Basil J. McAllister v. Minister of National Revenue, [1989] 1 CTC 2127, 89 DTC 71

Rip, T.C.J.: —Basil J. McAllister, the appellant, appeals income tax assessments for 1983, 1984 and 1985 on the basis that in those years he carried on the business of farming and is therefore entitled to deduct losses to the extent permitted by subsection 31(1) of the Income Tax Act ("Act"). [1]

Mr. McAllister resides in Pleasant Valley, County of Antigonish, in Nova Scotia. Since 1975 he has been employed by the Nova Scotia Department of Transportation and Communications as a heavy equipment operator. However, because of a spinal deterioration he has been forced to take a leave of absence from his employ. Medical specialists have advised him to give up his employment and farm. Prior to 1975 Mr. McAllister was a member of the Canadian Armed Forces.

In 1953 Mr. McAllister acquired approximately 80 acres of land which had not been farmed since the mid-19305. In the late 1950s, after his mother's death, he acquired a neighbouring 80 acres, more or less, from his brother. Both properties together consisted of 35 acres of pasture, 35 to 40 acres of hay, 118 acres of woodlot and about 25 acres of scruff land. The properties were in poor condition prior to 1977.

During the winter season and the years in appeal Mr. McAllister was on call by his employer seven days a week, on a 45 hour basis, to clear snow. During other times of the year he would work five days a week from 7:00 a.m. to 4:40 p.m. Evenings, weekends, holidays and vacations were devoted by Mr. McAllister to working on the farm, building, clearing land and cleaning the barn, amongst other farm work.

In 1977-1978, Mr. McAllister, with his own labour, built a steel barn on the property having an area of 46 feet by 30 feet; the barn had a concrete floor. In 1984 or so he constructed a tool shed of similar construction to the barn.

In 1979 Mr. McAllister entered into a Woodland Management Plan with the Minister of Lands and Forests of Nova Scotia with respect to the 118 acres of woodlot owned by him. He commenced operating the woodlot in accordance with the plan and built two roads, one for tractors and one for trucks; he also built a bridge.

His gross incomes from the woodlot during the years 1982 to 1987 were as follows:

In 1979 Mr. McAllister purchased approximately $22,000 of farm equipment including a 60 horsepower, four-wheel drive tractor which could be used for the woodlot as well as for farming, for which he paid $13,500. He also purchased a large hay baler for $2,300, a mower for $600, a plough for $995, a harrow for $1,000, a hay rake for $1,800 and a fertilizer spreader for $1,000. A new disc mower and disc harrower were acquired in 1985 for $2,400 and $400, respectively. In 1982 he acquired a manure spreader and cultivator for $950 and $500, respectively. The current value of this equipment is not less than their original aggregate purchase price, according to Mr. McAllister.

All money borrowed by Mr. McAllister to purchase this equipment has been repaid to the lender. In 1987 he had no interest expenses on moneys borrowed for the farm. Mr. McAllister testified he devoted all his physical energies to the farm in the years under appeal and has sacrificed personal luxuries in favour of the farm.

Mr. McAllister's first venture in farming was in 1977 or 1978 when he started raising pigs after construction of his barn. By 1980 he had ten sows and a purebred boar. He had 50 to 60 pigs by 1981 when, he says, the bottom fell out of the pig market; in addition he lost 40 to 50 weanling pigs through disease for which he received no compensation.

In the meantime he started raising cattle, beginning with one cow in 1976; by 1981 he had four to five head of cattle. He decided to "drop pigs" and go into beef cattle. He never showed a profit from his pig operation. His decision to raise beef cattle was due to the fact he did not wish to devote the additional labour required in dairy farming and if he “wished to go into any type of farming” it would have to be beef cattle.

Mr. McAllister did not make any projections when he started the beef operation (or the pig operation) to determine if and when the operation would be profitable. However, at trial he said he anticipated he would show a profit by 1986 or 1987 with 15 head of cattle "if" he had no problems and no losses. He hoped to have 12 to 15 cows breeding 10 to 12 calves a year. He elected to increase his cow population naturally rather than through acquisition. He did purchase one purebred cow which he subsequently sold at a loss; the cow gave birth but had insufficient milk to nurse the calf.

Mr. McAllister bred his cows artificially but without success; in 1984, for example, he bred his five breeding cows 16 times yielding only two calves. He admitted he had "bad luck" with the cattle. Mr. McAllister's annual cattle holdings were as follows:

At the time of trial Mr. McAllister had five cows, all with calf, which he anticipates could fetch $700 to $800 each. He had sold four head in 1988 prior to the trial.

Mr. McAllister personally performed almost all the labour on the property during the years in appeal; the only labour he did not perform was to bring the wood to the roadside for pickup. His back ailment, which began sometime around 1977 and which has shown substantial deterioration in the past three or four years, has forced him to curtail personal work on the property. His long term disability from employment entitles him to 70 per cent of his pay. His ailment has no doubt adversely affected his ability to work the farm.

He originally acquired the farm to eventually work at home "rather than going out to work”. He thought that one day his farm would be profitable. His back problem has prevented him from cutting wood although he sees the woodlot as profitable in future years. To put his beef cattle operation on a profitable basis he cleared land for growing feed; he also intended to build a new barn, specifically for cattle, and would have built the barn were it not for his back.

According to Mr. McAllister all his major expenses have been incurred. He had equipment which has been depreciated for accounting purposes over the years but is still of good quality. That he no longer has the burden of interest payments and his equipment has been depreciated to a great extent demonstrates, his counsel submits, his potential for profit.

Losses from the beef and woodlot operation, as agreed by counsel, were as follows:

The expenses incurred by Mr. McAllister were not allocated separately to the beef operation and the woodlot operation; accordingly one cannot determine whether the losses were attributable more to one operation rather than the other.

Counsel for Mr. McAllister submitted that the appellant carried on the business of farming, which included the beef farm and the woodlot operation, as a sideline business since he devoted all of his time and energy to the farm, invested substantial capital in the farm and that the farm, as capitalized, was susceptible of making a profit. Counsel referred the Court to subparagraph 2(a) of Revenue Canada Interpretation Bulletin IT-373R of March 14, 1985:

Where a farm includes a woodlot from which the income usually is minor in relation to the income from other farming operations:

(a) Proceeds from the sale of logs, lumber, poles, firewood or Christmas trees are income from farming.

Although administrative policy and interpretation of law by the respondent reflected in Interpretation Bulletins are not determinative, they are entitled to weight and become an important factor in case of doubt about the meaning of the legislation: per de Grandpré, J. in Harel v. The Deputy Minister of Revenue of the Province of Quebec, [1978] 1 S.C.R. 851 at 859; [1977] C.T.C. 441 at 448 and Dickson, J. (as he then was) in Nowegijick v. The Queen, [1983] 1 S.C.R. 29 at 37; [1983] C.T.C. 20 at 24.

Expenses claimed by Mr. McAllister during the years in appeal included, amongst other things:

For the most part the expenses claimed by Mr. McAllister were with respect to his beef cattle activities. The only expenses that are clearly for the woodlot operation are an unknown proportion of machinery and truck expenses, work and machine rental and for the construction in 1984 of a road. If a statement of income and expenses was to be prepared for each of the beef operation and woodlot operation, it would appear the beef operation incurred losses in excess of that described for both activities jointly and the woodlot operation may have been profitable.

In counsel's view, notwithstanding the fact that in the years of appeal income from the woodlot exceeded income from beef cattle, the potential income from beef cattle in future years was of such an amount that income from the woodlot would be minor in relation to cattle sales. Counsel failed to lead any evidence as to projected income from beef cattle in subsequent years, assuming Mr. McAllister was physically able to operate the beef cattle operation, stating such projections would not be precise. In my view, if Mr. McAllister had not suffered the back ailment his income from the woodlot would not have declined. Whether or not the income from the woodlot would be "minor" in relation to the beef cattle operation is therefore mere conjecture.

In any. event in the appeals at bar there is no evidence establishing the woodlot income was income from farming. A woodlot, as I understand it, is land covered with trees grown without the intervention of man. Income is earned from a woodlot by cutting the trees and selling the cut trees as lumber: this is not an activity contemplated in the subsection 248(1) definition of "farming". [2] Accordingly the woodlot operation should not be considered to determine whether or not the farm property maintained by Mr. McAllister was maintained in connection with a business carried on with a reasonable expectation of profit.

Mr. Justice Dickson, as he then was, stated in Moldowan v. The Queen, [1977] C.T.C. 310 at 313-14; 77 D.T.C. 5213 at 5215, that:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, 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. The list is not intended to be exhaustive.

Mr. McAllister has not shown a profit from farming in the years prior to 1983 or since. In his statements of income for the years in appeal he has included income and expenses from both his cattle activities and the woodlot, and, as I have previously stated that on the facts, the woodlot was not a farm activity.

Some expenses claimed by the appellant were purely personal (i.e., electricity, heating fuel, personal consumption) and certain other expenses claimed by him were for his own labour (i.e., construction of storage shack, freight and trucking). During the lunch recess I suggested to counsel that they review the expenses during the lunch hour to determine if, as a result of such personal expenses, Mr. McAllister’s losses from the cattle operation were less than assumed by the respondent, and by chance Mr. McAllister may have earned a modest profit. After the lunch recess Mr. McAllister's counsel advised the Court he was content with the respondent's assumptions of expenses and he agreed that the question of expenses was not in issue.

Mr. McAllister had no background in farming and did not undertake any training towards farming or agriculture.

There is no evidence that Mr. McAllister’s intended course of action, such as it was, would lead eventually to a farm activity which would show a profit. His intended course of action was dictated by external forces: he opted to farm beef cattle because of time restraints. He hoped to produce 10 to 12 calves a year with 12 to 15 cows but there was no corroboration to confirm this was a reasonable expectation that would produce a profit. A taxpayer's intensive labour in and by itself is not, in my view, sufficient to make an activity profitable. In certain situations the vast quantity of labour put into an activity is indicative more of the inability of the activity to produce a profit than the ability to produce a profit. The time spent on the farm is a positive factor in favour of the taxpayer when the farm itself has potential for profit; if the farm does not have the potential no amount of labour will make it profitable.

The activity ought also to be capitalized in such an amount that a profit can be produced. A taxpayer may have excellent training and an ideal course of action but if the activity is undercapitalized its chances of profit are not good. There was absolutely no evidence established that the capital invested by Mr. McAllister was sufficient for the beef cattle to return a profit: see Darnel v. M.N.R., [1988] 2 C.T.C. 2099 at 2105; 88 D.T.C. 1492 at 1496.

The appellant relied on the following judgments of the Court: Said v. M.N.R., [1986] 1 C.T.C. 2115; 86 D.T.C. 1009, Armstrong v. M.N.R., [1988] 1 C.T.C. 2198; 88 D.T.C. 1122 and Johnston v. M.N.R., [1987] 2 C.T.C. 2374; 87 D.T.C. 632. None of these cases support the appellant's position. In Said, the Minister consented to allowing an appeal for an earlier year on the basis that the taxpayer had a reasonable expectation of profit and the trial judge found no evidentiary reason not to extend the same treatment to the two later years in appeal. In Armstrong, the trial judge found the taxpayer's plan of operations of a horse farm to be continuous and sound; there was testimony corroborating the racing potential of the horses. In Johnston, the respondent allowed Mr. Johnston to deduct farm losses to the extent permitted by subsection 31(1); the taxpayer appealed the assessment on the basis that he was entitled to unrestricted losses. The Court was not asked to determine whether or not Mr. Johnston carried on the business of farming.

In the case at bar the respondent has not conceded the appellant's farm activity had a reasonable expectation of profit in any year. There was not a scintilla of evidence that if Mr. McAllister had a plan of operations, they were sound, nor was there any corroboration of the farm's potential for profit. The question before the Court was whether Mr. McAllister carried on the business of farming, and based on the evidence, or lack of same, the answer must be in the negative.

The appeals are dismissed.

Appeals dismissed.