Clarence Cocks v. Minister of National Revenue, [1991] 2 CTC 2023, 91 DTC 688

Margeson, T.C.J.:—The present appeal concerns only the question of whether or not the appellant's chief source of income during the taxation years 1985 and 1986 was farming, or a combination of farming and some other source of income. If it is not, then the taxpayer is limited in those years to deduct losses 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") otherwise he may deduct full losses in those years as he claimed in his return.

Initially, there were 15 other separate issues representing disallowances by the Minister for items of expense, additions by the Minister to income or disallowance of capital cost allowances claimed by the appellant. All of these items by agreement are resolved in favour of the Minister and the appeal with regard to them is dismissed.

Facts

The appellant, Clarence Cocks, resides two miles north of Renwer in the Province of Manitoba on farm property. He comes from a farming background. He worked on the farm until June 2,1966 when he went to work with a drilling company. He was 22 at the time. While on the farm, he did most kinds of farm work during the farming season and in the winter cut pulp to supplement the farm income as most farmers had to do. His work in drilling was with Midwest Drilling. He started at the bottom in the industry and worked his way up from driller to foreman and to superintendent by 1979. He worked at drilling for 12 months of the year at that time except for holidays. He owned some farm land during that period of time and carried on a part-time farming operation and again did all the usual work of a farmer, including clearing, fencing, rock picking, seeding and harvesting. During the years 1982, 1983 and 1984, he incurred farm losses and reported them as restricted farm losses in his returns and these were allowed.

In 1984, the appellant asked to be demoted to the position of foreman so that he could spend more time in his farming operation. He said by taking this course of action he could spend as much time as he wanted and needed at home. Prior to 1984, the appellant said he spent more time at drilling than at farming but from that point on he spent more time in farming than in drilling. He says he discussed with his accountant in 1985, his intention about claiming full losses and his accountant told him he could as he then considered he was entitled to do so because he was spending more time in farming than in drilling.

The appellant continued to live on the farm and had a Canadian Wheat Board Producer's Permit Book, took out crop insurance and had certificates of seeded crop areas. He leased some land and owned some, all farmland. By 1985, he had four quarters in operation, three of which were leased and one was owned by him. This was the same situation in 1986. All the land was within five miles of his home quarter.

The appellant obtained a full line of grain farming equipment and had all he needed to carry on a full-time operation. By the end of 1985 he had invested $155,000 in equipment and $26,000 in land. He would get home to the farm by the first week in April and get the farm work done, crops planted, etc. and said that his money would run out and he would go back to the drilling for five to six weeks and then return to the farm in mid-August to get ready for harvesting. His position was that he worked at the farm whenever he wanted to. He would go drilling for six weeks and if he had to come out, he did. He would not go drilling in the Spring and would not go back until he was ready. He said that in 1985 he spent 15 to 16 hours on the farm and only eight hours a day drilling when he worked. He also said that he would only work up to six weeks drilling and then return to the farm for a week. In 1985, he worked part of November, December, January, February, March and April at drilling. In 1985, he seeded wheat and oats, had an average crop and had grain to store after his quotas were filled. He was working four quarters of land at that time.

By 1986, the appellant said that he had $158,000 in buildings and equipment plus the value of his land. The year 1986 was much like 1985 he said. He came to the farm the first week in April. According to him, it was a very wet Spring that year and he used a lot of fertilizer and tried out a new crop. The first week of July, he went back to Midwest Drilling after his farm work was done. He came back about August 15 or 20 and got his machinery ready. It turned out to be a very wet year and ultimately he went back to the drilling to get more money because he could not keep up his bank payments. The farm took the bulk of his hours in 1986 as well and at no time was he employed full-time by the drilling company.

Between 1987 and 1989, he expanded his operations and had $250,000 invested in farming including land. He bought another quarter for $24,000. In 1988 and 1989 he never went drilling at all in the summer. Farming took up more of his time.

He indicated he has qualified for grain deficiency payments and reported a net farming profit in 1989. He confirmed Exhibit A-25 which was a Summary of Farm & Employment Income between 1985 and 1989 but indicated there would be small differences in total. The position of the appellant was that he would stay on the farm and give up the drilling completely once he got his bank loan paid off. He said he intends to stay on the farm in three years' time when the mortgage is paid off. By 1990, he was working nine quarters of land.

In cross-examination, the appellant said he had a goal in mind and that was to get himself set up in farming to make a decent living without going to work at drilling. He was asked about the kind of land he had and it was obvious from his answers that he knew the kind of land well and considered it satisfactory for his intended operations. He felt he had sufficient experience in farming to make it work and felt that his kind of operation would be the most successful on that type of land. He said there were a few straight grain farmers there and they were making a good living. He relied on his own judgment.

The position of the appellant was that in 1985 he rearranged his time, his hours and his direction in life and obviously felt he was involved full-time in farming. He took on more land, committed more time to the operation and committed more equipment to it. He reiterated that once the bank interest was down he would make a profit. He agreed that in 1985, even without the interest, there would be no profit if you took into account depreciation. He felt he was at no greater risk from leasing than from owning land and indeed he felt the way to make more profit was to lease rather than buy land, especially if he had to borrow money to buy the land and he did not intend to do that. Further, he wanted more land so as to fully utilize his equipment.

His farming income was over $60,000 in 1989 and he was unable to answer whether he would be able to gross more than that in the future and did not have his 1990 results available. He was asked whether or not he could calculate how much he could make and he said he could not and that depended upon prices and other factors, but it is obvious that his position was that he could make a good living from his operation.

He confirmed that he would like to work 12 quarters of land and summerfallow three to four quarters and by such an operation, he would also save on fertilizer. In 1985 and 1986, his plan was to work 12 quarters in due course, he feels it will be two years before he reaches 12 quarters.

Appellant's Position

The appellant says that he has shown that he is a full-time farmer, that his appeal should be allowed and he should not be restricted to claiming subsec- tion 31(1) losses. He says that farming is his chief source of income and that he comes within Class I as set out in Moldowan v. M.N.R., [1977] C.T.C. 310; 77 D.T.C. 5213. He says that farming was the centre of his work and provided his chief source of income. He says that when you consider the requisite elements

(1) time spent, (2) capital commitment, (3) profitability, that he qualifies in all respects.

The appellant argues that there is significant evidence to establish profitability here, both actual and potential. If you discount interest and depreciation, it is a profitable business. He says in three years' time when the loans are paid off, the business will be profitable and he intends to rely solely on farming for his income.

The appellant regards 1985 as a pivotal year. Before that,he was a part-time farmer by his own estimation and then he became a full-time farmer, that was his plan and his course of action. He says he did the right thing. He spent more time on the farm, got more land and equipment and had a change of occupational direction. The appellant says the evidence shows the Minister's assumptions were wrong in describing him as a full-time employee at the Midwest Drilling Company. He sought accounting advice, he had an objective to give up non-farming work. He says section 31 is not directed at people like him, he has not abused this section, his intention is to make farming his sole occupation. He refers to Raymond Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 and says that the line of judicial decisions allows full deductions in facts similar to his. He is eligible for crop insurance, deficiency payments and is considered by other governmental bodies to be a full-time farmer and should be considered to be such under the Income Tax Act.

Respondent's Position

The respondent argues that the most important case is Morrissey, supra, which brought to a head the criteria set out in Moldowan, supra and set out how we are to apply the principles set out in Moldowan. He argues that before Morrissey, supra, the Courts were concluding that once you decided it was the centre of his work, then you could conclude that farming was his chief source of income, but Morrissey says at page 242 (D.T.C. 5084) that you must go one step further and show profitability. Notwithstanding the amount of time spent in farming and the capital investment, you must go one step further and find profitability. Further, he says that this requirement is significant and refers to pages 427-28 (D.T.C. 5238-5239) of Mohl v. Canada, [1989] 1 C.T.C. 425; 89 D.T.C. 5237 which points up the requirement for profitability—actual or potential and he says we do not have that in this case.

The respondent agrees that the appellant had a profit one year but that is not enough. He says that there should be more evidence of profitability. He argues that one needs some way of correlating the time, effort and capital expenditure to the end product as to what it is capable of producing. He says that it need not be expert evidence but it might be, but there should be some evidence to show that it would be significantly profitable and when it would be significantly profitable.

The respondent, for his part, agrees that we have some evidence in that regard in this case where Mr. Cocks refers to the paying down of the interest but he says that is only one factor. The Minister feels the profitability must be considered after capital depreciation as shown in Moldowan at page 313 (D.T.C. 5215) (although he agrees that Moldowan was considered on the basis of reasonable expectation of profit before Morrissey).

The respondent argues that the appellant is not assisted by his argument that he did not inherit the land, that he could not afford to buy it outright and that because of bank charges, he found it more difficult to make a profit. Those are factors he must consider before going into farming and are part of the formula in determining if there is a possibility of significant profitability. He admits that if Mr. Cocks continues to expand his operation, there will be another factor added towards more profitability. That is only another factor he says.

Analysis and Decision

In the appellant's argument before me it was argued that section 31 is not directed at people like him, that he had not abused section 31 and that he intended to make farming his sole occupation in the future. I do not see how the reference to abuse abets his position any as the case before me must be decided on the facts as disclosed in reference particularly to the years in question, not unmindful of course of the history of the operation and its future possibilities.

It has been stated that the purpose of section 31 is to place a limit on the amount by which a taxpayer's income from all other sources may be reduced by losses suffered as a result of his carrying on farming operations as a secondary source of income, and where farming activities are nothing more than hobbies or pastimes and clearly lack commercial inspiration, to disallow such losses as against other income. It seems to me that Moldowan v. The Queen, supra, clearly follows this conception when it sets out three classes of farm operations. The difficulty in this case as in many others normally arises in distinguishing the appellant as an appropriate Class I or Class II farmer.

In this case I think the question is the same. Does the appellant fall within Class I or Class II set out in Moldowan, supra? The answer must be found on a consideration of all relevant factors including gross income, net income, capital investment, cost flow, personal involvement, centre of work routine and occupational change. Further, it must be considered on the basis of Moldowan, supra, in light of Morrissey, supra, Mohl, supra, and The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256. In order for the appellant to succeed here there must be "significant profitability” potential and the appellant should be able to look to farming as his chief means of support or livelihood.

The only evidence before me on any of the above-mentioned requirements is that of the taxpayer himself and most of his evidence stands unrebutted. The only question remaining is whether or not this evidence adduced is sufficient to meet the burden on the appellant, on the balance of probabilities, when one administers the tests above referred to.

The respondent takes the position that there has not been sufficient evidence of "profitability". He agrees that there is evidence advanced by the appellant that he expects to be profitable when he gets the bank loan paid off, when he leases more land, when he ceases to work any part of his time in drilling, that he showed a profit in one year, that he has good knowledge of his land and that the appellant feels it reasonable for him to be able to look to it in the future as his chief source of income and livelihood and he does.

There is certainly no expert evidence before me such that when one correlates all the indications of time spent, effort administered, capital input, capital depreciation, interest charges and other contingencies that the end product would be a viable and significantly profitable operation. The respondent is not suggesting that there need be such expert evidence but he suggests that there should be adduced some evidence to the same effect.

The case was not raised by either parties here but this issue was considered in the case of Campbell v. M.N.R, [1988] 1 C.T.C. 2232; 88 D.T.C. 1156 where the full amount of farm losses were allowed by the Tax Court of Canada. In concluding that farming was the taxpayer's chief source of income, the Court placed great emphasis on the report of an agricultural economics expert stating that it is possible to operate a normal sized successful farm operation and maintain outside employment over 50 hours per week. In the case at bar it certainly would have been helpful to have such expert evidence but we do not. All evidence of that nature is derived from the appellant himself, and it is not rebutted. Consequently, the Court is left only with that evidence to consider under all the circumstances as they exist here.

I am satisfied on the balance of probabilities that during the years in question, 1985, 1986, the appellant had made a commitment to make farming his main occupation, the centre of his work routine, the bulk of his time was spent in farming and what time he could spare from his farm was spent in drilling, chiefly to augment his farm income. He had invested substantially in farm equipment, had a considerable knowledge of farming and had developed considerable skill over the years in relation to farming. His knowledge of the land that he was working was considerable, not only from having worked the land as a part-time farmer over the years but also from information he had received from other farmers in the area who had successful farm operations on that kind of land. He believed that he knew what it took to develop a successful and profitable farm operation and he felt that he either had it or surely would very soon.

On the question of profitability the closest evidence we have to that of an expert is the appellant himself who although not qualified as an expert, certainly showed that he had considerable skill and knowledge about what a successful farm operation required and when pressed by the respondent, was certain that his operation would meet the test.

Considering all the evidence before me, the requirements as set out by the relevant cases, the credibility of the witnesses, the arguments of counsel, relating particularly to the years in question, not unmindful of the history of the operation and its future possibilities, and limiting my conclusions to the factual situation of this case, as the learned trial judge found in The Queen v. Graham, supra, reconsidered and upheld by the Federal Court of Appeal, I find that the appellant might reasonably expect his farming operation to "provide the bulk of his income" and it most certainly was "the centre of work routine”.

I find that in the years 1985 and 1986, the appellant fell within Class I as set out in Moldowan, supra and is entitled to full farm loss deductions for those years. The appeal in that regard is allowed and the matter referred back to the Minister for reconsideration and reassessment based upon these findings.

The appellant has by and large been successful in the appeal and therefore will be allowed his party-and-party costs to be taxed.

Appeal allowed.