Dan Wiebe v. Minister of National Revenue, [1987] 1 CTC 2397, 87 DTC 309

Brulé, T.C.J.:—The present appeal, heard in Saskatoon, Saskatchewan, on February 20, 1987, is from notices of reassessment for the taxation years 1981 and 1982 by which the Minister of National Revenue restricted the appellant's farm losses for each ‘of the years in question to $5,000 pursuant to subsection 31(1) of the Income Tax Act.

Facts

The appellant was raised on a farm and shares this background with his wife. Both have always wished to return to farm living. The appellant has kept abreast of new developments in farming and farm machinery.

It proved impossible for the appellant to go into farming immediately after high school and so the appellant chose to study accounting. He was eventually hired as an accountant in a car dealership in Saskatoon, Saskatchewan, where he worked throughout the taxation years under appeal.

In 1981 the appellant decided to enter into a farming partnership with his brother who had previously owned a dairy operation. A 1200-acre property with farm buildings and machinery was purchased under the name of both brothers and their wives. Both brothers invested $100,000 each and the $400,000 balance of the purchase price was borrowed.

Under the brothers' understanding of the partnership the appellant's brother would live on the farm site and look after the operation during weekdays. Because the farm was situated approximately 200 miles from the appellant’s work place in Saskatoon it was agreed his presence on the farm would be required only on weekends and holidays. The appellant would perform farm-related tasks such as bookkeeping and planning in Saskatoon on weekdays. He plans to move to the farm and abandon his work as an accountant as soon as the operation is profitable enough to allow it.

Issue

At issue in the present appeal, is whether the Minister was justified in restricting the appellant’s farm losses to $5,000 in each of the 1981 and 1982 taxation years.

Analysis

Section 31 of the Income Tax Act reads as follows:

31(1) 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, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

The exact meaning of section 31 of the Act (formerly subsection 13(1)) has been clarified by the Supreme Court in the case of William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. In that decision Mr. Justice Dickson described, at 315 (D.T.C. 5216), the categories of farmers created by the Act:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(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 subsection 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 subsection 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.

In order to determine in which category the appellant belongs the guidelines provided by the Court at page 313 (D.T.C. 5215) of that case must be considered:

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.

The respondent has admitted the taxpayer had a reasonable expectation of profit from his farm operation in the taxation years in question. Dickson, J. goes on to say on page 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. A man who has 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 profitablity 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.

Before examining the facts of the present case in the light of the suggested criteria, it is appropriate to consider the following comment by Mr. D.K. McNair from his book Taxation of Farmers and Fishermen, Richard De Boo Publishers, Don Mills, Ontario, 1986 at page 12-28:

Thus, the determination of whether farming, alone or in combination with some other source, is the chief source of income is made for each partner taking into account not only his income from, activities and investment in, the partnership, but also his income, activities and investment associated with farming ventures carried on outside the partnership. As a result, farming could be considered to be the chief source of income for one or more partners, in which case those partners would not be subject to the restriction on the deduction of farm losses, while for other partners in the same partnership farming, alone or in combination would not be the chief source so that they would be subject to the restriction. Similarly, if one or more partners is subject to the restricted loss rules, the maximum deduction of $5,000 is available to each partner, rather than having to be divided among them.

The Court feels this constitutes a proper statement of the law and does not consider binding the fact that the appellant’s partner's losses are not restricted.

In relation to evidence adduced pertaining to prior or subsequent taxation years the Court agrees with the statement of Couture, C.J.T.C. in the case of Ernest Koteles, Patricia J. Koteles v. M.N.R., [1986] 1 C.T.C. 2511 at 2513; 86 D.T.C. 1378 at 1380:

The Court has to consider the facts as they were presented in evidence and, therefore, as they allegedly existed in 1981. Admittedly it is permissible to the Court to consider events which took place either prior or after the taxation year under appeal, as what happened in those years often provides informative data as to the true nature of an appellant’s farming operations in a year under appeal.

The appellant initially invested $100,000 for the purchase of the 1200-acre farm and farm buildings. Another $100,000 was invested by his brother and the remaining $400,000 was borrowed by the partnership. Since the original purchase, the appellant has purchased a further 160 acres of land and the partnership has rented another 1200 acres of land. The appellant’s total investment as of 1986 was approximately $230,000.

The Court is satisfied that the appellant has met the test of capital committed in respect of "chief source of income", stated by the Supreme Court in the Moldowan case (supra).

The appellant spent approximately 1,850 hours per year working as an accountant for the car dealership. His work schedule was fairly flexible and allowed him to take time off for farm business. As for the time spent working on the farm, the appellant estimates this to be in the area of 1,000 hours a year. This includes time spent working weekends from April to October and on yearly holidays. To this must be added another 350 to 500 hours a year the appellant has spent working away from the farm on related business. This includes work related to soil testing, bookkeeping, planning management, keeping up to date on farm techniques and machinery and the building of calf feeders.

The test of time spent, as revealed by the ordinary mode and habit of work must, in the present case, be applied in the light of the capital committed by the appellant and of the sharing of responsibilities resulting from the partnership.

Because of importance of the appellant’s capital investment, the comments made by Taylor, T.C.J. in G.B. Hunter v. M.N.R., [1985] 1 C.T.C. 2440 at 2443; 85 D.T.C. 404 at 406 may be properly applied to the present case:

Obviously, with this type of farming operation the start-up costs are extremely difficult to handle but he, through really hard work, working with Hydro and working on the farm, was able to handle the start-up costs. The fact that he is doing outside work is no different than if he had to go to the bank to borrow the money.

The comments of Joyal, J. in the case of Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62 at 67; 85 D.T.C. 5058 at 5062 may also be of use in evaluating the time the appellant spent physically present on the farm:

The plaintiffs physical presence on his farm was usually over weekends and holidays. The intellectual input, however, was a daily affair.

It is true that the plaintiff was not spending full-time at the farm culling the herd, cleaning the barns, feeding the stock or sowing and reaping his harvest. I find as a fact that the plaintiff was not running a cottage industry where that element of “time spent or devoted” has been most appropriately applied. The plaintiff was engaged in large-scale operations requiring commitment of large and risky expenditures. The decision-making process and the nature of the involvement must perforce be measured qualitatively as well as quantitatively. I fail to see any substantial difference in law between time spent thinking, planning, organizing and deciding, and time spent putting up split-rail fences. Although the plaintiff did do all of the usual farming chores on a continuing basis during the whole history of his farming operation, I think that the test is substantially met in the intellectual direction he provided to the business and in the constant attention he had to give his large investment.

The appellant’s projections based on sensible assumptions called for profits within a reasonable amount of time. The losses experienced by the appellant may be attributed in a large part to circumstances beyond his control. The potential profitability of the operation, taking into account all relevant factors, has been established.

The facts in the present case indicate that the taxpayer experienced a change of mode and habit of work. The appellant’s employment income allowed him to earn the capital required for the farm operation. Because of the partnership arrangement it was possible for the appellant to do farm- related work away from the farm on weekdays and to perform the necessary physical labour on the farm site on weekends and holidays. These facts, in light of the actual and potential profitability of the operation, lead the Court to the conclusion that, for the taxation years in question, the appellant falls within the first category of farmers described in the Moldowan case (supra), those free of the limitation of section 31 of the Act.

For these reasons, the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellants shall be entitled to party and party costs.

Appeal allowed.