Walter T Chen v. Minister of National Revenue, [1984] CTC 2451, 84 DTC 1415

Goetz, TCJ:—This is an appeal by the appellant relating to his 1977, 1978 and 1979 taxation years.

Issues

1. Whether the appellant was entitled to deduct farm losses pursuant to the provisions of section 31 of the Income Tax Act SC 1970-71-72, c 63 as amended.

2. The deductibility of certain car expenses.

3. Whether the proceeds of logging operations on the appellant’s land were on account of capital or income.

Facts

The appellant was a highly successful ear, nose and throat specialist practising in Prince George, BC. The appellant’s wife urged him to purchase the land in question which was shown on an aerial map and two copies of a surveyors plan. Mary Chen, the appellant’s wife was a laboratory technician by profession but in 1964, she became a consultant in this field and worked with her husband as an audiologist and bookkeeper. She had lived in Regina, Saskatchewan until she married the appellant. Her parents farmed three miles outside Regina. Her uncle had a hay and dairy farm at Pilot Butte, a few miles from Regina. She claimed a love and affinity for farming.

She prevailed upon the appellant to purchase 800 acres of land in 1968/69 (hereinafter referred to as “the property”) located 15 miles from Prince George. One of the appellant’s friends who told him about the property advised him that the property was timbered and only 40 acres used as a farm. The appellant said “It could have been all wild as far as I was concerned”.

In the Minister’s reply to notice he alleged in part as follows:

4. Of the aforesaid 800 acres of property purchased only 14% of same or 86 acres were cultivated and used for the production of hay in each of the years under appeal.

5. In the years 1973 to 1979 inclusive the Appellant claimed a loss from the operation of a farm in the following amounts:

1973	$1,969.00
1974	$5,000.00
1975	$2,308.00
1976	$2,816.00
1977	$2,302.00
1978	$3,730.00
1979	$4,828.00

6. In 1978 and 1979 the Appellant contracted with a logging firm for the sale of timber on his property and received the amounts of $3,778.00 and $85,971.75 respectively.

7. In the Appellant’s return of income for the years under appeal, he claimed the following expenses as a deduction from income:

	Office Lease	Motor Vehicle
1977	$2,763.00
1978	2,958.00	$1,176.62
1979	2,958.76	1,400.21

8. By way of Notices of Reassessment dated December 31, 1980, the Respondent disallowed the following expenses claimed by the Appellant:

	Office Lease	Motor Vehicle
1977	$1,563.00	—
1978	1,758.00	$ 823.63
1979	1,758.76	980.15

on the basis that the office lease expenses as claimed by the Appellant were unreasonable in all the circumstances and further that 70% of the automobile expenses claimed by the Appellant were for the Appellant’s personal use and enjoyment.

9. By way of the aforesaid Notices of Reassessment dated December 31, 1980, the Respondent further disallowed the Appellant’s claimed farm losses in each of the years under appeal on the basis that his chief source of income was neither farming nor a combination of farming and some other source of income.

10. Further, by way of a Reassessment notice of which was dated December 30, 1980 with respect to the Appellant’s 1978 and 1979 taxation years, the Respondent included in the Appellant’s income the amounts of $25,000.00 and $64,749.75 respectively from the sale of timber situated on his property which amounts were adjusted by way of Notices of Reassessment dated December 31, 1981 to include in the Appellant’s income for 1978 and 1979 the amounts of $3,778.00 and $85,971.75 respectively on the basis that the Appellant received the aforesaid income from the business of selling timber situated on his property.

11. In assessing the Appellant in each of the years under appeal in the manner set forth in paragraphs 8, 9, and 10 herein, the Respondent relied upon the following assumptions of fact, inter alia:

(a) the amount of $1,200.00 allowed the Appellant as office lease expenses in each of the years under appeal was reasonable in all the circumstances and he puts the appellant to strict proof of the contrary of this assumption;

(b) in 1978 and 1979, the Appellant incurred automobile expenses in the amount of $352.99 and $420.06 for the purpose of gaining or producing income with the balance of the expenses claimed in the amount of $823.63 and $980.15 in 1978 and 1979 respectively being incurred for the Appellant’s personal use and enjoyment;

(c) in each of the years under appeal the Appellant was engaged as a full time medical specialist in the city of Prince George;

(d) the Appellant’s chief source of income for his 1977, 1978 and 1979 taxation years was neither farming nor a combination of farming and some other source of income;

(e) in each of the years under appeal the Appellant had no reasonable expectations of profit from carrying on a business of farming;

(f) in his 1978 and 1979 taxation years the Appellant was in the business of selling timber for a profit.

The Minister relied, inter alia, upon sections 3, 9, 31(1) and 9(1), and paragraphs 18( l)(a) and 12(l)(g), of the Income Tax Act, RSC 1952, c 148 as amended by S 1, c 63, SC 1970-71-72.

Mary Chen said that, at time of purchase there were only 40 acres cultivated which were underwater because of beaver dams. This situation was remedied and in 1969 the 40 acres were ploughed. She later purchased 13 pregnant cows who fed on marsh grass. The next year 40 more acres were cultivated and by 1979 the appellant had 160 acres under cultivation. She used hired hands to do odd jobs about the property and a Mr Zingle performed the haying operation on a 1/3-2/3 crop sharing basis.

In 1972 the hayshed was destroyed by fire and Mrs Chen sold the herd. The purchase price of the property was $25,000 — the only assets on the land were a truck and the shed. She and her son in 1976, did rootraking on weekends of “walkdownland” (land which had been bulldozed leaving debris and stumps). The land when purchased, was timber land owned by a former logger. The area around Prince George is one of the most active logging areas in the world according to the appellant’s testimony.

In 1973, Mrs Chen decided to sell hay and ignore a cattle operation. From 1968 to 1981 she admitted they never reached a viable operation. Zingle did the day to day work in the haying operation The appellant was very busy with his practice and would, in the summer, spend a few days and weekends in their camper truck located on the property. Dr Chen was very allergic to hay. The aerial photo was taken in 1978 and showed the land as being mostly covered with trees. The Prince George area was subject to severe weather conditions and not ideal for a hay-growing operation although a few small farms were operating. The property as well as having aspen and larger timber was intersected by a large creek. Dr Chen stated he knew nothing of farming and sought no advice with respect to the development of the property. He thought it would cost about $200 per acre to clear. Robert Holtby a government agrologist testified on behalf of the appellant. He stated that if someone had approached him about buying the property he would have said “Don’t rush”. He said clearing costs would run between $450 and $500 per acre. In 1968, the property did not have enough cultivated acreage for a cow-calf operation. Further Mrs Chen had no knowledge of such an operation.

Zingle received / of the hay production for the work he performed. In that there were 700 acres to be cleared, Holtby stated that it would take an enormous amount of time and money to develop a viable farm operation.

A Harry Gairns gave evidence as a professional forester and engineer. He testified that the property was covered with a dense stand of small diameter pine and spruce, but that sawmills gradually adjusted their equipment to be able to use smaller diameter trees and that from 1971, this improved the market for lumber. The Chen property was ideal for this type of operation.

In 1975, on inquiry from Mrs Chen he personally checked the land and advised her of the form of contract that Chen should enter into with a logging company. He said the cost of clearing would be $500 per acre. He negotiated the contract for Mrs Chen and followed through to see whether the logging company was complying with the terms of the contract.

On October 30, 1978 Clear Lake Sawmills Ltd signed this form and among other things agreed to construct access roads and bridges. On March 5, 1979, Mrs Chen wrote Dave Turner granting him authority to cut trees for fence posts of no greater diameter than 3’ inches at sixty cents per post cut. He was not to interfere with Clear Lake’s operation. In 1978 and 1979, the income from these two contracts for the sale of this timber was $3,778 and $85,971.75, respectively. The $85,971.75 was placed by the appellant in savings certificates and then invested in a concrete ready-mix plant. Although a good portion of the property was said to be potentially arable, to bring it to that state was a tremendous investment.

Dealing with the issue of car expenses: Dr Chen owned 2 cars one of which he used for his practice. He deducted 50 per cent of the cost of operating that vehicle from his income on the advice of his accountant. He used it to go back and forth to the hospital where he conducted rounds and performed operations. He was often on call on weekends. He attended medical meetings and treated Indian children once a week at a distance of 100 miles from Prince George.

Findings

I shall deal first with issue number one, namely the application of subsection 31(1) of the Act which reads as follows:

(1) Where a taxpayer’s chief source of income for a taxation year is neither farming not a combination of farming and some other source of income, for the purposes of sections 3 and 111 his losses, if any, for the year from all farming busines 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 deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his income for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 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 deductions in respect of expenditures described in section 37” were deleted,

exceed

(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.

This section was formerly 13(1) of the Income Tax Act, 1952, c 148, as amended and was dealt with thoroughly by Dickson, J of the Supreme Court of Canada in the case of William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, more particularly at 313 and 5215 respectively:

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.

Further at 315 and 5216 of his judgment, he says:

In my opinion, 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 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 livelhood 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.

Mrs Chen’s so-called farm experience in a haying or cattle operation was nil. The area surrounding Regina, Saskatchewan is very rich wheat growing country. Her view of uncle’s Pilot Butte obviously would be minimal. Nevertheless she did have a love of the farm and in my view in light of the appellant’s testimony he purchased the farm out of love and to humour her. He could not have cared less as to the condition of the land. He liked the trees and the creek and the property being situated only 15 miles from Prince George made it an ideal weekend retreat. He was allergic to hay and the haying operation had no attraction for him. he admitted when purchasing the property he made no inquiries as to the viability of the property, nor did he obtain a feasibility study. The witness Holtby stated that the property might have some farm viability in the future but it required “enormous capital and effort”. Chen thought it would cost about $200 per acre to clear the land, whereas the experts stated it would cost at least $500 per acre. In 1975, he obtained a very thorough and complete land appraisal of the property in light of the capital gains tax introduced in 1971. This in itself, has no real bearing on my decision in this appeal.

Admittedly, Mrs Chen spent money in connection with her short lived cowcalf operation which she should not, quite obviously, have gotten into in the first place. She, with hired help, also raked windrows of debris on the “walk-down” land.

If it was the appellant’s intention to make the farm viable as soon as possible, why did he invest the proceeds ie $3,778.00 and $85,971.75 from the logging of his timber in a concrete ready-mix plant? His busy medical practice precluded him from the carrying on of a commercial farming pursuit. See Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417 particularly at 544 and 5421 respectively:

Farming as a commercial operation reuires the close attention of the farmer even if he merely acts in a managerial capacity if there is to be a reasonable expectation of profit. Work and attention is an essential ingredient in the farming process. This I find Dr Holley did not and could not give it. I am not unmindful of the assistance Dr Holley said was rendered by his wife and his hired help when he had it, but I find that this did not bring the work to the level of adequacy for a reasonable expectation of profit.

The series of farm losses from 1973 to 1979 are rather relevant: Joseph Shie- witz v MNR, [1979] CTC 2291; 79 DTC 340, at 2293 and 341 respectively:

Had the Appellant demonstrated that he had identified the risks, and had he indicated that he undertook to pursue a plan for management of the risks or the minimization of the risks, his assertion that there was a reasonable expection of profit would not have struck me as being little more than wishful thinking.

The unbroken string of losses in all years prior to 1976, and the absence of any evidence indication the formation and implementation of a plan to bring about a change leads me to the conclusion that on the balance of probabilities, the Appellant had no reasonable expectation of profit during any of the years in issue.

I don’t consider that the appellant could possibly have had in mind a reasonable expectation of profit under the circumstances.

In dealing with issue #3, ie the logging operation; the appellant treated the income therefrom as capital and not income. Revenue Canada treated this as income. I treat the sale of standing timber as a sale of stock in trade. See: C W Logging Company Limited v MNR, [1956] CTC 15; 56 DTC 1007 decision of the Exchequer Court of Canada where Ritchie, J states at 24 and 1012 respectively:

Standing timber, like grain or vegetables, is a crop which, in the absence of a specific reservation, changes ownership when the land on which it stands is sold. Standing timber is a crop regardless of whether the owner of the land has adopted and is following any reforestation policy or is allowing nature to take its course and produce new growth. A sale of land which includes the growing crop is, as a rule, the sale of a capital asset. A crop, however, can be harvested by the owner or sold standing to a purchaser with permission to enter on the land and harvest it. A sale of standing crop only, with title to the lands remaining in the vendor, is the sale of property which is akin to stock-in-trade or an inventory of raw material. Such a sale is of a current asset.

This decision applies to the case before me. The appellant sold timber and post cutting rights. This applied to much of the area around the property. The contracts merely gave the loggers the right to cut timber. See: The Algoma Central and Hudson Bay Railway Company v MNR, [1961] CTC 9; 61 DTC 1027 particularly at 24 and 1035 respectively:

Every covenant, agreement, was for a consideration which was a unit price per acre on a designated area and for a specified period. These transactions gave rise to monthly or annual revenues. It also granted timber cutting rights for dues on a stumpage basis. The same applied to the timber cut on the land cleared for flooding purposes. The land reverted to appellant after it had become useless for the purposes for which the rights had been granted to the contractors.

The appellant owned the property throughout. The loggers were merely given the right of access to the property to remove timber and to pay the appellant so much per cubic foot of timber that was logged. This was a production or use of his land. See MNR v Gerthel L Lamon, [1963] CTC 68; 63 DTC 1039 a decision of the Exchequer Court of Canada. See also, Louis Holker v MNR, [1972] CTC 2315; 72 DTC 1265 at 2316 and 1266 respectively:

With respect to the selling of timber, he explained that one day he met a logging trucker in the Malahat Chalet and asked him if he would be interested in selling timber. Subsequently, a Mr Rolls obtained a written contract which was filed as Exhibit A-4, the relevant clauses of which are set out hereunder:

2. The vendors hereby authorize the Purchaser to enter upon the said lands, to cut, fell and remove therefrom timber standing thereon.

3. The Purchaser shall pay to the Vendors for all timber cut and felled the sum of TWENTY DOLLARS ($20.00) per THOUSAND (1,000) board feet.

and further at 2317 and 1267 respectively:

As for the profits earned from the sale of timber, I would like to reproduce hereunder section 6(1)(j) now section 12( l)(g) of the Income Tax A ct which reads as follows:

6. (1) Without restricting the generality of Section 3, there shall be included in computing the income of a taxpayer for a taxation year . . .

(j) amounts received by the taxpayer in the year that were dependent upon use of or production from property whether or not they were instalments of the sale price of the property, but instalments of the sale price of agricultural land shall not be included by virtue of this paragraph:

After reading this section, I have no hesitation in saying that the proceeds from the sale of timber are taxable. No matter what the intention of the appellant was when he bought the property and no matter in what manner he sold the timber, if the proceeds depend upon use of or production from the property within the meaning of the above section, they are taxable. In my opinion, the proceeds came from the use of and pro- duction from the property within the meaning of the above section and, consequently, the appeal on that issue should be dismissed.

The payments from the loggers represented income from the property, and was properly considered part of the appellant’s income in that he retained ownership of the land. See George Lackie v The Queen, [1979] CTC 389; 79 DTC 5309.

The appellant did not contest the reassessment with respect to office lease expenses but contested the reassessment as it related to his car expenses. From the facts adduced, I have concluded that the appellant is entitled to deduct motor vehicle expenses and allow his appeal to that extent. In all other respects the appeal is dismissed.

Appeal allowed in part.