Eldon James Johnson v. Minister of National Revenue, [1984] CTC 2656

Taylor, TCJ [ORALLY]:—This is an appeal from Mr Eldon James Johnson with respect to his 1977, 1978 and 1979 taxation years. The matter at issue is the disallowance during those years of a farming loss claimed with respect to the provisions of section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended. The amounts are not at issue and are therefore not specifically relevant, and there has been no challenge by the Minister as to the calculation of the amounts nor of the expenditures involved, including fairly substantial expenditures related to capital invested in a farm.

First of all, I want to make a note of the fact that I can do nothing but give substantial credit to Mr Briskin, the counsel, and to the accountant, Mr Rivard, for the appellant; and certainly Mr Cossette. In the notice of appeal, and indeed I believe in the letter sent to the Minister of National Revenue dated March 26, 1981, there was reference to several items of jurisprudence which might appear to support the claim that this taxpayer has to the deduction he has made.

The issue, of course, is that the deduction from the farm loss has taken from income otherwise taxable in its own right: income from salary and income from rentals. In other words, putting it down to the simplest possible equation, the taxpayer’s objective, at least as far as income tax is concerned, is to reduce the impact of taxes otherwise payable on income he has earned. The deduction of the farm loss accomplishes that and makes it attractive of course.

The jurisprudence to which Revenue Canada and, in turn, this Court was referred to in the letter dated March 26, 1981, was jurisprudence which dated from the years 1972, 1974 and 1975. It is not for me to examine in detail what might have been the evolution of the law since that point in time, but as a matter of interest I would read from a decision in Cooke v MNR, which is [1975] CTC 2296; 75 DTC 223, which is the last-dated jurisprudence noted by the appellant in the letter to which I have referred. I assume, and I think with good reason, that the letter for the appellant may have been written, or at least assistance provided, and quite properly, by the accountant Mr Rivard. I wish to note that I am sure that Mr Rivard, particularly after reference to the jurisprudence, may have felt that he had good reason to assist in the filing of the tax returns and in making the appeal based on the reasons we have noted. He did so quite properly and quite conscientiously.

The Cooke decision to which Mr Rivard referred, was written by the then chairman of the Tax Review Board, Judge K A Flanigan at 2299 [225] he says:

There is no question from the perusal of the extract that I have just read aloud that farming is a business. In the last few years we have overcome the great wealth of decisions that held that a person could not be engaged in farming unless he had a reasonable expectation of profit.

Then Judge Flanigan goes on to some other comments. That indeed was Judge Flanigan’s view at that point in time — undoubtedly his view of the law: that it was not necessary to show a reasonable expectation of profit from farming for purposes of the Income Tax Act.

In the case of Goring v MNR, [1976] CTC 2255; 76 DTC 1202, the following year, 1976 — my first year at this work — I wrote the following in connection with the dismissal of a farm loss, where the appellants were requesting the full farming loss:

There was a considerable evidence of a laudable effort to rehabilitate the property and turn it into a base for the family estate and the same evidence also indicated strongly the motivation for this effort to be both a love of rural life and farming as an occupation, as well as a deep and understandable attachment to this particular home- stead property. It is evident to me that it is at least partially in recognition of these latter human feelings that the Income Tax Act does contain the provision in section 31 permitting the deductibility of a portion of the loss in the year in which it is incurred. It is in recognition of this in-between situation that the Minister has provided in the Act the relevant provisions dealing with rstricted farm losses. The alternative would be to regard the operation as merely the base for a personal retreat, recreation or hobby.

And again I point out that that was written in 1976 — I note the Supreme Court decision in Moldowan v The Queen, to which both counsel referred, came down in 1977 ([1977] CTC 310; DTC 5213]). It defined and cast into stone the interpretations to be placed on the matter and required, without any question, that a reasonable expectation of profit be demonstrated before even that which is referred to as the restricted farm loss could be attained.

Counsel for the appellant has properly noted that neither this amount at issue nor the source of income was the chief source of income for the appellant. Counsel for the appellant has also made reference to the term “farming business’’, and asserts this operation was “something other than a hobby”. He also noted, and agreed with the Court’s discussion with the appellant regarding the nature of the expenditures which were being deducted, — that many of them, by far the vast majority of them, would have been incurred whether or not there were any cows raised on the property.

I point out that the raising of cows in itself may not necessarily be farming, but if it can be termed “farming” it is not necessarily the “business of farming”. So merely providing a location in which cows might be raised is a long way from being in the business of farming. The business of farming is an activity related to

agriculture in which it can be demonstrated there is a reasonable expectation of profit.

Many taxpayers take umbrage at the expression frequently used by the Minister that the costs disallowed by the Minister were personal or living expenses. It should be pointed out that the Minister has absolutely no choice except to so identify them. If they are not business expenses, then according to section 248, the definition section of the Income Tax Act, they are automatically personal and living expenses. That terminology may be unfortunate and somewhat confusing, but it is not for the Minister to show that these are “personal or living expenses” in the common sense usage of those words, nor do they have to show characteristics which identify them as “personal and living expenses”. If they are not business expenses which can only arise out of an activity with a reasonable expectation of profit, they are indeed personal or living expenses under the Income Tax Act.

I also make another comment, and I think (for me) it was probably the most crucial bit of evidence brought forward this morning. It was brought forward with the best of intentions on behalf of the appellant, but for me it was decisive with regard to the fact that the appellant’s appeal could not succeed: that is the statement of Mr McPhee, one of the witnesses for the appellant, a neighbour farmer, that in the year 1976 farming had become very difficult. At that time he (Mr McPhee) had 45 or 50 beef cattle of somewhat similar type to that which the appellant was hoping eventually to have, and Mr McPhee’s wife found it neces- ary to return to full-time employment. This was approximately the period of time at which Mr Johnson (the appellant) is asserting to the Court that he was going into the business in an area only 6 miles removed from Mr McPhee and that he had “a reasonable expectation of profit”. In my mind it is a complete impossibility. More than that it would demonstrate that Mr Johnson could not possibly have examined all the pros and cons of the activity into which he was venturing from any business viewpoint, recognizing that he had to make a profit. When one talks about making a profit, one does not talk about necessarily making a profit in the specific years under review, although that is a situation which is becoming more and more difficult to evade. If one does not make a profit in the years under review — (and we would not have appeals in front of us if one made a profit) — then it becomes very difficult for the appellant to support the view that in the future he is going to make a profit of some sort.

I would note some of the other jurisprudence referenced by counsel for the appellant. The first case is a fairly recent one of Helen Kasper v The Queen, ([1982] CTC 178; 82 DTC 6148) which I have reviewed myself in hearing more recent cases, and the conclusion I reached with regard to Kasper is that it turns on the specific conduct of the appellant in that case — the appellant having changed the mode and manner of life which permitted the learned judge in that instance to grant the appeal. It is difficult to see in the recital of the case any other major determining factor, and so that is the one which, in my mind, the case must turn on. That situation I do not have here, in the appeal this morning.

In the case of Paul E Graham v The Queen, ([1983] CTC 370; 83 DTC 5399) one only has to read the headnote, let alone the balance of the case. I read two sentences from the said headnote:

The taxpayer changed his occupational direction when he purchased this farm in 1968. There is no real difference between financing the startup costs by borrowing as other farmers do and by continuing on with one’s employment as this taxpayer did.

I have nothing which is inconsistent with that in this appeal.

I would also note, with regard to Graham, (supra), if there is no difference between putting in one’s own money and borrowing money, that one should be able to go to a financial institution, and borrow, and convince that lending institution the borrowed money is for the purpose of “making a profit”. I would suggest it would have been extremely difficult for this appellant, to put forward a viable option to an independent financial institution on the basis of the information available to us here today.

I also note that the Graham judgment may be under appeal, that is my understanding at least.

In Robert J McCaw and Jean McCaw v MNR, ([1983] CTC 2324; 83 DTC 292), which was also referenced by counsel for the appellant, there is a critical phrase which reads, “a reasonable expectation, and not a reasonable expectation of large profit”. I am completely in accord. It is not necessary that this taxpayer could show that in the years under appeal he could have made a profit equivalent to or something like his other income. But there’s no indication that he could have made any profit — this is the problem. Later on in that same judgment (McCaw and McCaw, supra), Mr Cardin, now Judge Cardin, says: “The fact that it did not do so does not establish that their expectation of profit was not reasonable or justified”. There is considerable debate as to whether the expectation of profit should be one viewed solely from the appellant’s side of the table or whether it is a more objective statement of purpose, that is, whether someone completely independent of the operation would reach the conclusion that it is a reasonable expectation.

The cases of The Queen v J R Zavitz, ([1981] CTC 17; 81 DTC 5007) and Norman G Hall and Stirling C Lane v MNR, ([1983] CTC 2003; 83 DTC 8), take this point into account. Zavitz, (supra), which is quoted by the appellant, is a case of my own which was upheld when appealed by the Minister to the Federal Court. It was a very unusual and unique situation, and both in my own judgment and that of the Federal Court it was noted that the year under appeal was 1974. Neither myself nor the judge at the Federal Court was prepared to reach a conclusion that in that one specific year it could be said that there was not a reasonable expectation of profit. In both instances there is also a caution that no inference could be made to the future beyond that year.

The Hall matter is much the same. It was not appealed to the Federal Court. I allowed the restricted farm loss in that case and pointed out the reasons why it was so identifiably unique. These distinctions were capably noted by Mr Cossette with reference to the Minister’s views and position on the Hall judgment.

In terms of jurisprudence, I have just recently written two decisions: Wilson v MNR, ([1984] CTC 2158; 84 DTC 1164); and Wild v MNR, ([1984] CTC 2154; DTC 1170). They deal with the subject of farm losses and the current state of the law, at least as I understand it, from the Supreme Court and the Federal Court, and they may have some useful comments in them that the appellant and his accountant may wish to review.

In summary, I can only reach one conclusion. The appellant invested quite heavily his surplus funds in the farm property, and certainly had the anticipation of some day living there, and hopefully making it a profitable venture. He also invested quite heavily of his own time, labour, thought and dedication. But none of those factors can add up to proof that during the years under appeal, 1977, 1978 and 1979, there was a reasonable expectation of profit. In my view there was no expectation of profit at all. The appellant, if he intended to operate this as a farm, had clearly taken on an obligation of a farming nature, which was going to cost him money and cost him considerable money for a long time ahead. The Minister’s counsel did file with the Court tax returns subsequent to the years under appeal from the appellant which show that the profit picture had not turned around.

In the final analysis, therefore, the jurisprudence that is available to me and that which I have examined leads me to only one conclusion: that the appellant did not have a reasonable expectation of profit and the appeal must be dismissed.

Appeal dismissed.