Douglas N Best, Dorothy Wendy Best v. Minister of National Revenue, [1985] 2 CTC 2404, 85 DTC 728

Bonner, TCJ [ORALLY]:—These are appeals from assessments of income tax for the 1979, 1980 and 1981 taxation years. The assessments were made on the basis that section 31 of the Income Tax Act applies to limit the deductibility of losses incurred by the appellant, Douglas N Best, in carrying on the business of farming. The assessments were founded, according to the amendment to the reply to notice of appeal which was sought at trial, on an assumption that the appellant’s chief source of income during the years in question was neither farming nor a combination of farming and some other source.

During the years in question, and indeed from 1973 to the present time, Mr Best has carried on the practice of law. That activity has generated income as set forth on Exhibit A-8 and also in more detail on Exhibit R-1. Farming has, during the years in question and indeed continuously to the present time, generated losses as set forth on Exhibit A-7. The appellant stated that he expects to make a farming profit next year. The exact basis on which that expectation rests is not entirely clear.

In considering whether farming, either alone or in combination with the practice of law, was a chief source during the relevant period a number of factors must be considered. In William Moldowan v The Queen,* [1] Mr Justice Dickson, as he then was, said:

The next thing to observe with respect to s 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer’s income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words “source of income’’.

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. Source of income, thus, is an equivalent term to business: . . .

In assessing as he did the Minister has conceded that Mr Best’s farming operation was a business and therefore a source of income.

Turning back to the Moldowan case, the Court considered the words “chief source”. At 486 (CTC 314) His Lordship said:

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 expectation may signify a change in the chief source, but that is a question of fact in the circumstances.

Next the Court described the classes of farmers envisaged by the Income Tax Act. I will not read the descriptions of the three classes, but I will point out that with minor modifications the opening part of the definition of the second class gives a clear and accurate description of a person of the first class into which the appellant submits that he falls, namely, a “. . . taxpayer who does . . ”, and that is one of the modifications, “. . . look to farming, or to farming and some subordinate source . . .'', and I emphasize the word “subordinate”, “. . . for his livelihood . . .''. The opposite side of the coin to the question of whether farming became a chief source is whether during the years in question the practice of law was to the appellant, or became for the appellant, a sideline business.

Further, on the subject of the general legal framework, it is relevant to emphasize that section 31 speaks of a taxpayer’s chief source of income “for a taxation year”. As Chief Judge Christie, as he then was, pointed out in William M Kerr and Gail Ann Forbes v MNR,* [2] circumstances may change from time to time. Thus, although it is relevant to consider evidence as to the status of a taxpayer's farming venture in years subsequent to the years in issue, as was pointed out by Mr Justice Cattanach in Paul E Graham v The Queen,t [3] it does not necessarily follow from proof that a farming venture was a chief source in the tenth year of operation, for example, that such was also the case in year one, year two or year three.

One final note on the subject of the general state of the law. Where Mr Justice Dickson referred in Moldowan to a “major preoccupation” he was not, as I understand his reasons, referring to subjective preoccupation. His Lordship was, I think, quite clearly referring to preoccupation from the income-earning standpoint. The question is what was the chief business or income-earning venture and not what was the taxpayer's chief obsession.

The appellant was called to the British Columbia Bar in May of 1973. He practised law from then to June of 1978. From 1976 to June of 1978 the appellant was permanent Crown counsel at Williams Lake. In June of 1978 he resigned that position and bought a 44-acre parcel of land on 108th Road, near Horsefly. At the time of purchase there was a small house on the property, but there were no other buildings, no fences and no clearing or meadow. A deep well was required. The appellant commenced clearing operations. From October 1, 1978, to March 31, 1979, the appellant went back to the practice of law as a Crown prosecutor in Quesnel. While so employed he made improvements to the house, cleared a barnsite, set timbers for a barn and built a storage shed. In 1979 tree-clearing operations continued. The appellant fenced the perimeter and bought cattle. Initially he bought non-purebred commercial cattle, but in 1979 he decided to go into a purebred operation.

In 1980 the appellant planted 30 acres of oats as a cover crop for timothy and alsike (save for a one-acre test plot which he seeded with a legume). He built a barn and corrals and rented 80 acres of nearby land, primarily for purposes of pasture. Although he had tried to get a range permit in 1979, he did not succeed in getting one until 1983. '

In 1981 the appellant purchased the 270-acre deeded Gravel Creek property. It was located 10 miles from the 108th Road property. Also in 1981 he applied for an agricultural lease with purchase option. He secured that lease and option in 1982 on a 130-acre parcel adjacent to the 270 acres.

Exhibit A-1 lists the development of the appellant’s cattle inventory over the period from 1979 to 1985. The financial results of the farming operation are summarized on Exhibit A-7. It will be noted that the projections for 1985 and 1986 are, at best, rough and quite possibly overly optimistic estimates, but nothing turns on that fact.

Dale W. Anderson, the District Agriculturalist, in the last paragraph of his statement of evidence, Exhibit A-9, stated the following:

Because of rising input costs and a fairly constant beef price over the last 8 years, the profit margin in ranching has narrowed considerably. It is no longer possible to finance an entire operation from scratch. An operator must phase in slowly and keep the debt load low if he hopes to succeed. An outside income is essential during this time, in order to pay for land, equipment, improvements, and cattle.

The appellant was, in my view, at least during the years under appeal, a person engaged in phasing in slowly, to use Mr Anderson's words. The practice of law was the source of outside income of the sort which Mr Anderson, correctly in my view, regarded as essential in order to pay for land, equipment, improvements and cattle. That circumstance is one which, as I see it, points with some clarity to the primacy of law as a source of income during the years under appeal. For five years up to June of 1978 law was the appellant’s sole source of income. Starting then and continuing through at least to the end of the years in issue the appellant was engaged in a process of setting up or creating a farming operation. It is impossible to accurately describe the farming operation as a chief source of income not just because it generated losses continuously from June of 1978 to the present time, during which same period law alone generated income, but also because the farming enterprise, at least during the years under appeal, was in an immature state.

Despite the fact that farming was, again during the years in question, the principal focus of the appellant’s interest and attention, the key ingredients of a farming operation of a scale worthy of the description “chief source of income” were missing. The process of acquisition and improvement of the required land was incomplete. Similarly, the acquisition of machinery was still underway. The immature state of the farming operation probably resulted from the inability of the appellant to commit sufficient capital to the enterprise.

The evidence did not show with any degree of reasonable accuracy that from today's standpoint, and much less from the standpoint of 1979, 1980 and 1981, the farming operation was likely to generate income at a level sufficient to permit the abandonment of the practice of law. I have no doubt that the appellant's goal was to devote himself exclusively to farming. It was not shown that the appellant could, during the years in question, have reasonably expected to achieve that goal within the then foreseeable future. It seems plain to me that farming was a sideline, not the practice of law. It was to law that the appellant looked, and for the foreseeable future was forced to look, for his livelihood.

For the foregoing reasons the appeals will be dismissed.

It was agreed at the outset that the appeals of Dorothy Wendy Best could succeed only if Mr Best's appeals succeeded. Her appeals will therefore also be dismissed.

Appeals dismissed.