Brian A. White v. Minister of National Revenue, [1987] 1 CTC 2178, 87 DTC 122

Christie, A.C.J.T.C.:—The appellant appealed to this Court in respect of his 1978 to 1983 taxation years inclusive. At the hearing his counsel informed the Court that the appeal was being abandoned with respect to 1978 and 1979.

In computing his income the appellant seeks to deduct his full farming losses against other income. In reassessing the respondent’s position is that only the limited losses provided for under subsection 31(1)* [1] of the Income Tax Act (“the Act”) are deductible.

The respondent having allowed the deduction of limited losses under subsection 31(1), no question arises regarding whether, in the years under review, the appellant’s farming endeavours were a business within the meaning of the Act; that is to say, whether in those years the appellant had a reasonable expectation of profit from farming. For the purposes of this appeal he did: Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071 at 2073; 84 D.T.C. 1094 at 1096. The only question is whether during his 1980 to 1983 taxation years the appellant was within the second of the three classes of farmers which Mr. Justice Dickson (prior to his appointment as Chief Justice) said in delivering the judgment of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 are envisaged by the Act. His Lordship described these classes at 315 (D.T.C. 5216). What was then subsection 13(1) is now subsection 31(1):

(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 carried 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 carried 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.

The appellant was born on January 1, 1947 at Caron, Saskatchewan. He moved to British Columbia with his parents when he was eight years old. In 1963 and 1964 he spent his summer vacations on his uncle's farm south of Regina. He graduated in medicine from the University of British Columbia in 1971. On completion of his internship in 1972 he went to Dawson Creek, British Columbia, and while there developed a real interest in farming. He attended a number of cattle shows and spent time at the Agricultural Research Farm. He made an unsuccessful bid for one-quarter section of land.

In 1975 he moved to Nanaimo and after looking at a number of parcels of land and farms, he chose a ten-acre farm near the northern boundary of Nanaimo. The price was $89,000. He acquired a few cattle, a number of pigs and other animals not described. This operation lasted until 1979. It suffered “small losses" during these years. They were not deducted in computing the appellant’s income and the precise amounts are not in evidence except that in a letter of August 22, 1983 to National Revenue (Exhibit A-16 which will be further discussed) the appellant stated that the 1979 loss was $11,000. During this time he was also engaged in practising medicine as a general practitioner in Nanaimo in partnership with two others. He estimated that on average during the period 1976-80 he devoted 80 hours per week to the practice of medicine. In the spring of 1979 he decided to become involved in the production of beef in a significant way and, for this purpose, decided to focus on full-blood Simmental cattle. They had been introduced into Canada from Europe in the late 1960s. He bought a herd in the fall of 1979 for $67,000. It consisted of 10 bred cows, 3 bull calves and 1 heifer calf. At this time he made a projection for his banker in support of an application for a loan (Exhibit A-1) that shows a loss of $7,400 in 1980 followed by profits of $800, $8,660, $3,850 and $5,480 in 1981, 1982, 1983 and 1984 respectively. The proposed loan was to be repaid in 1984.

The appellant declared that his goal was and is to become “one of the best purebred Simmental breeders in Canada".

In 1980 he began to reduce the time devoted to medicine. Wednesdays and weekends were allocated to farming. In this ear he began to exhibit at cattle shows where he enjoyed success. Particular reference was made to a bull calf he had in 1982 “that went on to the show circuit and came second in class at Spokane, Washington, was reserve calf champion in Round-Up at Calgary, was calf champion and reserve grand champion at Farm Fair in Edmonton, and placed fourth in class in a very strong show at Agribition in Regina". In this year he also bought a one-third interest in an animal said to have been one of the best Simmental cows in Canada. The appellant also attended at important sales of Simmental cattle.

In 1982 he decided that in order to achieve his ambition he would have to expand his herd as well as his land base, the latter so he could raise more feed. He made an offer to lease a 100-acre dairy farm, but it was not accepted. In 1983 he made an unsuccessful offer to buy a 60-acre farm south of Nanaimo. In the fall of that year he located an 80-acre farm ten miles from the centre of Nanaimo that he purchased in the spring of 1984 for $310,000. This land was related to a dyke system and he received the use of an additional 50 acres for maintaining the system. By 1984 the ten acres previously referred to was within the limits of the city of Nanaimo. The acquisition of the 80 acres involved a trade of the ten acres, the value of which was set at $200,000.

Reverting to 1983 for a moment, on August 22 of that year the appellant wrote a lengthy letter to Mr. T. Kuss of National Revenue regarding his entitlement to deduct his full farming losses. In it he projected a farming loss of $15,000 in 1984 and a profit of $30,000 in 1985 and significant profits from then on. A third projection prepared by the appellant is in evidence (Exhibit A-17) that shows losses of $100,000 for each of the years 1986 and 1987 and a profit of $17,900 in 1988 that soars to $213,000 by 1995.

The appellant said that in 1981 he reduced the time spent on practising medicine to 30-35 hours a week and by 1988 he hopes to reduce that to 30-35 hours per week for six months of the year. As will be seen with respect to the 1981 reduction in time spent on medicine, there is no concomitant diminution of the appellant’s income from that source.

Projections aside, the reality of the appellant’s actual gross farm income and net farm losses as established from the statements of farming income and expenses* [2] filed by him with his income tax returns for his 1980-1985 taxation years and their correlation with net professional income is:

Some time was spent at the hearing on the $28,715 or 34 per cent reported increase in the appellant’s income from 1984 to 1985 in the face of the appellant’s evidence that during this period the increase in payments to doctors under the medical insurance plan was “a very small amount”. He suggested three or four per cent at most. This is a guess. The appellant said the time spent practising medicine was "slightly higher" in 1985 compared with 1984. His medical overhead decreased by $11,344 from 1984 to 1985. Although the appellant did not mention this his associate, Dr. H. W Mark who testified on his behalf principally regarding the appellant's reduction in time devoted to medicine commencing in 1979, said that in 1984 physicians in British Columbia paid the provincial government $7,000 to $9,000 "as a voluntary pay back”. The Court was told this related to the restraint program. Mark did not say that the appellant had in fact made the payment.

There is nothing that contradicts the appellant’s assertion to the effect that he has undertaken farming with energy and intelligence. He has sought advice from knowledgeable sources. He learned the technique of artificial insemination and is endeavouring to master the skills involved in embryo transplants. He estimated that this objective is two-thirds accomplished although he admitted that to date he has not achieved great success in this regard. Embryo transplants can accelerate the quantity and improve the quality of beef production. He is a member of the British Columbia Sim- mental Association. He reads an estimated six periodical publications re- lated to the production of feed and beef. They also include information about marketing. Although the ultimate aim of the appellant is to deal only in Simmental cattle he became significantly involved with other beef cattle after he acquired his present farm. The reason for this involvement was the enhanced amount of feed available in relation to the Simmental herd and the prospect of the other cattle contributing financially to the success of the ultimate aim. In the letter of August 22, 1983 to Kuss he said that his capital commitment to his farming business is approximately three times that committed to the medical business. The appellant spoke of an underground drainage project undertaken in 1985 that cost $20,000 and, in the same year, a major renovation to the barn system to which no amount was attributed. Later he referred to a machinery inventory of $150,000.

I believe the foregoing reviews the evidence in sufficient depth. While there has been a substantial commitment by the appellant to his farming enterprise, these things must not be lost sight of in determining whether he is entitled to full farming losses. His prescience regarding the profitability of his farming business is unreliable. It appears to be based on subjective hopes rather than on objective expectations as it should be. His projections do not give sufficient weight to the vagaries of farming in respect of both production and marketing. While the risks in the production and marketing of beef are not of the magnitude involved in say the breeding, raising, training and racing of horses, they are there as the appellant’s experience shows. I do not find the appellant's allegation regarding the amount of capital devoted to farming compared to that devoted to his medical practice of much assistance in the absence of something, if there is anything, to show that capital commitment to one has some degree of relevance to capital commitment to the other. Further even if it is assumed, because on the evidence it can hardly be taken as established, that in 1985 there was a four per cent increase in rates payable under the Medical Services Plan and that the appellant made a voluntary payment of $8,000 to the government in 1984 (which nevertheless he would have had to spend the time and effort to earn) these things cannot alter the overall picture in any meaningful way. The history of losses during the 11-year period 1975 to 1985, especially those incurred since 1979 are germane and negative to the appellant's position. The importance of the appellant's professional income in relation to farming income is obvious. In determining whether a taxpayer is in the first or second class of farmers relativity between or among sources of income must be taken into account, with the probable exception of income from passive investment property such as interest, dividends, rents and royalties. In Moldowan, Dickson, J. said at 314 (D.T.C. 5215): “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.” I cannot construe the second sentence as indicating or even suggesting that all quantum differences are to be disregarded. When relativity between farming and medical income is taken into account the figures cited can only operate to the detriment of the appellant’s contentions.

In reassessing, the respondent has, by allowing the appellant to deduct limited losses under subsection 31(1) of the Act, in effect concluded that the appellant was in the second class during the years under review. A taxpayer in the second class is excluded from the first class. The onus is on the appellant to establish that on the preponderance of probability the respondent erred in this regard. He has failed to do so. In my opinion the whole of the evidence leads to the conclusion that the appellant cannot realistically or objectively be regarded as being other than a taxpayer who did not look to farming or to farming and, as a subordinate source, his professional income for his living during the time relevant to this appeal. As between the business of farming and the business of practising medicine, when what was committed to each is considered together with the financial results of each it is, I think, apparent that farming was in a sideline relationship to practising medicine.

The appeal is dismissed.

Appeal dismissed.