Jack Topolewski and Mary Topolewski v. Minister of National Revenue, [1986] 2 CTC 2405, 86 DTC 1824

Tremblay, T.C.J.:—These appeals were heard on February 26, 1986 at the City of Vancouver, British Columbia.

1. The Point at Issue

The point at issue is whether the appellants, husband and wife and main shareholders of View Construction Ltd., are correct in the computation of their personal income, for the taxation years 1979, 1980, 1981 and 1982, to claim 50 per cent of farming losses, amounting to $29,310, $60,529, $21,727 and $31,398, respectively.

The farming business is carried on as a partnership, known as J. & M. Ranches, since 1974. The appellants contend they devoted virtually all their available time to working on the farm and that their chief source of income for the years in question was farming.

The respondent disallowed the said losses and allowed only restricted farming losses of $5,000 per year, on the basis that their chief source of income was neither farming nor a combination of farming and some other source of income.

2. The Burden of Proof

2.01 The burden of proof is on the appellants to show that the respondent's assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In both instant cases, the assumptions of facts are described in paragraphs 6(a) to (g) of the replies to notice of appeal.

2.02.1 As for the appellants, Mary Topolewski's reply reads as follows:

6. In reassessing the Appellant and restricting her farm loss to $5,000 in each of the years reassessed, the Respondent made certain assumptions of fact, inter alia:

(a) The Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income.

(b) The Appellant's chief source of income was at all relevant times derived from her involvement in the construction business and equipment rental business as Secretary and shareholder of View Construction Limited and as shareholder of Columbia Excavating Limited and of J.E.T. Equipment Limited.

(c) The farm revenue and expenses for each of the years under appeal are as follows:

Statement of Farm Revenue & Expenses

	Jack & Mary Topolewski
	1978	1979	1980	1981	1982
REVENUE
Livestock	4,336	46,193	65,242	73,772	53,705
Interest	374	889	325	577	8,785
TOTAL REVENUE	4,710	47 ,082	65,567	74,349	62,490
TOTAL EXPENSES	48,515	62,401	96,096	96,076	93,888
	(43,805)	(15,319)	(30,529)	(21,727)	(31,398)
Inventory Adj.	21,000	(14,000)	(30,000)	—	—
	(22,805)	(29,319)	(60,529)	(21,727)	(31,398)

	1978	1979	1980	1981	1982
EXPENSES
Feed & Hay	8,632	15,178	21,538	31,925	28,972
Fuel	1,892	1,156	990	5,188	4,544
Insurance & Taxes	1,589	2,078	4,920	5,170	4,999
Interest	2,382	1,348	361	5,161	6,009
Livestock	3,531	13,025	31,650	4,025	9,602
Land Rental	—	2,250	—	991	—
Misc.	878	1,517	3,207	2,926	5,281
R&M	2,470	513	99	757	273
Supplies	1,877	1,871	—	—	—
Training Fees	1,175	1,368	—	—	—
Utilities	1,038	1,565	1,587	—	—
Vet	501	814	1,974	1,986	2,182
Wages	16,061	14,742	25,052	32,170	27,386
CCA	6,489	4,976	4,718	5,777	4,640
	48,515	62,401	96,096	96,076	93,888

(d) The Appellant [Mary Topolewski] had the following other sources of income:

	1979	1980	1981	1982
(Bonus	10,000.00	10,000.00
View Const. (Salary	15,206.00	66,723.00	18,400.00	19,056.00
Interest	2,317.00	3,993.00	14,461.00	23,951.00
Net Rental Income	203.00	19,372.00	27,198.00	25,221.00
T4A View Construction	—	1,650.00	1,425.00
				—
Dividends — View Const.	—	—	135,234.00	—
Taxable Capital Gain	—	—	30,465.00	3,830.00

(e) Farming was not the Appellant’s ce ntre of work routine or major pre- occupation.

(f) The Appellant did not invest significant amounts of capital in order to establish farming as her chief source of income.

(g) The Appellant did not look to farming for her livelihood nor could she expect to do so in the near future.

2.02.2 For the appellant, Jack Topolewski, the assumption of facts are the same as those concerning Mary Topolewski, except paragraph (d), which reads as follows:

(d) The Appellant had the following other sources of income:

	1979	1980	1981	1982
(Salary	52,779.00	55,080.00
View Const. (Bonus	140,000.00	490,000.00	613,632.00	52,987.00
Dividends	2,125.00	2,510.00	2,127.00	1,722.00
Interest	34,661.00	51,574.00	73,614.00	75,363.00
Rental Income	2,824.00	22,077.00	27,198.00	25,222.00
Taxable Capital Gain	34,279.00	362.00	17,751.00	2,255.00
Misc. Other Income	3,235.00	846.00	287.00	27.00
Columbia Excavating	—	—	—	5,864.00

3. The Facts

3.01 The appellants reside in the City of Kamloops, in the province of British Columbia.

3.02 In 1974, the appellants, husband and wife, acquired a farming property situated 35 miles east of their place of residence and commenced at that time to establish a cattle farming business on the land.

3.03 The aforesaid farming business was conducted as a partnership, known as J. & M. Ranches. The sole partners of the farming business were both appellants.

3.04 The appellants are both employed by View Construction Ltd. of which they are shareholders.

3.05 The herd size has increased from 79 animals in 1976 to 155 animals in 1983.

3.06 Jack Topolewski was born on a farm in Poland. He was six years old when he arrived in Canada in 1930. In 1938, his father acquired, in Manitoba in the Swan River Valley, a 160-acre farm, a mixed farm of grain and cattle.

3.07 In 1943, Jack Topolewski left the farm to join the army. He served in Canada and overseas and was discharged in 1946. He then wanted to take a mechanical course but a counsellor encouraged him to go back to the farm, and he took this advice.

3.08 In 1947, he acquired a quarter-section of land, 160 acres, by means of the Veterans’ Land Act. It was raw land, entirely covered by bush. Although he succeeded in clearing 50 acres and cultivated the property, farming was a depressed industry in those years.

3.09 In November 1952, he got married. His wife, Mary, was born and raised on a farm in the same general area as the Valley.

3.10 They decided to leave the farm and travel to British Columbia to seek work in this farming area. In March of 1953, he obtained employment in the construction industry with Ben Ginter Construction in Prince George. The same year, he sold the farm in Manitoba and used the money to repay the loan, made pursuant to the Veterans' Land Act.

3.11 In September 1956, he had the opportunity to become a 35 per cent partner in View Construction Ltd. for $8,000. Ben Ginter, the other partner in the firm, sold Jack Topolewski his remaining interest in 1969 for $900,000. The Royal Bank loaned the appellant, Jack Topolewski, this money based on the value of the construction company.

3.12 The company was successful but it required hard work. He had to work 15 to 18 hours a day and was always away from home. The appellants adopted two children, a boy born in 1962 and a girl born in 1965.

3.13 Since 1973, Jack Topolewski has been trying to sell the shares of View Construction Ltd. but without success. The company continues to operate.

3.14 In the spring of 1974, he acquired in partnership with his wife 48 acres of land situated 30 miles east from Kamloops for $175,000. They also leased a 70-acre piece of land from the provincial government. In that parcel of land there was approximately 10,000 acres for summer grazing and this, in fact, is the Hydro right of way. After the land was cleared, the Department of Forestry sowed grass. A group of seven photos were filed as Exhibit A-1, showing the South Thompson River, the land, the buildings, the animals and the grazing land.

3.15 In 1976, the appellants acquired a 30-acre piece of land located to the west side and a ten-acre piece of land located to the south side of the property. In 1979, they acquired a 30-acre piece of land located to the east. Later they tried to acquire a section of land (640 acres) which was part of the Department of Forestry reserve. Their intention was to clear it and plant hay ‘so that [they] would have all of [their] own feed for the winter" (TS, p. 26). The Department of Forestry would not let it out of the Forestry Reserve, which meant the appellants could not purchase it.

They also attempted to buy any of the property on either side of their farm. After negotiation "the price was too high” (TS, p. 26). The intention was to continue in the cattle and purebred stock businesses. The latter pursuit involves basically the breeding of quality improved cattle, as commercial stock does not have the same dollar value (TS, p. 28).

3.16 In 1974, before buying the property, they had made inquiries with other ranchers and arrived at the conclusion "that the money that [they] could make would be in the purebred, raising of purebred seed stock" (TS, p. 27). After attending various cattle shows in British Columbia and Alberta, they decided to invest in Hereford cattle. They had “an objective of 240 head of cattle, of which 80 to 90 head would be brood cows, so that [they] would have a recycling of 80 head a year, and to date, of course, [they] have not reached that objective". This objective was sufficient for the land they owned (TS, pp. 27-28).

3.17 The two appellants decided to start out as a joint business: ".. . my wife wanted to have more involvement in it, so we inquired, and discussed it with our accountant, and our lawyer, and on the advice of our lawyer, we had formed a partnership, and run it as a partnership business" (TS, p. 28).

3.18 Since 1974, they have been retaining the expertise of a herdsman, Gerrard Tone, who is a cattle technician. He works full time with the cattle and lives on the farm. The appellants had a housetrailer on the farm where they stayed on weekends.

3.19 As Exhibit A-2 (A-2(a) to A-2(e)) five copies of The Canadian Hereford Digest (1982, 1983, 1984, 1985) were filed. One can read the reference to the classification animals owned by J. & M. Ranches. According to the witness, Jack Topolewski, in 1974, the average bull size and weight was in the area of 1,000 to 1,100 pounds. "Over the short time that [they] had ranched [they] upgraded [their] stock from 1,000 pounds to 15 and 1,600 pounds of weight, and in 1983 [they] had the grand champ bull at the Kamloops bull sale, that weighed . . . 1,995 pounds as a two year [sic] old." (TS, pp. 30-31). The animal was sold for $5,000 (Exhibit A-2(c) ).

3.20 The herd size of J. & M. Ranches from 1976 to 1985 is summarized as follows (Exhibit A-3):

3.21 Cattle sales since 1974 are summarized as follows (Exhibit A-4):

3.22 Jack Topolewski explained that he and his wife made, among others, the following improvements to the farm for about $150,000: a hay shed, feeding pens, loafing barns for cattle, shelters, corrals, fences and a mainline for the irrigation system. Repairs included the river bank and the river flat.

3.23 Jack Topolewski testified that despite devoting most of his time to his company, he spent 75 to 100 hours per month assisting in the operation of the farm, which is about 30 per cent of his time he spent with the company. He had a radiophone and was in constant communication with the ranch, contacting the herdsman daily.

3.24 Mary Topolewski was the bookkeeper, doing “all the accounts and payables”. Her husband said, “she's got a keen eye for selecting of cattle. She's much better at it than I am.” (TS, p. 37)

3.25 The appellants entered into an agreement in 1983 with The Ranch of the Vikings with respect to semen interest for a pedigreed quality bull (Exhibit A-5). The purpose of this agreement was to upgrade the quality of his herd and finally to improve the prospect of profit, because the value of the animals goes up as they improve (TS, pp. 39-40). It is in evidence that the appellants insured the bulls they purchased. For example, in 1980, they bought Standard Domino for $9,500. It was insured for the whole amount with a premium of $855 (Exhibit A-6).

3.26 The 1974 to 1985 financial statements of J. & M. Ranches were filed as Exhibit A-7. They confirm the statement of farming revenue and expenses for 1978 to 1982 detailed in the respondent's reply to notice of appeal (para. 6(c), quoted in paragraph 2.02.1 above). It also shows the revenue and expenses for 1983, 1984 and 1985.

From 1983, the financial statements show that the partnership obtained income from renting trucks.

Gross and net rental income are indicated as follows:

3.27 In 1974 and 1985, the schedule of capital employed in farm operations was shown in Exhibits A-7 and A-8 as follows:

Inventory Fixed Assets Land, Total of Cattle House, etc.

1974 $ 35,586 $ 14,999 $175,000 $225,585 1985 $159,800 $ 11,900 $175,000 $453,800

The 1985 inventory of cattle is detailed in Exhibit A-8 as follows:

Livestock Inventory December 31, 1985

Number		December 31, 1985
70	Bred Cows @ $1,100	$ 77,000
2	Commercial Cows @ $750	1,500
3	Herd Bulls @ $4,000	12,000
17	2 Year Old Bull @ $1,800	30,600
29	Yearling Bulls @ $900	26,100
18	Year Old Unbred Heifers @ $700	12,600
139		$159,800

3.28 The summary of livestock purchases from 1974 to 1985 (Exhibit A-10) is given as follows:

3.29 The gross salary of Jack Topolewski from the construction business was $52,000 in 1983 and $37,000 in 1984. In 1985, becuse there was a depression in construction business, no salary was paid to the appellant.

3.30 In cross-examination, Jack Topolewski explained that:

(a) he is involved in three companies, View Construction Ltd., Columbia Excavating Ltd., and Jet Equipment Incorporated; Columbia Excavating Ltd. is a holding company which owns 73 per cent of the shares of View Construction Ltd.; Jet Equipment Incorporated was created for the purpose of acquiring equipment; it works in conjunction with View Construction Ltd., which builds roads and highways in British Columbia and Alberta (TS, pp. 53-54);

(b) from 1979 to 1982, the annual gross revenue of View Construction Ltd. totalled from $15 to $20 million (TS, p. 55); the annual gross income was in the range of $10 million in 1983 and 1984 and $17 million in 1985;

(c) concerning the farming operation and his maximum size of 240 head of cattle, the herd had to be built up over the slow period of time (TS, p. 59):

Well, the building up of cattle is a slow process. From the time that you breed an animal, you don't get the results of it for three years. You don't really know what you’re going to get from that, from them two animals for a period of three years. They will produce a calf in the first year, but it takes two years for it to — before we know whether it’s a quality animal or not.

(d) if he did not use his available capital of about $275,000 in 1979, 1980 and 1981 for building up the size of cattle faster to reach 240 cattle it was because . [they] felt that [they would] like it to build itself as it went. [They] can only go so fast, and by injecting more capital at a faster pace, it just merely increases [their] losses" (TS, p. 61). “The operating costs would have gone up some, but certainly the losses would have increased dramatically” (TS, p. 62); in taking the time to reach the maximum quantity they were sure to reach a good quality: “It’s all in the quality. It’s always there" (TS, p. 64);

(e) if he had then succeeded in selling the business he would have bought more cattle, but . . it was not moving, and therefore, [he] couldn’t apply [his] full energies to the farming at that time, and carry on with the business as well” (TS, p. 62);

(f) he wanted to sell the business “essentially with a view to retiring on the farm . . .’’ (TS, p. 70); however, if a sale did not go through, it would be a question of price; “The price had usually been agreed on, but it’s the obtaining of the money to complete the deal. The money is always the problem" (TS, p. 70).

At the end of the cross-examination, counsel for the repondent asked the witness the following questions (TS, p. 71):

Q. And in 1979 to 1982, you didn't expect farming to provide your livelihood, at that time?

A. No, I didn't necessarily depend on it.

Q. Essentially, you were looking at it in a long-term goal, building it up slowly, and hoping to sell the business, and after the business was sold, having farming as the source of income at that time?

A. That’s correct, yes.

3.31 In direct examination, Mary Topolewski testified that:

(a) she was born in Manitoba and grew up on a mixed farm (grain, cattle, pigs and chickens);

(b) their intention has been always to return to a farm; they were therefore very happy when they bought the farm in Chase, British Columbia, in 1974;

(c) for the years in question she was the bookkeeper of the farm (dealing with finance and the registry of cattle) as well as the bookkeeper of the business; as such, she spent 15 hours per week working for the business and 20 hours for the farm.

3.32 In cross-examination, the appellant, Mary Topolewski, testified that:

(a) she was the secretary director of View Construction Ltd; she has a 17 per cent interest in the company;

(b) she received a basic salary and at the end of the company’s fiscal year, depending on its income and availability, she would also receive a bonus;

(c) besides the bookkeeping, she went to various sales in Alberta and British Columbia to purchase bulls and females, and all cattle shows to help groom the cattle; she also assisted the herdsman in the weighing of the cattle and would cook for the men during haying time;

(d) they need the herdsman because her husband spent most of his time with the business: however, if her husband were not in the business, both their farming experiences would have been sufficient to run the ranching business.

3.33 Also in cross-examination, she made the following admission (TS, p. 79):

Q. Well, essentially, during those four years, from 1979 to 1982, you had these large amounts of money available, and you chose not to put the money, or all of the money, obviously there was a lot put into the farm, but you chose not to put all the money into the farm, because you weren't looking to the farm to provide your livelihood, to provide how you got along?

A. Yes.

3.34 In direct examination, Gerard Tone testified that:

(a) he has been the herdsman managing J. & M. Ranches since February 1, 1978;

(b) he was born and raised on a farm and had worked with his father for two years; after he worked for five years “with a registered angus herd in Alberta and a commercial herd in Alberta” (TS, p. 86); he has taken a training course for herdsman, an artificial insemination course, husbandry courses, disease, management and some agriculture courses.

(c) in February 1978, there was a discussion as to the kind of cows they wanted to raise on the farm (TS, 88-89):

A. Yes, we wanted to be very competitive with the rest of the breeders, to produce a quality of animal that would be accepted by both the purebred people and the commercial people.

So, that meant going to shows and sales in all the surrounding area to see what they were buying, finding out what they wanted. And that, by doing so, we decided the best route to go was to raise these cattle to get predicability that we could increase, and know what our increases in quality would be. So that we had gone out and bought 80 cows, like, we had 40, to double it, and you bought more cows, there is no guarantee they would be good. But, if you use those cows, breed them to the top bulls, keep the offspring, you can get a predictability. You know pretty well that that will be a better animal that [sic] the mother. So, this is this culling situation, and if we do it slowly, by selection, we get a far better quality animal with more predictability than just guessing by buying them.

(d) to produce high quality purebred hereford stock, it is better not to buy 240 head of cattle in the same year (TS, p. 89):

A. . .. It would be such an astromical [sic] amount of money you would have to buy just the top animals in more than one herd, and you’ve got a lot of other people wanting those top animals. It would be just not economical in any way.

(e) in 1978, the two-year-old bulls at the ranch weighed from 1,000 to 1,200 pounds; they were selling in the neighbourhood of $500 or $600; in 1985, the two-year-old bulls weighed 1,600 to 1,900 pounds; they were sold for $1,400 to $5,000 (TS, p. 90);

(f) the calves, yearlings and cows also improved in quality; the calf weights were increased from 400 pounds to 536 pounds, the yearling weights from 700 pounds to 900 pounds, the two-year-old weights from 1,500 to 1,800 pounds;

(g) the farm is now very competitive, especially in the British Columbia industry. “We're in the top 10 to 15 herds out of say 500 herds” (TS, p. 91); in terms of physical size in their purebred operation, the appellants have the second or third largest in a 30-mile radius;

(d) the appellants are very active in the farming operation; during a year they spent between 100 to 120 days at the ranch; during the summer and when calving would start in January, they came twice a week at night from 6:30 to 10:00;

(i) they had the following actual sales in 1985:

The quality of cattle of J. & M. Ranches (Exhibit A-9) is known. Its breeding program is known. People who bought their product before, come back now to still buy their products.

3.35 In cross-examination, Mr. Tone confirmed what he said in direct examination. He also explained that prices were high in 1979, but dropped in 1982, 1983 and 1984. Since that time, however, the quality of cattle has increased. Now they are selling more quality cattle for a higher price.

3.36 In direct examination, Keith Miller testified that:

(a) he is the secretary fieldman for the British Columbia Hereford Association and representative for The Canadian Hereford Digest for the province;

(b) every year since 1981 he visits 125 registered Hereford farms and 100 commercial farms in British Columbia;

(c) in British Columbia the Hereford Association has 500 members, each owning an average of 9.5 cows; the largest breeder owns 300 cows. J. &

M. Ranches is with the top 15 in the province.

(d) a registered Hereford farm owns animals that are registered, with papers and a genealogy; the registry office is located in Calgary. A commercial farm does not have registered animals. “The profitability should be better for a registered breeder than for a commercial breeder, because [they] have a chance of having a better average per animal” (TS, p. 117). However, concerning an ordinary registered breeder, he said (TS, pp. 117-118):

A. He has to start out by doing some public relations work, by getting his name known, and by establishing a good breeding program with quality animals. And most people, when they start out, do not get any, or very much consultation from anyone, and they just buy a bunch of cows that are registered. Just because an animal has papers, that does not necessarily make it good.

And, so, in my experience, what’s happened is most people, when they start in to a registered purebred operation, within about five to seven years they have sold every cow that they started out with initially, and they’re starting to rebuild agains, buy what they think will work for them.

(e) concerning the J & M Ranches program (TS, p. 118):

A. I would think that J & M Ranches are 75 per cent along the way to where they want to be. They’re three-quarters there. I don’t think you ever reach the pinnacle of what you feel is the exact type of cattle that you want, because you’re always striving to improve or if you’re not, you’re going to start going backwards, let’s put it that way.

(f) he would not recommend buying 240 purebred cattle in bulk, "because of the fact that [they] would end up culling 50 per cent of them at least” (TS, p. 120); essentially there is no guarantee of quality: "Sometimes you don't buy the proper type” (TS, p. 120); moreover, 1979 and 1980 were not the years to buy 240 head of pure cattle: "prices have taken a jump . . . The cattle industry is one of peaks and valleys . . . We have cycles, and about every eight to ten years ..(TS, p. 120);

(g) in British Columbia, very few full-time farmers have a capital investment of $450,000;

(h) J. & M. Ranches are “at most of the major shows .. . they're doing as good a job as they can possibly do given the circumstances of time and money available. . . . to have a purebred hereford herd of good quality animals, it’s been my experience that it takes ten to 15 years to attain that status" (TS, p. 122);

(i) according to his experience, it is normal to have a loss of $20,000 to $30,000 per year in the industry of purebred hereford breeders, before netting a profit (TS, p. 123);

(j) to have a revenue of $135,000 in 1988, in 1989 his estimation is that the 1985 expenses of $85,000 would increase by $10,000 to $12,000 (Exhibits A-7 and A-9) (TS, p. 126).

3.37 In cross-examination, Mr. Miller testified that:

(a) some members of the Registered Hereford Owners Association may also own commercial cattle; some of them are even hobby people that live on five acres (TS, p. 127); half of the 550 members are hobby farmers (TS, p. 128);

(b) two factors influence the increase in price: the quality of the herd and the perception that prices are increasing in general (TS, pp. 135-36).

4. Law — Cases at law — Analysis

4.0 1 Law

The main provisions of the Income Tax Act involved in the instant case are subsections 9(2) and 31(1), subparagraphs 53(1)(i)(i) and 53(2)(c)(i) and subsection 96(1).

9. ...

(2) Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

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 the 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 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.

53. (1) In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to him of the property such of the following amounts in respect of the property as are applicable:

(i) where the property is land used in a farming business carried on by the taxpayer, an amount in respect of each taxation year ending after 1971 and commencing before that time, equal to the taxpayer’s loss, if any, for that year from the farming business, to the extent that such loss

(i) was not, by virtue of section 31, deductible in computing the taxpayer’s income for that year,

(2) In computing the adjusted cost base to a taxpayer of property at any time, there shall be deducted such of the following amounts in respect of the property as are applicable:

(c) where the property is an interest in a partnership,

(i) an amount in respect of each fiscal period of the partnership ending after 1971 and before that time, equal to the aggregate of amounts each of which is the taxpayer’s share (other than a share under an agreement referred to in subsection 96(1.1)) of any loss of the partnership from any source for that fiscal period, computed as if this Act were read without reference to

(A) the references in section 14 and paragraph 38(b) to “2”,

(A.1) paragraph 18(1)(l.1),

(B) paragraphs 12(1)(o), 18(1)(m), 20(1)(v.i) and (gg), section 31, subsection 40(2), section 55, subsections 69(6) and (7) and paragraphs 81 (1)(r) and (s), and

(C) subsections 112(3.1) and (4.2),

96. (1) Where a taxpayer is a member of -a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(a) the partnership were a separate person resident in Canada;

(b) the taxation year of the partnership were its fiscal period;

(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of

(i) each taxable capital gain and allowable capital loss of the partnership from the disposition of property, and

(ii) each income and loss of the partnership from each other source or from sources in a particular place,

for each taxation year of the partnership;

(d) each income or loss of the partnership for a taxation year were computed as if this Act were read without reference to subsections 59(1.1) and (1.2) and 66(12.1) and paragraphs 59(3.1)(a) and 66(12.2)(a), (12.3)(a) and (12.5)(a) and as if no deduction were permitted by subsection 65(1), section 66, 66.1, 66.2 or 66.4 or the Income Tax Application Rules, 1971 in respect of this paragraph;

(e) each gain of the partnership from the disposition of land used in a farming business of the partnership were computed as if this Act were read without reference to paragraph 53(1)(i);

(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof; and

(g) the amount of the loss of the partnership for a taxation year from any source or from sources in a particular place were the loss of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof.

(2) The provisions of this subdivision shall be read and construed as if each of the assumptions in paragraphs (1)(a) to (g) were made.

4.02. Cases at Law

Counsel for the parties referred the Court to the following cases at law:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213;

2. Knaak v. M.N.R., [1984] C.T.C. 2460; 84 D.T.C. 1397 (T.C.C.);

3. Roney v. M.N.R., [1984] C.T.C. 2701; 84 D.T.C. 1431 (T.C.C.);

4. Bastien v. M.N.R., [1985] 1 C.T.C. 2317; 85 D.T.C. 262 (T.C.C.);

5. The Queen v. Graham, [1985] 2 F.C. 107; [1985] 1 C.T.C. 380; 85 D.T.C. 5256;

6. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.);

7. Hunter v. M.N.R., [1985] 1 C.T.C. 2440; 85 D.T.C. 404 (T.C.C.);

8. Laufer v. M.N.R., [1984] C.T.C. 3052; 85 D.T.C. 16 (T.C.C.);

9. Timpson v. M.N.R., [1985] 2 C.T.C. 2114; 85 D.T.C. 446 (T.C.C.);

10. Van Nostrand v. M.N.R., [1986] 1 C.T.C. 2132; 86 D.T.C. 1104 (T.C.C.);

11. Gordon v. The Queen, [1986] 2 C.T.C. 280; 86 D.T.C. 6426 (F.C.T.D.).

4.03. Analysis

A. Appellant's Technical Argument

4.03.1 The appellant's technical argument is that section 31 applies to the partnership level, and not at the partner level as the Minister has reassessed.

If the appellant is correct, the partnership’s sole source of income in the years involved was a combination of farming and a subsidiary source of rental income. The partners would therefore take the part of the losses apportionate to the partnership.

4.03.2 Counsel for the appellant bases his argument on subsections 96(1), 9(2), 31(1), 53(1), 53(2) of the Act all quoted above (para. 4.01). It is useful here to summarize the substance of these provisions. Where a taxpayer Is a member of a partnership, as in the instant case, the non-capital loss and the restricted farm loss shall be computed as if the partnership were a separate person (para. 96(1)(a)). Moreover, the said losses shall be computed as if “each partnership activity . . . were carried on by the partnership as a separate person, and a computation were made of the amount of each income and loss of the partnership from each other source or from sources in a particular place, for each taxation year of the partnership” (subpara. 96(1 )(c)(ii) of the Act).

Subsection 9(2) of the Act specifically states: "Subject to section 31, a taxpayer's loss for a taxation year from a business . . . is the amount of his loss . . . computed by applying the provisions of this Act. . . mutatis mutandis”

Section 31 of the Act says: "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. .. . .”

Counsel for the appellant therefore concludes that the main activity and main source of income of J. & M. Ranches, as a separate person, is the farming operation until 1982, combined with the rental operation since 1983.

4.03.3 According to counsel for the appellant, the remainder of subsection 96(1) of the Act is consistent with this interpretation. Paragraph 96(1 )(d), for instance, provides eight deductions (among others, a gas and oil allowance in subsection 65(1)) of losses which must be computed at the partner level and not at the partnership level.

Counsel for the appellant also referred to paragraph 96(1)(e) of the Act which provides that when a partnership calculates the gains or losses arising from the sale of farming land, paragraph 53(1)(i) must be excluded; section 53 provides adjustments to cost base. In the computation of the cost of a parcel of land used in farming business, the taxpayer's losses must take into account to the extent that such losses were not deductible by virtue of section 31, as provided in subparagraph 53(1)(i)(i) of the Act.

Since the latter provision does not apply to a partnership, counsel for the appellant contends that it is only consistent with the former interpretation because the losses of the partnership have already been deducted by virtue of paragraph 96(1 )(d) of the Act.

4.03.4 To confirm his thesis concerning the interpretation, counsel for the appellant also referred to subsection 53(2) of the Act concerning interest in a partnership. This subsection states that when a partner calculates his interest in the partnership for purposes of selling it, any loss to the partnership from any source must be computed "as if this Act were read without reference to [amongst others] section 31” (clause 53(2)(c)(i)(B) ).

The reason again, according to counsel for the appellant, is because the said losses have already been already deducted.

B. Respondent's Reply to the Appellant's Technical Argument

4.03.5 The respondent referred to paragraph 96(1)(g) to refute the appellant's argument. In sum, this paragraph provides that if the taxpayer is a member of a partnership, his loss shall be computed as if the amount of the loss of the partnership were the loss of the taxpayer, to the extent of the taxpayer's share thereof.

C. Decision of the Court

4.03.6 The point to be decided is whether section 31 applies to the part of the loss of a partnership applicable to a member in the computation of his income.

Subsection 96(1) is a deeming provision. Despite the fact that partnerships must be considered as separate persons in the computation of their incomes or their losses, they are not taxpayers. Their members are taxpayers. The income of a partnership is not taxable in its hands but in its members hands. This is obvious from all the provisions of subdivision j of Division B of Part I of the Income Tax Act (sections 96 to 103). These sections always refer to the members of the partnership. This appears from the headings: “Partnerships and their Members” “Allocation of share of income to retiring partner” (subs. 96(1.1)) “Disposal of right to share in income, etc.” (subs. 96(1.2)) “Validity of election by member of partnership” (subs. 96(3)) and others.

4.03.7 As I see it, the legislator in the Act provides two steps for setting up the taxation of the income (or the deduction of loss) of a partnership.

First the computation of the net income (or the loss) of the partnership must be as if the partnership were a separate person. At that level, section 31 of the Act must be set aside because it applies only to a taxpayer, and a partnership is not a taxpayer.

Once the net income (or the loss) of the partnership is discovered, the legislator puts the taxation of the income (or the deduction of the loss) in the hands of the partners, that is the second step. This procedure is clearly described in paragraph 96(1 )(g) of the Act. Section 31 of the Act, which is at the level of the taxpayer, then applies. Finally, where the legislator says at subsection 9(2), “Subject to section 31”, it is only because section 31 is a particular rule and subsection 9(2) dictates a general rule. This circumstance renders appropriate to indicate the existence of section 31.

4.03.8 After having written the above paragraph, I was informed of a decision rendered by Mrs. Justice B. Reed of the Federal Court — Trial Division concerning the Gordon case (para. 4.02(11)). The same technical argument was submitted by counsel for the appellant. The Court made the following conclusion at 288 (D.T.C. 6432):

I think the preferable interpretation is that argued by counsel for the defendant. The partnership loss or income flows through to the individual, retaining its characteristics in respect of its sources. The total income of each partner individually then determines whether or not subsection 31(1) is applicable to them. The partnership is not a taxpayer. The income is not taxed in the partnership’s hands; it is taxed in the hands of the partners. Subsection 31(1) applies to a “taxpayer".

D. Gentlemen Farmers or Full-Time Farmers?

4.03.9 The technical arguments being settled, the question remains of whether the appellants' chief source of income is “neither farming nor a combination of farming and some other source of income . . .” as understood under subsection 31(1) of the Act quoted above.

In this respect, the Supreme Court of Canada, in the well-known Moldo- wan case (para. 4.02(1)) made the following comments at pages 486 to 488 (C.T.C. 314-15) (the Court refers to subsection 13(1) of the former Act, which has the same wording as subsection 31(1) of the new Act):

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 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.

There has been difference of opinion on whether the word “combination" in s. 13(1) requires some “connection" by way of physical relationship or integration or inter-connection between farming and the subordinate activity which provides another source of income. Section 3(f) of the Income War Tax Act of 1917, as amended, made reference to “connection” in defining the permissible deductions from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income. Section 3(f) read:

(f) deficits or losses sustained in transactions entered into for profit but not connected with the chief business, trade, profession or occupation of the taxpayer shall not be deducted from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income.

The word “connected” is not found in s. 13 of the present Act. As Thorson P. said, obiter, in Simpson v. Minister of National Revenue([1961] C.T.C. 174) there is no reason why there must be such a limitation. I share this view. See also Dorfman v. Minister of National Revenue, supra, at p. 154 and Bert James v. Minister of National Revenue ([1973] C.T.C. 457), at p. 464.

It is clear that “combination” in s. 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think s. 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

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 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 livelhood but carries 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 carries 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 reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. 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.

4.03.10 The main criterion suggested above by the Supreme Court is the reasonable expectation of income from the various revenue sources.

On the one hand, there is no dispute that the farming operation and the business operation of the appellants have reasonable expectations of profit (paras. 3.14, 3.15, 3.18 to 3.22, 3.25 to 3.28 and 3.34(e), (f), (g), (i) etc.). On the other hand, it is also obvious that the business operation is more profitable: from $15 million to $20 million from 1979 to 1982 (para. 3.30(b)).

However, it is not only a question of quantum. One must also consider the time spent and capital committed in relation to each source of income.

4.03.11 In both main sources of income the capital committed is substantial (paras. 3.11, 3.14, 3.15, 3.22).

Counsel for the respondent on the one hand reproaches the appellants for not having purchased the 240 head of cattle immediately in 1979. In this respect, the preponderance of the evidence (paras. 3.30(c), 3.34(c), (d), 3.36(d), (e), (f)) is to the effect that the appellants followed the better route in taking eight to nine years to acquire the 240 head of cattle.

On the other hand, the same counsel contends that the purchase of the head of cattle must not be considered as an investment because they form part of the inventory.

Despite this argument and because of the adduced evidence referred to above, the Court must conclude that the requirement concerning capital committed in the farming operation is widely met.

4.03.12 Concerning the bulk of income and the time spent, it is appropriate to quote the definition of a full-time farmer by the Supreme Court of Canada at page 487 (C.T.C. 315): “a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine”.

It is obvious that for both appellants the bulk of income does not come from the farming operation (para. 6(c), (d) of the replies to notice of appeal quoted in paras. 2.02.1 and 2.02.2).

The preponderance of the evidence concerning the centre of work routine of the appellant, Jack Topolewski, is obviously to the effect that he spent the major part of his time with the company working 15 to 18 hours a day (para. 3.12).

However, the evidence is also to the effect that since 1974 actual efforts are made to sell the business (even if not all described above) with the intention of staying to work on the farm. In the meantime he hired a qualified herdsman and hoped to build the farm slowly towards a long-term goal (para. 3.30(e)), spending about 20 hours per week on the farm (para. 3.23). The Court is convinced that if the business had been sold, the appellant would have spent the majority of his time on the farm, making the hiring of a herdsman unnecessary (para. 3.32(d)). Despite those latter facts, the Court must conclude that the centre of the work routine of the appellant, Jack Topolewski, and his main energy, were not committed to farming as a main expectation of income. The reassessments issued by the respondent in this respect must therefore be maintained.

4.03.13 Concerning the appellant, Mary Topolewski, she spent 15 hours per week as bookkeeper for the company. However, she spent 20 hours per week engaged in bookkeeping for the farming operation (para. 3.31(c)). Moreover, she attended various sales to purchase bulls and females. She is more adept at this activity than her husband, according to the latter (para. 3.24). She assisted the herdsman in weighing of the cattle and cooked for the men during haying time. She was present at all cattle shows, helping to groom the cattle (para 3.32(c)).

The preponderance of the evidence is to the effect that the centre of Mary Topolewski’s work routine is within the farming operation; the Court favours the appellants’ thesis.

5, Conclusion

For these reasons, the appeal of the appellant, Jack Topolewski, is dismissed and the appeal of the appellant, Mary Topolewski, is allowed.

The appellant, Mary Topolewski, is entitled to party and party costs.

Appeal of Jack Topolewski dismissed;

Appeal of Mary Topolewski allowed.