Elmer Parent v. Minister of National Revenue, [1985] 1 CTC 2337, 85 DTC 312

Tremblay, TCJ:—This appeal was heard on September 23, 1984 in the City of London, Ontario.

1. The Point at Issue

The point is whether the appellant, a sheet metal worker, is correct in the computation of his income for the taxation years 1978, 1979 and 1980 in deducting as restricted farming losses $3,305.81, $5,000 and $5,000 respectively, pursuant to provision 31(1) of the Income Tax Act.

The respondent reassessed the appellant and disallowed the said restricted losses. According to him there is no reasonable expectation of profit and the said losses must be considered as personal or living expenses, which are not deductible.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

3. In assessing the appellant as aforesaid, the respondent proceeded upon the following facts:

(a) at all material times, the appellant was employed as a sheet metal worker from which employment he earned income of $4,630, $15,147 and $14,266 in the 1978, 1979 and 1980 taxation years, respectively;

(b) the appellant purchased the property on which his farming activities were conducted in or about 1966; since that time, the appellant has changed the nature of his activities from that of maintaining sows, to raising feeders, to breeding calves, and then to raising sheep and goats;

(c) at no time has the appellant’s income from his farming activities exceeded the expenses incurred in relation to them; more particularly, the appellant earned income and incurred expenses during the 1978 through 1981 taxation years as shown on Schedule I, attached; (at the trial Schedule I was amended and Schedule IT was added)

(d) the appellant’s farming activities did not at any time constitute a business with a reasonable expectation of profit;

(e) the expenses incurred by the appellant in regard to his farming activities were not expended for the purpose of gaining or producing income from a business or property but were personal and living expenses of the appellant.

The basis for the figures of Schedule I and Schedule II are from the appellant’s income tax return. They read as follows:

SCHEDULE 1

EARNED INCOME AND INCURRED EXPENSES SCHEDULE II

	1978	1979	1980	1981
Forage Crops	$ 2,000.00
Swine	173.58 $ 82.92 $ 285.63
Poultry	2,134.20		261.65	$ 1,531.00
Sheep	45.90	12,754.70	396.00
Livestock Inventory	7,000.00	11,000.00	14,500.00	16,467.03
Cattle			356.72
Lamb & Kids				704.90
Wool				14.00
Custom Killing				1,239.00
Hay				2,500.00
Total Income	$11,353.68 $23,837.62 $15,800.00 $22,045.93

	1978	1979	1980	1981
Mortgage Interest	$ 1,559.40	$ 2,670.46	$ 2,583.45	$ 2,490.51
Other Interest	249.81	1,320.60	1,816.65	2,973.12
Insurance	310.32	311.50	605.00	718.00
Building & Fence Repairs	900.07	578.94	226.55	26.50
Gas and Oil	443.18	173.67	68.27	325.05
Repairs (Mach. & Truck)	896.62	561.30	1,369.92	1,979.11
Cattle	38.50		120.00
Swine	141.50	464.00
Poultry	168.00	316.50	77.00
Sheep	6,735.00	12,489.47	2,201.40	2,353.50
Veterinarian Fees	13.00	139.80	110.01	25.45
Feed and Straw	1,906.60	3,946.45	1,885.65	2,981.36
Utilities	363.13	587.28	608.27	558.73
	1978	1979	1980	1981
		—
	—
Accounting	$ 373.50 $ 55.00 $ 65.00. $ 14.50
Advantage	12.50
OFA Dues	72.75
Duck Wax	93.60
Office Supplies	20.50
House Maintenance (25%)	323.96
Capital Cost Allowance	943.36
Property Tax		479.79	475.99	614.76
Auto Repairs, Gas & Oil		182.86	189.50	192.79
Small Tools	337.80	259.91	286.55
Freight		43.54		95.00
Bee Supplies		482.68
Livestock Inventory		7,000.00	11,000.00	14,500.00
Other (Personal Consumption)	(100.00)	(200.00)	(200.00)	(200.00)
Total Expenses	$15,465.30 $31,941.64 $23,462,57 $30,355.93
Net Loss	$ 4,111.62	$ 8,104,02	$ 7,662.57	$ 7,500.00
Adjustments to determine
cash loss
Closing inventory	$ 7,000.00 $11,000.00 $14,500.00 $16,467.03
Less: Capital Cost Allowance	943.36
28(1 )(b) opening inventory	— 0 —	7,000.00	11,000.00	14,500.00
Livestock purchase duplicated		6,000.00
Unreported income	1,000.00
Cash Loss	$ 9,168.26	$ 6,104,02	$11,162.57	$ 9,467.03

ACTUAL INCOME AND DIRECT EXPENSES

	1978	1979	1980	1981	TOTAL
Forage Crops & Hay	$ 2,000.00			$ 2,500.00
Swine	173.58 $	82.92 $ 285.63
Poultry	2,134.20		261.65	1,531.00
Sheep	45.90 12,754.70 396.00
Cattle			356.72
Lamb & Kids				704.90
Wool				14.00
Custom Killing				1,239.00
Total Income	$ 4,353.68 $12,837.62 $ 1,300.00 $ 5,578.90				$24,070

	1978	1979	1980	1981	TOTAL
Cattle	38.50		120.00
Swine	141.50	464.00
Poultry	168.00	316.50	77.00
Sheep	6,735.00	6,489.47	2,201.40	2,353.50
Veterinarian Fees	13.00	139.80	110.01	25.45
Feed and Straw	1,906.60	3,946.45	1,885.65	2,981.36
Total Direct Expenses	$ 9,002.60 $11,356.22		$4,394.06 $ 5,381.31		$28,949
				Gross Loss $ 4,879
Total Fixed Expenses	$ 6,642.70 $ 7,585.42 $ 8,068.51 $10,474.62				$32,771
				Net Loss $37,650

3. The Facts

3.01 At the beginning of the trial, the counsel for the respondent informed the Court that his client admitted the appellant’s contention for the 1978 taxation year but not for the 1979 and 1980 taxation years.

3.02 The facts alleged by the respondent, in subparagraphs (a), (b) and (c) of paragraph (3) of the reply to notice of appeal, are admitted by the appellant. Subparagraphs (d) and (e) are denied.

3.03 The appellant, in direct examination, testified that:

(a) the salary income ($4,630 in 1978, $15,147 in 1979 and $14,266 in 1980) was earned from four or five employers. They were temporary employments; around Christmas-time, Easter-time or summer-time, “when companies are closed down for holidays, renovations and maintenance work, new equipment going in.’’ TS 9 Those employers were located in Oshawa and Toronto which are respectively 125 miles and 80 miles from Dundalk, Ontario where his farm is located.

(b) He bought his own farm in 1966 with the intention to go into farming, to have a viable operation. He had the appropriate buildings on the farm.

(c) Until 1976, his father and mother were living on the farm with his family. They helped them. In his own absence, his father was able to look after the bigger livestock, like cattle. After their departure in 1976, he sold the cattle and bought sheep and goats. His wife is able to look after them, during his absence for work.

(d) He has adequate barn space and equipment to look after “100 ewes and 50 nanny goats’’. TS 11

(e) When he had been working for an employer, he worked at night on his farm about two hours and during the weekend for 14 to 16 hours. During the years involved, he worked about 20 hours per week on the farm (1,000 hours per year). In 1980, for his employers, he spent about 950 hours ($14,266 = $15 per hour)

(f) He based his expectation of profit on documents issued by the Ontario Ministry of Agriculture and Food. The following documents were filed:

Exhibit A-l: The Economics of Sheep Production — February 1977

Exhibit A-2: The Economics of Sheep Production — June 1980

Exhibit A-3: Pro forma budget from Ontario Ministry of Agriculture and

Food — June 1980

(g) Exhibit A-l entitled Economics of Sheep Production gives result of studies on production of former years: Recent Production Developments', Production systems and marketing; Estimated Capital Investment and The Budget Workshop.

The budgets were drafted to meet the 3 basic lamb production systems.

1. The ewes are lambed in January and February and the lambs sold as light lambs, weighing 40 to 60 pounds at Easter.

2. The ewes are lambed in January, February, or March, and the lambs sold as handyweight lambs (80 to 100 pounds) in May and June. This system usually takes advantage of the peak in the yearly price cycle.

3. The ewes are lambed in April and May and the lambs sold as handyweight lambs in September and October with about two-thirds marketed from pasture. This system makes maximum use of grass and is the lowest cost system if low cost pasture is available.

(h) The appellant however chose for self-sufficient operation.

This is shown in the appendix of the notice of appeal.

PROJECTION FOR SELF-SUFFICIENT OPERATION

Sheep

100 ewes at $150	$15,000
4 rams at $250	1,000
	$16,000

Each ewe, lambs once a year producing 100 lambs. 20 would be retained for herd maintenance, and 80 would be sold. This would produce revenue of $8,000. In addition, the sheep would produce an average of 8 lbs of wool at 67 cents per lb or 557 per year. Thus gross revenues from the sheep would be about $8,500.

Goats

50 milking nannies at $150	$ 7,500
3 billie goats at $250	750
	$ 8,250

Each nanny would have 3 crops of twins every 2 years (ie maximum of 300 kids in 2 years). Nannies not producing twins are sold. Thus, on a yearly basis, 100 kids would be sold for $70 each or $7,000. The big revenue generator will be goats milk. One milking nanny will produce an average of 2,000 lbs/milk per year, or 200 gallons. Current price per gallon is approximately $4. Thus, yearly revenues would be $800/nanny or $40,000 per year.

Thus, overall revenues would be $55,500 which would cover expenses and provide an adequate return for the labour and money invested.

(i) It appears from A-3 that for 100 ewes, there is a gross income of $12,400 and an implied profit of $3,119. In late 1978, he purchased a herd of 100 ewes. Pursuant to R-l (Schedule I) above he paid $6,735. He maintained it about one year. He sold them in 1979 because they were poor producers. However the selling price was $12,754.70 (R-1).

They were not up to expectation and I found out later, they looked pretty good when I bought them, but I found out later they were somebody else’s culls. TS 18

There was “a very high death rate on account of poor lambing and the lambs were the same thing too; they were very poor lambs.” TS 18 Despite good rams, the percentage of lamb per ewe was less than one. The normal lambing rate is one and a half.

(j) After the bad experience, he continued to purchase ewes. In 1979 indeed, pursuant to R-l he paid $12,489.47, in 1980, $2,202.40, in 1981, $2,353.50. In 1984 at the time of the trial he had 62 ewes and 48 goats. In 1980 he sold sheep for $396 and for nothing in 1981. He is still working on the farm about 20 hours per week.

(k) The herd closing inventories were 12 in 1980, 61 in 1981, 30 in 1982 and 60 in 1983.

3.04 In cross-examination, the appellant testified that

(a) His farm has 150 acres but only 100 acres are workable.

(b) He was brought up on a farm. His father and his grandfather owned a farm. Moreover he read a lot of literature about farming. He became fairly well experienced.

(c) From 1966 to 1981, he gave all the documents to his accountant who then prepared the financial statements and the tax returns. When somebody is “in that small position” he does not always think, when incurring an expense, about the profitability in a short period but assumes that at some point in the future it is going to work out and will get a profit eventually. (TS 21)

(d) His income, other than farming income, was $10,000 (1978), $17,000 (1979), $18,999 (1980) and $30,000 (1981).

(e) Since 1981, he has had a permanent job, five days a week and 12 hours per day. Since 1981 he has been living in Oshawa (5 days) and coming back home for the weekend.

(f) The income per ewe was $50.55 compared with 124 (Exhibit A-3) and the lambing is less than one per season compared with one and a half. (TS 32)

(g) In 1982 he sold 30 lambs because they were poor quality. At the end of 1981, the size of the herd was 76.

(h) For 1982 and after, the respondent asked him not to file as a farmer in his income tax return but he has continued farming. However, he was less concerned with whether or not it was profitable.

3.05 In re-direct examination the appellant from Exhibit R-l (Schedule I and II) testified that the total actual income of $24,070 from 1978 to 1981 plus the 1981 closing inventory of $16,462.03 less the total direct expenses of $28,949 for the four said years gives a gross profit of $11,588.03 over the four years.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 18( l)(h), 31(1) and definition of Personal and Living Expenses:

Sec 31. (1) Loss from farming where chief source of income not farming.—Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /z of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

18(1)

(h) personal or living expenses.—personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

“Personal or living expenses" — “personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

4.02 Cases at Law

The cases at law referred to the Court by the parties are:

1. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213;

2. Gilles Morisset v MNR, [1984] CTC 2202; 84 DTC 1176;

3. Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417;

4. Joseph Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340;

5. Stubart Investments Ltd v The Queen, [1981] CTC 168; 81 DTC 5120.

4.03 Analysis

4.03.1 The Supreme Court of Canada in the Moldowan case says that

the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

The appellant contends he is in the second class being a gentleman farmer. The respondent’s contention however is that the appellant is in the third class because he carried on his farming activities as a hobby. The crux of the matter is whether the farming activities in the years involved had a reasonable expectation of profit. This element indeed is the point which determines whether an activity is a business, as provided in the definition of “personal or living expenses” quoted above. In the Moldowan case, concerning the reasonable expectation of profit one can read:

There is a vast case literature on what reasonable expectation of profit means and It is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews, [1974] CTC 230; 74 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same startup losses as the man who begins a tree farm on raw land.

4.03.2 From the different cases at law especially from the Moldowan case, the main criterions to establish the reasonable expectation of profit of an activity are:

1. the time spent by the taxpayer in the activity

2. the taxpayer’s training

3. the profit and loss experience in the past years

4. the taxpayer’s plan for management of the activity

. physical assets in hand for the realisation of the plan

6. capability of the venture to show a profit

4.03.3 Time spent for the activity during the years involved

The evidence shows that the appellant spent 1,000 hours per year for the farming activity without computing the time spent by his wife. It is almost the same number as he spent in 1980 for his different employers. (3.03(e)(j)) The Court thinks that considering the nature of the activity, the appellant has reversed the burden of proof on this point.

4.03.4 Taxpayer's training

Raising sheep and goats or calves does not require specific studies at university. The appellant was brought up on a farm (3.04(b)). His father who was an experienced farmer was living with him on the farm from 1966 to 1976. Reading and experience rapidly completed his training. In the years involved, the appellant could be considered as an experienced farmer. The point can be considered in favour of the taxpayer.

4.03.5 Profit and loss experience in the past years

This point does not favour the taxpayer. Indeed no evidence was given that, since he has been a farmer, he made some profit.

4.03.6 Taxpayer's plan for management of the activity

Wishful thinking is not sufficient to make a farmer or to carry on a farming business. Formation and implementation of a plan are required to confirm the intention to carry on a farming business.

The appellant’s decision to choose the self-sufficient operation and therefore to purchase 100 ewes in late 1978 seems to be based on Exhibit A-1 (3.03(g)(1)). It is on that basis that the respondent considered in that year that there was a reasonable expectation of profit. The appellant continued to improve the plan purchasing animals in 1979, 1980 and 1981 despite the difficulties in 1978. (3.03Ü)).

It is true that the plan did not succeed for different reasons. However the appellant had indeed a plan to make a profit. This point is in the appellant’s favour.

4.03.7 Physical assets in hand for the realization of the plan

Since 1966 the appellant has owned a 150-acre farm. One hundred acres are workable. He also owned appropriate buildings for the animals. Moreover the inventory of the animals from 1978 to 1983 seem sufficient (3.03(j)(k)).

In these circumstances, the Court concludes he has had on hand the physical assets for the realization of the plan.

4.03.8 Capability of the venture to show a profit

The capability of the venture as capitalized to show a profit after charging depreciation must be considered with the plan to manage farming activities and the physical assets required for the realization of the plan. These two criterions are in favour of the appellant. One must also consider that for the four years, 1978 to 1981, there was a gross profit of $$11,588 (3.05).

4.03.9 Taking all the criteria as a whole the Court concludes that there was in 1979 and 1980 a reasonable expectation of profit. As the respondent gave his consent to judgment for the year 1978, therefore the appeal must be allowed for the three years.

5. Conclusion

The appeal is allowed in accordance with the above reasons for judgment and the matter referred back to the respondent for reassessment.

Appeal allowed.