Leo Bastien, Donna Bastien v. Minister of National Revenue, [1985] 1 CTC 2317, 85 DTC 262

Kempo, TCJ [ORALLY]:

Part I — Issue

These are appeals and claims for full deduction of total farm losses concerning the 1978, 1979 and 1980 taxation years of the appellants Donna Bastien and Leo Bastien which were heard on common evidence. The common basis of the appeals is that each is a taxpayer who is in the business of farming through their respective partnership interest, that each is a person who does look to farming or to farming and some subordinate source of income for his or her livelihood and that thereby each does escape the limitations of section 31 of the Income Tax Act.

Stated succinctly, the issue to be resolved is whether or not each of the appellants fall within class 1 or class 2 of the three categories of farmers envisioned within this provision as stated by Mr Justice Dickson (as he then was) in the leading Supreme Court of Canada case of Mo Ido wan v The Queen, [1977] CTC 310 at 314; 77 DTC 5213 at 5215.

To paraphrase from that case:

Whether or not a source of income is a taxpayer’s “chief source’’ of income is both a relative and objective test. While relevant, it is not a pure quantum measurement. The distinguishing features 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, amongst other things, in relation to a source of income the time spent, the capital committed, profitability both actual and potential, a change in the mode or habit of work or reasonable expectation which may signify a change in the chief source, a change of occupational direction and commitment of energies and capital to farming as a main expectation of income would not disentitle the deduction of the full impact of start-up costs.

Turning to the case at bar there was no question but that these appellants were engaged in full-time employment off the farm and that the farming operation during the years in question was not a hobby but rather constituted a business partnership and as such a source of income to them. The evidence confirms that which was not disputed, that is that the appellants were in the business of farming during those years notwithstanding its unprofitability since its inception. Accordingly each would have had a reasonable expectation of profit and as such satisfies the general underlying criteria in support thereof, namely the factors of amongst other things their training, their intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance and that the losses could be characterized as start-up losses. (Id at CTC 314; DTC 5215.)

As to the appellants’ “chief source’’ of income for the taxation years in issue the following is a compendium of the principal distinguishing features that were, in my opinion, determinative of the issue.

Both of the appellants have had a long-time involvement in farming during childhood and prior to their marriage. Since their marriage in 1958, and more particularly since 1961 they have lived continuously on their own farm land and both have had a mutually shared desire to be in a farming business of their own. This plan and program began upon marriage and faltered almost totally from 1969 to 1975 due to factors beyond their control which were fully described and understandable. The medical and financial situation of the appellants improved considerably by 1975 and accordingly they decided the time was right to again begin their farming business by the growing and selling of soybeans on the 57.5 acres then owned.

Since then each of the appellants has continuously committed just about all of their after-employment time, labour, skills and energy to the farming business and which, according to the evidence and when needed for their particular farming operation, was at least equal to if not greater than that expended by or was required of them in their employment. It was shown that their employment conditions encompassed the necessary flexibility to meet their farming requirements.

The bulk of the aggregate of their employment and farming income can be seen to have been invested in the farm. Their whole attitude was that of increasing their farming business and its income by the use of off-farm income without resorting to any heavy borrowing. In the period 1976 to 1983 the capital investment was in excess of $200,000 or approximately two-thirds of the aggregate of their net spendable off-farm income earned in that time (Exhibits A-5 and A-9).

The bulk of the funds for the farm equipment came from the off-farm income of Mrs Bastien who is an extremely intelligent, truly remarkable and highly organized woman. The contribution to the farm business by Mr Bastien has been shown to have been in a different way but clearly of equal need and merit. Their respective strengths and weaknesses have been efficiently integrated with obviously successful results in their farming business.

Over the period 1976 to 1983 inclusive the appellants’ aggregate annual off- farm employment income net after deduction (ie spendable) increased from approximately $31,300 to approximately $52,540; the annual gross farm revenue of the partnership grew from approximately $10,700 to approximately $42,000 and, with the exception of 1977, 1981 and 1983 which are essentially break-even years, the cash flow had been in a negative position not exceeding $6,500 in any one year. But for the bad weather in the 1983 planting season there was an expectation of cash flow profit of approximately $9,000 — $10,000. All through this time period the appellants’ off-farm employment or job functions remained essentially the same. The magnitude of the losses as claimed are composed of capital cost allowances on the machinery acquired for this farming business which is described as being necessarily capital rather than labour intensive.

The appellants’ evident overall business-like approach to their farming business is indicative of their dedication, commitment, abilities and knowledge in relation thereto and are reflective of their position that farming during the years in issue was not to be merely a sideline or auxiliary business. A detailed list of the appellants’ actual farm associated activities (Exhibits A-8 and A-12) and overall achievements (Exhibits A-5, A-6 and A-ll) was impressive. They underscore and corroborate the commitment to and realized farming goals and actual achievements of the appellants to date.

The appellants’ projections (reference second last page of Exhibit A-10) indicate that in 1984 the gross farming revenue would approximate that of the 1983 aggregate net (spendable) off-farm revenue and that the farm operation would show a cash flow profit of $14,400 taking into account the projected operational expenditures, the yield and the selling price per bushel, all of which were predicated on past experience. Since March of 1984 Mr Bastien is spending his full time in his farming business. On the last page of Exhibit A-10 it is projected that with a planned acquisition of an additional 80 acres nearby the gross farm revenue of the partnership would be some $92,000 and that the cash flow profit would be approximately $34,000. It was clearly shown that the farming machinery and equipment on hand was more than adequate to handle the additional land acquisition.

While appreciating that none of the above is alone determinative of the issue, viewed collectively it can be fairly said that each of these appellants was a taxpayer whose chief source of income for the taxation years in question was from farming or a combination of farming and some other source of income.

Accordingly the appeal is allowed and the matter is to be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the limitative provisions of section 31 of the Act do not apply. In coming to this decision the following cited cases were considered in addition to that of Moldowan v The Queen (supra)’.