Tillsonburg Glass & Mirror Limited v. Minister of National Revenue, [1985] 1 CTC 2345, 85 DTC 307

Christie, ACJTC:—This appeal is concerned with a claim by the appellant to entitlement to deduct farming losses in its 1980 taxation year in an amount in excess of $5,000. In reassessing, the respondent reduced the claimed deduction to $5,000 which is the maximum permissible to a taxpayer in a taxation year under subsection 31(1) of the Income Tax Act (“the Act”). The acknowledgment on the part of the respondent that the appellant is entitled to restricted farming losses eliminates any question regarding whether, in its 1980 taxation year, the appellant had a reasonable expectation of profit from its farming operations. For the purposes of this appeal, it did: Kerr & Forbes v MNR, [1984] CTC 2071 at 2073; 84 DTC 1094 at 1096. The only issue is whether the appellant was, during 1980, within the first of the three classes of farmers which Mr Justice Dickson (as he then was) said in delivering the Judgment of the Supreme Court of Canada in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, are envisaged by the Act. A person (which includes a corporation) in the first class is 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 entitled to deduct the full amount of his expenses to the extent that, as provided by paragraph 18(l)(a) of the Act, they are incurred for the purpose of gaining or producing income from his farming business. His Lordship observed that the reference in subsection 31(1) of the Act to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to a person within the first class. A taxpayer in this class is one whose major preoccupation is farming. It is necessary to consider whether, during the year under review, the appellant’s income from the source other than farming was “subsidiary” or “auxiliary” to the farming income.

The appellant was incorporated under the laws of Ontario on January 22, 1962. Its head office is at Tillsonburg, Ontario. The shareholders are Mr Wesley E Heckford (49 per cent) and his mother (51 per cent). Mr Heckford is the president and general manager of the appellant and, at all relevant times, his mother played no part in the direction or the management of it. This was left to Mr Heckford. Mrs Heckford is approximately 81 years of age. Prior to the time that the appellant became involved in horse farming its business was the manufacture and sale of glass and mirror products. During 1980 and, as will be seen, during other years the appellant had sources of income from farming and from the manufacture and sale of glass and mirror products.

In his evidence in chief Mr Heckford said that his interest in racehorses began in 1968 or 1969. In partnership with others he commenced purchasing them in 1971. Between then and 1976, six horses were purchased on this basis, all of which were subsequently sold. In 1977 he purchased a horse named “Possessed” entirely on his own. In 1978 the appellant commenced purchasing horses. It purchased three in that year named “Navy Grog”, “Golden Bret” and “Possessed”, the latter being bought from Mr Heckford. Between 1980 and 1984 the appellant purchased ten additional horses including three in 1980. Four of the horses purchased by the appellant produced 13 offspring up to the date of the hearing, all but one of which has been sold. At the time of the hearing the appellant had nine horses in its inventory. In the course of cross-examination Mr Heckford was confronted with copy of the appellant’s financial statements for the years ended December 31, 1976, and 1977 which shows losses of $12,263 and $10,296 respectively regarding racehorses which, of course, suggests the appellant commenced its horse farming operation in 1976, not 1978. The witness did not dispute what is said in the financial statements. A rather unsuccessful attempt was made in re-examination to reconcile the conflict between Mr Heckford’s evidence in chief and in cross-examination. Nevertheless I do not regard this as having any significant bearing on the outcome of this appeal. To the extent, however, that Mr Heckford’s evidence conflicts with that reflected by the financial statements, I accept the latter. In 1979 the appellant purchased a one- fortieth interest for $25,000 in a stallion named “Dream Maker”. On January 2, 1982, it purchased 75 acres (“the farm”) about two and one-half miles west of Tillsonburg for $225,000. The vendor allowed the appellant access to the farm about 5 or 6 months prior to the date of sale and purchase. During this time and subsequently significant improvements were made, such as the construction of paddocks and a “run in shed” for the horses. In November 1981 the appellant transferred its horses from places where they were being boarded to the 75 acres. Mr Heckford testified that, after becoming interested in racehorses, he had taken steps to familiarize himself with the horse-racing business which includes the breeding and raising of the animals. He attended a seminar in this regard as well as a good number of sales. He subscribed to several publications related to the business.

I now turn to a comparison of the two aspects of the appellant’s business, namely, horse farming and the manufacture and sale of glass and mirror products. In addition to Mr Heckford, seven persons worked for the appellant in 1980. This was the basic workforce at times prior and subsequent to 1980. One of the seven was Mr Heckford’s son, Kirby, who commenced full-time employment with the appellant in May 1983 after he graduated from a “business course” at Humber College. Only Mr Heckford and his son were concerned with the horse-farming business and, in this regard, it was Kirby Heckford’s testimony that he worked “full time from 8 until 5:30” in relation to the glass and mirror aspect of the business. He said he assisted his father regarding farming in the evenings and on weekends. Mr Wesley Heckford said that prior to the purchase of the farm by the appellant, he would spend something in the order of 14 hours per week on the farming business and eight to ten hours a day on the glass and mirror business. In addition he had another corporation, W E Heckford Sales Limited, which was incorporated in the late 19603. It leased, among other things, photocopiers and computers. Mr Heckford said he devoted about one and one-half hours a day, five days a week to this corporation. After the farm was purchased there was a very significant increase in Mr Heckford’s devotion of time and energy to farming. During what was referred to as the busy season, from the middle of August to the middle of October, he would spend as much as six hours per day on the horses. This was in preparation for and attending on the sale of horses. There is however no suggestion that he ever relinquished his position as the person in overall charge of the appellant’s operations. A considerable amount of financial information regarding the appellant was placed before the Court at the hearing which contributes greatly to the resolution of this appeal. Financial statements of the appellant for the years 1976 to 1983 inclusive are in evidence. Inter alia, they show:

1. The total sales of glass and mirror products ranged from $342,935 to $527,437. The figure for 1980 is $456,994.

2. The total income from horse farming ranged from 0 (start-up year) to $55,071. The figure for 1980 is $7,337.

3. The glass and mirror business had net income before income taxes in each year in amounts ranging from $40,383 to $93,619. The figure for 1980 is $86,906.

4. The farming operation lost money in every year except 1979 in amounts ranging from $9,072 to $51,011. The profit in 1979 was $6,377. The loss in 1980 was $9,072.

5. Total farming income as a percentage of the appellant’s total income ranges from 0 (start-up year) to 11.3. The figure for 1980 is 1.6.

6. Farming income as a percentage of farming expenses ranges from 0 (startup year) to 182. The figure for 1980 is 44.7. The number 182 relates to 1979 which, as indicated in paragraph numbered 4 (supra), was the only year in which the farming operation showed a profit.

These numbers speak for themselves and, in the context of this appeal, they say a great deal that is unfavourable to the appellant. In my opinion, when they are taken together with the other evidence alluded to farming could not reasonably be expected to provide the bulk of the appellant’s income or the centre of its work routine in 1980. Farming cannot be properly regarded as having been the appellant’s major preoccupation during that time. Clearly the income from the manufacture and sale of mirror and glass products was not “subsidiary” or “auxiliary” to the farming income. It was just the opposite. While it is true that Mr W E Heckford who was the president and in complete de facto control of the appellant throughout had a great deal of interest in and devoted a considerable amount of time and effort to the farming activities of the appellant, this is by no means conclusive of whether the appellant comes within the first class of farmers described in Moldowan. His dominant executive responsibility is a fact to be considered, but it is one that can be outweighed by other relevant facts. Also, Mr Heckford’s interest in and devotion to the horse-racing aspect of the appellant’s business coupled with his large shareholding in the appellant and his relationship to the other shareholder does not settle the issue in this appeal in favour of the appellant. To hold otherwise would be to ignore the settled differentiation which must be made between a corporation and its shareholders. They are separate and distinct legal entities. In the circumstances the appellant cannot succeed.

The appeal is dismissed.

Appeal dismissed.