Steven Gorjup v. Minister of National Revenue, [1985] 2 CTC 2194, 85 DTC 530

Taylor, TCJ;—This is an appeal heard in Toronto, Ontario on May 14, 1985 against income tax assessments for the years 1977, 1978, 1979 and 1980, in which the Minister of National Revenue disallowed the restricted farm loss claimed. At the commencement of the hearing counsel for the Minister informed the Court that her instructions from the client (Revenue Canada) were not to proceed with the appeal with respect to the years 1977 and 1978. Therefore the remaining issue for determination by the Court is whether for the years 1979 and 1980 there was a “reasonable expectation of profit”.

In view of the comments on this appeal which follow, in my view it would be advantageous to provide a broad base for the opposing assertions of the parties as detailed by the written record:

For the appellant — from the notice of appeal:

I am a Ryerson Graduate in Mechanical Technology, with supplements Business Administration. 39 years old, married with four children aged 13, 11, 10, 6. Own a farm with 100 acres, located 60 miles north west of here in Caledon, Ontario. I am employed by Rochester Instrument Systems as a Special Engineering Applications Supervisor. I’m on salary with flexible hours.

As a child I lived on a farm in Europe. I moved to Toronto and went to school here. During my high school summer holidays I worked on a tobacco farm, hay farm and factories.

I met my wife in 1965. Her father owned a 200 acre farm, I come up to the farm regularly to help with the farming. Eventually we bought half of the acreage, which contained an old farm house and barn. With our downpayments, my father-in-law built himself a new house. He did not have a barn. He used our barn to house 48 beef cattle, in turn we used his farm machinery and also helped him harvest his crops.

We worked in this fashion for 3 years, helping each other, then my father-in- law had a stroke and retired from farming.

We engaged people to do custom work for us, but found that they were unreliable. Custom workers come at their convenience, and we had situations where our entire fields were ruined and spoiled by rain. We concluded that we had to buy our own equipments. To become familiar with current methods of farming, I attended lectures and Open House at Guelph University, following crop developments, feed lot operations, read books, magazines, literature on farming, followed daily Livestock Market Reports, visited Toronto Stockyards in the fall for annual Western stocker sale.

Below is a summary of activities from 1975 — present.

1975 — Beef Cattle

1976 — Sold cattle in Fall

1977 — Used Custom Workers for harvesting crops. Sold some hay in field

— most was spoiled by rain. Purchased tractor and mower.

1978 — Sludge was delivered to fertilize field. Purchased small farm imple-

ments.

1979 — Heavy field cultivating equipment purchased. Hired older person

to work farm with my machinery during the day, but found that this resulted in many hours of additional repairs and part cost replacement.

Picture #1 — Shows 25 acres worked.

1980 — Additional equipment purchased — swather combine, cultivator

and disc.

Picture #2 — Seeded 15 acres.

1981 — Harvested hay and stored in barn. Sold over fall and winter. Wet

fall — could not plow.

1982 — Plowed middle field — stuck many times.

Picture #3 and

Picture #4 — Ended up plowing only high areas. Had to abandon crop because

crop could not be harvested with own combine or hired Custom Workers.

Picture #5 — Also plowed 22 acres front NE left fallow due to weed

growth (mustard seed).

Picture #3 — 1983 — Cultivated middle field.

Picture #6 — Plowed front field SE 15 acres.

Picture #7 —1984 — Field plowed & sown with hay seed 22 acres. High

cost of seed and fertilizer.

Picture #8 — Purchased cattle in Fall. Sold some hay, kept enough to feed

cattle.

Picture #9 — 1985 — Fixed fences for pasturing cattle. Fed cattle all winter.

1985 — Expectations

Harvest 50 acres of hay

Pasture the cattle

Build up the herd by purchasing 10 cows.

Picture #10 — Additional 20 acres being worked for hay crop. Additional

acreage being negotiated for.

Picture #11 — Anticipated expense of $500.00 to clean out ditch, and

$250.00 for electric fencing.

Picture #8

Picture #12

Picture #13 — Shows some equipment — the balance is located in the

shed.

Conclusion

I’ve incurred extraordinary expense by purchasing used equipment requiring much repair. The land had to be plowed, seeded and fertilized, this has now been done. The same level of expense should not occur because of planned crop rotation.

I have become a member of the “Ontario Cow-Calf Breeders Association”, whereby information is pooled and weight gains of calves will be monitored. This will result in selecting the breed combination (bull) that will give the most growth and therefore command a premium price when calves are sold. It is my intention to sell off the male calves and keep the best females for breeding. In order to keep accurate records of birth dates, weight gains of calves, I have access to an Apple Computer at work.

Since the “Cow-Calf Program” is sponsored by the Ontario Government, I feel I will be in a position to utilize the information available to me and generate a profit from my operation.

I feel it would be unfair to me and my family to put me in a category of “non expectation of profit”, since we all worked so hard to get to this stage, and my children look forward to participating in this cow-calf operation, which is in place now.

I have made submissions of my plans to Revenue Canada — it is my intention to follow this except that I have to work on the fields first, before purchasing the cattle.

Since I have a mechanical background, I am able to repair the equipment, including welding. My average participation has been 45 hours per week on the farm work, with the heaviest loading in the spring and summer.

I intend to farm full time, by building up a herd. At the present time I need the off farm income to purchase additional stock to breed.

I have the full support and commitment of my family in making this farm a viable operation.

For the respondent — from the reply to notice of appeal:

— The Appellant is employed as a sales engineer for United Electric;

— in 1974, the Appellant purchased a farm from his father-in-law for $92,500.00, including a mortgage of $62,500.00;

— from the time of the acquisition of the farm, no profit has been earned by the Appellant from its operation;

— the farm was maintained by the Appellant for his own use or benefit, and for the benefit of persons connected with the Appellant by blood relationship or marriage and was not maintained in connection with a business carried on for profit or with a reasonable expectation of profit;

— the expenses incurred by the Appellant with respect to the farm were personal or living expenses of the Appellant and not outlays or expenses incurred to earn income from the business or property.

The respondent relied, inter alia, upon paragraphs 18(1)(a) and 18(1 )(h) and subsections 31(1) and 248(1) of the Income Tax Act RSC, 1952, Chapter 148 as amended.

According to the testimony of the appellant, he had commenced the operation in 1975 by purchasing some cattle, and his plan had been to gradually expand it in co-operation with his father-in-law’s nearby farm operation (by sharing equipment, expertise, produce, etc) but this had been interrupted in 1977 when his father-in-law had a stroke. He sold his cattle and concentrated his efforts on improving certain sections of the land for growing grain and hay crops — which then (at some future time) would be the feed basis for the cattle operations he intended to restart. By 1980 he had some 25 acres under cultivation, and by 1985 this had been increased to more than 50 acres in production. In 1984 he re-entered the cattle business, and believed he could look forward within a year to having about 50 head of cattle, which should be a viable operation financially. He presently has in excess of 30 head of cattle.

Counsel for the Minister submitted a schedule of the farming operation, which was agreed to by the appellant, as follows:

The arguments of both the agent for the appellant and counsel for the Minister followed the usual familiar lines. For the appellant, — essentially that the operation needed a period of time to show that it could be profitable; that the appellant and his wife had put a great deal of time and effort as well as their available funds into the operation; and that farmers could not be expected to make a profit without some form of “subsidisation”. For the Minister, — essentially, that there was no evidence upon which it could be concluded the operation would ever be profitable; and that in the meantime the farming was being heavily subsidised by the balance of the taxpayers. Both parties made substantial reference to the case law, particularly Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213; and the recent case of The Queen v Paul E Graham, [1985] 1 CTC 380; 85 DTC 5256, a decision of the the Federal Court of Appeal was also raised.

The noted case of Moldowan (supra), dealt with the question of “restricted” or “full” farming losses. The result was that the appellant, Mr Moldowan was unsuccessful in his bid for entitlement to the “full” farming loss deduction. He had been accorded the “restricted” farm loss before the trial, and while certain inferences respecting the basis for allowing a restricted farm loss may be drawn from that case, it is not evident to me that the Supreme Court therein determined whether Mr Moldowan was indeed entitled to even the restricted farm loss — that point was not in issue. In fact the “headnote” from [1977] CTC 310; 77 DTC 5213 states quite explicitly: “His horse-racing operation was not a business carried on for profit or with a reasonable expectation of profit.”, although I have not found in (Moldowan (supra), support for that conclusion. One may conclude that he was so entitled, but such a conclusion does not arise out of Moldowan (supra), itself. Therefore, while examining a question such as that before the Court in this appeal one may find some assistance in Moldowan (supra), the basic question to be addressed — entitlement to “restricted” farm loss — is not specifically addressed therein. One might therefore usefully vault over all the intervening case law and arrive at the recent case of The Queen v Paul E Graham, Federal Court of Appeal, wherein that which might be gleaned from Moldowan (supra) regarding “restricted farm losses” is reviewed and certain perspectives attained, since it can reasonably be asserted that some current, pertinent and different illumination has been provided to the lower courts, in Graham (supra). One need only deal with the “reasonable expectation of profit” question, for the “restricted farm loss”, and at least to that degree the problem is simpler than when the “full farming loss” comes into play. On the “business” operation point, I might quote from The Deputy Minister of Revenue of Quebec v Julius Lipson, [1979] CTC 247, Supreme Court of Canada, March 6, 1979 at 250:

It is perfectly clear from these provisions that, in order for an expense to be admissible as a deduction from a taxpayer’s income, it must have been incurred in order to make a profit. It is not enough that the expense was incurred in order to obtain gross income, as counsel argued at the hearing. By virtue of section 5, to gain income means to yield a profit.

While the provisions of the Provincial Income Tax Act were under consideration in Lipson (supra), the thrust of the relevant section would seem to be identical to the Canadian Income Tax Act. In so reviewing Graham (supra), I am prepared to conclude that “gross income” results as such, can have only a very limited value in considering the “reasonable expectation of profit” question.

In Graham (supra), both the majority, and the dissenting opinion accepted and supported the judgment in the Federal Court — Trial Division, that there was a “reasonable expectation of profit”, so while the fundamental question in Graham (supra), was the same as in Moldowan (supra), the learned judges in Graham made it clear that the circumstances portrayed entitled Mr Graham to at least the restricted farm loss. I quote from page 387 and 388( DTC 5262 and 5263 of the majority judgment:

In determining this aspect of the appeal, it should not be overlooked that counsel for the appellant conceded that the farming operations of the respondent constituted a “business” within the meaning of the Act and that he had a reasonable expectation of deriving a profit therefrom.

It would thus appear that the reasonable expectation of profit from the farming operations having been conceded (and such a concession was a proper one having regard to the evidence objectively) . . .

And from 392 (DTC 5266) of the dissenting opinion:

. . . I do not suppose anyone apprised of the facts would have any difficulty in our case to realize that the respondent was certainly not farming as a hobby.

As I see it, since Graham (supra), was decided in favour of the taxpayer at both the Trial Division and Appeal Division of the Federal Court, on the question of “full farming losses”, the evidence to support that conclusion must have been more than adequate to deal with the somewhat lesser, at least primary question of “restricted farming losses”. So what are the characteristics indicated in the judgments which would support even the “restricted farm loss” conclusion? First, we turn to the majority judgment in Graham (supra) — from the Federal Court, Appeal Division. While not meant to be all-inclusive, I have considered that the following points therefrom may have been taken into account in the determination:

1. . . the respondent had always harboured the dream of returning to farming as a means of livelihood.”

2. "In furtherance of this dream he had applied for the transfer to the new generating station in Lambton County, which is a rural area.”

3. "During the first 2 Z> years of ownership he remodelled both the house and the barns and installed therein equipment essential for the hog farming operation which he proposed to undertake.”

4. "He did all the work himself. In 1973 the respondent purchased a further 5 acres of land abutting his original acquisition.”

5. "In 1976 he had 9 sows, 2 boars and 5 feeder pigs.”

6. "By 1979 his herd had grown to 28 sows, 2 boars, 148 feeders and 73 weanlings. During that year he had sold 210 pigs.”

7. "To illustrate the progression of the hog operation the following table is useful.”

				TABLE 1
	Sows	Boars Boars Feeders			Weanlings	Hog
Year	Jan 7		Jan 1	Jan 1	Jan 1	Production
1973	2
1974	4
1975	9
1976	9	2	2	5
1977	13		1	48	16	70
1978	18		2	95	84	128
1979	28		2	148	73	340

8. "By purchases and rentals, the respondent had under cultivation 75 acres of land by 1979 of which he owned 61 and rented 14.”

9. "To establish the quality of the respondent as a farmer, his counsel called William Richard de Mars who was the Deputy Reeve of the Township of Sombra in which Mr Graham’s farm is located and who was engaged in the same type of farming operation as the respondent. The following excerpt from his testimony at trial supports the respondent’s evidence and the submission of his counsel that he is a dedicated, efficient, progressive and innovative farmer. (Excerpt not included. )”

While probably more relevant to the “full farming loss” question, the two other quotations from Graham (supra), which follow, may have information value with regard to the “restricted farm loss” question:

The income from that source (outside salary) his limited savings and borrowings, as well as his income from cash crops were all utilized in the hog farming operations. As the respondent testified, he had committed all of his resources to the farm.

In his reasons for judgment, the learned trial judge included the following schedule which formed part of the Minister’s assumption as set forth in the Statement of Defence, infra, showing the respondent’s income from his two sources of income, employment and farming, in the years 1975 to 1979 inclusive:

	1975	1976	1977	1978	1979
Employment Income	25,148	26,407	29,605	30,400	33,374
Gross Farm Receipts	9,678	16,246	30,076	41,292	43,228
Expenses	15,096	23,345	40,801	51,309	53,930
Farm Income (Loss)	(5,418)	(7,099)	(10,724)	(10,017)	(12,702)*
*(Note — apparent mathematical error)

Therefore, what do we have in the instant appeal? Mr Gorjup is not barred from the claim for "restricted farm loss" based on the conditions cited and accepted in Graham (supra) — (1) full time employment, (2) spare time on the farm, (3) consistent losses. In addition Mr Gorjup meets the apparent fundamental requirements of dedication to the rural way of life recited in Graham (supra).

It might well be argued that in the circumstances of this case an appropriate way of looking at the "losses", would be as a form of “capital expenditure", in the sense that virtually all of the taxpayer's effort and resources had been devoted to either holding or improving the capital asset elements of the operation (land, buildings, machinery, inventory, expertise, etc), from which he hoped to make a profit eventually. (See Warden v MNR, [1981] CTC 2379; 81 DTC 322). However, this aspect of the matter was not raised by the respondent and in light of the Graham (supra), judgment, it might have been irrelevant in any event.

It might be another matter, if Mr Gorjup were demanding consideration of the “full farming loss", but under the circumstances of this appeal, where only the claim to "restricted farming losses" is in question, I must determine, based on Graham (supra), that his claim is warranted.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.