discussions about possible reassessments did he express any intention of purchasing 160 acres.

This was not a "typical farm” during 1986, 1987 and 1988 and therefore the respondent suggests that it is completely unreasonable to use the standard expenses of a '^typical farm". The appellant's farm operation had specific expenses that would continue to be incurred and cannot be factored out of the profit plan. Further, the interest factor is a significant one that must be considered and it was not considered in this case. It was not an unpredictable expense and therefore there was no basis for significantly reducing this item of expense in the reconstructed income and expense statements from that claimed in the appellant's statement of income and expense in his income tax return during the relevant years.

As a result it is submitted that the expert's opinion with respect to profitability is of little value.

The respondent takes the position that even though the expert evidence indicates a negative return in backgrounding operations in general between 1986 and 1988, there is no evidence to show that'" but for" these reduced prices there would have been a profit in the appellant’s operation. The evidence did disclose a nominal net return for such operations in general between 1981 and 1985, but there was no evidence to show that the appellants operation would have shown a profit except for 1984, which the respondent attributes to the livestock inventory election.

The respondent has conceded that the operation was a source of income but suggests that the evidence has disclosed that the operation was not capable or potentially capable of profit. Further it was submitted that the profit shown in 1984 was an aberration and due only to the mechanics of section 28 of the Act, there was no reason to have confidence about potential profit on any objective basis. The expert's opinion of profitability was based upon a "typical operation" and this was not one. The operation was not capable of profitability in the years in question and it could not be a chief source of income.

The appellant suggests that the farm operation as it currently exists is not a continuation of the farming operation as it existed pre-1989 and this is corroborated by the expert's testimony. The post-1989 operation showed a substantial change in circumstances, it was a new operation. As the operation existed prior to 1989 it was incapable of providing the appellant with a livelihood. Further the respondent says there is no special entitlement to deductibility because of start-up costs because the appellant must first place himself in the Class 1 category of farmers in order to have the issue of start-up cost considered and this he has not done. In any event, by the years in question all of the appellant's infrastructure was in place and the operation did not change.

The respondent rejects the argument of the appellant that the proper mode of comparison between the different forms or sources of income is merely to compare the actual or potential profit of the farm in question to the profits that one might reasonably expect to derive from a farming operation of the same size and type. This is not a proper interpretation of section 31 of the Act, which is not ambiguous, which calls for a comparison between farm income and non-farm income, both actual and potential, and when you do that here it is obvious that the appellant could not expect a reasonable rate of return from the farm operation. This operation showed a continuous loss situation and the non-farming income source showed a relatively consistent increase in income.

Analysis and decision

In light of the considerable amount of evidence given in this case extending over a period of nearly 20 years including expert evidence relative to the period from 1981 to 1992, it is important to focus on the fact that the period in question in this appeal is for the taxation years 1986, 1987 and 1988, not unmindful, of course, of the history of the operation from its conception.

It must also be remembered that the main consideration is not whether there was a reasonable expectation of profit in those years, as that has already been conceded by the Minister in allowing limited farm losses, but whether or not in those years the appellant's chief source of income was farming or a combination of farming and some other source of income as those terms have been interpreted.

The respondent suggests that the meaning to be given to those words under section 31 of the Act is not ambiguous, is plain and is open to only one meaning. I must confess that at first glance the words chief source of income rather than chief sources of income, or one of the chief sources of income, when referring to more than one source appears to me to be rather ambig- uous. The number of cases dealing with its meaning appear to indicate that the phrase is incapable of precise definition and involves more of a consideration of a number of different factors, which might include gross income, net income, capital investment, cost flow, personal involvement, centre or work routine, occupational change and significant profitability.

If anything is clear it is the fact that the cases have not followed a consistent pattern and it is a question of fact to be decided by the Court based upon all of the evidence. The critical question of whether farming or farming in combination with some other source was the appellants chief source of income during the taxation years in question was considered to be a difficult question by Ryan, J. in the Federal Court of Appeal in Moldowan v. M.N.R., [1975] C.T.C. 323, 75 D.T.C. 5216 [aff'd [1978] 1 S.C.R. 480, [1978] C.T.C. 310, 77 D.T.C. 5213] at page 333 (D.T.C. 5219) and he offered some guidance as to what that phrase entailed when he said:

In my opinion an appropriate path to a resolution of this difficult problem is to give significant attention to the taxpayer's ongoing income-earning activities in a practical and businesslike way and in this way to determine which of the taxpayer's sources of income, in the ordinary run of his affairs, but taking account of his plans and his activities in implementation of his plans, is the chief source of his income in the sense of its usual or its foreseeable profitability or of both. In seeking an answer, gross income, net income, capital investment, cash flow, personal involvement, and other factors may be relevant considerations.

[Emphasis added.]

Some further guidance was provided by Strayer, J. in Mohl, supra, at page 428 (D.T.C. 5238-39), where he said:

It now appears clear from the Supreme Court decision in Moldowan, supra, as recently interpreted by the Federal Court of Appeal in Morrissey, supra, that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term “ significantly profitable” because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a “ sideline business” to which the restriction on losses will apply in accordance with subsection 31(1).

Bearing in mind the above considerations, the question in this case is therefore, has the appellant established on a balance of probabilities, that farming was a chief source of income in the taxation years 1986, 1987 and 1988?

To satisfy the requirements referred to above the appellant relies upon his own evidence, buttressed as he indicates, by the expert opinion of Donald Lester Hoover as an agronomist and expert in farm economics and the material reproduced in the report. His evidence, and to a lesser extent the evidence of Mr. Barry Francis Sittler as to the amount of time spent at “Gemco” after 1986, he concludes confirms that after that date he had moved from a Class 2 farmer to a Class 1 farmer as those terms are referred to in Moldowan, supra. The main thrust of his argument is that farming had now become the centre of his work routine, he was spending 40 hours a week on the farm, he had changed his occupational direction and he was now a full-time farmer.

On the question of the amount of time spent on the farm in the years in question there is conflicting evidence as well as to how much time he spent at "Gemco". The evidence of the appellant on that matter was from memory only and he produced no records in support of that position. The Court is satisfied in any event that he spent more time at“ Gemco” than he had initially indicated and certainly more than the agreement called for and this was certainly true of the early part of 1986. The evidence of Mr. Sittler also confirms this and even then his evidence was only based upon recollection and obviously bearing in mind what was called for in the agreement. Again, that witness would have no idea of what the appellant was doing when away from "Gem co".

The evidence is also conflicting as to how much time the appellant spent on the farm after 1986 and it went from a high of 40 hours per week to a low of 20 hours per week according to the testimony of Mr. Sewlal. In any event, no evidence suggests that he ever spent more than eight hours a day there and one would have to wonder if this amount would be sufficient in light of the many problems the operation had to contend with.

The appellant maintained that he had changed his work routine and that farming was the focus of his attention in the years in question and yet even then he made no financial forecast as to when he might break even, or as to what the operation might entail or the additional costs associated with the separation of the farms as well as the other special problems associated with his operation.

The Court is unable to determine from the evidence what specific tasks the appellant performed daily that would require eight hours of work by him and one would think that that would be a fairly easy task even from memory if it were done on a regular and ongoing basis.

The Court is not satisfied on the evidence before me that the appellant's operation in the years in question, including the breeding operation and the backgrounding operation required the amounts of time that the appellant indicates he put it into it, bearing in mind the size of the operation, the breeding program, the existence of the permanent structures on the farm and the fact that in the winter months there would not even be the travelling factor between the two farms.

The appellant argues that the expert evidence confirms that he acted in a reasonable and businesslike way in an attempt to realize his profit projection made in 1986. However, an expert's opinion is only as good as the information upon which it is based, and if that information is not accurate, is incomplete, is based upon mere supposition and fails to take into account very relevant factors such as interest, non-current expenses, depreciation and the backgrounding operation, even if it might not be expected to change the overall picture significantly, then the weight to be given to the report in the context of a case such as this is significantly reduced.

The information upon which the expert based his opinion was mostly of a hearsay nature provided by the appellant. There were no supporting records and indeed the information relied upon by the expert was at times at variance with the evidence given by the appellant himself. It is clear from the evidence that the expert based his opinion upon a set of conditions which did not exist here. The Court is satisfied that the appellant's farm operation in the years in question were not “the typical farm” as envisaged by the expert and consequently the opinion is to be given little weight on the question of profitability in the years in question.

It is noteworthy that the farm operation of the appellant that is the basis of this appeal, was not even in existence when the report was prepared, that the expert only looked at the situs from the roadway and all his factual information about it came from the appellant himself, mostly from memory, which facts often times prove to be inaccurate. Further, the Court finds that the projections made for the present operation are of little value in considering a profitability in the 1986, 1987 and 1988 operation because by that time the appellant had an essentially different operation in almost every respect.

The Court does not accept the appellant's argument that his efforts were frustrated by events which were beyond his control. Almost without exception these factors were clearly predictable rather than “only becoming apparent with hindsight” as the appellant suggested.

The appellant had been involved in some form of farming endeavour since 1972 and claimed limited farm losses which were allowed up to 1986 and there is no evidence that he took any reasonable steps to turn the operation around until 1989 when he sold his two properties. The Court fails to see how such action could reasonably be considered to be "proactive steps, instituted in a business-like manner and reasonably calculated to overcome the so-called frustrating events which were present in the years under appeal" as the appellant suggests. It is of no avail to the appellant to argue that all of these problems and the negative financial results that they created were start-up costs because if you were a Class 1 farmer, full start-up costs would be allowed in any event.

The Court cannot accept the appellant's argument that the proper interpretation of Moldowan, supra, is “that the level of actual or potential profitability which the taxpayer must demonstrate for the farm under review should bear some relation to the profits which can reasonably and objectively be derived from a farming operation of that size and type”. I am sure that is not the type of "objectivity" that the Court had in mind in Moldowan, supra.

Unlike the cases of Twigg and Cocks, supra, the Court is unable to conclude that the appellant devoted the vast majority of his energy to the farming operation. Unlike Morrissey and Graham, supra, the Court is unable to conclude that the appellant, during the years in question, might reasonably have expected his farm operation to provide the bulk of his income nor was it the centre of his work routine.

As in Mohl, supra, the Court finds that farming was nothing more than a sideline business for the appellant and profits if at all realized would be nothing more than modest in terms of the other sources of his income. As in the case of The Queen v. Connell, [1992] 1 C.T.C. 181, 92 D.T.C. 6134 (F.C.A.) and Masson v. M.N.R., [1987] 2 C.T.C. 2186, 87 D.T.C. 515 (T.C.C.), there is no concrete evidence or detailed analysis of when the appellant expected to make a profit or how he expected to do it in the years in question, if he ever directed his mind to the question of profit until the year 1989 when he essentially started a new operation. I sincerely doubt that he had anything else in mind but except “to run a few cows or calves or whatever he could that would eat the grass and try to make some money out of it,” as he indicated when he first became interested in farming.

The Court is not satisfied that the appellant has met the burden of proving that farming or a combination of farming and some other source of income was his chief source of income for the years 1986, 1987 and 1988 and the appeals are hereby dismissed.

Appeals dismissed.