Dennis C Gray v. Minister of National Revenue, [1984] CTC 2883, 84 DTC 1726

Bonner, TCJ [ORALLY]:—The appellant brought appeals from assessments of income tax for the 1977 and 1978 taxation years. His counsel indicated at the outset that the 1977 appeal was abandoned and it will therefore be dismissed. The 1978 appeal raises one issue only, namely, whether section 31 of the Income Tax Act applies to limit the deduction of a loss from farming. The appellant’s only other source of income for the 1978 year was the operation of a service station.

The appellant was brought up on a farm. He had, however, for many years before 1978 earned his livelihood in other fields. From 1961 to 1969 he worked as a mechanic. In 1969 he became a service manager at a General Motors dealership. In 1974 he purchased a service station at Rocky Mountain House. During the years 1977, 1978 and 1979 the service station produced annual incomes for the appellant in the order of $28,000.

In 1970, 2/2 quarter-sections of land were left to the appellant, his brother and his sister. Initially the land was leased out. In 1976 the appellant bought a tractor and a brush mower and set to work on part of the land. However, differences with his co-owners led the appellant to decide to purchase land of his own.

In the Spring of 1978 the appellant bought 171 acres for $80,000. He made a small cash payment of $1,000 or so and financed the rest of the purchase price through the Treasury Branch. He commenced immediately, with the assistance of a hired hand, to make some improvements on the land. An entrance road was built, a pump was installed on the existing casing and a shed built at the site. A fence, corrals and other sheds were erected. Machinery and horses as listed on Exhibit A-2 were acquired. All of this was made possible initially by the income which the appellant earned from operating the service station.

From 1976 onwards the appellant spent less and less time working at the service station. He was able to do so and still operate the business successfully because he employed all persons necessary to carry on the business. His own function was managerial in nature only. By 1978 the appellant spent about an hour a day on service station business and no more. The rest of his time was spent on the farm.

In 1978 the appellant proposed to sell the service station, but that idea was, however, according to the appellant “voted down’’ by his family.

Much emphasis was placed on the fact that the appellant’s time in 1978 was mainly devoted to work on the farm. However, the issue in this case must be tested on broader considerations than a simple measurement of time spent. In Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, Mr Justice Dickson said at 314 [5215 and 5216]:

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 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.

Because the farming operation in question here was just starting, regard must be had to the potential of the operation which in 1978 was planned. The evidence indicated that the operation planned involved the breeding and sale of horses. The evidence was silent, however, on the subject of the scale of the proposed operation and on the anticipated revenues connected with the operation. It is thus impossible to measure the relative significance to the appellant of farming as an income source.

However, there is some evidence which leads me to doubt that the farming operation had the potential to become either the chief source of income or one of a combination which would be the chief source. The appellant did not appear to be willing or able to commit much capital to farming. Little cash was invested in the 1978 purchase of land. Quite possibly the appellant could not invest more because his capital was tied up in the service station which his family did not want him to sell.

In any case the totality of the evidence does not establish, on the balance of probabilities, that the farming operation proposed in 1978 had the potential to become either alone or in combination with some other source the appellant’s chief source of income. The 1978 appeal will therefore be dismissed.

Appeal dismissed.