Neil Nikolaisen v. Minister of National Revenue, [1984] CTC 2057, 84 DTC 1027

Rip, TCJ:—This is an appeal from notices of reassessment made by the Minister of National Revenue of the appellant’s income tax for 1977, 1978 and 1979 whereby the Minister of National Revenue disallowed farm expenses incurred and claimed by the appellant in each year since, in the Minister’s view, these expenses were incurred in respect of personal or living expenses within the meaning of subsection 248(1) of the Income Tax Act and therefore are not eligible for deduction in computing income in accordance with paragraph 18(1)(h) of the Act.

Mr Nikolaisen was raised on a farm nine miles southeast of Prince Alberta, Saskatchewan. The appellant’s father had been engaged in mixed farming consisting of pigs, cattle and grain. The appellant worked on his father’s farm until his father took ill in 1958 when the appellant, then about 18 years of age, moved with his family to Prince Albert. He got married in 1959; his wife was also raised on a farm.

In Prince Albert, Mr Nikolaisen was employed at the packing house plant of Burns’ Foods.

Mr Nikolaisen’s in-laws purchased approximately 65 acres of land near Prince Albert in 1969 for the appellant and his family. At the time, Mr Nikolaisen was working the night shift at Burns’ Foods, that is from 9 pm to 5:30 am. During the spring and summer of 1969, before reporting for work at Burns’ Foods in Prince Alberta, Mr Nikolaisen would spend approximately four to five hours clearing by hand some of the land, building a house for his family and digging a well by hand on the land purchased by his in-laws. The Nikolaisen family moved from Prince Albert to the property in August 1969.

In 1970 the appellant cleared more land for growing potatoes and other crops. In the spring of 1970, his mother-in-law gave him a cow and a calf to start cattle farming. In 1970, he fenced in some of the property and started building a barn which was completed in 1971; the lumber for the barn came from trees growing on his land which he cut and sawed up. All the family — his wife and children

— participated in building the barn.

Once the barn was completed in 1971, the farm was built to “where we wanted” and Mr Nikolaisen purchased two pig breed cells.

It was never the appellant’s intention to work at Burns’ Foods for the rest of his working days. He always intended to return to farming as soon as it was financially possible.

In 1975, Mr Nikolaisen suffered the misfortune of a fire destroying the barn. Mr Nikolaisen loss 33 weanling pigs, a cow, a calf and two breed cells; after the fire he had four sows left and was almost back to where he started in 1969. Also in 1975, Burns’ Foods closed its packing plant in Prince Albert and the appellant was permanently laid off.

Since 1975, the appellant never had a permanent job off the farm. He worked part-time as a truck driver for several hauling and transportation companies near Prince Albert and worked near his home or as far away as Meadow Lake, Saskatchewan. The work was seasonal. He did not like working far from home because he would have to leave his wife and family alone on the farm. He worked off the farm to earn sufficient money to support his family and to continue building up the farm.

All of Mr Nikolaisen’s earnings from employment, after family expenses, were plowed back into the farm. The appellant did not borrow any funds to build up the farm. The appellant did not take any holidays in the years immediately prior to the years in appeal, during the years in appeal, or since.

All the appellant’s spare time was spent on the farm. During the week he was employed as a trucker, 50 per cent of the working week would be spent on his employment and 50 per cent of the time would be spent working on the farm; during the weekends all of the time was spent working on the farm.

A new barn was started in 1975 and completed in 1976; again all the family helped in the building of the barn. The appellant also built a grainary. Mr Nikolaisen would purchase grain to feed the pigs.

Mr Nikolaisen did not sell all his animals each year. He kept a stock for reproduction because “stock doesn’t always turn out the way you want”.

In 1976 Mr Nikolaisen cleared more land. He also had the misfortune of losing two cows which were hit by a truck and killed when they wandered through a hole in the fence onto the road. By 1976 Mr Nikolaisen had about 30 to 35 hogs.

In 1977 Mr Nikolaisen did more clearing and fencing. He lost four cows to hardware disease, a disease caused by the animal ingesting metal mixed with ordinary feed.

In the years in appeal Mr Nikolaisen continued to work part-time as a trucker, obtaining seasonal work only, since “I was never lucky enough to get a full-time job”. When he was not working as a trucker, he worked on the farm. In 1978 he dug a new well by hand since the original one was collapsing; in 1979, he had to put in a commercial well because the hand-dug well was giving him too many problems. In 1978 he also trenched 250 feet from the well to the barn so that the running water would be available to the barn.

In 1978 the appellant had health problems with his pigs and lost many of them. He cleared another three to four acres of land, broke it up, cleared the roots, and seeded it into grass for hay. He lost several weanling pigs and four sows when they pigged.

In 1979 Mr Nikolaisen was working as a trucker sometimes for three days a week, sometimes for four days a week and sometimes for five days in a week. But, again, all the time he was not working was spent working on the farm. During the year he again lost cattle because of suspected hardware disease.

During the years in appeal the whole family worked at the farm, including one son who worked full-time on the farm.

Mr Nikolaisen’s income from the farm never approached his income from his employment as a truck driver. In 1977 his farm income for the sale of hogs was $2,005.63, while his expenses were $7,215.05, a loss of $5,209.42. His income from employment in that year was $20,523.25. In 1978 his income from employment was $19,900.80, while his farming income was nil while he had expenses from farm in the amount of $6,362.39. In 1979 his employment income was $26,211.82 while his farming income was nil; he claimed a loss from farming in the amount of $9,221.09.

Because of his misfortune with cattle Mr Nikolaisen, in 1980, replaced the herd. He had been advised his cattle may have had some genetic problem or what he was doing with the cattle was simply not right. In 1982 he sold all of his cattle and devoted the farm to raising hogs. He has since installed an electrical fence to prevent the pigs from getting out and chewing on the fence.

Almost from the beginning Mr Nikolaisen’s goal was — and remains — to make a total living from the farm. At time of trial he said he was now in a position to do this. He will carry on pig farming and is in the process of building a pig barn for 30 cells so that he could raise pigs from birth to sale. A thirty sow barn he stated, would give him a decent living.

The issue to be determined is whether the appellant’s chief source of income is from his employment as a truck driver, and that farming is only a sideline business, in which case the appellant would be entitled to no more than $5,000 of losses from the farming business in computing his income in each taxation year in accordance with section 31 of the Act, as claimed by the appellant, or, on the other hand, whether Mr Nikolaisen’s farming activities were only a sideline and not a business at all, in which case no amount of the farming losses would be deductible in computing his income. On the other hand, if Mr Nikolaisen was actually farming not as a sideline but as a so-called “bona fide” business, he should be entitled to deduct all of his farm losses in computing his income.

In Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213 at 5216, Justice Dickson, speaking for the Supreme Court, stated that the Income Tax Act envisages three classes of farmers:

(1) A taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the center of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 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 s 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.

Subsection 13(1) of the Act referred to by Justice Dickson, is now section 31 and the material language of this section is unchanged.

The respondent is of the view that Mr Nikolaisen falls within class 3; in his pleadings, the appellant alleged he fell into class 1 but in opening argument his counsel said he would be content to be permitted the restrictive farm loss deduction provided for in section 31, ie, as a class 2 farmer.

Justice Cattanach of the Federal Court has reviewed the law as to the criteria required for a taxpayer to fall into each of the three classes in Graham v The Queen, [1983] CTC 370; 83 DTC 5399. In that case, a permanent full-time employee of Ontario Hydro, who had been raised on a farm, acquired a farm and by prodigious labour, without outside help, restored a dilapidated house in two and a half years and in a further two years readied barns for a pig rearing operation by installing the necessary equipment at expense and effort; the taxpayer worked eleven hours a day on the farm after coming home from his work at Ontario Hydro and arranged his vascation to fit the time he could best work on the farm. The Federal Court-Trial Division, found that the taxpayer’s main preoccupation was farming and he was entitled to deduct his farming losses in computing his income.

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; (Moldowan per Dickson, J p 5215). 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 and in determining this, time spent, capital commitment, profitability, both active and potential are important factors to consider. If the chief source of income is not from farming alone, which appears to be the case with Mr Nikolaisen, then it is to be determined whether his chief source of income was from a combination of farming and some other source of income.

From the very beginning in 1969 Mr Nikolaisen had the intention of leaving Burns’ Foods and to commit his life to farming. While it is true the farm property was purchased for him by his in-laws, this should not detract from the commitment Mr Nikolaisen and his family gave to the farm. He cleared over 45 acres of bush by hand, he built a farm with wood from trees that were growing on the farm; he and his family were the only ones working on the farm at all relevant times. In his view 30 sows would be sufficient to carry on a business of farming and to give him a standard of living which he would feel comfortable with and at time of trial he was finally approaching the number. I am satisfied that subjectively the appellant is a dedicated farmer and farming is his all consuming interest. He was precluded from becoming a farmer in his youth by the adverse circumstances of his father’s illness and he was diverted to employment with Burns’ Foods. His evidence was that the employment at Burns’ Foods was not something that a farmer would like to do; he was always looking upon things with a farmer’s perspective.

Like in the Graham case, by working prodigiously, without outside help, except from his family, Mr Nikolaisen built a house and farm in less than two years and in a further two years he was beginning a farm operation. Unfortunately, he had business reverses due to circumstances beyond his control. The destruction of the barn and the loss of animals affected his gross revenue, but in the circumstances of this case I do not believe that much weight should be given to the fact that his gross revenue was negligible.

When Mr Nikolaisen started his farm in 1969, and in the years under appeal, he had a reasonable expectation of profit and if it were not for his unforeseen reverses, the business might well have been showing a profit, or be close to it, in the years in appeal. (Vide Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213 at 5215; Dorfman v MNR, [1972] CTC 151; 72 DTC 6131 and subsection 248(1) of the Act).

A farmer “is not disentitled to deduct the full impact of start-up costs” (vide Moldowan, page 5216); it must be borne in mind that the appellant started his farming operation from scratch in 1969 and almost from scratch in 1975. He spent much of his physical labour building a house and barn and clearing bush and it was not until the time of the trial that he felt he was ready to embark on a pig farming operation to the extent he had envisioned earlier.

As Justice Cattanach stated in Graham “the initial expenses of such a farming operation will be extraordinarily high but that does not detract from the validity and necessity of these expenditures to reach the ultimate objective” (p 5407). I adopt the reasons of Justice Cattanach in the Graham case in concluding that, like Mr Graham, Mr Nikolaisen’s major preoccupation was farming and his employment was a sideline, albeit an important sideline. I therefore find that the chief source of income of Mr Nikolaisen was from farming and his employment as a truck driver. In the circumstances, Mr Nikolaisen falls within the first class of farmer as set out by Justice Dickson.

In his notice of appeal Mr Nikolaisen argued that he be entitled to deduct all of his farming expenses; at the opening of the trial his solicitor indicated he was not asking for the right to deduct all his farm loss but that he would be content with the restrictive farm loss only. The evidence at trial was clear that Mr Nikolaisen was carrying on the business of farming and therefore should be entitled to deduct all of his business losses. I shall therefore issue judgment accordingly.

The parties also agreed that the respondent calculated interest charges incorrectly in respect of Mr Nikolaisen’s 1977, 1978 and 1979 income tax assessments and agreed that the interest charges in respect of tax refunds pending prior to the reassessment be adjusted accordingly on reassessments made in accordance with the reasons for judgment.

I therefore will allow the appeal and refer the assessments back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed.