Patrick J.A. Daniel and Jean M. Daniel v. Minister of National Revenue, [1991] 2 CTC 2119, 91 DTC 897

Taylor, T.CJ.:— These are appeals heard on common evidence in Toronto, Ontario on February 26, 1991 against income tax assessments for the years 1984, 1985, 1986 and 1987 in the case of Patrick Daniel and the year 1987 for Jean Daniel. The matter at issue is the disallowance by the respondent of full farming losses claimed as follows:

One half of the 1987 loss ($5,111) was claimed on behalf of Jean Daniel, the balance of that year and all of the other years was claimed by Patrick Daniel in both cases against substantial other investment and pension income. For the year 1987 a parcel of land of 200 acres of land was purchased in the name of Jean Daniel adjacent to the first farm property of 140 acres which was held in the name of Patrick Daniel. It was the contention for the year 1987 that the two parcels of land should be combined into one farm for income tax purposes, and operated as a partnership from then on between the two appellants—a proposition which the respondent apparently accepted.

One item of evidence submitted by the appellants did extend the farm income and expense picture for the years 1988, 1989 and 1990 (projected). The operating results were (losses):

Analysis

First I shall deal with the apparent dramatic "improvement" in the loss between 1986 and 1987 (reduction from $25,318 to $10,223 above). It resulted largely from the sale of hay and straw stored from 1986 and from sale of wood from the "new" 200-acre additional farm and from property tax rebates. The fact that it is illusory is demonstrated by the upswing in the increased losses for 1988 and 1989 above. I am not prepared on the basis of accumulated losses of $124,303 for the six years, 1984 through 1989, to regard the projected loss of $1,710 for 1990 as the "proof" that there was a reasonable expectation of profit in the years under appeal.

In this matter, the respondent has assessed based on the view that the operation of the farm did not meet the necessary criteria establishing that there was "reasonable expectation of profit”. In light of the history of the farm from 1971 through 1983, during which period Mr. Daniel was a one-sixth proprietor (before he purchased the entire property)—there were virtually uninterrupted losses—that would seem to be a correct position for the respondent to take. The record of the farm for the years 1984 through 1987 continued with substantially increased losses. There would seem to be little to support these appeals for those years by Mr. Daniel, and the proposition by counsel for the appellant that somehow adding the adjacent 200 acres of property to the original "farm" increased the viability of the original farm is simply without any foundation and is rejected. The fact that the appellants, commencing for the year 1987, "entered into an agreement to operate the farm and the adjoining land as equal partners" has no bearing on the issue before the Court. The adjoining land had no separate profitability potential—at least none was demonstrated to the Court—so the issue is whether there is any reason—other than the substantial loss results over a period of some 17 years, 1971 to 1987—which should be taken into account in a determination of the issue. Counsel for the appellants put forward several points which he regarded as substantive. In these, the thread of comments and opinions expressed in many judgments of the Court commencing with Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 could be seen—the devotion of the farm, the hard work, the investment, etc. In my view the signal case of Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, dealt with a section 31 assessment—and the issue there was chief source of income—simply put, the appellants, appealed for deduction of full farming losses as opposed to the restricted farm loss of $5,000 already granted by the respondent. It was the contention of counsel for the appellants in this matter that such case law had little, if any, relevance in these appeals. I do not agree. The claim of these appellants is for deduction of the total losses—and that amounts to the same thing as “chief source of income" in my view and I do not see how the claim of an appellant for the full farming losses is different when the respondent has granted the restricted farm loss, as contrasted with a situation as in this case when the respondent has refused any such concession.

There were two other arguments raised by counsel for the appellants. First that they changed "direction" when they retired, started to live on the farm in 1984, and "worked it” on a full-time basis. Counsel’s argument from that is that the appellants should be entitled to start-up costs as detailed in Moldowan, supra. I do not agree. The question of start-up costs was addressed in detail in McClure v. M.N.R., [1988] 2 C.T.C. 2140; 88 D.T.C. 1504 and I am not persuaded that the use of that term in Moldowan, supra, can be superimposed on the circumstances of this case.

The other point raised was that these appellants should be entitled to combine their incomes, including the losses from the farm, as described in Moldowan, supra, on page 315 (D.T.C. 5216:

The reference in subsection 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000.

I do not agree. As I see it, the learned justice in Moldowan, supra, in the same context and on 314 (D.T.C. 5216) made the situation quite clear:

It is clear that “combination” in section 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think subsection 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

But irrespective of that clear direction, the fact is that counsel for the appellants is looking at the operation of the farm during the years in question as a "source of income" which it was not. A “source of income" for a farm designates it as a "business" and a "business" must have a “reasonable expectation of profit". There has been nothing demonstrated which would provide viable assurance of such a profit.

In my opinion these appellants had as their respective sources of income— the funds earned from interest and dividends on investments. The farming operation fits compeltely into category 3 as outlined in Moldowan, supra, and the losses therefrom can have no value to them as a reduction of the regular income tax impact arising out of that source—the only source—the investment and pension income. The appeals are dismissed.

Appeal Dismissed.