Patrick E Salerno v. Minister of National Revenue, [1984] CTC 2688, 84 DTC 1639

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on June 21, 1984 against income tax assessments for the years 1977, 1978, 1979 and 1980 in which the Minister of National Revenue disallowed as deductions from other income, farm losses claimed by the appellant. The essence of the notice of appeal is as follows:

This statement is in rebuttal to your recommendation that my farming operation is:

(a) Not a farming operation

(b) Not a business

I have 50 acres of productive farmland. 30 acres in hay, 7-8 acres in hardwood bush, 10-12 acres to be seeded for oats or wheat in the spring. All the work in the fields is done by me. This requires cutting, raking and baling the hay. The hay is then picked up from the field and placed in the barn. I get two cuttings a year between June and August. The wood lot is a potential market for fire wood; the trees have been marked by the Ministry of Lands and Forests. The fields to be sown in oats or wheat will be plowed, disced and seeded by me, but I will have someone custom harvest the grain. I do not have or plan to have a combine to do this work.

I also have a flock of sheep, 35 ewes and 2 rams. This started four years ago with three ewes and a ram. I have increased my flock at a steady rate by buying ewes, but mostly keeping twin lambs from my own flock. The work involved in sheep farming is feeding them twice a day, 6:00 am and 5:00 pm, seven days a week. General care, hoof trimming, needling, powdering, and doctoring any sick animals. The greatest amount of work comes during lambing time. The sheep have to be checked more often, generally every three hours and at least once during the night: 3:00 am. This is required to catch any ewes that may have difficulty lambing — I do not like to lose any lambs. The heaviest lambing time is January and February, the coldest months, and new born lambs can freeze to death, so I like to be there to dry them off. My lambing loss last year was one in about 27. You have to be there in case of any lambing difficulties.

I buy 1 to 3 feeder calves a year, fatten them up and sell them as freezer orders.

Now in my spare time, I build and repair fences, build and repair barns, and build pens for the sheep, and also repair farm equipment.

As to the farm being productive, I have the facilities to be totally self-sufficient in two to three years; all my own hay and grain. With the lamb production at my present rate, (I have 35 with 150% lambing), that would be 51 lambs at $70.00 per lamb on the average, that would be $3,500.00. Within 4 to 5 years, I could have my flock up to at least 100 ewes. This increase can be done by keeping some of my lambs from this lambing season. This would not require a capital outlay and insures that I get ewes that have a better chance of twinning.

At the present, most of my major expenses are loan interests, but in two years these will be cut down to minimum, making the farm a profitable operation.

I cannot understand how this would not be classed as a farm operation. I have started small and steadily progressed at a rather small cost to the Government (Income Tax Refund), the rest is paid out of my school income.

I am assuming from your recommendation, that I am doing this for the tax write-off, but on examining other investment possibilities, I could still have a tax write-off with a lot less expenditures and certainly a lot less work for me and my wife. I do not call lambing at —18°C in the barn at any hour of the day or night, or haying in the hot summer sun for 10 hours a hobby farm.

In conclusion may I say that if I had a few chickens, one cow, two ewes, and rented out all of my land, I would agree with your recommendation. But with my land use and number of stock, the number of hours and the labour that is put into this operation, I feel that this should be classed as a farm.

The Minister’s position was:

4. In assessing tax as aforesaid, he relied inter alia, upon the following findings or assumptions of fact:

— the Appellant purchased 50 acres of land at RR #1, Canfield, Ontario, in 1974 for $30,000.00 cash and gave a $38,000.00 mortgage on the property in order to finance the building of a house and barn;

— the Appellant commenced his farming activities in 1976:

— from the time the Appellant commenced his farming activities, no profit has been earned by the Appellant from the operation of the farm;

— farm losses claimed by the Appellant in computing his income for the 1976 to 1981 taxation years totalled $849.93; $6,999.79; $7,994.39; $9,760.99, $7,941.03 and $6,934.62 respectively;

— the farm was maintained by the Appellant for his own use or benefit, and for the benefit of persons connected with the Appellant by blood relationship or marriage and was not maintained in connection with a business carried on for profit or with a reasonable expectation of profit;

— the expenses incurred by the Appellant with respect to the farm were personal or living expenses of the Appellant and not outlays or expenses incurred to earn income from a business or property;

— In the alternative, the Respondent submits that the Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income, thereby limiting the Appellant to a restricted farm loss within the meaning of subsection 31(1).

The Court recognizes and appreciates the forthright and complete manner in which this taxpayer presented the facts of his case. Without going into unneeded detail, it can be summarized that during the years under appeal he could not have expected to make a profit, let alone make a profit; and that any potential profit which he hoped for would only come when he had built up a stable flock of sheep, reduced his fixed indebtedness considerably, and finished restoring the property in a way that it could be used to its maximum — in short, when he had invested sufficient capital to make the operation viable on its own. The fundamental position of the Minister of course, (supra), is that in addition to the capital of his own that he was contributing, he was utilizing unpaid income taxes (amounting to some $15,000, according to the reassessments) in bringing about this transformation and establishment of the farm. Counsel for the appellant relied substantially on Graham v The Queen, [1983] CTC 370; 83 DTC 5400, in which the appeal was allowed, and argued that at the minimum Mr Salerno was entitled to the “restricted” farm loss deduction. Counsel for the Minister recognized that Graham, (supra), was under appeal, and did point out several distinctions which could be made between it and the instant case. In addition counsel quoted from Warden v MNR, [1981] CTC 2379; 81 DTC 322, and summarized the Minister’s position as being that nothing had been brought out at the hearing which would even warrant the “restricted” farm loss.

I take no satisfaction in a situation where a taxpayer is faced with a substantial income tax bill, as a result of the reassessment of several prior years by the Minister, and indeed that is a sore point with such taxpayers. However, it is beyond my powers to rectify that problem, and I can only reflect in a judgment the conclusion to be drawn from the facts of the case. The major fact is cited earlier “during the years under appeal he could not have expected to make a profit, let alone make a profit”. Further there were no extenuating circumstances pointed out which would lead to a conclusion that the losses at issue were only temporary and part of a well-orchestrated plan for profit-making. As I have noted in other decisions (Wilson v MNR, [1984] CTC 2158; 84 DTC 1164), I do not see that permitting the diversion of income taxes otherwise payable, into a source of farm operating or investment capital, was viewed as the proper interpretation of section 31 of the Act in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213.

The appeal is dismissed.

Appeal dismissed.