Mark Harding v. Minister of National Revenue, [1990] 1 CTC 2322, 90 DTC 1169

Sarchuk, T.C.J.:—Mark Harding appeals from reassessments made by the respondent with respect to his 1979 to 1985 taxation years inclusive. Initially a number of issues were before me; however the parties have consented to judgment being issued by this Court with the result that all contentious matters but one have been determined. With respect to the remaining issue, the appellant, in calculating his taxable income for the years 1980 to 1985, deducted full farm losses. The respondent disallowed the losses as declared by the appellant and allowed losses in accordance with the provisions of section 31 of the Income Tax Act (the Act). The appellant contends the respondent erred in assuming that in the taxation years in issue his chief source of income was neither farming nor a combination of farming and some other source of income.

Evidence was given on behalf of the appellant by his brother, Grant Harding; Mr. Gerald Miller (Miller) and Mr. R.A. Schoney (Schoney).

Mark Harding also testified. He is a 38-year-old businessman and until recently was vice-president in charge of production for Harding Industries Limited (Industries). Initially established by the appellant's father, Industries was purchased in 1974 by the appellant, his brother and by Mr. Morris Zuk, each acquiring a one third interest. The company enjoys an excellent reputation in the sheet metal fabrication business. At all relevant times the appellant was also the owner of a one-third interest in M.G.M. Holdings, a company which was for the most part involved in real estate and, among other things, was Industries’ landlord. During the years in issue the appellant was also involved in other real estate investments in Phoenix, Arizona and apartment blocks and a shopping centre in Saskatoon.

The appellant began working at Industries upon leaving high school. Other than the fact that his mother came from a “farm background”, prior to the commencement of his cattle operation he had no farm experience whatsoever. However he asserts that he has had a lifelong dream to become involved in the farming business. In 1975 Harding purchased 80 acres of land 14 miles from Saskatoon on which site he built a home for his family. No steps were taken to begin farming at that time.

In or about 1980 the appellant was introduced by one of his neighbours to Miller, a businessman/farmer who, among his many interests, was co-owner and president of Miller Bros. Running MB Stock Farm Inc. (Miller farm). This business specialized in the production and marketing of Chianina cattle. The appellant spent considerable time at the Miller farm, became interested in this breed and following a number of discussions with Miller, decided to become involved in breeding Chianina. To that end he sought and obtained Miller's assistance in the acquisition of some stock. His first purchases were made at the Chianina Sale of Champions held in Saskatoon in 1980 and consisted of 12 head (cows and heifers; some full-blood and some cross-breds). [1] The total cost of $61,600 was financed by Harding personally. These cattle were initially boarded at the Miller farm since the appellant's property did not have the necessary facilities or shelter. It was understood that this arrangement was to remain in place until such time as the appellant's farm property was expanded and put into suitable condition for the proposed breeding operation. Miller was also involved in an embryo transfer program and this service as well as artificial insemination was provided to the appellant's cattle.

Mark Harding made no formal or written projections at the time he decided to commence breeding Chianina cattle. It appears fair to say that he was most influenced by Mr. Miller who was himself in the business of buying and selling Chianina cattle and who, I might add, had a vested interest in promoting this breed. He accepted Miller’s view that Chianina had the potential of being accepted in the commercial industry. The cattle were described by the appellant as a very large breed, originally Italian, first introduced into Canada in the early 19705. He was led to believe that they made swift inroads into the Canadian beef industry, particularly because of their ability to gain weight, their meat production and the leanness of the product. He says that he realized that entry into the cattle business would be difficult and that the best route was through the breeding of purebreds, since it was initially cheaper and it required less land. In so far as the downside was concerned he understood that the quality constraints were greater and that in terms of market value one could expect greater swings. However based on his review of Chianina Association data in 1979 and 1980 he concluded that as a business it looked stable and he believed that the projections were good. He did not particularly view this as a high risk project nor would he categorize his venture as speculative, stating that he did not foresee any difficulties, believing that the growth potential of Chianina breeding was fairly good.

Of the original 80 acres of farmland purchased by Harding five acres were dedicated to the family residence. Following the decision to jump into the cattle business he proceeded to have the balance of the acreage fenced. Open acreage was seeded to feed crop. In 1983 the appellant purchased an adjoining 70 acres of land. In that year it was refenced, cattle shelters, corrals and a handling system were constructed. A new well was dug and a new power system installed.

The appellant continued to build up his inventory of cattle by way of breeding and purchases. Additional cattle were purchased in 1981 and 1982 at a cost of $20,500 and $44,900 respectively. Further purchases were made in 1983 and 1984 (cost unknown). A modest number of sales took place in these years as well. The high point was reached in 1984 when the total inventory at the end of the year stood at 51 animals. By 1984 the appellant kept a substantial portion of his cattle on his own farms. However the expensive full-bloods and those on a transplant program remained at the Miller farm. No further purchases were made thereafter; the number of calves born declined and the cattle were slowly sold as market conditions permitted and by year-end 1989 the appellant's Chianina cattle operation had ceased to exist.

According to the appellant in the latter part of 1984 there was a decrease in cattle prices generally while concurrently feed prices and other costs rose. He described the Chianina cattle business as “a little shaky". By 1985 it was his recollection that they were suffering more than other breeds. In that year Miller’s Chianina operation went into receivership. Since he was a major player in Chianina breeding his business difficulties had an adverse effect on the whole of the Chianina industry.

In October 1985 the appellant's business associate Morris Zuk died and it became necessary for the appellant to devote more time to Industry's business. Concurrently other people in the cattle business were reducing their operations and, according to the appellant, he considered his position and took a decision "to stabilize and to reduce his herd". When the outlook did not improve in 1986 and the Chianina cattle industry did not appear to have weathered the storm particularly well the appellant concluded that it would be a long time before the situation would turn around and in the interim the losses would be too great to warrant continuing with the project. He decided to sell his herd and in 1986 and 1987 disposed of the bulk of his inventory. In 1988 the appellant sold the farm and the family residence.

The appellant made most of his major capital expenditures on a cash basis. He did not require bank financing and chose not to use it other than for a modest operating line of credit. The value of the farm assets in the years 1980 to 1985 as calculated by the appellant are set out in Exhibit A-10 as follows:

The value attributed to the cattle inventory is Harding's estimate of approximate value based on ”. . . the sales that I purchased the animals at, and what the sales were going at on average at that point in time for those type of animals." According to Schoney's report the value of the “total long term assets” for 1980, 1981 and 1982 reflect the value in each year of the original 80 acres. This was calculated by reference to the 1983 value of $44,250 and indexed backwards by the average of all Saskatchewan land values. This did not show up in the accountant's list of assets until 1983.

The appellant described his personal involvement in the cattle operation as differing in time expended and intensity over the years. During the first three years when his cattle were boarded at the Miller farm he and his wife spent a reasonable amount of time there to learn as much as they could about the business. In 1981 and 1982, the appellant and his wife joined the Saskatchewan and Canadian Chianina Associations as well as the American Chianina Association. They attended a number of cattle shows and became personally involved in making further purchases. He asserts that sales were made as a result of his membership in these organizations and from the showing of his cattle. The appellant also increased his involvement on his own farm property, spending more time in upgrading and preparing it for his cattle. In 1982 and 1983 they became more actively involved in showing their cattle. In 1983 when the additional 70 acres were purchased the appellant did most of the work; fencing and constructing the necessary handling facilities himself. During the next two years, 1984 and 1985, the herd was at its maximum with most of the cattle located on the appellant's farm. He asserts that the amount of time he spent on farm activities in those years was substantially greater. The third stage encompassed the years 1986 to 1989 following the death of Morris Zuk and the appellant's decision to discontinue the Chianina breeding operation. These years are not in issue and his involvement was directed to an orderly-disposition of the inventory and the closing out of the operation. The Court was provided with a retrospective “estimated time log” to demonstrate the appellant's gradual change of occupational direction and his commitment to farming (Exhibit A-11).

The appellant testified that although it was necessary to rely on employment income in order to finance his farm investment, it was his intention to devote the majority of his time to the business of farming and his plans were well underway until interrupted in part by market conditions and in part by the demise of Morris Zuk. The appellant concedes that he had substantial employment earnings from Harding Industries, M.G.M. Holdings and other sources in the taxation years in issue as shown in this summary filed as Exhibit A-13:

Mr. Gerald Edward Miller (Miller) earned a Bachelor of Science (Agriculture) degree from the University of Saskatchewan in 1969. He had been involved in Miller Bros. Feed Lot Co. Ltd., a family business, prior to that time and then from 1969 to 1978 he managed some of its operations. In 1978 he became coowner and president of Millers Bros. Running M.B. Stock Farm Inc. which carried on the business of production and marketing of Chianina seed stock. This company was placed in bankruptcy in 1985. In that same year he became the owner/manager of Dusty Rose Stock Farm Inc. which carries on business as a producer and marketer of purebred livestock including Chianina, Red Angus, Black Angus and Charolais. In 1987 Miller was employed as a manufacturer's representative by W.W. Manufacturing of Canada Ltd. and since that time has been responsible for sales and service of livestock handling equipment in Saskatchewan, Manitoba, North Dakota and South Dakota. Over the years he has been actively involved in the Saskatchewan, Canadian and American Chianina Associations; the Brown Swiss Association and with Canadian Western Agribition. He was presented to the Court as an expert in the purebred cattle industry with particular knowledge of the Canadian Chianina breed.

The testimony elicited from Miller took the form of a somewhat discursive dissertation on purebred merchandising from which I extract the following relevant facts. Chianina cattle were first introduced into Canada from Italy in 1971. They were intended to be marketed both as purebreds and as a breeding technique to be utilized to upgrade other breeds. The latter practice, in due course, would provide seven different merchandise bull options within the Chianina breed, being: full-bloods; upgraded white purebreds; upgraded black purebreds, percentage white purebreds, percentage black purebreds, Hereford cross-breds and by introducing the Maine-Anjou breed into the Chianina stock, Maine cross-breds. If I understood the thrust of Mr. Miller's testimony all breed associations in order to promote their breed and to get larger memberships and greater registrations, utilized the concept whereby their associations “would offer recordation of these part bloods". What effect these marketing stratagems had on the cattle industry generally or on prices and how this impacted on the appellant's operation is most decidedly unclear from Miller’s testimony.

With respect to 1980, the year in which the appellant entered the cattle industry, Miller’s view was that prospects were "nothing less than excellent” since sales were high and Chianina were doing very well in comparison to other breeds. He testified that:

We had respect within the commercial industry. . .we had been showing extensively across Canada. We were well recognized in as far as price levels were concerned. Nobody at that time was indicating anything but an expansion with regard to prices, and then acceleration of prices.

The market for Chianina cattle at this time consisted of the purebred seed stock market, that is other purebred breeders in the Chianina industry; the commercial industry, being farmers and ranchers who utilized Chianina bulls to produce offspring for the feed lot and slaughter business, and lastly the culls which were sold to the markets for slaughter. Of these the purebred was the key market and according to Miller at that time, that is in the early 1980s, it was still developing respect and acceptability in the cattle industry. As to the prices of Chianina cattle in 1980 the test they had:

. . . just come out of the late 70’s when everything was on a wild type swing and prices were escalating and had escalated into the 80's. . .the Chianina cattle specifically had a price levels [sic] where we saw some little increases from 80 to 81 to 82, somewhere in there, but definitely in 83 right down to 85 they not only fell, they absolutely plummeted whereby we saw purebred cattle that at one time were worth, as an example, $10,000.00 go right to a value of $ 1,500.00 to $2,000.00.

Miller produced a single page graphic analysis of Chianina female sales averages in the United States which, according to him, reflected and paralleled Canadian sales and price experiences from 1980 to 1988.

When asked by appellant’s counsel to express an opinion as to the reason for the fluctuation in prices concerning Chianina cattle during this period he discussed marketing including presentation, cross-breeding, breed association stratagems, maintaining customer interest, but failed to directly respond to counsel's question. He did say that the Miller farm was placed in receivership by the bank because it had lost total confidence in the Chianina industry. Miller added that in 1985 the sales of Chianina cattle plummeted and this did not allow breeders the opportunity of getting any return back on their investment as a result of which many elected to go into other breeds. His own operation, when resurrected as Dusty Rose Stock Farm Inc., was directed towards the breeding of Charolais cattle.

When counsel for the appellant asked Miller to assume the existence of constant economic factors and in that context to describe for the Court the ingredients necessary to establish a successful purebred operation, he outlined the following: the acquisition of a select line of livestock of the purebred product either by sale or by breeding, for example through embryo transfers; the facilities to house the inventory properly, taking into account that purebred facilities must be a little more involved since the purebred industry requires more intensive management; and in addition the desired commitment and proper record keeping, both for the purposes of registration and recording of performance. Forming part of the intensive management is the proper presentation of animals, halter breaking, washing, grooming, all of which was designed to develop an image of a purebred breeder whose product is top quality. It was his view that with proper management a reasonable start-up for a purebred cattle operation was between three and five years. When specifically asked about the appellant's farming operation he ventured the following:

Well, the opinion that I would put forth is this, that Mark Harding definitely, through acquisition of cattle, both from our operation and other sources, that being other production sales, and sales where I know he bought cattle, the application of the genetics and the use of artificial insemination, embryo transfer. All of these things. The record keeping, his activity in the involvement in the association. The use, as an example, of some of the techniques, the zero grazing, et cetera, on his farm. All of those things indicated to me that his commitment and the way he was doing his attention to detail was excellent.

Dr. Richard A. Schoney is an associate professor with the Department of Agricultural Economics, University of Saskatchewan. He is an agricultural economist with his particular endeavour being farm management and production economics including agricultural finance and farm appraisal. At the request of the appellant's solicitors Dr. Schoney prepared an analysis of the appellant's farm operation (Exhibit A-17). He used three criteria in his appraisal of the appellant's operation; time and energy spent, the capital commitment and the expectation of profit. In his appraisal he relied on a number of sources; the first and prime source was the appellant himself, including the balance sheets and income statements prepared by his accountant. The second source of information encompassed the various breed association magazines and journals while the third was general statistical data from a census or from agricultural statistics.

With respect to evaluating time spent Dr. Schoney set up a simple procedure to help the appellant retrospectively evaluate his time on a year by year basis by way of time logs (ultimately filed as Exhibit A-11). In his synopsis Dr. Schoney stated the following:

Based on Mr. Harding’s time logs, Mr. Harding spent less than a majority of his time on the farm/herd in 1980, but by 1982 was spending approximately 56% of all his time on the farm/herd and thus, this could be regarded as his chief source of employment.

With respect to capital invested Dr. Schoney reviewed the balance sheets provided by the appellant's accountant and adjusted them to reflect "the total cattle operation". He obtained data from the appellant as to the “value of the cattle inventories’ and then proceeded to adjust the accountant's balance sheets on the asset side to reflect in total the capital committed by the appellant to the operation. This calculation, which forms part of Dr. Schoney's report, was also filed through the appellant as Exhibit A-10.

In his report his comments with respect to the capital committed were:

Mr. Harding had committed approximately $250,333, almost all equity capital by 1983. While this is somewhat low in comparison to the total capital commitments associated with a full-time Saskatchewan grain farm, he could have expanded using additional borrowed monies/leased lands to the level associated with most Saskatchewan grain farms.

In his testimony he added the following:

If he had additional borrowed capital, or if he has leased land, then he could have come up within that kind of a threshold of a full-time operation. It’s a very difficult term, it’s a very grey area, because there are no fast things of a quarter of a million or a half a million, or a million. It all depends on how the operation is set up. My analysis of it, he was at least in that area, where it could have been a full-time operation by bringing, for example, renting land, or buying land, or bringing maybe debt capital into it. So he's in that, certainly that grey area.

The third factor considered by Dr. Schoney was the reasonable expectation of profit. In his report he summarized his finding as follows:

In any new venture, there can be at least several different outcomes —some good and some bad. Accordingly, it is important in evaluating the probable expectation of profits to delineate potential outcomes, given the state of knowledge existing when Mr. Harding made his decisions. Four potential outcomes are delineated based on 1) actual fact, 2) that Chianina prices would follow a similar pattern to the Hereford breed, 3) Chianina prices would maintain their 1980 price levels and 4) that Chianina prices would follow a similar pattern to the Charolais breed. The first outcome is fact: Mr. Harding clearly did not establish a profitable and viable Chianina breeding operation —his average net farm income adjusted for inventory changes over the 1980-1984 period was ($9,574). The second potential outcome—Chianina prices would follow purebred Hereford prices—generated an average net farm income of $7,753. The third scenario considered is based on Chianina prices maintaining their 1980 levels, neither increasing in 1981 and 1982 nor decreasing in subsequent years. Under this scenario, net farm incomes averaged $20,835, clearly indicating potential profitability. The last scenario is based on the Chianina purebred prices following the price patterns of the Charolais breed. Under this scenario, the average 1980-1984 net farm income would have been $44,804 and the average 1980-1985 net farm income would have been $38,430; again clearly indicating profitability. In summary, three of the four outcomes indicate profitability. However, the expectation of profitability depends upon the probabilities attached to each of the outcomes. Thus, the question of the probable expectation of profit devolves to the subjective probabilities associated with the various scenarios and whether Mr. Harding’s estimates were also reasonable. This is obviously a difficult question to answer. Mr. Harding and many other investors thought the probabilities warranted the risk. Mr. Harding was an entrepreneur and was accustomed to taking risks and was aware of the nature of the risks.

In his testimony he described the concept as:

. . .the expectation of profit in our profession deals then with the idea of outcomes and probabilities, and then the summation of the weighted probability weight times the outcome.

Dr. Schoney's conclusion as stated in his report was that the appellant made a sincere effort to establish a purebred breeding operation and the Chianina herd was a major focus in his life in terms of time and capital commitments. Moreover, had the Chianina purebred prices followed either Hereford or Charolais price patterns over the period of 1980-1985, he would have generated a profit.

It is submitted on behalf of the appellant that his major preoccupation during the taxation years in issue was farming. Notwithstanding the fact that he was employed by Industries he had changed his occupational direction and had committed his energies and a great deal of capital to the farm. His cattle operation had a reasonable expectation of profit, a fact that was conceded by the respondent. The losses incurred reflected no more than the substantial start-up costs inherent in an operation of this type. The appellant concedes that during the period when the cattle were located on the Miller farm substantial losses were incurred, primarily due to the boarding costs, feed, veterinarian fees and other related charges. However, since Chianina stock was expensive, particularly those animals referred to as "full-blood", Harding believed that he was protecting his investment by utilizing the excellent services provided at the Miller farm including a full-time veterinarian. Counsel submitted that the appellant made a significant investment in the operation and that this investment was made in the anticipation that there would be a level of profitability established in the future. For that reason the appellant chose not to borrow from financial institutions which would have added substantial financing costs. With such additional charges the commencement of the cattle breeding operation would probably not have been feasible. Counsel submitted that the evidence of Mr. Miller and Dr. Schoney supported the appellant's position that his major preoccupation was farming.

I have concluded that the evidence falls short of establishing that the appellant's chief source of income was farming or a combination of farming and some other source of income. Among the various shortcomings in the testimony is the lack of any objective evidence from which I can reasonably conclude that the operation as structured was commercially viable. It seems to me, given Miller’s testimony, that the Chianina market was extremely small and restricted. It did not have the base, the stability, nor the acceptance of the basic purebreds, the Hereford, the Shorthorn and the Angus. Exotics are unquestionably on the speculative end of the cattle business. Notwithstanding this fact, Miller postulated a five year period as being adequate time to develop a good herd and to demonstrate one's ability as a quality breeder. This bald assertion was totally unsupported by any other evidence. Furthermore there is no evidence that the appellant had established a reputation or credibility as a quality Chianina breeder or that his program had produced or was likely to produce stock capable of being exhibited and sold at that level.

Secondly, even if one were to accept that the appellant changed his occupational direction, there is no evidence that his Chianina breeding operation had the potential of being a profit earning business let alone his chief source of income. No projections had ever been made regarding future potential earnings; there is no evidence as to the appellant's financial expectations from this operation; there is no evidence as to whether the operation was large enough to generate profits adequate enough to meet the chief source test over a reasonable period of time. There is indeed but marginal evidence to support the possibility of breaking even. I appreciate that the respondent by his pleadings and by his assessment has conceded that the appellant's farm operation had a reasonable expectation of profit, but that alone is not sufficient. I must add of course that Dr. Schoney's testimony regarding capital committed suggested that the operation was cautiously if not under capitalized.

Mr. Miller's testimony, while interesting, unfortunately provides little assistance to the Court in determining whether farming was the appellant's chief source of income in the years in question. Miller spoke of the appellant's commitment and the fact that he was applying acceptable methods and techniques both in his purchases and in his breeding program, and indeed those aspects of the appellant's approach were not seriously questioned by counsel for the respondent. What is more relevant, in my view, are Miller's responses, elicited in cross-examination, as to the basis of the escalation of prices for Chianina cattle in the late 1970s:

Ms. Goldstein:

Q. . . .What was the cause of this escalation?

A. Basically the fact that the Chianina cattle were new in 1971 to Canada. What we found with all of the new cattle coming in from Europe was the straight speculation type adventure with regard to new breeders getting involved, people from other breeds, people from the commercial industry all of a sudden doing that, and we were still seeing and experiencing that sort of thing right into the late 70's.

Q. So, people were speculating on these breeds and hoping they would be successful?

A. Absolutely. Cattle or calves that were in from Europe, okay, came here for the reasons of introducing into Canada some new product, some new genes, so to speak, because what we had here in Canada basically were the three original breeds, the three British breeds, the Hereford, Shorthorn and Angus, and we were looking at that time for something that was going to explode the cattle to another size and frame, and that sort of thing.

Q. So would it be correct in saying that in part the high prices were due to the sudden demand for these animals, and that's part of the speculation?

A. Price is definitely always related to demand.

This indicates that the high prices in those years were the result of a speculative surge and could not be relied upon as an indicator or a gauge of future prices or trends. I do not accept that it was reasonable to assume that the acceleration of prices would continue as suggested by Mr. Miller. Furthermore I see no reason to assume that the appellant was not privy to this knowledge given the fact that he was relying on Miller for advice, not only in setting up his operation, but in the acquisition of his herd.

It is also a fact, as Miller ultimately conceded, that the purebred business not only

. . is fickle sometimes in the fact that people within the business can get out and change and we saw those things happening.

but that this affects specialty or exotic breeds to a greater extent because as he put it

. . Jet's say, the Hereford breed has got such a tremendous number of breeders. You don't see those people falling in and out as fast as you would in a breed that only has, as an example, in the Chianina breed, the number of breeders they would have had at the most at any one time was 600.

Miller conceded that this was not a novel or new factor which caught him by surprise in the 1980s and that the viability of an exotic breeding operation can change overnight as a result of public reaction. Again I see no reason to assume that the appellant was not aware of these facts, indeed from the tenor of his evidence it would appear that he knew them but chose to ignore the downside.

With respect to Dr. Schoney's evidence and in particular his conclusion that had the Chianina purebred prices followed either Hereford or Charolais price patterns the appellant's farm operation would have generated a profit, I can only say that this conclusion must be very carefully weighed in light of his testimony as to the likelihood of that occurring. As he said: "the real question is what is the probability assigned to that," adding that it is always very difficult whenever you assign probabilities but more particularly when this is done after the fact. As for his four scenarios or potential outcomes Dr. Schoney stated:

. . .two were in there just really kind of for comparison. Really the major two were the first one and last one.

These were "what actually happened" and "that Chianina prices would follow a similar pattern to the Charolais prices’. He went on to say:

The first one he certainly lost money, that's a fact. And then trying to get out of it cost him more money where it was not included. The second one, though, this picture was kind of rosy that, you know, we followed Charolais, he would have done very well. And certainly 35,000 or 40,000 per farmer is a very good income. And that would have been at least comparable to a vast majority of the farmers we have in Saskatchewan. And the real question it comes down to is what was the probability associated with those, and I didn't try to estimate that.

In comparing the Chianina breed and the Charolais breed Dr. Schoney stated that the Charolais, also an exotic breed, was more established; it came on line much sooner; went through an uncertain area until it became established. The Chianina was a much newer breed and was beginning at a later and different point of time. He conceded that "Every breed is somewhat different, they come in different timing or different expectations. The Charolais breed demonstrates at least there was a potential of maintaining the prices and going up.” That was one outcome that could have been expected. Another outcome that could have been expected was that prices could go down dramatically, however Dr. Schoney did not want to give any estimates as to the probability of either event occurring.

With respect to relative prices it should be noted that some inconsistencies exist in the evidence of Miller and Dr. Schoney. Miller's evidence was to the effect that all purebreds suffered from the same drop in prices following 1982 while Dr. Schoney testified that Charolais prices remained high in 1982, 1983 and 1984. At another point of time Miller testified that there existed a consistent pattern for all exotic cattle in terms of prices while Dr. Schoney's report pointed to a lack of consistent prices for exotic cattle breeds, as demonstrated by the Charolais where the prices went up and Chianina where the prices went down.

I do not wish to be, in any sense of the word, critical of Dr. Schoney's evidence since admittedly he was faced with a difficult task in attempting to establish probabilities for the occurrence of certain events. However the problem with such evidence is that if an expert witness in all honesty cannot estimate the probability of the occurrence of any particular scenario, what weight can be attached to the expert's conclusion? One further comment. Dr. Schoney's report implies that the appellant considered various scenarios, the probability of the occurrence of any of them and made his plans and estimates on that basis. There is, however, no evidence that the appellant did so and indeed, to his credit, he did not even suggest that occurred.

In his summation counsel for the appellant relied on the principles enunciated by Dickson, J. (as he then was) in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, and on three subsequent decisions which expanded upon those principles, Ronald Timpson v. The Queen, [1987] 1 C.T.C. 389; 87 D.T.C. 5266 (F.C.T.D.), Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.) and Charles Roney v. The Queen, [1988] 2 C.T.C. 357; 88 D.T.C. 6489 (F.C.T.D.).

There is a similarity between the facts in this appeal and those in Moldowan. The latter are, in my view, all too often overlooked or ignored. The fact is that Moldowan did show a profit in at least two of the years in which he carried on his farm operation. It was also fact that he was actively and personally engaged in his farm activities. His volume of purchases and sales was substantial and, taking into account the relevant purchasing power of the dollar at that time, far exceeded the investments made by this appellant. Moldowan too was involved in other business endeavours. While there are some distinguishing features on balance the similarity is striking. In dismissing Moldowan's appeal the Court at page 315 (D.T.C. 5216) made several comments which are relevant:

. . .I do not think it can fairly be said that the appellant was a person whose chief source of income was a combination of farming and some other source of income in the sense I have indicated. He devoted considerable effort towards launching new ventures. Horse-racing consumed only several hours of his day and that for part of the year only. His commitment of capital was cautious. The nature of the enterprise is risky. It is difficult reasonably to plan to devote energies to it principally in the expectation of a steady living. He suffered constant and increasing losses with the exception of two years in which minor profits were made. Although none of the above is alone determinative, together they suggest only one business venture of several, with nothing distinguishing in the way of "a chief source of income".

The other three judgments cited by counsel for the appellant, particularly Hadley, are, in my view, distinguishable on their facts. It is fair to say that the main thrust of the testimony in this appeal, particularly that of Dr. Schoney and Miller, was directed to establishing the existence of a change in occupational direction on the part of the appellant. It was submitted that farming had become a major focus in his life in terms of time and capital committed. This approach, however, ignores what I consider to be an equally important factor, that is the actual or potential profitability of the operation. As Mr. Justice Ryan stated in his reasons for judgment in the decision of the Federal Court of Appeal in Moldowan v. The Queen, [1975] C.T.C. 323; 75 D.T.C. 5216 at page 333 (D.T.C. 5219):

The critical question is whether farming or farming in combination with some other source was the appellant's chief source of income during the taxation years in question. Once one accepts that a source may be a source of income in a particular year though, through it, the taxpayer suffers a loss in that year, one loses the possibility of simply comparing net income from each source as the test for determining the chief source. One must therefore seek some other guide; and while it is true that a source may be a source of income in a particular year though it did not yield a profit in that year, it nonetheless appears to me pertinent to look at each of the taxpayer's sources from the point of view of capacity for present or future profit or for both when one is seeking to determine his chief source of income in that year. The relative importance of sources as sources of income would seem to me to be in most part a function of their capacity to produce gain. 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.]

As Mr. Justice Cattanach noted in PE. Graham v. The Queen, [1983] C.T.C. 370; 83 D.T.C. 5399 (F.C.T.D.) at page 378 (D.T.C. 5406):

Mr. Justice Dickson was confirmatory of those remarks by Mr. Justice Ryan when he said:

While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source" to distinguish whether or not the interest is auxilliary.

In Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 (F.C.A.) Mahoney, J. said at pages 241-42 (D.T.C. 5084):

Moldowan also says, dealing with the difference between classes 1 and 2, “while a quantum measurement of farming income is relevant, it is not alone decisive”. While the determination that farming is a chief source of income is not a pure quantum measurement, it is equally not a determination in which quantum can be ignored.

In further explanation he said:

Moldowan suggests that there may be a number of factors to be considered but we are here concerned only with three: time spent, capital committed and profitability. In defining the test as relative and not one of pure quantum measurement, Moldowan teaches that all three factors are to be weighed. It does not, with respect, merely require that farming be the taxpayer's major preoccupation in terms of available time and capital.

[Emphasis added.]

He continued by observing:

On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

[Emphasis added.]

I am satisfied that the evidence fails to establish the existence of actual or potential profitability. I cannot conclude that there is any possibility of this taxpayer's chief source of income being farming or a combination of farming and some other source of income. At best his farm operation can only be categorized as a side line business.

To give effect to admissions in the respondent's reply to the notice of appeal for the 1979 and 1981 taxation years and to the “Partial Consents to Judgment" dated August 8, 1986 and August 29, 1989 (filed) the following appeals are allowed, without costs, and the matters referred back to the respondent for reconsideration and reassessment on the following basis:

Taxation year 1979:

The amount of $421.57 included in computing the appellant’s income for his 1979 taxation year as a Joan by Harding Industries to the appellant in the 1979 taxation year is to be deleted;

Taxation year 1980:

The appellant is entitled to deduct, on account of interest, the amount of $7,650 for the 1980 taxation year;

Taxation year 1981:

1. The taxable capital gain for the 1981 taxation year will be calculated in accordance with the Partial Consent to Judgment filed;

2. The amount of $ 10,338.87 included in computing the appellant's income for his 1981 taxation year as a loan by Harding Industries to the appellant in the 1981 taxation year is to be deleted;

3. With respect to the 1981 taxation year, the service connection fee in the amount of $57,307.36 and the soil testing fee of $363 were expenses on account of capital and the appellant's one-third share is not deductible to the appellant on current account in 1981.

The appeals with respect to the 1982, 1983, 1984 and 1985 taxation years are hereby dismissed.

Appeals dismissed.