Louis Ganci and Guy Ganci v. Minister of National Revenue, [1990] 1 CTC 2354, 90 DTC 1317

Teskey, T.C.J.:—The appeals of Louis Ganci (Louis) and Guy Ganci (Guy) were heard together on common evidence. They appeal their 1984, 1985 and 1986 reassessments wherein the Minister classified the appellants as “Class 2" farmers as defined by Moldowan, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, thereby restricting their farm losses to $5,000 a year pursuant to section 31 of the Income Tax Act.

Issue

The single issue herein is whether either or both appellants are "Class 1” or “Class 2" farmers as defined by Moldowan, supra.

Facts

Louis, aged 60, (born January 2, 1929) is the father of Guy, aged 29 (born June 16, 1960). Louis operated and ran his father’s 140-acre mixed farm in Ontario from 1949 to 1959. In 1959, 110 acres of this farm was sold off and Louis purchased the remaining 30 acres where he lived with his wife and family until 1974. On this 30-acre parcel, he kept horses, some cattle and raised hay. During this period he sold a few beef animals, however the animals were basically kept for his own family’s consumption and use.

In 1974, he and his family moved west to a 10-acre parcel close to the farm in question. In 1983, his 10-acre parcel and home were expropriated for $180,000.

In that same year, Louis and his wife purchased a 160-acre parcel of land near Sparwood, B.C. for $120,000. They paid $80,000 in cash and gave to the vendor a $40,000 first mortgage at 10 per cent. Guy then purchased a one-third interest in the property and assumed full responsibility for paying the vendor's take back mortgage of $40,000. At the time of purchase, 151 acres was uncleared land in its natural state, the remaining 9 acres had been cleared approximately 50 years previously but had not been worked for some 32 years. The fences were either fallen down or non-existent and the land was vacant. This property is the farm in question and is now called the "Elk Valley Santa Gertrudis Ranch”.

The farm operation is an equal partnership with losses and income being split equally.

Louis used the balance of the money received from the expropriation to build a log house on the property which was started in 1983 and completed in 1984 where he and his wife reside. Guy moved a mobile home onto the property in 1984 where he and his wife reside. They now have two children ages five and two. In 1984, besides completing the log home for Louis and his wife, preparing the site for the mobile home and installing all the necessary water and hydro lines, they started to clear some acreage, purchased some equipment and erected some fences.

Louis, a stationary engineer, has had a full-time job since 1974 with Weststar, a mining company in the area. Guy has had a full-time job with Weststar as a heavy machine operator since 1978.

Both men's work schedule is the same in that each works two 12 hour days with a two day break and then two 12 hour night shifts with a four day break. They are on alternate shifts so that one or the other is always at the farm. Louis has had five weeks of paid holidays since 1984 and Guy had four weeks' paid holidays in 1984, 1985, 1986 and 1987. Since last year, he has had five weeks' paid holidays. All holidays and days off are spent working on the farm. When working, all daylight hours after work are spent working on the farm. On occasion, during the calving period when their presence on the farm is imperative, Guy has taken unpaid time off work.

A great deal of evidence was received on the hours worked on the farm. The Court is satisfied that both men put in more effort and time into the farm operation than to their mine jobs. When the property was purchased, both men's lives were substantially changed and their occupation directions changed. All their time and energies are directed towards the farm.

All of the appellants' capital has been committed to the farm as well as all available income after living expenses. The evidence fully establishes that the necessary capital has been, and will be ejected, into the farm from employment income earned at Weststar. Both men would like to quit their jobs at Weststar and devote their entire energies to farming.

Louis and Guy are pioneers in the truest sense. They started with 160 acres of rock and bush and now have under cultivation approximately 60 acres. They have another 55 days’ work which will be performed in 1990 to complete the preparation and placement into cultivation of approximately another 60 acres. This, then would leave approximately 50 acres to clear and prepare which will be accomplished over the next three to five years. All cleared areas are enclosed with fences and all necessary corrals have been fenced. One barn and two sheds have been erected by their own labour. The appellants, besides doing their land clearing, are presently erecting another pole barn and are elk proofing the winter feeding areas by raising the fences to eight feet in height.

The driving force behind the operation is Guy Ganci. He is a very hardworking knowledgeable cattleman. He loves his animals and cares greatly for them. He and his father have now been working continuously for five years to bring their 160 acres of bush and rocks into production. They estimate that it will take three to five years to bring the farm into a significantly profitable operation. They raise and breed purebred cattle known as "Santa Gertrudis”. They are 3/8 Brahma and 5/8 shorthorn. This breed of animal is becoming more and more popular as the meat is lean and low in cholesterol. The breed is quite hardy to both heat and cold. They are disease resistant, good foragers and bear their young with ease.

Both the father's and the son's major preoccupation is farming and their employment is a subsidiary necessity to provide the necessary cash flow and capital to achieve their goals. All work is done by them personally. Their entire energies, beginning in 1984, have been directed towards clearing the farm and bringing it into a productive operation. The purchase of the farm changed their mode and habit of work They purchased five cows and one bull in 1985 and an additional seven cows in 1986. Although they have been selling a few animals each year since 1987, their herd now has reached a total number of 25. They estimate that by both continuing to work at Weststar, they can inject into the farm operation the necessary capital to bring it into full operation in three to five years and be debt free. It is estimated that the cost to bring the balance of the entire property into cultivation is $37,000. Another $20,000 has to be spent on the purchase of top purebred Santa Gertrudis animals.

The plan is to produce all necessary winter feed on the property to sustain their herd over the winter months. This will be a limiting factor. They estimate when the herd reaches 50 animals that the farm will be producing approximately a gross income of $80,000 and a net income well in excess of $50,000. At that time, Louis will be retired and the farm will be his only income. Even if Guy remains working after this period, the income in relation to investment and his wages will be substantial.

Once the farm is in full operation, the large start-up expenses will cease.

The farm has two streams running through it. Its productive capacity can be doubled by irrigation. This is planned for the future. Obviously this could again give substantial more profits as the herd could be doubled.

Analysis

The authoritative judicial decision is that of Dickson, J., as he then was, for the Court in Moldowan v. The Queen, supra. Dickson, J. said:

. . . whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.

One would not expect a farmer who purchased a productive going operation to suffer the some start-up losses as the man who begins a tree farm on raw land.

Whether a source of income is a taxpayer's “chief source" of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of “chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may he tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

The reference in s. 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. 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 auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

Moldowan, supra, has been considered at length twice by the Federal Court of Appeal.

Firstly; In 1985 in The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 a two to one decision. There, Urie, J. with Mahoney, J. concurring reported the trial judge's conclusion of facts which can be summarized as follows:

— the taxpayer invested all his available capital in farm land, building and residence.

— the taxpayer put forth prodigious labour, without outside help to establish the farm operation.

— the plaintiff's, every resource was invested and devoted to his farm and operation which included all his savings, his income from his employment and his labour.

— there was no question that the taxpayer's personal involvement was dedicated to farming to the maximum.

— that the main preoccupation of the taxpayer was farming but he had income from a sideline employment.

— Urie, J. also went on to say:

(1) "The trial judge had no doubts whatsoever as to the respondent's credibility.”

(2) "He accepted without reservation the viva voce of all the witnesses and drew supportable, proper inferences therefrom.”

(3) "Found that the cumulative effect of the rather unusual circumstances disclosed by the evidence in this case was to satisfy him that the main preoccupation of the respondent is farming but he has income from a sideline employment'."

Secondly; In 1988 in Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, again a two to one decision. There Mahoney, J. with MacGuigan, J. concurring set aside the judgment of the Trial Division and dismissed the taxpayer's action with costs. The Minister had assessed Morrissey as a "Class 2" farmer. Morrissey wished to be assessed as a “Class 1" farmer. Mahoney, J. said, at page 242 (D.T.C. 5084):

The Appellant has admitted that the respondent was farming with a reasonable expectation of profit. That means he was farming as a business and is conclusive that he was not a class 3 farmer. It also implies that farming was a potential source of income and calls for an enquiry whether it was potentially a chief source of income either alone or in combination with another source. In considering subsection 31(1), it seems to me that potentiality, rather than actuality, is the question in all cases since the provision applies only where there is a loss in a taxation year. That is not, of course, to say that actual profitability in other years may not be evidence of the potential for profit in years of losses.

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.

In my opinion, this case is clearly distinguishable from The Queen v. Graham, [1983] C.T.C. 370; 83 D.T.C. 5399; affd. [1985] 1 C.T.C. 380; 85 D.T.C. 5256. There, the trial judge, at page 378 (D.T.C. 5406-7), had found:

In the circumstances of these appeals I do not accept the premise predicated upon the evidence that the plaintiff might not reasonably expect his farming operations to "provide the bulk of income” and it most certainly is "the centre of work routine".

While expressed in a double negative, that was understood by this Court to be a finding, supported by the evidence, that farming was both the centre of the taxpayer's work routine and could be reasonably expected to provide the bulk of his income. That finding, in the opinion of a majority of this Court, placed that taxpayer clearly within class 1.

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.

The Federal Court-Trial Division has commented on Morrissey in three recent decisions, namely:

Mohl v. Canada, [1989] 1 C.T.C. 425; 89 D.T.C. 5236

Pavlakovich v. Canada, [1989] 2 C.T.C. 260; 89 D.T.C. 5432

Glass v. Canada, [1989] 2 C.T.C. 314; 89 D.T.C. 5497.

In Mohl, supra, Strayer, J. concluded on page 428 (D.T.C. 5238):

It now appears clear from the Supreme Court decision in Moldowan as recently interpreted by the Federal Court of Appeal in Canada v. Morrissey, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 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).

In Pavlakovich, supra, Muldoon, J. dealing with the facts, at pages 262-65 (D.T.C. 5434 and 5436) said:

The steady reduction of the loan was consistent with the plaintiff's unwavering intention, which the Court accepts as factual, to quit the mine and to be solely a farmer.

The increasing progression of revenues and production gives good reason to find that there was indeed a reasonable expectation of income which, as the Supreme Court of Canada held in the Moldowan case, "is a question of fact in the circumstances". It is a fact which this Court finds to be so, upon the evidence presented here.

The question in issue here is whether his chief source of income, including his reasonable expectation of income, was such as to relieve him of limitation on losses imposed by paragraphs 31 (1)(a) and (b) of the Act.

He concluded his judgment on page 268 (D.T.C. 5438) where he said:

The marked similarities of the Graham case with the case at bar dictate the same result upon application of the same legal principles. Except for the part year 1977 which extends only from autumn to the end of 1977, in which, despite some farm work, the plaintiff was situated in class (2) according to the Moldowan judgment, the losses incurred in 1978,1979 and 1980 are found to be deductible. In each of those latter three years the plaintiff's chief source of income was farming or a combination of farming and some other source of income, as determined according to the principles of law enunciated in the Moldowan and Graham judgment decisions.

In Glass, supra, Dubé, J. after reviewing Moldowan, supra, Morrissey, supra, and Mohl, supra, concluded on page 321 (D.T.C. 5501 and 5502):

Applying the three criteria of time spent, capital committed and profitability, I find in the instant case that the taxpayer was not carrying on farming merely as a “sideline business”. He had truly changed his mode and habit of work and centered the bulk of his energy on sheep farming. The capital involved was modest but he gave all he had, and more, cashing in his RRSP and overextending himself into debt. His uncontradicted evidence is to the effect that he spent much more time on the farm than he did at the Program. His stated intention, and I found him to be very credible, was that he only maintained his job at the Program so as to bring in some desperately needed cash flow while he was in the process of launching his farm operations. He, of course, expected to succeed at this venture. Unfortunately, because of the severe economic and weather conditions experienced during the early years, he was not successful. It appears that farming was potentially his chief source of income, at first in combination with another source, and then all by itself. As indicated by Mahoney, J. in the Morrissey decision “POTENTIALITY, RATHER THAN ACTUALITY, is the question in all cases since the provision applies only where there is a loss in a taxation year”.

[Emphasis added.]

Conclusion

Dealing in order with the three principal criteria namely; time, capital and profitability this Court finds:

Time

Although the respondent argued strenuously that insufficient time in 1984 was spent on improving the farm for farming purposes to pass the quantum test, this Court finds that in each year in question, the main preoccupation of both appellants was farming and their employment was secondary in time and interest even in 1984 when they completed the log home and moved the mobile home onto the farm.

Capital

The Court is satisfied that for both appellants the outlay of capital is substantial. It is all that they have and all that they have earned in the last five years and will be all that they earn from Weststar for the next three to five years. They will be debt free by 1990 and the required capital investment after that will be made with cash from their employment. Every resource of the appellants is invested in their farming operation which includes all of their savings, their income from their employment and their labour.

Substantial Profitability

On the balance of probabilities on accepting the appellant's testimony without reservation which is uncontradicted in any manner, the court is satisfied that after the start-up period (being the time required to convert 160 acres of raw land into 160 acres of producing farm land, which period will end in another three to five years, (i.e. a total of 9 to 11 years) that the farming operation will produce substantial profits. Their chief source of income will be from farming or from a combination of farming and other sources.

Appeal Allowed

For the above reasons, this is referred back to the Minister for reconsideration and reassessment on the basis that for the taxation years 1984, 1985 and 1986 both appellants were “Class 1" farmers and were entitled to deduct from income all their farm losses.

The appellants to have their costs.

Appeals allowed.