Robert Kaelber, Margit Kaelber v. Minister of National Revenue, [1985] 2 CTC 2305, 85 DTC 627

Goetz, TCJ [ORALLY]:—These are appeals by Robert Kaelber and his wife Margit Kaelber, relating to reassessments for the 1978 to 1981 taxation years inclusive.

It was agreed at the outset of the hearing that the appeals would be heard on common evidence. Testimony was given by Robert Kaelber, Mrs Margit Kaelber and a Mr Anderson.

The issue is whether farming losses incurred by the appellants for the taxation years 1978, 1979, 1980 and 1981 are deductible, and if so, to what degree.

The Crown takes the position that the appellants were hobby farmers. The appellants take the opposite position, that they were operating a full- time farming business. Every case must be adjudicated upon its own individual facts. The case law cited to me by both parties basically stems from a decision from the Supreme Court of Canada, in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, a judgment of the now Chief Justice Dickson of the Supreme Court of Canada.

I am going into the facts in some detail because I do consider this a unique case on the facts.

The appellant Robert Kaelber was born on a farm, raised on a farm, worked on a farm all of his life until he came to Canada. He became well qualified as a result of attending an agricultural institute and receiving his diploma. In 1951 he came to Canada with 50 cents in his pocket and relatives to rely upon. He says he came to Canada with a view to acquiring a farm, that was his bent, and all his training up to the time he came to Canada. The acquisition of land in Canada by Europeans, in my knowledge and by the cases I have heard and in my practice of law, is almost phobic. The owning of land means much more to a European than it seems to we Canadians who have so much at hand. With this idea in mind, in order to sustain himself, he took many jobs, logging, took electrical construction work, took classes in electricity whereby he became qualified as an electrician. He worked wherever he could and saved his money.

In 1960 he returned to Germany to help his parents reconstruct their barn. He was there about a year. While in Germany he learned welding and he also took a course in mechanical engineering before he returned to Canada.

He married while in Germany and in 1961 he returned to Vancouver, British Columbia. While he worked in Vancouver as an electrician, or any other job, he was saving his money and he and his wife would spend their spare time on weekends looking for his dream farm. He thought he had found one in 1968 at Williams Lake, with a partner, and invested $20,000 on a 1,200-acre spread. For reasons not necessary to go into, he terminated his relationship with his partner, who bought him out. With that money he started his own electrical shop in Williams Lake, which grew into a thriving business and he developed a parts and appliances stock and had four to five employees working for him.

Mr Kaelber found a farm, the ranch in question, about nine miles from Williams Lake and, to use his words, “.. . it was like a dream come true . . .”. He obviously saw more in that piece of land than many of us would. It was just a prospector's patch with a broken-down cabin and a crumbling barn. He paid $47,000 for it and made a down payment of $20,000, the balance purchased by way of Agreement for Sale. The money paid as a down payment came from his electrical business. He carefully planned what he had to do to make that patch of land viable. It was composed of two valleys, flooded swampy meadows and with his obvious industry and astuteness he converted all of these seeming factors that were against him into real assets. he knew that he would have a problem with Hydro and indeed he did run into a problem, because the Indian reserve next to him would not allow him to extend the hydro lines through the reserve. He then embarked upon a plan where he would get hydro-electricity by constructing a dam up one of the valleys.

Mr Kaelber acquired a turbine from Europe and, as I understand it, it is not in use as yet, but it indicates to me a long-range plan on the part of the appellant to make his seeming unproductive patch of land a productive ranch. It was valley bottom land which, according to Mr Anderson, is very rich. The appellant Robert Kaelber dug ditches and he spent time building an access road of almost two miles. To make it an all-weather road, he acquired a crawler tractor which was able to do many jobs for him. He also acquired a dump truck. He built culverts, reconstructed, renovated and extended the prospector's cabin. He had three children and had to make it comfortable for them to be there when they came out to the farm.

The appellants and their family lived in town other than for the times that they were at the ranch dealing with calving, haying, all those functions that had to be performed. They would be there on the land. I see nothing wrong with them living in town as opposed to living on the land in the circumstances.

Mr Kaelber acquired mostly second-hand older machinery because he was clever with his hands, as many farmers are. He built it up into top equipment.

Mr Kaelber called Dale Anderson, a highly-qualified professional agrolo- gist who was the acting district agrologist in the area and who was quite familiar with the whole scene. The agrologist's examination and inspection of the ranch was conducted on February 25, 1985 and his report is exceedingly enlightening in so far as the Court is concerned. He had nothing but high praise for the appellants for the careful planning, the excellent work, the construction of buildings, as he said, to last. He had everything good to say about the farming operation by the appellants and he concludes his report by saying, and I quote from his report: "I have no doubt whatsoever that this operation does indeed have an expectation of profit and it has potentiality to ultimately support the family.”

Counsel for the Crown properly pointed out to me that “. . . yes, that may be so, as of February 1985 . . ”, but that brings me back to having to deal with reasonable expectation of profit and other determining factors as laid down in the Moldowan case (supra).

According to Mr Anderson's evidence, and not from his report, he gave accolades to the appellant Robert Kaelber for the order of his improvements, the high quality of his improvements, and considered Robert Kaelber a very capable man. He indicated, and this is vital, that with this type of operation it is only prudent to phase in slowly, sensibly, and not to incur a high debt load. Otherwise the margin of profit would be nil or the operation would up in a loss.

The appellants appreciated the fact that the forage potential of the farm that they owned was high and that is corroborated by Mr Anderson, the agrologist. At the same time they realized that to have a viable operation they needed grazing land. Robert Kaelber approached the British Columbia government with the view of leasing Crown land for grazing purposes. He was faced with a departmental requirement requesting him to clear 80 per cent of the arable land that he owned and, if he did that, then they would lease to him. The work involved is reflected in Exhibit A-7, which is a graph of income and expenses.

In the taxation years under review, as properly pointed out by Mr Little, and I agree, Revenue Canada, taking a bird's eye view of these years, I think can be, shall we use the word "forgiven" for coming to the conclusion that they did, because in those years, in the audit period, the appellants incurred very heavy expenses because of the requirements of the British Columbia Government that the land be cleared. As a result, they had to virtually sell off their whole herd to pay out the clearing costs, which indeed would be heavy to clear up that amount of land. This more or less stopped them cold in the progression to reaching a profit level. Exhibit A-1, which is referred to as a schedule of major ranching activities, is, to me, very illustrative of the hard work put into the farm by the appellants.

The four years in question indeed resulted in an annual farming loss, and then in 1982 the income starts rising. The appellants are back into what they were trying to do when they were stopped cold by the British Columbia Government. I could see the exasperation and frustration after doing all of

that work and being confronted by a bureaucrat saying: “Sorry, our policy has changed; good luck". Then on top of it, we have to look at it from the appellants’ point of view. Revenue Canada steps in and more or less gives them the coup de grace by the reassessments for the years involved. The appellants have their land now in a state where it is worth $200,000 to $250,000.

According to Robert Kaelber, the land itself, from the work he has done on it, is worth about $143,000. This is to illustrate his planning and foresight; he got a number of licences from the British Columbia Government to divert and to dam water on his land and, in the process, set up a hydroelectric plant of his own. He has all the necessary licences to complete his work. With respect to his electrical business, he incorporated a company in town close by and he got it working to the point where his staff could handle it and he became a trouble-shooter. The evidence discloses that he only spent about 25 per cent of his time in the trouble-shooting process. His wife kept the books and spent 50 per cent of her time at the electrical shop but she was able to do all of the farm work, driving a truck, driving a tractor, whatever was necessary. She worked and so did the children.

The hydro and damming plans which would make electrical power available to the farm as well as the ability to irrigate, to me indicate the opposite, that this was well planned, that this was a very careful planning on the part of both appellants. They spent, to my way of thinking, once they acquired the land, all the possible time that they could, and in particular Mr Kaelber, the fact that he was able to plow into the farming operation, income that he derived from his electrical company, I do not think in any way should mitigate against him. On the contrary, that to me is highly preferable to going to the bank and borrowing the money to make the improvements that he did. This ties right in with what Mr Anderson says; the dangerous thing is to do things precipitously in this type of operation, which can result in no profit and end in bankruptcy.

The Anderson report, in toto, is most helpful as far as the Court is concerned. The profitability and loss picture is set out fairly clearly in Exhibit A-9, showing the schedule of farming income and expenses. We had the first four years where there would be heavy start-up costs. Admittedly, the appellants purchased the land in 1973 and started working on it in 1974, and the Crown has pointed out that the start-up time is too long and elicited from Mr Anderson the comment that it did seem unduly long. I do not think and I do not know, whether Mr Anderson was appraised of the fact of the very severe problem that the appellants ran into during these respective taxation years in expending large amounts of money in the clearing of the land pursuant to a promise by the Province of British Columbia on which it reneged. To me this is certainly the clear area indicating why the start-up period, instead of being five years, as hoped by the appellant, went beyond that. It is a clear answer why those start-up costs, which were heavy, should be allowed.

When you think of the criteria laid down in the Moldowan decision (supra), the appellants meet them all and more, because Mr Justice Dickson did not suggest his list of criteria was exhaustive. Since I am referring to the Moldowan case, I should also refer to two other decisions: Graham v The Queen, [1983] CTC 370; 83 DTC 5399, a decision of the Federal Court, Trial Division, by Mr Justice Cattanach which I understand is under appeal; and the case of Nikolaisen v MNR, [1984] CTC 2057; 84 DTC 1027, which is a decision of my brother Judge Rip of the Tax Court of Canada.

I mentioned the Graham case because Justice Cattanach came down with a number of worthwhile comments as it related to the facts of that case. The appellant in that case, in my view, was not in nearly as strong a position as the appellants in the case before me, by any means.

The thread of evidence flowing through — the thread of this dream of a farm — owning a ranch or a farm by the appellants, flows all the way through the evidence. It is consistent throughout that Robert Kaelber had clearly changed the direction of his main activities from being an electrician to that of being a rancher. He changed direction, he was committed to the creating of a viable, profitable ranching operation. Seventy-five per cent of his time was spent on the farm, and because he was smart enough to establish a business that could virtually run by itself except for the trouble spots that it ran into, this should not be held against him. On the contrary, it should be considered in his favour.

Robert Kaelber has carved out of a prospector's patch in the mountains something that appears to be a vast improvement to what he found when he bought the land. Exhibit A-2 shows photographs of the area, cleared meadows, drained meadows, excellent building construction, it just forces me to the conclusion that it is this type of person that is a worthwhile citizen in Canada and surely he should not be penalized for showing acumen and industry dedication to the fact that he wanted to build and establish a ranch which would support him. He is reaching that stage now. He is into a profit picture as of 1982 and he has projected what his profit will be and his whole lifestyle is that of being a rancher. He has changed from an electrician to a rancher and that process has been ongoing since slightly before he bought the land. His wife is of a farming background. They both work together as husband and wife as partners in this project.

I do not have to touch specifically, other than the way I have to this point, the criteria in the Moldowan case (supra). Mr Kaelber has also put a great amount of money into it, his capital investment, his time spent, his new direction in life, all to the fulfilling of a dream. I have heard many of these cases and I do not think I have heard one so clearly manifest of a dedication of a person establishing a farming operation.

I therefore rule that for the taxation years involved the appellants are entitled to deduct all of their farming losses as being in the first category of the classes of farmers as set out by Mr Justice Dickson in the Moldowan case (supra), at pages 315 and 5216 respectively.

The appellants have suffered considerable pain and heartache as a result of all of these succession of events over which they had no control, in spite of the effort that they were exerting.

The appeals are therefore allowed on the basis that the appellants are entitled to deduct their full farm losses as being related to a full farming operation and I award costs to the appellants.

Appeal allowed.