Gordon Bergeson v. Minister of National Revenue, [1990] 1 CTC 2462, 90 DTC 1389

Mogan, T.CJ.:—The appellant is a full time employee of the federal government working as a park warden in a national park. The appellant and his wife reside in a house provided by his employer within the park where he works. In 1983, the appellant and his wife purchased a 320 acre farm approximately 5 miles east of Rossburn, Manitoba and 12 miles from the house in the park where he lives. When computing his income for 1984 and 1985, the appellant deducted the amounts of $5,085 and $5,044 respectively as losses suffered in the operation of his farm. The respondent disallowed the deduction of such amounts on the basis that the appellant did not have a reasonable expectation of profit from the operation of his farm. The only issue in this appeal is whether the appellant had a reasonable expectation of profit from his farm.

The appellant was raised in a farm environment. While still at school, he worked two summers for a grain farmer and one summer for a dairy farmer. He commenced working for Parks Canada in 1959 and, when this appeal was heard in 1989, he had worked for Parks Canada for 30 years. The appellant and his wife were married in 1960 when he moved to the Park where he was working at that time. In 1961, they purchased a quarter section of land (160 acres) near Onanole, Manitoba, approximately 80 miles from where they lived. The appellant and his wife had three children between 1960 and 1966. They were not able to farm the quarter section because he had a full time job at the park; the land was too far from their dwelling; and they had a young family to care for.

In 1983, the appellant and his wife sold the land near Onanole and they purchased a half section of land (320 acres) at Rossburn which is the farm described above, 12 miles from the house in which they live. They immediately started to improve the new land for farming. They cleared a portion of the land of stones and old logs. The appellant installed one half mile of new fence with treated posts and three strands of wire. He also repaired two and one half miles of older fence which was already on the property. The purpose of the fencing was to keep in livestock. In 1984, the appellant installed another half mile of new fence; he built a barn, a garage and new corrals; and he continued to clear more land of stones and logs. In 1985, he broke and fallowed 35 acres; he purchased some farm machinery; he cleared more land and installed another half mile of new fence. In 1986, the appellant planted and harvested 35 acres of wheat; he broke and fallowed another 35 acres; he purchased and repaired a grainery for grain storage; and he planted some trees. And in 1987, the appellant planted 70 acres in alfalfa; he built a road and cleared more land.

Over the years, the appellant had become an expert on quarter horses and he is frequently asked to judge quarter horse competitions at rural fairs in Manitoba. From 1984 to 1988, the appellant owned from five to eight quarter horses at any point in time. He was engaged in raising, showing and selling these horses. By 1989 when this appeal was heard, he was growing 70 acres of hay partly for use in his horse operation. He belongs to the American Quarter Horse Association and is a member of the Manitoba Light Horse Council. He also belongs to local agricultural societies.

As an employee of Parks Canada, the appellant is required to work 75 hours in each 2 week period. This schedule permits him to spend about two days each week at his farm where his time is allocated roughly 2/3 to land and crops and 1/3 to livestock and fences. The appellant uses a portion of his land for pasturing cattle for neighbours. He does not lease the land to those who own the cattle but charges a fee per head: 27</ per day for cows and bulls and $9 per season for calves. This policy permits him to go on any part of his land at any time. At the hearing of this appeal in 1989, the appellant stated that he intended to move to his farm in three years when he can retire from Parks Canada with a full pension.

The schedule below shows the appellant’s employment income for the years 1984-88 and the revenues and expenses of his farm operation for those years.

For the years under appeal, the appellant's farming operation produced cash losses of $3,336 in 1984 and $3,289 in 1985. The farm losses which he actually deducted in 1984 and 1985 were increased by capital cost allowance of $1,750 and $1,755 respectively. It is interesting to note from the above schedule that the appellant's farm produced cash losses of $650 in 1986 and $343 in 1988 while producing a cash profit of $493 in 1987.

Counsel for the respondent argued that the appellant's pasturing fees should be regarded as rent and not as part of farm revenues. There are, no doubt, circumstances when a person owning farm land and permitting others to use it for grazing cattle or growing crops would derive income from property and not from farming. Those circumstances do not exist in this case because (i) the appellant always owned five to eight horses which could share the pasture land with the feeding cattle; (ii) no portion of the land was leased to the owner of the cattle; and (iii) by charging 27¢ per day for cows and bulls, the appellant retained control of his land and could use any part of his 320 acres at any time so long as there was adequate pasture for all the livestock (his own and others).

In determining whether there is a reasonable expectation of profit from farming, it is relevant to look at the cost of the farm, particularly if the farm has been recently purchased and is heavily mortgaged. In 1983, the appellant and his wife paid $30,000 for this half section near Rossburn; there is no mortgage of the land; and they purchased the farm equipment for cash. They still (in 1989) owed $7,000 for a house which they purchased in 1987. At the hearing, the appellant estimated that, in addition to the original cost of $30,000, he and his wife had invested another $17,000 to $20,000 in the farming operation; and he was satisfied that he and his family could farm this half section at a profit.

I have concluded that the appellant had a reasonable expectation of profit from his farming operation and the appeal should be allowed to the extent of permitting him to deduct the so-called restricted farm loss as defined in section 31 of the Income Tax Act. The appellant has not claimed that farming was his chief source of income either alone or in combination with any other source and, indeed, the evidence would not have been sufficient to support such a claim. On the other hand, the evidence was more than adequate to prove that the appellant had a reasonable expectation of profit from his farm. The appellant lived and worked in a national park just 12 miles from his farm; and he was able to spend 2 days each week at the farm. On a cash basis, he actually made a small profit in 1987 while suffering small losses in 1986 and 1988.

In Gordon v. The Queen, [1986] 2 C.T.C. 280; 86 D.T.C. 6426, Reed, J. reviewed the history and purpose behind the restricted farm loss provision and stated at page 287 (D.T.C. 6431):

What emerges from those sources is a concern that taxpayers (especially those who enjoy a substantial income from other sources) may be prepared to carry on a farming business with a certain degree of indifference towards the losses incurred. This indifference arises out of, for example, the fact that the farm losses may be carried at the marginal rate of tax on other Income; the recreational and personal life style provided by the farm environment is attractive; farm land often carries with it potential for future land development; an asset is often created out of what would otherwise be a highly taxed income. It seems to me a significance factor, whether one be talking about the hobby farmer or the part time farmer, is a consideration of whether or not the business is being carried on on a commercial basis with a determination to make the business profitable as soon as possible.

The appellant stands in sharp contrast to the person who works in an urban setting with significant employment or business obligations and acquires agricultural land with a view to operating a farm collateral to his or real avocation. The appellant has always lived in a rural environment. His dwelling is close to his farm lands. His employment duties are limited in scope and he can rely on spending two days each week at his farm. The farm expenses are reasonable in relation to his employment income and his cash losses in 1986 and 1988 were minimal. In my view, the appellant is really trying to make a profit from his farm as soon as possible and there is a reasonable expectation that he will do so. This appeal is allowed with costs.

Appeal allowed