Witkor Solotorow v. Minister of National Revenue, [1988] 2 CTC 2388, 88 DTC 1667

Bonner, T.C.J. [Orally]:—The appellant appeals from assessments of income tax for the 1981, 1982, 1983, 1984 and 1985 taxation years. On assessment the respondent applied section 31 of the Income Tax Act ("Act") and limited the deduction of the losses incurred by the appellant in carrying on the business of tree farming. The issue is whether the respondent was correct in doing so. It was the appellant's position that his chief source of income during the years in question was a combination of income from farming and income from employment at the General Motors plant at Oshawa.

Two witnesses gave evidence at the hearing of this appeal. The first was the appellant. He testified that he is 63 years old, that he was born in Poland, that he lived there for 14 years and that he then moved to West Germany where he lived for 16 years. In 1955 he moved to Canada. He commenced to work in Oshawa as a tool and die maker and a mould maker. He is married but separated from his wife. He worked continuously for General Motors from 1959 to February 1988 when he retired.

When in Germany, the appellant had 30 acres of land on which he grew grain. After two earlier abortive farming ventures the appellant bought the farm now in question in 1979. It is located near Lindsay. The purchase price was $64,000. The appellant paid $4,000 from cash savings, $15,000 raised on the security of a mortgage on a cottage and he borrowed the balance on the security of a mortgage on the farm. Initially the appellant rented the farm to an experienced farmer. The land was rocky and the farmer damaged his equipment trying to work it. The appellant then decided in 1981 to grow Christmas trees. He reasoned that the trees would take eight years to grow to the proper size and that he would retire in 1989 after the 30 years of service required for a full pension.

The appellant decided to grow spruce trees which are unaffected by the salt thrown up by passing traffic. During the years 1981 to 1985 the appellant planted trees or caused them to be planted at a rate of 20,000 per annum. In 1986 and 1987 he planted 10,000 trees per year.

The process involves cultivating the land, the purchase from the government nursery of seedlings, the planting of the seedlings and, as the trees grow, shaping them by hand pruning. The appellant employs student labour for planting. That work too is done by hand using a tool devised by the appellant.

In 1988, the appellant planted no trees. He appears to have devoted his efforts to marketing instead. He has found that there is a considerable variation in the rate of growth among trees of the same age and planted at the same time. Observing the building boom in the Toronto-Oshawa area he decided, correctly as it has turned out, that he could market live trees for use in landscaping. The landscaping market is satisfied by smaller trees than those required for use as Christmas trees. The appellant employs student labour to assist him in transplanting shrubs to peat pots prior to delivery to customers.

Exhibits A-6 to A-9 indicate that the appellant has been able to sell a substantial number of trees for both landscaping and Christmas tree purposes at prices ranging from $12 to $15. These exhibits and the appellant's testimony satisfy me that it is likely that he will continue to be able to sell his trees.

For a number of years the appellant kept sheep. He explained that he tested and confirmed that sheep did not eat spruce. They fertilized the trees with their droppings. However, they required feed grain presumably as a supplement to grass growing among the trees. When the cost of feed rose the appellant disposed of the sheep.

I have previously described Mr. Solotorow's farming background. He testified that in connection with the spruce growing venture he made enquiries at the government establishment where he buys seedlings. Although the evidence discloses a limited background and training it would seem to be sufficient to enable him to produce trees which can be sold at prices sufficient to yield substantial profits.

At the time the appellant undertook the venture he was approaching and quite sensibly planning for the period following his retirement from General Motors. A sharp decline in income from that source could be foreseen. In support of his decision to engage in the tree farming business he committed substantial capital relative to his resources and substantial amounts of time. As to capital there must be taken into account not only the cash invested but also the fact that he pledged his cottage property in support of one of the loans. The appellant did not buy the vast quantities of expensive equipment necessary for success in many other types of farming. On the other hand he appears to have acquired all the equipment necessary to cultivate the soil, plant the trees, shape them and eventually harvest them. Nothing in the case law dealing with investment suggests that any absolute dollar amount of investment is required. What is required is that the enterprise be provided with enough capital to carry it on properly and this one was so provided.

As to the time spent there was evidence that the appellant spent almost six hours a day on weekdays and two full days on the weekend working on the farm. Certainly he had no interests other than his involvement in his farm. I might observe that in cases such as this the evidence as to time spent is often coloured by wishful thinking and an inability on the part of the taxpayer farmer to distinguish between time spent in operating the farm as a business and time spent at the farm doing other things. This colouration of the evidence becomes more intense in cases where, as here, the appellant lives on the farm. However, the essential question is whether the taxpayer has enough time available to operate the farming business in question properly and whether he in fact devotes that amount of time. In this case the answer to both branches of the time question is yes. That conclusion is supported by the evidence of success in producing adequate quantities of trees of appropriate quality. The survival rate achieved by the appellant's operation, 65 per cent, will yield enough trees to generate revenues as projected in Exhibits A-14 and A-15.

I turn next to the question of profitability actual and potential. Obviously the enterprise lost money heavily during the years in question. The figures in the table at the top of page 3 of the reply to notice of appeal were admitted. As to the 1985 taxation year the figures are: employment income $53,896; farm income $2,638; farm expense $25,989 and farm losses $23,350.

The question here requires an examination of the appellant's farming enterprise as a source of income and thus both its past results and its potential profitability must be considered. In cases such as this the taxpayers almost invariably attribute their farm losses to start-up costs. They seek comfort from the following sentence to be found at page 315 (D.T.C. 5216) in Moldowan :

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 . . .

They frequently cry start-up despite the fact, obvious to all but them, that their farm operations have persisted in losing money long after they have reached a mature state. The present case stands in marked contrast. Here the crop, spruce trees, required about eight years to reach the maturity for Christmas tree purposes and somewhat less to reach maturity for use as shrubs. Losses during the years before the crop reaches maturity are inevitable and without doubt can be viewed as costs which can aptly be called start-up costs. In evaluating the appellant's enterprise as a source of income, one must look at potential profitability in the mature state. The projection prepared by Mr. Lukow, Exhibit A-14, appears to be refreshingly realistic. In The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193, Mahoney, J. said this at page 236 (D.T.C. 6197):

Each case where the realization of profit is so postponed will have to be examined on its own merits to ascertain that the profit is not merely notional and that the expectation of profit is indeed reasonable .. . .

Mr. Lukow was not cross-examined on his projections. It is significant that the Lukow projection foresees a future profit sufficient to justify the money which the appellant has invested by way of start-up costs. This is not a case in which an attempt is made to justify year after year of substantial losses by pointing to potential future profits of minimal amounts. It must be noted that the evidence of the appellant's marketing success this year found in Exhibits A-6 to A-10 provides a solid foundation for the revenue figures projected by Mr. Lukow.

The Lukow projection indicates the likelihood that the farm will, in the years 1989 to 1993, yield annual profits far in excess of the appellant's pension income. Thus in the years in issue the appellant is to be seen as a man who, anticipating retirement from General Motors, commenced a change in occupational direction and committed his energies and capital to farming as a main expectation of income (if I may borrow the words of Dickson, J. [as he then was]). The years in question were years of transition from a period when employment at General Motors was the appellant's chief source to a period when farming will be the appellant's chief source. During that period farming and employment constituted, in my view, a combined chief source.

I do not agree with the submission that farming did not become all or part of a chief source before this year. To adopt that view is to ignore the evidence which shows that the farming business was in full operation during 1981 to 1985 save only for marketing which could not of course be done because the trees were not mature.

For the foregoing reasons, the appellant's appeals will be allowed, with costs, and the assessments will be referred back to the respondent for reconsideration and reassessment on the basis that section 31 does not apply during the 1981 to 1985 taxation years to limit the deduction of the appellant's farming losses.

Appeals allowed.