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.