Amerik Singh Nijjar v. Minister of National Revenue, [1987] 1 CTC 2338

Bonner, T.C.J. [Orally]:—This appellant appeals from assessments of income tax for the 1979, 1980, 1981 and 1982 taxation years. The assessments were made on the basis that section 31 of the Income Tax Act applies to limit the deductibility of farming losses sustained by the appellant in those years.

It was the position of the appellant that the section 31 limitation did not apply because his chief source of income was either farming or, more particularly, a combination of farming and trucking. The appellant's activities in trucking, carried on first as a business and subsequently as an employee, generated income as set forth on Exhibit R-2. Farming, on the other hand, has generated revenues, expenses and losses as summarized on Exhibit R-1.

The appellant arrived in Canada from India in 1968. While in India he did have some experience in farming. He had supervised the operation of the family farm while still attending school. Following his arrival in Canada the appellant worked first as a labourer on a farm for a few months. Subsequently he worked in a sawmill for several years. Next he worked as a construction labourer. In 1975 he bought a truck and went into the trucking business. I have already referred to the financial results of the trucking activity.

In November of 1978 the appellant sold two houses and invested the proceeds, approximately $40,000, in the purchase of a 29-acre farm property at Cloverdale. The cost of the farm was $165,000 and the purchase was financed by a first mortgage of $100,000 and a second of $25,000. According to the appellant the farm, at the time of purchase, was not in a productive state. It was, he said, overgrown with grass and bushes and there was, he said, a jungle at the rear. There was a very substantial number of stumps which had to be removed and burned. In the course of doing that the appellant found that his tractor slipped in the wet and thus a severe drainage problem was revealed.

The appellant did invest a great deal of his labour in his effort to convert the land which he had purchased into a productive farm. In 1979 he devoted his efforts to plowing and stump removal in the middle field as shown on Exhibit A-1. In that year he also grew a few potatoes, I gather unsuccessfully due to the wet. In 1980 he continued with stump removal in the easterly fields as shown on Exhibit A-1. An attempt to grow cauliflower in that year was unsuccessful due to the water problem.

In 1979 the appellant consulted a government agricultural representative. He asked whether his land was suitable for the production of blueberries. He was told that it was if drained.

The appellant consulted further with a blueberry expert in 1980. In 1981 he tried without success to borrow the money needed to purchase the drainage tile and blueberry plants to commence operations. In 1982 he succeeded in securing the necessary loan. He installed the tile drainage system and in September of that year he planted eight acres in blueberry bushes. In the spring of 1983 he planted a further seven acres of blueberry bushes. The appellant hopes to plant a further substantial area in blueberries next year if finances permit.

There can be no doubt on the evidence that, although trucking produced the money during the years in question, it was farming that had the first call on the appellant’s time and financial resources.

The schedule entered in evidence as Exhibit A-4 suggests that 15-acre and 25-acre blueberry operations are capable in the mature state of generating annual profits of $50,000 and $75,000 respectively. Exhibit A-6 suggests that a 25-acre operation has the potential to yield total net income of $127,500 over the first ten years. Both calculations rest on premises as to sale prices and costs which may be rather optimistic. A finding whether the estimates are too optimistic will not, however, affect the outcome in this case.

Section 31 of the Income Tax Act commences with the words, “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 . ..". The words “for a taxation year” are not to be ignored.

In the case of William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, Mr. Justice Dickson (as he then was) pointed to the significance of the words “source of income". He said at 313 (D.T.C. 5215):

The next thing to observe with respect to subsection 13(1) (which is the predecessor of section 31) 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”.

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit.

His Lordship went on further at page 314 (D.T.C. 5215) to say the following:

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 had 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.

The thrust of the appellant’s case was that the farming business which was said to be part of the combined chief source during the years in question was a blueberry-growing operation. It was the profit potential of such an operation to which the evidence was directed. I cannot find on the evidence that an operation of that type commenced before September 1982. The evidence was plain that a blueberry operation could not succeed on the appellant’s land until proper drainage was installed. Also, obviously, a blueberry operation cannot proceed without blueberry plants in the soil. It was not until September of 1982 that both those prerequisites were satisfied and the blueberry farming could be said to have become a source of income at all.

As I appreciate the evidence, the appellant's activities prior to September of 1982 involved the conversion of a derelict farm into a property capable of productive use. It was not, however, until the spring of 1983 when a total of 15 acres had been planted that the scale of the blueberry operation arrived at the 15-acre level of activity explored in the evidence as to financial potential.

Counsel for the appellant submitted that a farming business may well commence before the plants have matured to the point at which a crop can be produced. I agree. However, I reiterate that it was not until 1982 that the physical plant was complete to the point when blueberry farming became a source of income at all. It was not until 1983 that the sale of operations reached the minimum level to which the evidence as to chief source was directed.

Nothing in the Trial Division decision of the Graham case ([1977] C.T.C. 370; 83 D.T.C. 5399) assists the appellant. It should be noted that Mr. Justice Cattanach was dealing with the taxation years 1977, 1978 and 1979 which followed the point in 1975 and 1976 where the appellant was, to quote His Lordship, “.. . able to embark upon the pig farming operation he had planned to the extent he had envisioned.” In this regard I refer to page 379 of the reasons for judgment in the C.T.C. reports (page 5407 of the D.T.C. reports).

For the foregoing reasons the appeals will be dismissed.

Appeals dismissed.