Terrance Tranfield and Roberta M. Tranfield v. Minister of National Revenue, [1987] 2 CTC 2364, 87 DTC 641

Sarchuk, T.C.J.: —Roberta M. Tranfield and her husband Terrance Tranfield appeal from reassessments made by the respondent in respect of taxation years 1978, 1979, 1980 and 1981. In assessing tax in those years the respondent acted on the basis that section 31 of the Income Tax Act applied to limit the deduction of farm losses by each appellant to $5,000. The appellants take the position that in the taxation years in issue their chief source of income was either farming or a combination of farming and teaching and maintain that they are entitled to deduct their full farm losses against other income.

The appeals of both appellants were heard together on common evidence by consent of all parties.

The relevant facts are as follows: the appellant Terrance Tranfield, is a carpenter by trade and a teacher at the Okanagan Vocational College by occupation. He was born and raised on a farm and worked on farms throughout his youth. In or about 1964 he completed high school, then served an apprenticeship and eventually was certified as a journeymancarpenter. He worked full-time as a carpenter until 1974.

Roberta Tranfield is a home-economics teacher. She was employed at the high school level by School District No. 23. She had been raised in an urban setting and for all practical purposes had no farming experience prior to their acquisition of the farm.

In 1974 they sold their Vancouver home and a vacation cottage and with the proceeds purchased 68'/2 acres of raw land in Oyama, British Columbia. The appellants testified that at all times, indeed, even prior to the date of their acquisition of the farm in 1974, it was their ultimate objective to carry on a Registered Polled Hereford cattle breeding operation.

The years from 1974 to 1977 were principally devoted to the clearing of the land; to fencing and cross-fencing and to the general preparation of the farm for a proposed cattle operation. When the farm was acquired there were no access roads, there was no water supply or power, nor were there any buildings on the property. In 1975 the appellants constructed a house/ workshop. That year work began on a water supply and shortly thereafter the first stage of an irrigation program was commenced. In 1981 approximately 50 acres of land were under irrigation. They began to clear land for hay fields and by 1978 11 acres were ready and seeded. By 1977 the most important buildings had been constructed although it was not until 1981 that all of the buildings currently on the farm were completed.

In the years preceding the taxation years in issue the appellants hoped to be able to defray their expenses by way of interim revenue measures. They attempted to do so by carrying on what can loosely be described as a mixed farming operation. They raised and sold chickens for the first two years; they kept milk cows and sold raw milk to customers in the general area until at least January 1, 1980; they sold hay on occasion; they tried the pig business, purchasing and fattening weanlings for resale. As disclosed by the financial summaries for those years (Ex. A-1), none of their efforts made much of a dent in the expenses incurred.

The first purchases of purebred Hereford cattle did not take place until February 1981. Mr. Tranfield’s evidence was that they were not ready to commence this operation at an earlier point of time because they did not want to go further into debt and because it had taken all of their efforts to convert the farm, described by him as wild land, into a property suitable for the cattle operation contemplated. In 1981 when sufficient land had been cleared and fenced and they had accumulated the necessary capital the Tranfields purchased six purebred Hereford cows at a cost of $12,900. Later that same year two additional cows were purchased.

With respect to the proposed Hereford operation the appellants opted to develop a basic herd by breeding their own cows, retaining the female offspring and selling off only bull calves and bulls. In 1983 their herd consisted of 23 registered animals, in large part breeding cows. That year, however, a lightning strike killed 12 cows. Six others were injured and lost their capacity to breed. The net result was that the appellants' breeding base was reduced to five cows.

Notwithstanding this setback the appellants were determined to continue with their program. Given the financial constraints they were facing, they decided to rebuild their herd by breeding rather than by purchasing cattle with the insurance proceeds. Accordingly they made but one acquisition in 1984, a yearling bull. As a result the growth of the herd was quite slow. At the present time it consists of 34 head made up of two mature bulls, 23 cows and yearlings, and nine calves of which five are bulls.

Mr. Tranfield stated that the optimum herd size for his property was 60 mature breeding cows. He was confident that this number would be reached within two years, that is in 1988. At that point of time the Tranfields propose to enter the market for purebred cattle through local auctions in places such as Vernon, British Columbia. Tranfield estimates that their product should command prices of $1,500 to $2,000 per head and projected annual sales totalling $100,000 to $150,000. All of his calculations are based on current prices with appropriate adjustments.

Both appellants expressed the hope that their cattle will be of such high quality that they will be able to market them not only in British Columbia, but also in Alberta where the demand and prices are reputed to be higher. If the anticipated quality is achieved they expect to be able to show their cattle as well. In addition that level of quality would create a substantial market for bull semen. According to Tranfield such results would substantially increase their gross revenues.

It must be noted that the appellants' assertions as to anticipated gross revenue and net profit are entirely speculative and are not based on any actual experience in the market. They have no track record to support their belief that their breeding program is sound or that their assertions as to value can be relied upon.

This year, for the first time, they propose to submit two bull calves to the local agricultural station for entry in an assessment program. These calves along with others received from competitor breeders will be fed a consistent diet; their growth and weight gain will be charted. In due course they will be compared to the other calves and graded. The results will be of utmost importance to the future of the appellants' operation. While the appellants are most optimistic, they admitted that they had no clear idea how their calves will grade.

As previously noted, both appellants were employed as full-time teachers in all of the years from 1975 to 1985 inclusive. Terrance Tranfield's annual salary during those years ranged from $18,090 to $42,130, while Roberta Tranfield's annual salary ranged from $12,363 to $35,874. During these years their farm operation produced gross revenues ranging from $32 in 1975 to $25,150 in 1984, and incurred a loss in each and every year from 1975 to 1985 inclusive excepting 1984. The losses ranged from $12,151 to $34,640. In 1984 a profit of $1,222 was shown. In that year the increased gross revenues and the small profit were the result of the receipt of insurance proceeds in the amount of $24,650 covering the destruction of their animals in 1983.

It is not disputed that throughout the years in question the appellants devoted a great deal of their time and energy to the farm operation. Mr. Tranfield's skills as a carpenter and the availability of the school carpentry shop (and the students) enabled them to reduce their capital costs to a fair degree. Although both taxpayers would like to leave teaching and devote themselves to farming on a full-time basis the financial performance of the farm operation has not enabled them to do so to date.

These are the salient facts. The issue before me is not in dispute. The respondent has conceded by his assessments that the appellants' farming activities amounted to a business which had a reasonable expectation of profit. Therefore the only issue still to be determined is whether the Tran- fields' chief source of income was from farming or a combination of farming and some other source. The respondent has taken the position that the appellants were otherwise fully employed and that their employment constituted the centre of their work routine. He contends that the farm operation was a business which was subordinate to or auxiliary to the appellants' full- time employment and that as a result it could not be considered a chief source of income.

By so reassessing the respondent has placed the appellants into the second class of farmer described by Dickson, J. (as he then was) in Mold- owan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.). The appellants, for their part, contend that they fall into the category of those taxpayers for whom farming may reasonably be expected to provide the bulk of income or the centre of their work routine. Such taxpayers who look to farming for their livelihood are entitled to deduct the full amount of their farm losses.

The appellants' position as set out by their counsel was that at all times they intended to conduct a registered Hereford breeding operation. However since they did not have the financial capacity to immediately embark on the development of a Hereford herd and since initially the property itself was unsuited for that purpose, certain preparatory steps had to be taken. These steps took a number of years and it was not until 1981 that the farm was ready to accept the first Hereford cattle. In the interim, expenses were incurred for the purpose of putting the farm into proper operating condition.

Counsel submitted that “restricting the source of income and chief source of income tests for years beyond years in which preparatory actions were taken" is inconsistent with Moldowan v. The Queen, (supra), and the many cases that followed. It was argued that many of these cases dealt with factual situations involving "start-up costs" and where the facts supported the conclusion that farming was the main "expectation of income" a taxpayer was not disentitled to deduct the full impact of start-up costs. Counsel for the appellants cited Gray v. The Queen, [1986] 2 C.T.C. 382; 86 D.T.C. 6504 (F.C.T.D.) (currently under appeal). In that case the activities of the taxpayer in the taxation years at issue were described as follows: “then (he) began extensive work on the property: old corrals which became rotten were torn down and replaced; the road on the property was upgraded; a workable water system was installed; 70 acres were summer fallowed; repair work was started on fences”. Notwithstanding the fact that the taxpayer was “building up the farm" and that the farm clearly was not in a condition to produce any profits, a loss of some $20,000 was allowed on an unrestricted basis.

Counsel also relied on Graham v. The Queen, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.); Morrissey v. The Queen, [1986] 2 C.T.C. 389; 86 D.T.C. 6509 (F.C.T.D.) (currently under appeal), and other cases to support his proposition that the lack of immediacy of profit potential by virtue of the fact that there was no basic herd in the years prior to 1981 did not operate to preclude the farming operation from being either a source of income or a chief source of income. He referred the Court to the comments of The Honourable Mr. Justice Cattanach in Graham v. The Queen, [1983] C.T.C. 370 at 379; 83 D.T.C. 5399 at 5407 (F.C.T.D.):

Notoriously the initial expenses of such a farming operation will be extraordinarily high but that does not detract from the validity and necessity of these expenditures to reach the ultimate objective.

Counsel emphasized that the absence of profitability either during the period when interim revenues were received or afterwards in comparison with employment income was the only test in Moldowan (supra) which the farming operation did not meet. He urged the Court not to place too much emphasis on the lack of gross revenues during these years since at all times those farming operations were intended only to be interim in nature and could not and were not expected to generate profits sufficient to offset the costs of putting the farm into condition for the planned Hereford operation.

The principles outlined by counsel have been generally accepted. The Courts recognize that it takes a great deal of time, effort, capital and dedication to be successful in farming and particularly to be successful in developing a cattle breeding operation. It is the acceptance of that premise by the various Courts which has allowed certain taxpayers to claim start-up costs even when such start-up costs have been incurred over an extended period of time. But acceptance of that premise does not automatically lead to a conclusion that in all instances farm operations are entitled to deduct full farm losses in the "start-up" years. In each case cited by counsel excepting Morrissey (supra), the Court has been satisfied that the very nature of the taxpayer's operation is such that a taxpayer may look to his farming operation activity to provide him with the bulk of his income within the meaning of Moldowan (supra).

In Timpson v. The Queen, [1987] 1 C.T.C. 389; 87 D.T.C. 5266 (F.C.T.D.) (on appeal to the Federal Court of Appeal) the taxpayer was permitted unrestricted deductions from losses incurred in a purebred cattle farm. In dealing with the subject of start-up costs Mr. Justice Cullen stated:

. . . it takes much more time, effort, capital and dedication to be successful in a purebred cattle operation. For that very reason start-up costs must be allowed over an extended period of time, even to 15 years mentioned by one of the witnesses.

As counsel for the respondent noted Mr. Justice Cullen prefaced those remarks with the statement at page 394 (D.T.C. 5270):

Here again, I believe it depends almost exclusively on the factual situation in place.

With reference to the facts in Timpson (supra) it is noteworthy that Cullen, J. in allowing full farming losses assessed and accepted the evidence of the taxpayer and six other independent witnesses who testified most favourably as to the taxpayer's intentions, knowledge, skill and time spent. This testimony established that the taxpayer used appropriate farming methods and procedures and that his reputation and credibility in the purebred beef cattle industry as well as his knowledge of farm economics were sound.

Similar evidence was introduced before the Court in Graham (supra) and in the case of The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193 (F.C.T.D.). In Graham the learned trial judge heard and accepted the following testimony:

Mr. DeMars, who is the deputy reeve of the County and is engaged in the same type of farming operation as is the plaintiff, testified that the plaintiff is a compulsive worker.

Further Mr. DeMars testified that the plaintiff was a dedicated, efficient and progressive farmer. The plaintiff has a good breeding line in his hog operation and he was the first to introduce the use of artificial insemination in the area with excellent results. He also gave Mr. DeMars advice whereby he raised his average index to 104.9, two-tenths above that of the plaintiff. They are both among the top 10 in the area.

In Matthews (supra) the Court relied on three expert witnesses who testified for the taxpayer as to his understanding of forestry, his reliability, his methods of operation and the reasonable likelihood of production of profits.

I note at this point that such evidence is sadly lacking in the case at bar.

Counsel for the respondent cited the decision of the Tax Review Board in Tranfield and Tranfield v. M.N.R. (unreported June 23, 1981). This was an appeal by the same taxpayers with respect to their 1974 to 1977 taxation years. The issue in that case was whether the activities of the appellants fell within the ambit of section 31 of the Income Tax Act so that the appellants were entitled to deduct full farm losses or whether they were only entitled to a restricted farming loss. The appeals came on before the Tax Review Board on June 23, 1981 and evidence was heard by F.J. Dubrule, Esq. Q.C., Assistant Chairman of the Tax Review Board relating to the taxation years in question as well as to taxation years 1978 to 1981. He concluded that the appellants were part-time farmers whose receipts from their farming operations did not exceed their income and expenses as a result of which they had no source of income therefrom, there being no combination of farming and some other source. The appeals were dismissed.

Counsel for the respondent contended that there was absolutely no change in their methods or in the nature of the appellants' operation from the 1974 to 1977 taxation years to the 1978 to 1980 taxation years, and submitted that this Court was effectively bound by the decision of the Assistant Chairman. I do not agree. Many of the cited judgments dealing with the issue of start-up costs and the availability of full farm losses in those years in which start-up costs are incurred have been handed down since 1981. The judgment of the Assistant Chairman, although entitled to reasonable consideration, must be read in light of these subsequent judgments.

I have considered the criteria in Moldowan v. The Queen (supra) and have concluded for a number of reasons that in the taxation years 1978 to 1981 inclusive, farming was not the appellants' chief source of income. The appellants' profit and loss experience in all of the years in issue, and indeed in all of the years that they have carried on a farming operation, discloses a string of losses broken only by the receipt of a large sum of insurance proceeds in 1984.

An examination of the sources of income from the standpoint of their capacity to produce a profit, both during the years in question and in the foreseeable future, gives little cause for optimism with respect to the farming operation. Even taking into account their plans for the Hereford breeding operation and the steps they have taken to this point in the implementation of their plans it is difficult if not impossible to accept their projections of future profitability, unsupported as they are on any factual basis.

This Court is asked by the appellants to accept without question their assessment of the quality of their breeding operation and of their herd. There is no evidence that the appellants have been accepted in the local ranching community which will be the logical market for their product. There are no sales upon which base prices can be established for their projections. Their financial projections are merely statements of the appellants' belief unsupported by any other evidence. Indeed as counsel for the respondent noted one has to question the qualification of the taxpayers in this particular case to make such projections. All of the estimates presented to the Court were based on their own general assessment of their progress. Furthermore the financial results projected were based on an anticipated 100 per cent success rate. That means no further loss of stock; the achievement of a very high level of quality; a competitive grading of their test calves and so on. Their unsupported assertions that such results will occur, are not, in my view, sufficient to discharge the onus that rests upon the appellants.

The appeals with respect to the 1978 to 1981 taxation years inclusive are dismissed.

Appeals dismissed.