Raymond Bertrand v. Minister of National Revenue, [1989] 1 CTC 2030, 88 DTC 1695

Tremblay, T.C.J. [Translation]:—This appeal was heard on February 5, 1987 at the city of Ottawa, Ontario.

1. Issue

The issue is whether the appellant, the vice-president of Bertrand et Frères Construction Co. Ltd. (hereinafter Bertrand et Frères), is justified in deducting farm losses of $20,605, $30,967 and $47,552, respectively, in the computation of his income for 1977, 1978 and 1979.

The respondent allowed only restricted losses of $5,000 for each of these years, in accordance with section 31 of the Income Tax Act, on the ground that the appellant's chief source of income was neither farming nor a combination of farming and some other source of income.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 The Court ruled in that judgment that the presumed facts underlying assessments or reassessments by the respondent are also presumed to be true until there is proof to the contrary. In this case, the facts presumed by the respondent are described in subparagraphs (a) to (f) of paragraph 6 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

[Translation]

6. In assessing the appellant for his 1977, 1978 and 1979 taxation years, the Minister of National Revenue relied, inter alia, on the following facts:

(a) during his 1977, 1978 and 1979 taxation years, the appellant was the vice- president of Bertrand et Frères Construction Co. Ltd., of which he is one of the major shareholders;

(b) the appellant’s chief source of income throughout these taxation years was Bertrand et Frères Construction Co. Ltd., and consisted of bonuses, allowances, salaries and dividends;

(c) during 1976 the appellant purchased a four-acre farm; in addition, the appellant leased grazing rights adjacent to his farm for his horses;

(d) during the 1977, 1978 and 1979 taxation years, the gross income from operation of the farm was $6,486.45 for 1977, $26,113 for 1978 and $24,034 for 1979;

(e) during the 1977, 1978 and 1979 taxation years, the appellant claimed losses in the amount of $20,605 for 1977, $30,967 for 1978 and $47,552 for 1979, when computing his income for those years;

(f) the appellant’s chief source of income for his 1977, 1978 and 1979 taxation years was neither farming nor a combination of farming and some other source of income.

3. Facts

3.01 The appellant was 40 years of age in 1976, when he acquired a four-acre property one mile from his residence, at L'Orignal, 50 miles east of Ottawa, Ontario.

Mr. Bertrand was then and still is the vice-president and quarry manager at Bertrand et Frères, which operated two quarries.

3.02 The company was formed in 1943 by two brothers, Anatole and Joseph Bertrand, the latter being the appellant's father. In 1987, the shareholders were nine descendants of the two founders. Among these descendants, Raymond holds 187 shares and Robert, 186 shares.

Bertrand et Frères is a well organized company. The appellant manages the mixed concrete division (operations and sales), which accounts for 46 per cent of the company's gross earnings.

3.03 The appellant does supervisory work, attends meetings with the sales personnel, receives the concrete inspectors, prepares contract tenders, etc.; 35 per cent of his time is spent on the company. He does not do any manual work.

3.04 He is also a shareholder in the Orignal Realty Co. Ltd., which buys and sells land. His sole activity is attending two meetings per year.

3.05 Before purchasing his farm, the appellant was aware that Bertrand et Frères, a relatively small company, would eventually be absorbed by a bigger company. This happened to a large degree in 1979, when Bertrand et Frères accepted an offer to purchase on the quarry located at Ottawa, and this decreased the time the appellant devoted to the company.

3.06 The appellant's gross earnings from the three income sources, from 1976 to 1985, are as follows, according to Exhibit R-1:

It should be noted that the gross income from Bertrand et Frères is as follows: salaries, $179,517; bonuses, $283,479; allowances, $40,958; dividends, $48,917; and interest, $2,175.

The salaries for the three years being appealed are $38,841 and the bonuses, $104,258.

3.07 With respect to farm activities from 1976 to 1985, gross earnings, expenses (including capital cost allowance) and net losses are as follows, according to Exhibit R-1:

The total capital cost allowance from 1976 to 1981 (there was none from 1982 to 1985) is $28,237. It is quite obvious that these so-called nominal expenses increase the losses by an equal amount. For the three years being appealed, 1977, 1978 and 1979, the total capital cost allowance is $16,061.61.

3.08 Continuing with respect to the farm activities, for the ten years from 1976 to 1985, the assets acquired read as follows, according to Exhibit R-1:

3.09 The purchases and sales of horses for 1976 to 1985 are as follows, according to Exhibit R-1:

3.10 When the appellant commenced his farming activities in 1976, and more seriously in 1977, he was advised to hire a competent horse trainer. Dr. Brault, a veterinarian, recommended one to him. Under the contract of hire signed on June 2, 1977 (Exhibit A-4), it was provided that in addition to a salary of $135 per week, the trainer would be given, at year end, 20 per cent of the net profits as determined by the accountant.

3.11 The appellant's farm was registered on August 5, 1977, according to the form of the Ontario Ministry of Consumer and Commercial Relations, under the name “5B Quarter-Horse Reg'd". The objects of the business were: “Showing, training, breeding and selling quarter horses" (Exhibit A-1).

3.12 In June 1977, the appellant had a barn built at a cost of $6,600 (Exhibit A-2) and an arena for running the horses, at a cost of $7,205 (Exhibit A-3).

3.13 The appellant borrowed money from the Banque canadienne nationale for his farming activities. He borrowed $45,000. The interest claimed as expenses amounted to:

The appellant said he received a $3,000 grant from the Ontario government in 1977 for the construction of buildings on his farm.

3.14 The appellant submitted that, in addition to taking care of administration, advertising, horse shows, treadmills for the horses, cross-breeding, buying of horses, etc., he also did manual work on the property, such as cleaning, grooming, fence repairs, etc.

Before the quarry was sold in 1979, he spent more than 55 per cent of his time on the farm, and after the sale, more than 65 per cent, seven days a week.

3.15 The following exhibits were introduced: a contract form for the livery or training of horses, or both (Exhibit A-5) and a form for the hire of services of a stallion (Exhibit A-6).

The appellant would meet the people who were to sign this kind of contract. He had several famous stallions, including Tuffernlove and Texas Whizzer (Exhibits A-7 and A-8).

3.16 The appellant had five people to train his horses between 1977 and 1981. The person hired in 1982 was still there in 1987. This person is paid $250 a week for a six-day week and, in addition to training the horses, handles the shoeing, breeding, breaking in the yearlings, competitions, etc.

In addition, it appears from the statements of income and expenditure for the years 1977 to 1985 that the salaries and fringe benefits paid were as indicated below:

3.17 Between 1977 and 1979, the appellant had up to ten horses, including seven mares. He admits he had too many horses during this period and that his trainer should have told him so.

4. Act — Authorities — Analysis

4.01 Act

The chief provisions of the Income Tax Act that are involved in this case are subsections 9(1), 9(2), 31(1), 31(2) and 248(1). They provide as follows:

9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

9. (2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

31.(1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1" were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's “restricted farm loss" for the year.

31.(2) For the purpose of this section, the Minister may determine that a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

248.(1) In this Act,

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

4.02 Authorities

The parties referred the Court to the following cases:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.);

2. Macaulay v. M.N.R., [1985] 2 C.T.C. 2161; 85 D.T.C. 468 (T.C.C.);

3. Wilson v. M.N.R., [1986] 1 C.T.C. 2488; 86 D.T.C. 1336 (T.C.C.);

4. Timpson v. M.N.R., [1985] 2 C.T.C. 2114; 85 D.T.C. 446 (T.C.C.);

5. Byron v. M.N.R., [1985] 2 C.T.C. 2139; 85 D.T.C. 459 (T.C.C.);

6. Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071; 84 D.T.C. 1094 (T.C.C.);

7. McLaws v. The Queen, [1976] C.T.C. 15; 76 D.T.C. 6005 (F.C.T.D.);

8. Cooke v. M.N.R., [1975] C.T.C. 2296; 75 D.T.C. 223 (T.R.B.).

4.03 Analysis

4.03.1 First, it is not disputed that the appellant was, during the years in question, operating a farming activity within the meaning of the definition of the word “farming” in the Act, cited earlier (para. 4.01).

4.03.2 There is no dispute as to whether the appellant had a reasonable expectation of profit. The respondent admitted this when he allowed restricted losses to the appellant.

4.03.3 The issue in this case is whether the appellant’s chief source of income is farming or a combination of farming and some other source of income, in accordance with the exclusion described at the beginning of section 31, cited above (para. 4.01).

In other words, is the appellant a full-time farmer entitled to apply the entirety of his farm losses, as provided in subsection 9(2) of the Act, or a gentleman farmer entitled only to the application of $5,000 of his losses, under subsection 31(1) of the Act?

4.03.4 (a) In Moldowan (para. 4.02(1)), the Supreme Court of Canada distinguished three (3) classes of farmers, at pages 487-8 (C.T.C. 315):

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

(b) And the Court added, primarily with regard to the full-time farmer, at page 488 (315):

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.

The Court also provided some tests for analyzing the facts, at pages 485-7 (C.T.C. 313-14):

(c) The next thing to observe with respect to s. 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer's income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words "source of income" . . .

(d) 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 be 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. . . .

(e) It is clear that “combination” in s. 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 s. 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.

4.03.5 In the instant case, this is not a person who has already been a farmer and who now has a new source of income, but the contrary.

The appellant's chief source of income since he began working has been his job with Bertrand et Frères. The issue is whether he “changes occupational direction and commits his energies and capital to farming as a main expectation of income” (Moldowan, S.C.R., at 488; C.T.C. at 315).

To determine this, it is necessary, in light of the two aforementioned sources, to consider the following points:

(a) the gross income;

(b) the net income;

(c) the capital committed

(d) h is ordinary mode and habit of work.

4.03.6 Gross income from 1976 to 1985

The gross earnings from Bertrand et Frères were $555,047, and the gross earnings from farming were $197,846 (para. 3.06).

According to counsel for the respondent, this comparison clearly favours the position of the Department of the National Revenue.

On the other hand, counsel for the appellant submitted that the real source from the job with Bertrand et Frères is the salary and this amounts to $179,517, and is thus lower than the gross farm income of $197,846, since the other income from Bertrand et Frères is more in the nature of investment income.

In my opinion, however, the bonus should be regarded as being more in the nature of employment income. Adding the bonus ($283,479) and the salaries ($179,517) provides a total of $462,996, or an average of $46,299 per year. For the three years being appealed, the salary ($38,841) and bonus ($104,258) total $143,099, or an annual average of $47,699.

In contrast, the gross farm income for the three years being appealed amounts to $56,633.45, or an annual average of $18,877.82. Thus it would appear, at first sight, that the appellant’s case does not stand up.

On the other hand, as was pointed out in Moldowan, the determination of the chief source is "not a pure quantum measurement" (S.C.R. at 486; C.T.C. at 314), especially when the source of the income from Bertrand et Frères is, for the appellant, a source that pre-existed farming, one that was inherited from his father who was in a favourable financial situation.

The farm income, for its part, derives chiefly from the sale of horses and livery. The study shows a progression even in years of recession.

4.03.7 Net income

The farm incurred nothing but losses totalling $99,124.39 during the three years under appeal (para. 3.07). Obviously, as the Courts have pointed out many times, a loss does not signify the non-existence of a source of income (paragraph 4.03.4(c)). The initial years of a business are always more difficult, especially when the business is horse breeding. It is necessary to build up the stock and establish a reputation. The errors inherent in any business start-up were in fact not lacking in this case (para. 3.17).

However, with regard to the losses, what is most troubling for the appellant is the long series of ten years of losses.

4.03.8 Capital invested

The capital invested is in the order of $73,583 (para. 3.08), $45,000 of which comes from a bank loan (para. 3.13).

Counsel for the respondent submitted that he did not invest enough, considering that his other source of income totalled more than $550,000 in ten years.

On the other hand, the appellant argued that with the land that was purchased, the adjoining land that was leased, the buildings that were constructed and the machinery that was acquired, he had everything he needed to provide for the needs of his business. Can more be demanded? I do not think so.

Furthermore, it is also necessary to take into consideration the liquidity needed for the purchase of horses and current expenses.

In the expenses that were claimed, the nominal expenses (capital cost allowance) in some respects are rather limited (para. 3.07). The appellant therefore provided the cash to bridge the difference between expenses and income.

4.03.9 Time spent

The evidence indicated that the appellant spent more than 55 per cent of his time on the farm (paras. 3.03, 3.04).

Referring to a letter from his accountant dated May 8, 1981, and addressed to the respondent, counsel for the respondent questioned the appellant's credibility in this connection. He would have been at the farm only a few hours a day, she argued. The letter was introduced as Exhibit R-1, and the passage in question states:

[Translation]

The farm is located half a mile from Mr. Bertrand's residence, and not a day goes by that he does not spend a few hours in the forenoon at the farm. His evenings and weekends are spent entirely on farm business.

This statement does not differ in substance from the appellant’s statement that he had worked 35 per cent of his time for Bertrand et Frères during the years under appeal and 25 per cent after the sale of one riding school in 1979. He spent the rest of the time on the farm, seven days a week, doing manual work and managing his business (para. 3.14).

Can it be said that his activity on the farm constitutes "the centre of [his] work routine", as described by the Supreme Court of Canada in Moldowan (para. 4.03.4, S.C.R. at 487; C.T.C. at 315)? At first sight, one might be inclined to think so.

4.03.10 Considering the evidence as a whole, can it be said that, during 1977,1978 and 1979, the appellant's income derived chiefly from farming and another source of income?

As was pointed out previously in Kerr and Forbes (para. 4.02(6)) and Wilson (para. 4.03(3)), it is not impossible for a taxpayer who already has another employment that is considered full-time to change his chief source of income and revert to being a full-time farmer.

However, the proof of change must then be very strong, demonstrating not only a devoted intention on the part of the taxpayer, but quite exceptional circumstances.

4.03.11 There is a ruling of this nature in the Federal Court of Appeal's judgment in Paul E. Graham, reported at [1985] 1 C.T.C. 380 and 85 D.T.C. 5256.

In that case, the appellant had been an employee of Ontario Hydro since 1962 who had been raised on a farm and who had always dreamed of going back to farming. In 1968, he purchased a nine-acre farm on which there was a house and a barn.

The facts are summarized at C.T.C. 380:

The respondent, an employee of Ontario Hydro, bought a small farm in 1968 which he subsequently expanded. His primary farming activity was the raising of hogs. At January 1 of each of the years 1977, 1978 and 1979 he had 13, 18 and 28 sows, respectively. The maximum capacity of his barns was 40 sows and the barns could not be expanded. Because of the nature of his employment he was able to devote a large amount of time to farming. The number of hours he worked on the farm considerably exceeded the time spent in his employment. He only slept five hours a day. In the 1977, 1978 and 1979 taxation years his income from employment was $29,000, $30,000 and $33,000 respectively. In the same period his gross farm receipts were $30,000, $41,000 and $43,000 but his net farm losses were $10,000, $10,000 and $12,000. In assessing the respondent the Minister considered that farming was not his chief source of income and limited the deduction of losses to $500 in each taxation year by applying the provisions of subsection 31(1). The Federal Court-Trial Division held that the main preoccupation of the respondent was farming and that he also had income from a sideline employment. The Crown appealed that decision and contended that the farming operations did not constitute a chief source of income nor was there a reasonable expectation that farming would be his chief source of income either in the taxation years or in subsequent years.

HELD:

The trial judge's findings of fact were supported by the evidence and he properly applied the principles enunciated in the Moldowan case. This was principally a fact-finding task and an appellate court should not interfere unless the findings of fact were insupportable or the proper law was not applied. The trial judge correctly held that the respondent was entitled to deduct all his farming losses. Per Urie and Mahoney, JJ.

Marceau, J dissenting: The respondent's losses in the taxation years were unavoidable. Even if his operation had been brought up to capacity it could not have yielded any significant profit. A person holding a full-time job cannot be a person who looks to farming for his livelihood, within the meaning of the first class of farmers set out in the Moldowan case, until his farming operation is capable of yielding a profit. The Minister's assessments were correct.

It should be noted that the Minister of National Revenue has appealed this decision to the Supreme Court of Canada. [Application for leave to appeal dismissed.]

4.03.12 In this appeal the long string of losses over ten years leaves me with a substantial doubt as to the validity of the change in the chief source of income. The point at issue is not whether the appellant's farming activity constitutes a reasonable expectation of profit, but rather whether his chief source of income has become his farming business.

The appellant had the burden of proof, and he has not demonstrated that his income came chiefly from farming and another source during the years 1977, 1978 and 1979.

5. The appeal is dismissed for the above reasons for judgment.

Appeal dismissed.