Thomas Brogan v. Minister of National Revenue, [1984] CTC 2331, 84 DTC 1309

Tremblay, TCJ:—This case was heard in Sydney, Nova Scotia, on August 3, 1983.

1. The Point at Issue

The point at issue is whether the appellant, an employee of Tom Brogan & Sons Construction Limited, is correct in computing his income for the 1977 to 1980 taxation years inclusive, in deducting amounts of net losses from his net income from fishing activities, which activities he considers a business.

The respondent contends that the expenses related to fishing activities are personal expenses because at no material time did the appellant have a reasonable expectation of profit from his fishing activities.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially 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 assessments or reassessments are also deemed to be correct. In the present case the assumed facts are described in the reply to notice of appeal as follows:

4. In so reassessing the Appellant’s income tax liability for his 1977, 1978, 1979 and 1980 taxation years, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) At all material times the Appellant was employed by Tom Brogan & Sons Construction Limited and received income from that source as follows:

1977	—	$28,000.00
1978	—	60,636.20
1979	—	54,500.00
1980	—	54,212.40

(b) The Appellant reported gross income from fishing, recapture of capital cost allowance from the sale of boats, expenses, and net loss from fishing for the 1973 - 1980 taxation years in the following amounts:

Net Loss/

Gain after

	Gross		Boat		Net Loss	Recapture &
	Income	Recapture	Rental	Expenses	From Fishing	Boat Rentals
1973 $1,327		—	— $ 2,058		$ 731	(731)
1974	3,145	—	—	4,767	1,622	(1,622)
1975	3,863	—	—	8,982	5,119	(5,119)
1976	2,777	—	—	7,012	4,235	(4,235)
1977	188	$ 550 $80		6,987	6,799	(6,169)

						Net Loss/
						Gain after
	Gross		Boat		Net Loss	Recapture &
	Income	Recapture	Rental	Expenses	From Fishing	Boat Rentals
1978	1,826	10,864	—	5,036	3,210	7,654
1979	4,168	—	—	11,906	7,738	(7,738)
1980	1,530	—	—	27,926	26,396	(26,396)

(c) At no material time did the Appellant have a reasonable expectation of earning a profit from his fishing activity;

(d) At all material times the activity carried on by the Appellant was not fishing, but a hobby of the Appellant and the expenses incurred by him were personal or living expenses.

3. The Facts

3.01 It is understood that for the 1978 taxation year, the respondent deleted the net fishing income of $7,654 which had been included in the income on the basis that the appellant was not considered to be in the fishing business. The said net income indeed was in fact due to recapture the amount of $10,864 and recapture is only used in the computation of income from business or property.

3.02 In chief examination, the appellant testified that:

(a) he was born in 1930; he got married in 1948 and had seven children; in 1971, his eldest boy was 21;

(b) after leaving the army in 1965, he decided to live in Florence, Cape Breton, Nova Scotia; in 1966, he bought a backhoe and truck loader and started in business as a contractor; in 1974, he incorporated the Tom Brogan & Sons Construction Ltd; he was the only shareholder at that time; in 1983, the company had 11 employees but it had had up to 22 employees; he is employed by the company, and the income from that source in 1977 to 1980 inclusive is the one detailed in subparagraph 4(a) of the reply to notice of appeal cited in paragraph 2.02 above;

(c) from 1965 to 1975, he also was a part-time fisherman;

(d) in 1971, he purchased his first fishing boat named “Sheila & Cathy”; it was then only to be used for lobster fishing; from 1971 to 1983, he purchased, in fact, eight fishing boats; as Exhibit A-l was filed the listing of the said fishing boats with the price of purchase and sale; it reads as follows:

(e) the photocopies of the photos of the eight said fishing boats were filed as Exhibits A-2, A-3, A-4 and A-5;

(f) the appellant also purchased a comfortable cruiser which he used for pleasure;

(g) in 1977, the federal Department of Fisheries reviewed the status of licenses of all the lobster fishermen in the Province of Nova Scotia; he was classified as a full-time fisherman, Class A license; to be classified as a Class A, a fisherman must work at least six (6) months as a full-time fisherman; the appellant spent in excess of this requirement;

(h) in 1977, Mr Brogan’s fishing boat sank during the lobster season; he had no boat to complete the season;

(i) in 1977, Mr Brogan developed a back problem from fishing. The problem was so severe that he spent time in the hospital; he was required to take back treatments from a hospital in Toronto; he was told to ease off for a year. During 1978, Mr Thomas Brogan, Jr operated the boat and the gross lobster income was reported by him; Mr Thomas Brogan, Sr helped with the lobster fishing and did some fishing for cod in the summer and fall. The income from the ground fish was reported by Thomas, Sr; in early 1977, Dr Murray A Tyber treated the appellant for a “degenerative disc disease of the lumbosacral spine”; a letter dated March 6, 1977 from Dr MA Tyber to Dr LD MacKenzie was filed as Exhibit A-6;

Thank you very much for asking your patient, Mr. Brogan, to see me with reference to his low back pain.

He was first seen January 6, 1977 when a diagnosis of degenerative disc disease of the lumbosacral spine was made. Treatment has consisted of therapeutic paravertebral lumbar nerve root blockade injection using Phenol in almond oil. A total of five blockade injections was given, blocking the sensory rami of LS to SI.

When last seen on February 5, 1977, Mr Brogan was completely pain free and had a full range of movement of his lumbar spine.

In addition to the above mentioned treatment, Mr Brogan was also started on AMITRIPTYLINE 25 mgs qid and lithium carbonate 300 mgs qid for control of depressive symptoms, the result of his low back pain. Mr Brogan has had a number of serum lithium determinations by the Ontario Provincial Laboratory and his last lithium level was 0.6 milliequivalents per litre.

I suggested to Mr Brogan that he stay on this medication for the indeterminate future, that is for several months at least, and then try a gradual withdrawal of this medication. Should his depressive symptoms return, I suggested that he restart his medication and gradually increase it to the above mentioned level. For the time that Mr Brogan is taking his lithium medication, he should have serum lithium determinations carried out. These should be carried out roughly every four weeks and the serum lithium levels should not be allowed to rise beyond 1.0 milliequivalents per litre.

Mr Brogan represents a complete response to nerve root blockade injection and he may very well be completely pain free for the indefinite future.

(j) during the year 1980, Mr Thomas Brogan, Sr injured his back again in the process of hauling trawl; he again spent time in the hospital; Mr Thomas Brogan, Jr then resumed fishing and the income earned was reported by him; in fact, the appellant was hospitalized three times: November 15-29, 1976, October 18-24, 1979 and January 15-21, 1981 (Exhibit A-7);

(k) “O’Patricia” was purchased in 1980 and was equipped with some of the best fishing equipment available; “O’Patricia” can endure storms and was equipped to fish for lobster, cod, flounder and scallops; during the first three weeks of the lobster season in 1982, the appellant’s gross earnings were over $5,000;

(l) the appellant filed as Exhibit A-8 a summary of the gross income to the net income or loss from 1972 to 1983 showing the result before and after the cca. It reads as follows:

(m) the fishing business starts in the middle of May; however, the fishermen have to work the three preceding months to get ready; on the sea, they have to go off-shore up to forty miles; they work seven (7) days a week; many, including the appellant, start at four (4) o’clock in the morning; one must have the knowledge and the know-how and must like fishing to do that; in the fishing period, he spends 90 per cent of his time working;

(n) ordinarily, during the month of February, he goes to Florida; it is the month without fishing and without construction;

(o) he has invested around $150,000 in the fishing business.

3.03 In cross examination, the appellant confirmed in substance the preceding testimony. However, he added that the major cause for the fishermen’s financial difficulties in 1977 was that the Russian ships “cleaned everything’’ up to 200 miles from the coast.

3.04 The second witness for the appellant, Mr N Brogan, barrister, testified that:

(a) in the present time his father and his mother owned the majority of the shares of the company, but that each son owned at least one share; in 1979, $52,000 of dividends were paid;

(b) his father comes to the office of the construction company about once per month;

(c) for 10 years, his father had been on a whaler from May to late fall.

3.05 The third witness for the appellant, Mr GA Unsworth, certified accountant, member for the firm Touche, Ross & Co. testified that:

(a) he has been the appellant’s accountant since 1973;

(b) a holding company was incorporated and Exhibit A-8 (paragraph 3.01(1) above) represents the reality.

4. Law — Cases at law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are 4(l)(a), 9(1) and (2), 18(l)(a), (b) and (h) and 248(1 )(a) under the definition of “Personal or living expenses”. They read as follows:

4. (1) For the purposes of this Act,

(a) a taxpayer’s income or loss for the taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer’s income or loss, as the case may be, computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from that source or no income or loss except from those sources, as the case may be, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto;

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

9. (2) Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

(h) 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;

248. (1) In this Act,

“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 that were referred to the Court are:

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

2. Casimir Van Straubenzee v MNR, [1981] CTC 2692; 81 DTC 552.

4.03 Analysis

4.03.1 The crux of the matter is whether during the years involved, a fishing business was a source of income for the appellant, and therefore carrying on the said fishing business was for profit or with a reasonable expectation of profit. If it was not, the expenses must be considered as “personal or living expenses” as outlined in the definition quoted at paragraph 4.01.

4.03.2 Both counsel for the parties referred to the Moldowan, (supra), case, judgment given by Mr Justice Dickson of the Supreme Court of Canada in which four other judges concurred. Both counsel invoked the principles issued in this case to base their own thesis.

The facts in this case are well summarized in the 77 DTC at 5213 and they read as follows:

The appellant taxpayer, a businessman who received substantial income from employment and several business investments, also engaged in horse-racing activities. In 1963 he realized a small profit of $1,593 from his farming activities, but thereafter he sustained a succession of losses, peaking $21,097 and $20,810 in 1968 and 1969 respectively. He engaged in training, boarding and racing horses for himself and others. After 1969, he reduced his farming activities. In computing his income for the 1968 and 1969 taxation years he deducted the full amount of the losses suffered in those years. The Minister only allowed the restricted farming losses of $5,000 in each of the respective years pursuant to subsection 13(1) of the former Act on the basis that the taxpayer’s chief source of income was neither farming nor combination of farming and some other source of income. The taxpayer appealed contending that he was actively engaged in horse racing which was a source of income to him, in affirming earlier decisions of the Board (73 DTC 228) and the Trial Division (74 DTC 6496), the Federal Court of Appeal (75 DTC 5216) dismissed the taxpayer’s appeal and held that the latter never seriously expected his farming activities to yield more than an income of insignificant importance in relation to his income from other sources. Therefore, his chief source of income was neither farming nor a combination of farming and some other source of income with the result that he was only entitled to the restricted farming losses. The taxpayer appealed further.

Held: The appeal was dismissed. While the taxpayer devoted a considerable amount of his time to his other business ventures, his horse-racing activities consumed only a few hours per day for only a part of the year. His horse-racing operation was not a business carried on for profit or with a reasonable expectation of profit. Therefore, his chief source of income was neither farming nor a combination of farming and some other source of income with the result that he was only entitled to the restrictive farming losses.

4.03.3 In the instant case, a farming business is not involved, therefore provision 31(1) of the Act does not apply as in the Moldowan, (supra), case. However, in that case, the Court had comments concerning the notion of “source of income’’ (sections 4 and 9 quoted above) and “reasonable expectation of profit’’ (referred to in the definition of “Personal or living expenses’’):

Although originally disputed, it is now accepted that in order to have a “source of income’’ the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v MNR, (72 DTC 6131), [1972] CTC 151. See also s 139(l)(ae) of the Income Tax Act which includes as “personal and living expenses’’ and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

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), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Moreover, for the purpose of section 31, the Supreme Court of Canada distinguished between a full-time farmer, a gentleman farmer and the one who carries on farming as a hobby. In the instant case, only the first and the third one are actually involved applying them to a fisherman:

(1) a taxpayer, for whom farming may reasonable 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 s 13(1) (now s 31(1)) in those years in which he sustains a farming loss.

(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 reference in s 13(1) (now 31(1)) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business.

The definition of a full-time farmer by the Supreme Court of Canada adds something more than the definition given by the Federal Court of Canada in CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282 at 510 [5286]:

(1) the farming losses of a full-time farmer where farming is the chief source of income (or a combination of farming and something else) in which event all losses are deductible,

4.03.4 Counsel for the appellant contended that the preponderance of the evidence in the instant case is to the effect that it can be said the appellant is “a taxpayer, for whom fishing may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer who looks to fishing for his livelihood is a full-time fisherman, and has the right to deduct the business losses”.

Counsel for the respondent, however, argued that basically the problem is the interpretation of the expression “reasonable expectation of profit” as provided in the Act and not the definition of a “full-time farmer” given by the Supreme Court of Canada in the Moldowan, (supra), case. This is true. However, the Supreme Court of Canada in the Moldowan, (supra), case explained the three kinds of farmers envisaged by the Income Tax Act especially for section 31. In giving the definition of a full-time farmer, the Court gives as criterion “the one . . . for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine . . .”.

The farmer then is free of the limitation of section 31(1), and therefore it is understood that he must be considered as carrying on a business, farming with a “reasonable expectation of profit”.

The Court thinks that the same reasoning must apply for the fisherman and allows the appeal.

5. Conclusion

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

Appeal allowed.