Ernest Koteles, Patricia J. Koteles v. Minister of National Revenue, [1986] 1 CTC 2511, 86 DTC 1378

Couture, C.J.T.C.:—These appeals were heard together on common evidence. They involved the appellants’ 1981 taxation year and the deductibility of farm losses incurred during the said taxation year from their respective employment income.

Both appellants were full-time civil servants, he with the Department of Transport and she with the Department of Supply and Services.

The bulk of the evidence was adduced by Ernest Koteles subsequently concurred in by Patricia J. Koteles. While this fact was not mentioned by the witness, the appellants were involved in a farming venture on a partnership basis, each owning a 50 per cent interest as reflected in their income tax returns and assessments.

The evidence disclosed that the appellants lived in Chelsea, Quebec and in 1974 they purchased a parcel of land of one hundred acres in Campbell’s Bay, Quebec, located some 50 miles from their residence. According to Ernest Koteles at the time of this purchase they did not intend to work this land or use it as an income-producing asset, but in 1981 for reasons which were not given or explained to the Court the witness said that they decided to start a farming operation on their land and become fully fledged farmers. No information was provided as to what prompted this sudden interest in farming or as to the extent of their prior involvement or exposure and experience in their proposed vocation.

In 1981 they cleared and planted 18 acres of their original purchase and the remainder was retained as forest or scrub land as referred to by the appellant. In the same year they also purchased another parcel of land of the same size, which was mainly forest, but no farming activities were carried on that second parcel in 1981.

The gross income derived from this first year operation was $806 and the expenses incurred including $12,935 of capital cost allowance amounted to $29,466 which gave rise to a loss of some $28,660, each partner claiming $14,330 of losses against his/her employment income of $27,746 in the case of Ernest Koteles and $24,098 for Patricia J. Koteles.

In 1982 they cleared an additional ten acres off the second parcel purchased in 1981 which were planted.

In 1983 they purchased another parcel of land of 200 acres of which 75 acres were cleared and 125 were forest.

From a chart prepared by the appellants and filed as an exhibit it shows that for the taxation years including the taxation year under appeal the farming property of the appellants consisted of:

These numbers indicate that during the taxation years after 1981 the appellants have devoted a substantial amount of time, effort and energy in ringing their operations to the level reached by 1984 and at the same time to have been able to cope with the requirements of their full-time employment.

The witness explained that when they started in 1981 there was nothing on the property; no buildings, no equipment and the land itself was strictly scrub land. they built two Quonset equipment storage buildings and one shelter for the harvesting equipment. On the financial statement attached to their respective income tax return for 1981 it indicates the following:

In assessing the appellants the respondent disallowed the losses as claimed by each appellant and allowed them the limited farm losses under the provisions of subsection 31(1) in the amount of $2,500 each.

The appellants filed notices of objection against their respective assessments which were confirmed eventually by the respondent. Their contention was that their farming operations in 1981 were more than a sideline business as implied by the respondent in his assessment and that they constituted in fact their major preoccupation notwithstanding their full-time employment.

The question that I have to resolve with regard to these appeals is whether during the taxation year 1981, the only taxation year under appeal, the appellants were entitled or not to their full farming losses in computing their respective income.

The answer to this question is dependent upon the facts as they existed in 1981 considered in the light of the principles laid out by Mr. Justice Dickson of the Supreme Court of Canada, as he then was, in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213.

The learned Justice who wrote the unanimous decision of the Court states at 315 (D.T.C. 5216) that the Act envisages three classes of farmers and I quote:

(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 but 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 which of the classes described by His Lordship were the appellants in 1981?

They had been civil servants for a number of years and their main source of income for 1981 shown on their respective tax return was their salary. In addition to their salaries the reported amounts received from a registered retirement savings plan which they apparently cancelled that year. They had owned a non-productive parcel of land for seven years in 1981, and the fact that they exerted efforts, energy and spent money in converting a portion of it, 18 acres out of 200, into productive land does not by itself, in my Opinion, support their claim that their farming activities were of sufficient magnitude to reduce their full-time employment to a subsidiary occupation.

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. However, in the present appeal no evidence was adduced by the appellants to demonstrate to the Court whether the prospect of future acquisitions of additional land formed part of a total long- range planning at the time of their initial decision of becoming farmers in 1981 or was merely the result of an expansion of their original venture which was carried on over the years as land became available for purchase. For this reason the acquisitions of land in subsequent years with the increase in acreage under culture are not of real assistance to the Court in determining the chief source of income of the appellants in 1981.

In their evidence they explained that when they started their farming operations in 1981 they were hoping that farming would become their chief source of income within a few years, in fact he mentioned five years but added: “as long as we were entitled to deduct our full losses against our salaries/' However, as mentioned before, no evidence was led with regard to their financial resources, their respective previous experience in farming and the extent of their knowledge of the industry including forestry operations so that the Court could appreciate whether their alleged expectations were capable of realization within a reasonable period of time or should be regarded as the formulation at that time of aspirations which in reality were completely beyond their reach.

Eighteen acres of land under culture and some 178 acres of forest, none of the timber having attained the required maturity for cutting and not expected to reach this maturity for at least five to ten years, according to the evidence, did not represent in 1981, in my estimation, an economic operation which could generate by itself at any time or could be looked upon to yield within a reasonable time sufficient income to meet the test enunciated by Mr. Justice Dickson in Moldowan with respect to the first class of farmers, that is whereby the appellants could reasonably expect that their farming operations could provide the bulk of their income or the centre of their work routine.

Admittedly in the years following the taxation year under appeal they did expand their operations substantially and it is quite possible that at some point after 1981 they could have relied on farming as their centre of work routine and claim with justification that their chief source of income was a combination of farming and some other source of income, but this is not what I have to decide in dealing with these appeals.

On the basis of the evidence presented in these appeals, I am unable to accept that for the taxation year 1981 the chief source of income of the appellants was a combination of farming and some other source.

For all these reasons the appeals are dismissed.

Appeal dismissed.