Melvin Astroff v. Minister of National Revenue, [1984] CTC 2788, 84 DTC 1689

Tremblay, TCJ:—This appeal was heard on April 10, 1984, in Montreal, Quebec.

1. The Point at Issue

Pursuant to the pleadings, the point at issue is whether the appellant, an employee of Tye-Sil Corporation Ltd on a consulting basis only, is correct in the computation of his income for the taxation years 1976, 1977, 1978 and 1979, to deduct farming losses of $43,464, $65,095, $35,236 and $31,624 respectively. The appellant contends he was then a full-time farmer in racehorse operation and that he has the right to the full deduction.

The respondent contends that during the years involved, the appellant was the main shareholder of three companies: ‘‘Mel Astroff Management Services Ltd, Brakmel Investments Ltd, and J Matlin Ltd’’. With respect to farming activities, he considers himself a gentleman farmer and allowed $5,000 pursuant to provision 31(1) of the Income Tax Act.

2. The Burden of Proof

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

13. In reassessing the Appellant for each of his 1976 to 1979 taxation years, the Respondent relied, inter alia, upon the following facts:

(a) Appellant, by training and work experience, is principally a management executive;

(b) Prior to Appellant's involvement in the field of horse racing, he acquired appreciable wealth through his management activities especially in respect to a company named “Tye-Sil Corporation Ltd’’ in which he was a shareholder;

(c) During his 1976 taxation year, the Appellant disposed of his shares in Tye-Sil Corporation Ltd for a total price of $1,250,000.00;

(d) During 1975, Appellant caused the incorporation of a company, namely Brak-

mel Investments Ltd, in which he became president and controlling shareholder;

(e) Brakmel Investments Ltd became the owner of 100% of the issued share capital of Mel Astroff Management Services Ltd and J Matlin Ltd;

(f) During 1976, the above mentioned “Tye-Sil’’ entered into a three year contract with Mel Astroff Management Services Ltd who accepted to provide consulting services with respect to Tye-Sil’s business operations for a fee of $50,000.00 per annum;

(g) In fact, Appellant was the only professional involved in Mel Astroff Management Services Ltd and had to render personally all management and consulting services of a professional nature;

(h) During the taxation years at issue, Appellant’s income, excluding farming revenue losses, was as follows:

	1976	1977	1978	1979
	$	$	$	$
Remuneration as an employee from:
—Tye Sil Corp Ltd	22,683
—Mel Astroff Mgm Svcs Ltd		13,000
—Business or professional income from
Mel Astroff Management Services Ltd	22,000
Dividends from:
—Brakmel Investment		12,800	14,400	54,000
—Other companies	644	1,635	1,920	2,598
Interests	13,734	12,552	13,110	13,479
Taxable capital gain	130,066	2,975	—	—
Allowable capital loss				(2,000)
Taxable portion of annuity	6,785	6,956	9,275	9,275
Family allowances	1,408	1,431	1,328	863
	197,320	51,349	40,033	73,215
Less deduction from employment earnings	150	250	—	—
TOTAL INCOME	197,170	51,099	40,033	73,215

(i) During the taxation years at issue, Appellant’s chief source of income was derived not only through his investments in Brakmel Investments Ltd and Mel Astroff Management Services Ltd and J Matlin Ltd, but from his active participation in said companies;

(j) In respect to Brakmel Investments Ltd, as reported in financial statements, the situation stated in a summary way was as follows:

	from	from		from		from		from
	30.05.1975	1.05.1976		1.05.1977		1.05.1978		1.05.1979
	to	to	to	to	to	to	to	to	to
	30.04.1976	30.04.1977		30.04.1978		30.04.1979		30.04.1980
	$		$		$		$		$
Assets	1,200,115	1,118,892			693,166	1,066,938			991,159
Liabilities
—loan payable to
shareholders	1,065,801		889,862		493,488		837,773		300,076
—other liabilities	97,259		138,405		113,372		205,017		198,605
—capital stock	28,200		28,200		28,200		28,200		514,120
—retained earnings	8,855		62,425		58,106		(4,052)		(21,642)
Income	19,184		106,951		63,150		74,707		110,443
Expenses	1,730		9,083		22,157		32,871		53,294
Net earnings	13,464		78,787		13,535		2,491		37,570
Dividends	—
			—		16,000		76,000		60,000

(k) In respect to Mel Astroff Management Services Ltd, a wholly owned subsidiary

of Brakmel Investments Ltd, the situation stated in a summary way was as follows:

	Ending	Ending	Ending	Ending
	May 31, 1976	May 31, 1977	May 31, 1978	May 31, 1979
	$	$	$	$
Assets	91,183	92,259	106,928	123,009
Liabilities	44,465	23,286	17,907	17,292
Shareholder’s
equity	52,766	73,207	91,825	107,982
Revenue	148,552	63,461	79,038	43,667
Net earnings	51,766	30,441	18,778	15,807

(1) In respect to J Matlin Ltd, a wholly owned subsidiary of Brakmel Investments Ltd, the situation stated in a summary way was as follows:

Ending	Ending	Ending
December 31,	December 31,	December 31,

1976 1977 1977 1978 1978

	$	$	$
Assets	409,960	341,304
Liabilities	420,885
Deficit less Capital Stock	(10,925)
Gross Revenue	2,676,509	2,540,990	not filed
Net loss	(35,045)

(m) In respect to J Matlin Ltd, which was a fruit and vegetable distributing enterprise, it ceased to operate presumably in the early part of 1978, when the trustee of a trust deed recalled the loan and took over the company;

(n) Mel Astroff Management Services Ltd may have ceased its operation during the year 1980;

(o) During the taxation years at issue, Appellant’s chief source of income resulted from a combination of revenue derived from employment, dividends, interest and fringe benefits for example, a Rolls Royce provided to him by Brakmel Investments Ltd but not with farming;

(p) During the taxation years at issue, Appellant’s activities in the field of horse racing contributed no income as evidenced below:

	1976	1977 1977	1978 1978	1979 1979
Revenue
—Purses		53,786	105,523	92,606
—Sale of horses	—	25,996	32,498	35,642
Total		79,782	138,021	128,248

Expenses

—Acquisition

of horses	Columbo	L’Ami Denver Lobell
	Hanover	Superbe
	(born 1975)	(born 1976)
	22,700	28,000	17,000
	Guess Hanover	Lady Ken	Ned Lobell
		Drummond
	(born 1975)	(born 1976)
	17,177	13,200	19,200
		Torys Pat	Conrad
			Lobell
		(born 1976)
		19,000	42,998.36
		Lamilou
		(born 1975)
		22,438
—Board & keep	1,545	49,785	79,857	121,120
—Travel &
Entertainment	702	2,433	1,158	7,379
—Interest &
bank charges	596	7,866	10,375	19,141
—Other	748	2,155	3,698	12,232
Total	43,468	144,877	174,286.36	159,872
Net Loss	43,468	65,095	36,265.36	31,624
(q) During the taxation years at issue, Appellant did not own a farm;

(r) During the taxation years at issue, Appellant did not endeavour to personally take care of his horses or become the trainer of said horses;

(s) Appellant’s precarious health did not permit him to devote much time to horse racing while being concerned and interested by Brakmel Investments Ltd and its subsidiaries;

(t) Appellant’s horse racing activities is but one business venture of several with nothing distinguishing in the way of a chief source of income by itself or in combination with other sources;

(u) Although Appellant may have an expectation of profit in the field of horse racing, such profit is most likely fortuitous and will not be large enough to wipe out past or future losses and contribute as a source of revenue with other revenues to Appellant’s livelihood;

3. Facts

3.01 During the trial, on one hand, the assumptions of facts alleged by the respondent in subparagraphs (a) to (u) of paragraph 13 quoted above (2.02) were admitted by the appellant except for subparagraphs (g), (1), (o), (r) to (u).

3.02 On the other hand, the respondent admitted that the appellant had farming activities and had from them a reasonable expectation of profit despite the fact that the appellant did not own a farm during the years at issue.

Moreover in the reply to notice of appeal the respondent admits paragraph 1, 2 and most part of paragraph 3 of the notice of appeal. They read as follows:

1. Prior to February, 1976, the Appellant was a major shareholder in and actively engaged in the management and administration of a company in the gift wrapping business, known as Tye-Sil Corporation Ltd.

2. Originally, he was employed directly by that company and in the latter years of his involvement with it, he was engaged by another company to provide management services to Tye-Sil.

3. In January, 1976, the Appellant sold all of the shares which he owned in Tye-Sil. Simultaneously with the sale, the management company which employed him revised its arrangement with Tye-Sil whereby it was engaged by the latter company on a consulting basis only. Accordingly, the Appellant’s employment by the management company was similarly changed to a consulting basis. (In fact, this arrangement required a minimal amount of his time.)

The respondent denied the last sentence of paragraph 3; “In fact, this arrangement required a minimal amount of his time.”

Finally, the appellant in paragraph 22 of the reply, admitted that during the taxation years under appeal, the appellant maintained an adequate accounting system for his farming activities and therefore the quantum of income and expenses is not in issue.

3.03 Concerning the time spent as consultant for Tye-Sil, the appellant testified that during the three-year period involved he did not spend one minute on consultation. He was only available. He never received any demand for services from Tye-Sil; never even a phone call. (Sn p 25, 26). The consultation fees of $50,000 per year paid by Tye-Sil were in fact paid not to the appellant but to Mel Astroff Management Services Ltd. The appellant made drawings for what he needed out of the said management company.

3.04 From the $1,250,000 received for his shares in Tye-Sil, the appellant sent one million dollars ($1,000,000) to Brakmel Investments Ltd, an investment company incorporated in 1975 by the appellant, his wife and his children. However he was the controlling shareholder. Brakmel invested to a large extent in term deposits. There are six (6) to twelve (12) investments in public marketable securities and shares in public companies. Brakmel has no employee and does not require any. The appellant said he spent about one hour per month with Brakmel including phone calls to the stockbroker.

In an average situation for the operation of Brakmel, it does not take more than ten or twelve hours a year. Brakmel can be called a passive company, . . . “from the point of view that the majority of its net worth has been invested in one or two term deposits almost continuously”. (Testimony of Mr B Clamen, CA, partner of the firm Rickter, Usher and Vineberg, which has been acting for the appellant and his companies for 20 years, Sn p 105, 106.)

Concerning Brakmel, its assets, liabilities, income, etc described in subparagraph (j) of paragraph 13 of the reply to notice [of] appeal (par 2.02) are admitted by the appellant.

3.05 J Matlin Ltd, a wholly owned subsidiary of Brakmel was involved in “fruits and vegetables” as purveyor to hotels and restaurants. Mr Clamen explained the investment made in Matlin Ltd:

A. Well, at the time Matlin was in financial difficulties and the bank, knowing that Mr Astroff had recently sold his interest in TYE-SIL and had money to invest — and both the firm and Mr Astroff had done a lot of business with the bank in question

— and the bank, knowing Mr Astroff s affairs suggested it might be a good investment for him in the sense that it could be had at a very reasonable price and that if the business conditions were to improve through improved management that perhaps it could become profitable.

The company however ceased its operation in 1978.

A. I know that the bank was the major creditor of the company and had what we call a trust debenture, a floating charge on all of the assets of the company, both tangible and intangible, and when the company started to do badly again, and I think mainly because of Mr Astroffs poor health and his lack of attention, the bank called the loan and the company ceased to operate. (Sn p 107, 108)

The appellant testified that because of a heart attack, he had to be out of town for over eight months. The son of the former owner of the business was his assistant. J Matlin Ltd was closed during the year 1978.

3.06 Mr B Clamen was consulted concerning the arrangement between Tye-Sil and Mel Astroff Management Services Ltd. He testified the appellant “was supposed to be available for consultation”.

A. I know that he had never been consulted. I have to add for the record, that he and his partner did not leave on the best of terms, and I would have been very surprised, even at the outset of that consulting contract , as to whether his partner would ever have consulted him unless it was a serious need for information. (Sn p 109)

3.07 Before selling his shares in Tye-Sil, the appellant said what he knew about horse racing was “just on a social basis”. This means that he used to go “once a week or every ten days to the race track with his accountant . . . We would have dinner and chip a fifty ($50.00) each. It was an evening out. Like, other guys go for an evening out with the boys and this was it.” (Sn p 36). In 1976, when he sold his shares in Tye-Sil, he was then 44 years old. He considered going into some other business: real estate, clothing manufacturing, hockey sticks (Sn p 37). Finally he “found horse racing something to do that kept me active every morning”. (Sn p 38)

I was very friendly socially with the leading driver here at Blue Bonnets — his name was Gilles Gendron — and one fall (1976), I said: you know Gilles, I think I’m going to buy a few horses; let’s go to the sales and buy, and that’s how it happened. (Sn p 38)

Personally he knew nothing about horses, however Gilles Gendron helped him. He chose the horses to buy; he trained them. The appellant paid him.

3.08 The first year in 1976, he bought five horses. They were 18 months old (Sn p 40). The appellant had no farm; the horses were stabled at Blue Bonnets for nothing.

A. Yes, because young horses are the life-blood of racing. They want that young horse to keep coming up every year, every year, so that as a horse gets old — at fourteen

(14) a horse cannot race any more. So as they get old, or sick, or this, or die off, or what-have-you, they always want young horses coming in. (Sn p 39)

3.09 At 18 months old the horses are not developed.

You will buy him in September, or even in August, and he will not race till the following June, because you’ve got to train him — a horse is the dumbest animal there is to start with. And he learns through repetition, repeats the same thing over, and over, and over, and over again, and you have to learn — like they’re a little bit like humans too. One you have to put a different shoe on one leg because he’s favouring that leg, or you’ve got to put a different piece of harness on, or a shadow scares him, so you have to put something on his eyes so he doesn’t see the shadow when he goes around. And it takes a good eight (8) to ten (10) months to train that horse to bring him to the stage of being a race horse, to start racing. (Sn p 40)

In 1976 and 1977 the appellant used to exercise the horses himself, until the doctor stopped him around in 1977. “I was paying a trainer anyway, he said so . . .” (Sn p 42). However the doctor encouraged him to continue his racing activities. “. . . he wanted me to. He said it stimulated me.” (Sn p 45)

3.10 Since 1976, he has been going to Blue Bonnets every morning between eight (8:00) and eight thirty (8:30) until noon, six days a week (Sn p 42). He said he even went on April 9, 1984, the day before the hearing of the instant case. “I go every morning as long as I have horses there and I always had horses there. I go and make sure the groom is looking after the horse, is cleaning the horses . . .” (Sn p 43). The appellant has some people working for him; trainer; assistant trainer, grooms . . . He has to check on them.

A. Well, the trainer works with his second trainer, or third trainer, if he’s big enough, and his grooms. And I go to make sure that my horses are fed, and they’re groomed properly, and they’re taken out to be exercised — because the groom is lazy, and when he is supposed to exercise the horse four (4) miles, two (2) is okay. You know, as long as it looks like he went on the track, you know, who is going to check? Normally you don’t check that the guy went around six (6) times or eight (8) times. I make sure that if it’s marked that he is supposed to go four (4) miles, he goes four

(4) miles. (Sn p 44)

The racing season is all year round but the training season is from September to June.

3.11 In 1978, the appellant decided to move horses to the States “where bigger money is”. . . . I employed a Jack Kopas, who is a big time trainer and I have been with him ever since.” (Sn p 45).

He trains half in Florida in the winter and the rest of the time he spreads his horses in New York, in Ontario on what is called the grand circuit, where if the horse is good enough he travels every two weeks to a different city and races for big money. (Sn p 45).

The appellant keeps horses in New York. “They move from Roosevelt Raceway to Yonkers Raceway. One track opens for a month or forty-five (45) days, then they switch to Yonkers which is twenty (20) miles away. They operate for forty-five (45) days.” (Sn p 46)

The appellant was going there and is still going periodically. “I would do the same thing I do at Blue Bonnets. I would check the horse, I would see if he’s lame, ask questions. If he was racing that night, I would stay and watch him race that night to see what’s going on.” (Sn p 47)

3.12 The appellant also keeps some horses at New Jersey Meadowlands because of a special problem.

The New York race tracks are half a mile. Every race is a one mile and the horse has to go around the race track twice. Some horses cannot go the turns twice. So when I get a horse that just cannot go on a small track, we race him at what is called the New Jersey Meadowlands. It’s right under the Lincoln tunnel. And that’s a one-mile track. And it’s much easier for the horses — the horse thinks he is running straight all the time. He doesn’t know he is turning where on a little track he knows darned well he is turning. (Sn p 47)

3.13 The appellant also keeps some horses in Ontario, if they are eligible for Ontario.

A. If I buy or breed a horse and I breed it to a stallion that is standing in Ontario, the same way if I breed it to one standing in Quebec, he’s eligible to certain races which represent, in Ontario, a lot of money, and Quebec a lot of money, and no other horse is eligible for that. You buy a horse in the States and he’s not eligible for that. So if I get one eligible to the Ontario ones, I send it to Ontario and it is kept in Ontario and races in what is called the Ontario circuit. (Sn p 47)

3.14 The appellant also has horses in Florida during the winter.

A. All my horses with Jack Kopas are trained in Orlando, Florida, all winter long. They start around the first (1st) of November till around the middle of May, before he comes north and sort of — what they call finish off the horse, to make him eligible to race. (Sn p 49)

3.15 Sometimes, just for one or two races, horses have to be moved by truck to Kentucky, to Pennsylvania or Ontario.

A. Yes, sure I’ve raced in Pennsylvania — you know, it depends on the horse. The dependence is not on you, it’s a hundred percent on the horse. Like, I just want to show you: the first race for Ontario-sired fillies is May twenty-sixth (26th) in Barrie, Ontario. I happen to have a two-year-old filly that’s eligible. The Quebec ones I don’t have here, but your horse has got to be ready to race from May twenty-sixth (26th), and he leaves Florida on the fifteenth (15th). So they’ve got to have him ready to go, because, you know, you have been paying all winter so it’s time to make some money. (Sn p 50)

3.16 The appellant testified the horses he purchased were all yearlings of 18 months old. He filed as Exhibit A-l a list of 17 horses he sold among the 51 horses he purchased. This list reads as follows:

3.17 The appellant’s racing operation is known under the name of “Brakmel Farms Reg’d”. The income and loss financial summary statement for the years 1976 to 1982 of Brakmel Farms Reg’d was filed as Exhibit A-2. It reads as follows:

The above figures are those given by the appellant in his income tax return. The respondent filed as Exhibits R-l and R-2 the figures concerning the years 1980 and 1981.

4. Law—Cases at Law—Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 31(1)(2) and 248 (definitions “farming” and “personal or living expenses”) alinéa (a):

Sec. 31—Loss from farming where chief source of income not farming

(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses 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 deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes 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 deduction under section 37 or 37.1’’ were deleted,

exceeds

(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.

(2) Determination by Minister. For the purpose of this section, the Minister may determine that a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

Sec 248

“Farming’’ includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

“Personal or living expenses’’ — “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 to which the Court was referred are:

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

2. Philrick Limited v The Queen, [1977] CTC 217; 77 DTC 5158;

3. Chester Douglas Brown v The Queen, [1975] CTC 611; 75 DTC 5433;

4. Neil Nikolaisen v MNR, [1984] CTC 2057; 84 DTC 1027;

5. Stewart J Cooke v MNR, [1975] CTC 2296; 75 DTC 223;

6. Norman G. Hall & Stirling C Lane v MNR, [1983] CTC 2003; 83 DTC 8;

7. Oscar Dorfman v MNR, [1972] CTC 151; 72 DTC 6131;

8. Bert James v MNR, [1973] CTC 457; 73 DTC 5333;

9. James A Wilfley v The Queen, [1974] CTC 510; 74 DTC 6422;

10. The Queen v Douglas C Matthews, [1974] CTC 230; 74 DTC 6193;

11. Helen Kasper v The Queen, [1982] CTC 178; 82 DTC 6148;

12. Charles R McCambridge v MNR, [1981] CTC 2314; 81 DTC 251;

13. Eero Blomberg v MNR, [1970] Tax ABC 608; 70 DTC 1394;

14. D A MacEachern v MNR, [1977] CTC 2139; 77 DTC 94;

15. David Tobias v The Queen, [1978] CTC 113; 78 DTC 6028;

16. W J Doyle v MNR, [1984] CTC 2205; 84 DTC 1174;

17. Ernest S Wilson v MNR, [1984] CTC 2158; 84 DTC 1164;

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

4.03 Analysis

4.03.1 Horse racing operation: farming

It is not in dispute that the appellant’s horse racing operation is farming, pursuant to the definition quoted above.

4.03.2 Reasonable expectation of profit

The respondent, in allowing the appellant the quantum of loss of $5,000 per year pursuant to 31(1), admits that the losses are not a “‘personal or living expense” pursuant to the definition quoted above. Therefore the appellant’s farming operation has a “reasonable expectation of profit”.

This fact also appears from the evidence, mainly from three elements and facts:

(a) The computation of the fiscal profit of a farming operation is not done pursuant to the general accounting principles of accrual system basis, the latter taking into account the inventories at the beginning and at the end of the involved period to establish the cost of sale and therefore the profit.

(b) The fiscal computation of the profit for the farmer which does not take into account the element of cost of sale but applying the cash basis system it takes into account only the purchases and sales done during the period to establish the profit.

(c) The Exhibit A-1.

Pursuant to the said Exhibit A-l and the appellant’s testimony, the cost of the 17 horses was around $130,000 and the sale price $445,000. At the end of 1983 the inventory was 34 horses (51 — 17). In case of liquidation in 1984, the total sale price of the 34 horses would have to be included in the income, depending on the value. The latter could be considered as the accumulated profit. The fair market value of those 34 horses was not given in evidence. However, in applying mutatis mutandis the sale price of the 17 horses of A-l, the fair market value would be over $950,000. Probably that in case of liquidation, the sale price would be lower than that but certainly over $500,000. And this is less the profit accumulated from 1976 to 1983 (Sn p 30).

At the present time, it is not yet a taxable profit. However it is really potential net profit materialized in assets and I think it is a significant criterion. There are at least 500,000 good reasons to say that there is a “reasonable expectation of profit” including the three years involved.

4.03.3 The crux of the matter is whether, using the wording of subsection 31(1) quoted above “the appellant’s chief source of income for the taxation years involved is farming or a combination of farming and some other source of income”. In other words, whether the appellant is a gentleman farmer as the respondent contends, or a real full-time farmer as contended by the appellant himself.

4.03.4 In the matter of farming losses, the most important case is W Moldowan v MNR given by the Supreme Court of Canada on May 31, 1977, [1977] CTC 310; 77 DTC 5213. After that date, all the cases at law concerning farming losses refer to it. It is the basis of the interpretation of section 31.

In view of the instant case, it is useful to quote the following excerpts:

CTC 314—DTC 5215

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. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. 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. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed the profitability both actual and potential. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

CTC 315—DTC 5216

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 subsection 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 subsection 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.

The reference in subsection 13(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 section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

Now it is important to study from the adduced evidence with respect to the criteria suggested in the Moldowan decision: time spent, capital committed and profitability and change in the taxpayer’s mode and habit of work.

4.03.5 Time Spent

The preponderance of the adduced evidence concerning the time spent by the appellant is in favour of the appellant’s thesis:

(a) During the years 1976, 1977 and 1978, during which he was engaged by Tye-Sil on a consulting basis, he did not spend one minute of his time as consultant. (par 3.03). The appellant’s testimony was confirmed by Mr Cla- men who, in fact, underlined the psychological reason of the whole matter. (par 3.06)

(b) Concerning the time spent in Brakmel, the appellant’s testimony, confirmed by Mr. Clamen, is to the effect that he did not spend more than one hour per month, due to the nature of the investment (par 3.04)

(c) Concerning Matlin, the evidence was to the effect that during the time Brakmel owned the said business, the appellant had a heart attack and he was out of town for over 8 months. Purchased in the middle of 1976, it was closed in 1978. The son of the former owner was then the appellant’s assistant and acted in his absence, (par 3.05)

(d) Concerning the time spent in the farming operation, it is obvious that it was the “centre of his work routine’’ to use the words of the Supreme Court in the Moldovan case to describe the full time farmer. (par 3.10, 3.11)

4.03.6 The Capital Committed

Concerning the capital committed, it appears from the evidence that the appellant invested $400,000 only for the purchase of horses, (par 3.16, 3.17)

4.03.7 Profitability

Concerning the profitability, the court thinks that the inventory at the end of 1983 being between $500,000 and 950,000 (par 4.03.2) must be considered as potential profitability which may be changed at any time into actual profit by selling part of it.

Indeed the sale of more horses and the purchase of less horses within one year can easily result in an actual profit. Moreover the average income from purses is around $75,000 per year from 1977 to 1982 (par 3.17, Exhibit A-2) which also confirms partially the basis of the potential profitability.

4.03.8 Change in Taxpayer's Mode and Habit

This critérium appears from the same evidence which substantially bases the critérium “time spent”. Indeed all the facts detailed in par. 3.03, 3.04, 3.06, 3.07, 3.10, 3.11 show how the mode and habit of the appellant are different from the time before the sale of the shares of Tye-Sil, when he was not an owner of horses and when he spent his full time in the administration of Tye-Sil.

4.03.9 In my opinion the evidence is largely in favour of the appellant’s thesis. Counsel for the parties referred to many other cases at law other than the Moldovan case. Most of them, however, were given before the Moldovan case. The latter is the one to be followed. The appropriate excerpts were quoted above.

5. Conclusion

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

Appeal allowed.