Robert Otto Glass v. Minister of National Revenue, [1984] CTC 2905, 84 DTC 1748

Taylor, TCJ:—This is an appeal heard in Saskatoon, Saskatchewan on July 30, 1984 against income tax assessments struck in 1982 for the taxation years 1978, 1979 and 1980 in which the Minister of National Revenue reduced the farming losses allowed as deductions against other income from the total amounts as claimed by the taxpayer, to $5,000 annually as covered under the provisions of section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Two paragraphs from the notice of appeal set out the dispute:

I have based my entire appeal on the fact that I am “a taxpayer whose chief source of income is farming or a combination of farming and some other source of income”.

According to the information which is available to me, ‘‘Interpretation Bulletin on Farm Losses #IT-322R” I am of the opinion that my position is a valid one. Of the three choices in that Bulletin, A, B & C, I must eliminate C & B and therefore am left with no choice but to file under the terms of alternative A.

From the reply to notice of appeal, the Minister’s position can be summarized:

In declaring his income for the said taxation years the Appellant, inter alia, reported as follows:

1978 1979 1979 1980 1980

Gross Income from sources other than

farming:

Business Income	$18,318.93	$19,491.75	$21,057.03
Family Allowance	924.48	720.00	784.80
RRSP	10,654.55	3,646.80	Nil
Interest	Nil	26.37	86.14
TOTAL	$29,897.96	$23,884.92	$21,927.97
Gross Farming Income	$ 4,422.50	$ 7,806.86	$21,092.34
Net Farming Income (loss)	($15,545.64)	($15,775.90)	($ 7,957.49)

and claimed the said net farming losses as a deduction from his gross income from other sources.

— In so reassessing the Appellant, the Respondent assumed that at all times material, inter alia, that:

— the Appellant had been contracted on full time basis to provide his services to the Farm Labour Pool in Saskatoon, Saskatchewan;

— the Appellant farmed during vacation periods and after his full time contractual services and duties had been rendered or fulfilled elsewhere;

— for each of the said taxation years the Appellant’s gross income from other sources exceeded his gross income from farming operations;

— for each of the said taxation years the Appellant’s net income from other sources exceeded his net income from farming operations;

— for each of the said taxation years the chief source of income of the Appellant was neither farming nor a combination of farming and some other source of income.

Mr Glass had prepared himself well for the hearing, and presented a considerable body of documentation which, in his view, supported his appeal, and I quote certain phrases from a prepared statement which he read:

. . . The price of land was high and credit was not forthcoming, so in 1975 we made a decision to pursue our dream from a new angle. In doing so we made a major decision to abandon my career of 12 years with the Saskatchewan Wheat Pool, giving up my seniority, pension and security, in favor of a one year contract to manage the Canada Farm Labour Pool for the Canada Employment & Immigration Commission. I was given every reason to believe that the contract would not be extended beyond the initial term of one year. (Submit contract) At this point we changed our occupational direction.

In the spring of 1976 I was offered not a one year, but a three year contract. Needless to say I signed it. The three year contract gave us ample time to plan and investigate. At this point we also learned that the Income Tax Act, under section 31, provided a monetary incentive for persons to establish an economic farming unit. In spring of 1977 we purchased 80 acres of totally undeveloped land and immediately put a well on the property. In spring of 1978 we moved out to a partially finished house, taking advantage of the first summer to build a barn and pens sufficient to winter our newly acquired flock of sheep — 150 in number. We would lamb out our first crop of lambs in spring of 1979, just about the time my then present contract would expire. (March 31, 1979) Please note that we had no actual lamb production in 1978. Our only income was via the resale of some undesirable stock which had been purchased earlier that same year.

On April 1st, 1979 I was offered an additional three year contract. By this time we knew that the extra cash flow provided by my monthly draws would be required to help us to finance our fledgling farm during a planned expansion to about 600 ewes, which was considered to be an economic unit. In spring of 1979 we lambed out 150 ewes and had a lamb crop of 210 lambs. Pastures were poor in early spring and many producers were dumping sheep and lambs because of a shortage of feed. Lamb prices began to decline. We felt that this would be a good time to hold back our own female lambs for breeding stock and expansion. This increased our flock to 210 ewes. During the summer of 1979 we built up our farm fences, pens and shelters to accommodate that 600 ewe flock. (Photos)

In spring of 1980 we lambed out the 210 ewes and realized a lamb crop of 330 lambs. Again we planned to hold back our female lambs for expansion. Conditions made us change our plans.

In 1979 we began to experience drought conditions. By 1980 these conditions had intensified. In early fall interest rates began to trend upward. This did not appear to be a very good climate for a fledgling farming operation with a large debt load and a heavy grazing requirement. In 1980 we held back only 40 of our prime female stock, selling 40 more to another producer. That year we received the highest farm income of the three years in question. This because we sold most of our production for the first time.

In this section I have showed that our farming operation was carefully planned with the intention of becoming our sole source of income sometime in the near future. Because of economic and environmental conditions several adjustments to our plans were necessary during 1978, 1979 and 1980. These changes did not alter the original intention which was to “provide the bulk of income and the center of (our) work routine”.

Our combined efforts are to establish an economic farm unit. This means that my efforts as pertain to my contract obligations (since my contract is still of an undetermined period of time) are to provide capital to help to establish that economic unit which we still strive to form. In mind and act I cannot distinguish sources of income, as I cannot distinguish obligations or preoccupations or time.

In 1982 we were forced to liquidate 100 of our best ewes. This came at a very critical time and has had a devastating effect upon our operational plans. Our flock had just reached its peak in productive value. We had just reached a point where we were able to restore the confidence of our banker; who had become very reluctant to give us any further extensions on loans. It will take us years to rebuild our flock to its former value, as we were left with nothing but old ewes and culls. Since that time we have purchased some replacement ewes in an attempt to rebuild.

Mr Glass during the relevant years, was the manager of the Canadian Farm Labour Pool, and indicated to the Court that he had considerable flexibility in performing his duties as such. He also had developed an interest and involvement with several parties in Saskatchewan, committed to the raising of sheep and the improvement of the potential for that industry. In cross-examination counsel for the Minister noted the heavy (and increasing) debt-service load which was part of the appellant’s farm operation, and that even as a result of a substantial sale of livestock in 1982, (allegedly forced by the Revenue Canada reassessments) there was no profit realized in that year. It was agreed by the appellant that the 1982 sale had been at individual ewe and lamb prices considerably higher than the going rate at that time — due to the quality of the stock.

In argument counsel for the Minister referred to Wilson v MNR, [1984] CTC 2158; 84 DTC 1164 and provided Mr Glass with a copy of this judgment as well as copies of the judgments in Moldowan v The Queen, [1975] CTC 323; 75 DTC 5216 (Federal Court of Appeal) and Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213 (Supreme Court of Canada).

Since the Minister had already agreed (by virtue of the restricted loss “assessments”) that Mr Glass was in the business of farming during the years relevant, the issue then became simply whether he was entitled to a greater deduction — the full farming loss. As I see it, there is no merit in Mr Glass’ first contention, that he “changed income earning direction” sometime in 1975, 1976, 1977 or even in 1978, as a result of changed circumstances — working on contract (in effect) rather than as an employee, but basically doing the same job. Neither is a second contention — the he “learned” during this period (see above) of the benefits accruing to farmers out of the provisions of section 31 of the Act, determinative of the issue. I should also note that there is little to support a view that his impression of such “benefits” for farmers, whatever they were, reflected accurately the legislative situation in the Income Tax Act. Thirdly, any argument that he was forced out of farming (even temporarily) by virtue of the 1982 reassessments is not sound, since these same reassessments pointed out (at the end of the 1980 taxation year) an accumulated “Restricted Farm Loss” of $24,279.48, available for utilization against future profits under section 111 of the Income Tax Act. The Court notes with appreciation, the accumulation and reflection of this “Restricted Farm Loss” on the relevant reassessments. It seems to underline the clear and appropriate areas open to farmers under the Act, and to emphasize that they are not treated in a discriminatory fashion by Revenue Canada, but rather in much the same way as other businessmen. If indeed, even in 1982, an objective view of the operation would have supported the prospects of reasonably foreseeable profits, private bridge-financing of some sort might have been arranged to maintain the operation during a period required to retire the accumulated income tax obligation. There was no indication from the appellant that any effort to secure such financing was attempted. Rather he indicated that the three separate fiancial institutions already backing the operation were becoming increasingly nervous about its stability. The decision in this appeal, therefore will arise from a comparison of the alternative source of income when contrasted with farming as a source.

The underlying argument put forward in this appeal is that the capital investment required to provide a viable farming operation could only be supplied by the appellant as he earned it and as it was available from the alternate outside source. The dispute with the Minister arises since the “outside source” income is that from which the taxpayer wishes to deduct his alleged farming losses (including debt-service charges) thereby reducing or eliminating entirely the income tax otherwise payable on the “outside source” income. It appears to be difficult for this taxpayer to accept that the net result is an investment in his farm, (through unpaid income taxes) by the balance of the taxpaying public — a choice not made in a positive fashion by those other taxpayers. The Income Tax Act does contain provisions which are social and economic as well as fiscal in nature, and it can be argued that such a purpose should be read into the various sections of the Act, (particularly section 31) dealing with farming. Unfortunately such a purpose (social) is not clear for the “farming losses” as I read the Act.

A subsidiary point, which arises on examination of the investment “aspect” of this appeal, deals with whether there is any difference within the tax structure, between investing one’s own money in a business, or borrowing the funds to do so. The carrying costs of any such borrowed funds would usually be a deductible expense, and efforts were made by the appellant at the hearing to equate these two approaches. As I see it, however, there is a difference which can be demonstrated in the following example. A taxpayer (Citizen A) decides to invest, let us say, $200,000 of his own money in a farming operation — and organizes it in such a way that he has a reasonable expectation of profit. Citizen A, as I see it, thereby foregoes perhaps $30,000 per year straight interest income (at 15 per cent) on his investment. He also escapes the income tax on that $30,000, (perhaps 50 per cent) but it could be expected that some net amount — let us say, even $15,000 would remain if he had not so invested in the farm. Citizen A, by his actions, is presumably anticipating a greater net return and reward from his investment in the farm than from interest-bearing bonds.

Now we look at Citizen B. He acquires a farming operation, similar to that of Citizen A — with a $20,000 down. payment and finances the balance of $180,000. He now has foregone $3,000 interest income (15 per cent on $20,000) on which he might pay $1,500 tax and retain $1,500. Citizen B, is also hoping for some better return from the farm. Citizen B has also assumed a debt service obligation of some $27,000 per year (15 per cent on $180,000) for which the farming operation becomes responsible, (let alone for some balance with which to pay off the principal of the debt). If he makes a profit there is no problem from Revenue Canada, and he has every right to deduct his debt service costs from farm income. Let us say Citizen B wishes to make a net income of $10,000 after interest but before taxes. Citizen A, then will have a net income of $37,000 before taxes. Let us also assume that both parties have a substantial “outside” income, Citizen A, has foregone $15,000 in gain on his investment, and now has retained $18,500 ($37,000 less 50 per cent tax) from his farm, for a net gain $3,500 overall in that year. Presumably he is satisfied. Citizen B, on the other hand, has foregone $1,500 in gain on his investment, and earned $5,000 ($10,000 less 50 per cent tax) from his farm, for a net gain of $3,500. Presumably he is also satisfied, and the total income tax structure has not discriminated against, or advantaged either party, as I see it. That point is noted in the judgment of P E Graham v The Queen, [1983] CTC 370; 83 DTC 5399 at 380 [5407], as follows:

I can see no real difference in the object sought to be achieved by the plaintiff and his neighbour, Mr DeMars.

Both had been employed in occupations other than farming.

Mr DeMars, when he undertook to farm, gave up his employment and the income therefrom. He borrowed heavily to begin and sustain his operation subject to the necessity of retrenchment at one point.

On the other hand the plaintiff did not give up his employment and begin farming on borrowed capital but rather devoted his employment income to the same end that Mr DeMars devoted borrowed capital.

Now, when one looks at the reverse scenario (a loss) a different picture emerges. Assuming that the two farms operate on the same identical pattern, but they both produce losses — identical losses, except for the fact that farm B has a built-in debt-service charge of $27,000, which does not accrue to farm A. Then the losses which would be claimed against other income — and reviewed by Revenue Canada, would be farm A $10,000, and farm B $37,000. Citizen A, who has already foregone $15,000 gain on his interest, does recoup $5,000 of this from “other income” (at a 50 per cent tax rate on the $10,000 loss) for a net deficit of $10,000. Citizen B, who has foregone some $1,500 gain on his investment, now recoups all of this $1,500 and an additional $17,000 in reduced taxes on “other income” for a total of $18,500 (at a rate of 50 per cent tax on the $37,000 loss). Citizen A is $10,000 behind, Citizen B is $17,000 ahead, a net difference of course of the $27,000 debt service charges — of which one could argue Citizen A had paid $10,000 through a discriminatory differential in income taxes on the outside source of income.

It appears to me therefore to be perfectly in order for the Minister to examine carefully a farm loss deduction from other income, when there is any risk of distortion of the system (as is the case because of debt charges), in order to ensure that the operating result (losses) reported did arise, or continued to arise, out of an enterprise with a reasonable expectation of profit. This exercise would tend to indicate that the system works to distribute the benefits and advantages of the tax provisions equitably, during periods of reported net income, but not necessarily during periods of reported net deficits. I would think that a continuation of this exercise, to compare situations in which Citizen A made a profit and Citizen B showed a loss, might be even more dramatic in highlighting the reasons for the Minister’s serious interest in this subject. The proposition of this appellant that he should be allowed to “write off’ his farm losses including the heavy debt-service charges during some alleged “start-up” period, because he will make a profit some day when this debt-service charge is eliminated by paying off the principal, could well be viewed as discriminatory tax treatment against the farmer who has invested his own funds in a similar operation. I am fully aware that the above is only a hypothetical situation and a theoretical exercise but it does serve to put into perspective the relative positions.

It is difficult to perceive, in the information supplied to the Court at the hearing the basis upon which the Minister accorded the so-called “restricted farm loss” to this taxpayer, but the Minister is to be commended on such a flexible approach rather than castigated for being unable to see the even greater positive aspects in the issue sought by the taxpayer. While this taxpayer might put up some argument that this farming operation was the “centre of work routine” (and I suggest that would be a debatable proposition), he could not argue that it provided the “bulk of income” and the evidence is diametrically opposed to the proposition that he looked “to farming for his livelihood” — all quotations from Moldowan, (supra). I can add nothing which has not already been said in Wilson, (supra). The appeal is dismissed.

Appeal dismissed.