James J Brown v. Minister of National Revenue, [1985] 1 CTC 2017, 85 DTC 39

Brulé, TCJ:—This is an appeal involving the 1977, 1978, 1979 and 1980 taxation years of the appellant. The issue in this case is whether the taxpayer, a bona fide farmer, can purchase cattle in December of one year, and sell them in January of the next year, and by so doing properly expense the purchase price in the first year while including the sale price in income of the next year.

Here the appellant had been in a farming business for thirty years including mixed farming but lately dealt in cattle. He had purchased, raised and sold cattle, but often made a practice of purchasing cattle from October to December when many came on the market before winter. In the years in question, the appellant bought cattle late in the fall and sold them after the year-end. He was on a cash basis of accounting and filed his income tax returns accordingly.

The Minister objected to this practice in the taxation years in question alleging that the purchases of the cattle were not made for the purpose of gaining or producing income from the business of the appellant within the meaning of paragraph 18(l)(a) of the Income Tax Act and disallowed the expenses of the purchases during the relevant years.

Appellant’s Position

Counsel for the appellant presented the following arguments:

(a) Mr Brown in the purchase, raising and sale of cattle is in a “farming business” as defined in subsection 248(1) of the Income Tax Act.

(b) Mr Brown carried on his farming business for the purpose of gaining or producing income from that business as required by paragraph 18(l)(a) of the Act.

(c) By virtue of subsection 28(1) of the Act the appellant was entitled to deduct the costs of acquiring the cattle in the taxation year in which he paid for them as an allowable expense.

(d) Mr Brown’s dealings were at arm’s length and therefore did not artificially reduce his income during the years in question, thus not within subsection 245(1) of the Act.

In support of these arguments counsel cited the following cases to which I will refer below:

Cecil McLeod v MNR, [1984] CTC 2327; 84 DTC 1297;

MNR v MP Drilling Ltd, [1976] CTC 58; 76 DTC 6028;

The Royal Trust Company v MNR, [1957] CTC 32; 57 DTC 1055;

The Queen v Clifford B Clark, [1974] CTC 305; 74 DTC 6242;

Don Fell v The Queen, [1981] CTC 363; 81 DTC 5282;

Bonavista Cold Storage Co Ltd v MNR, [1983] CTC 2093; 83 DTC 89;

Produits LDG Products Inc v The Queen, [1976] CTC 591; 76 DTC 6344;

Stubart Investments Limited v The Queen, [1984] CTC 294; 84 DTC 6305.

Minister’s Position

This can best be put forth by referring to paragraph 7 of the reply to notice of appeal which is as follows:

7. In so reassessing the Appellant, The Respondent relied, inter alia, upon the following assumptions of fact:

(a) at no material time did the Appellant take possession of any of the cattle, nor did the vendor attempt to deliver the cattle to the Appellant from the vendor’s premises;

(b) that the Appellant conducted the said purchases and sales of cattle with the

intention of minimizing his tax otherwise payable in the said taxation years;

(c) that amounts deducted by the Appellant from his income on account of expenses in relation to the said purchases and sales of cattle in the said taxation years were not made or incurred for the purpose of gaining or producing income from the business of the Appellant;

(d) that the deduction of the amounts as claimed by the Appellant on account of expenses in relation to the said purchases and sales of cattle in the said taxation years, if allowed, would unduly or artificially reduce the income of the Appellant in the said taxation years.

The Minister’s counsel in his argument supported his contentions by referring to the following cases:

Concorde Automobile Ltée v MNR, [1971] CTC 246; 71 DTC 5161

The Queen v Alberta and Southern Gas Co Ltd, [1977] CTC 388; 77 DTC 5244.

In addition he spoke to the Fell, Clark and Stubart cases, supra, cited by the appellant.

Analysis

There is no question, and it was not argued to the contrary, that (a) the appellant was a farmer within the meaning of subsection 248(1) of the Income Tax Act', and (b) he was entitled to deduct under subsection 28(1) of the Act amounts paid by him in the year, in the course of carrying on his business.

The question then is firstly, whether or not these deductions for the purchases of the cattle late in each year are permitted by paragraph 18(l)(a) of the Act, and secondly, if allowed would they artificially or unduly reduce income and therefore be in contravention of subsection 245(1) of the Act.

It was submitted by counsel for the appellant that “for the purpose of” gaining or producing income as required by subsection 18( l)(a) does not require that income be earned and in support referred to the judgment of Urie, J in the case of MNR v M P Drilling Ltd, supra, at 63 [6032] wherein he said:

In my opinion the short answer to the proposition advanced is that if the expenditures were made for the purpose of earning income and were not rendered non-deductible by virtue of Section 12(1)(b) [now 18(1)(b) ] or by any other provision of the Act they were proper expenses to be chargeable against income whether or not any income resulted from such expenditures.

This case followed that of The Royal Trust Company v MNR, supra, which advanced the same proposition.

One of the provisions of paragraph 18( l)(a) is that the deductions are permitted if for the purpose of “gaining or producing income”. The appellant was unquestionably in the farming business and computed his income in accordance with subsection 28(1) of the Act, which section provides for adding all amounts received in one year and deducting therefrom all amounts paid in the course of carrying on the business, and thus arriving at the income from the business. There is no mention in the Act, and therefore no prohibition, in expensing an item in one year and adding the receipt therefrom in the next year if realized in the subsequent period, even though the expenditure and receipt is brief in time if times are in different taxation years.

As to expenses being for the purpose of gaining or producing income “from the Business” it is necessary on the facts in this case to determine whether or not the appellant’s purchases and sales of cattle were indeed part of a business operation. In circumstances not unlike those in this case it was held that the taxpayer was engaged in a farming business — see Cecil McLeod v MNR, supra.

In another case The Queen v Clifford B Clark, supra, wherein the facts were also similar, a different result obtained. One must look closely at the facts in that case to see why it can be distinguished from the present one.

Mr Clark needed an expense to carry income into subsequent years when his income and therefore his taxes would be less. He sought the aid of a chartered accountant and estate planner who set up a company to purchase cattle near the end of one year and sell them after the new year commenced. There are many distinguishing facts in the present case from the Clark case and one can arrive at a different conclusion as to why each of the appellants in that case and the present one could not or could be considered to be in the business of farming in their cattle dealings.

I would like to list some of them:

1. In the Clark case there was a binding agreement as to the sale of the cattle; here on the evidence there was no such arrangement.

2. In the Clark case the purchase price was deposited into what amounted to a trust account to guarantee that the moneys would be available at the time of sale. In this case moneys were paid without conditions.

3. In the present case Brown had to pay interest on moneys he borrowed to pay for the cattle. Clark had no such obligation.

4. Clark had no other farm activities other than his cattle trades, while Brown had been farming for 30 years.

5. Clark did not pay any feed or transfer costs while Brown had to undertake these.

6. Clark had a firm agreement as to the sale of the cattle he purchased at that time while Brown decided when the sale was to take place. As a result Clark had no interest in cattle price fluctuations while any fluctuations could result in profits or losses for Brown.

7. Clark’s cattle were insured in the event of death whereas Brown assumed this risk and in fact some cattle died thus reducing his income.

8. The Clark deals were only a paper transaction whereas in Brown’s case there were bona fide arm’s length purchases and sales.

9. In Clark’s case there were post-dated cheques therein for the sales less a commission at the time of purchase whereas only in one case did Brown receive a post-dated cheque and that was when he was leaving the country and after the new year.

Based on the facts in this case I find that the expenses were properly deducted in accordance with paragraph 18(l)(a). It then remains to determine whether or not these deductions artificially or unduly reduced the appellant’s income.

A discussion of the words “unduly” and “artificially” is found in the case of Don Fell v The Queen, supra, and in Bonavista Cold Storage Co Ltd v MNR, supra. According to Cattanach, J at 375 [5292] in the Don Fell case the word “unduly” relates to quantum and means “excessively” or “unreasonably”, and “artificially” means “not in accordance with normality”.

Here it could not be said that the expense was “unduly” within the meaning in the Don Fell case. Fair market prices were paid for the cattle at the time of purchase and similarly the “going price” was received at the time of sale. As to the expense being artificial the purchase and sale were certainly in accordance with normality in the farming business.

There was nothing in evidence to show that the appellant acted except for business reasons. He said this in evidence and his dealings were at arm’s length. Mr Brown also stated that he did realize there could be tax advantages to his dealings.

In Produits LDG Products Inc v The Queen, supra, a case heard in the Federal Court of Appeal, Pratte, J said at 598 [6349]:

There is nothing reprehensible in seeking to take advantage of a benefit allowed by the law. If a taxpayer has made an expenditure which, according to the Act, he may deduct when calculating his income, I do not see how the reason which prompted him to act can in itself make this expenditure non-deductible.

The Court was referred to the case of Stubart Investments Limited v The Queen, supra, wherein the principal purpose of the appellant was to establish an arrangement to reduce taxes and this arrangement was approved by the Supreme Court of Canada. In that case reference was made to an article in Volume 29, Canadian Tax Journal (1981), by Ward & Cullity, an “Abuse of Rights and the Business Purpose Test” at page 473 wherein it was set out as follows:

Surely in the penultimate decade of the twentieth century it would be naive to suggest that business can, or should, conduct and manage their business affairs without regard to the incidence of taxation or that they are not, or should not, be attracted to transactions or investments or forms of doing business that provide reduced burden of taxation.

In the present case the appellant was a bona fide farmer according to the Income Tax Act’, he filed his tax returns in accordance with subsection 28(1) of the Act; he properly expensed the purchase of the cattle in each year believing a profit might be made and his actions did not fall within section 245 of the Act as an artificial transaction.

In view of this the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.