Ray Z Rivers v. Minister of National Revenue, [1984] CTC 2933, 84 DTC 1802

Kempo, TCJ:—

Part I Issue

This is an appeal and claim for full deduction of total farm losses concerning the 1980 taxation year of the appellant on the basis that he is a taxpayer who is in the business of farming and that, contrary to the respondent’s assertion, he is a person who does look to farming or to farming and some subordinate source of income for his livelihood and thereby does escape the limitations of section 31 of the Income Tax Act (the “Act”).

Stated succinctly, the issue to be resolved is whether or not this appellant falls within class (1) or class (2) of the three categories of farmers envisioned within this provision.* [1]

Part II Decision

The appeal is allowed and the matter is to be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that, for the appellant’s 1980 taxation year, the loss restrictions of section 31 of the Act do not apply.

Part III Reasons

This issue has been resolved in the appellant’s favour essentially on the basis of and, in my view, in accordance with the principles and tests as set out in the reasons for decision of Dickson, J (as he then was) in the leading case of Moldovan v The Queen, (supra).

To paraphrase therefrom, the class (1) farmer is a taxpayer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. It is a taxpayer who looks to farming for his livelihood and whose major preoccupation is farming but who may also have income from a sideline employment or a business which is in the nature of a subsidiary or auxiliary interest. These interests will not replace the taxpayer in the class (2) category which is of application to one who carries on farming as a sideline business and who does not look to farming or to farming and some subordinate source of income for his livelihood and is thus subject to the section 31 limitations. Whether or not a source of income is a taxpayer’s “chief source’’ of income is both a relative and objective test. While relevant, it is not a pure quantum measurement. The distinguishing features 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:

(a) the time spent;

(b) the capital committed;

(c) profitability, both actual and potential;

(d) a change in the mode or habit of work or reasonable expectations which may signify a change in the chief source;

(e) a change of occupational direction and commitment of energies and capital to farming as a main expectation of income would not disentitle the deduction of the full impact of start-up costs.

Turning to the case at bar there was no question but that the appellant was engaged in full-time employment off the farm as an economist with the public service and that his farming operation in the 1980 year was not a hobby, but rather constituted a source of income to him.The evidence confirms that which was not disputed, that is, that the appellant was in the business of farming for that year notwithstanding its unprofitability since its inception and that he would have had a reasonable expectation of profit therefrom.

As to this appellant’s chief source of income for his 1980 taxation year, the following is a compendium of the principal distinguishing features that were, in my opinion, determinative of the issue.

The appellant had a long time involvement in mixed farming while growing up on his parents’ farm. Since 1970 he had been particularly involved in the study and analysis of the sheep farming and marketing industry, both in New Zealand and in Canada.

Because of their shared interest in sheep farming, the appellant and his wife sold their home in 1976 and with the sale proceeds, their savings, a small family loan and a small mortgage a farm property of 97.5 acres was purchased 20 miles outside the city of Ottawa as their home place and for their own sheep farm.

Since then the appellant has wholly and continuously committed his afteremployment time, labour, skills, energy and study to the farm which, according to the evidence, was at least equal to if not greater than that expended by or was required of him towards his employment as an economist. His employment hours and times had the necessary flexibility for his farming purposes notwithstanding that any time so taken would have had to have been made up.

The bulk of the aggregate of his savings, employment and farming income was invested in the farm (Exhibits A-3 and A-6), his whole attitude being that of increasing his farming business and its income by the use of his off-farm income without resorting to any heavy borrowing. In the four year period 1977-1980, the capital investment, excluding the farm property, amounted to $44,160.

In 1977 the appellant’s wife gave up her outside employment. Because of her interest in and knowledge of sheep farming earlier acquired in New Zealand, she too has been actively involved in the running of the sheep farm business and has been paid a salary for so doing since 1980.

Over the period 1977 to 1983 inclusive the appellant’s annual off-farm employment income as an economist in the public service increased from $33,835 to $47,780, His annual gross farm sales grew from $140 to $15,630 and his farm loss peaked at $22,500 in 1980 and dropped to $2,900 by 1983. All through this time period the appellant’s off-farm employment or job functions remained essentially the same; he did not have to travel and, more notably, he had deliberately foregone pursuit of his professional career activities and advancement in the public service on account of his dedication and commitment to his sheep farming business.

The appellant’s planning, statistical and evident businesslike approach to his sheep farming business (Exhibits A-3, A-7 and A-8) are indicative of his keen analytical abilities and knowledge in relation thereto and were reflective of his position that farming was not just a sideline or subsidiary business. A detailed sheet (Exhibit A-4) of the appellant’s farm associated activities and achievements, farm training and courses and farm literature subscribed to was impressive and underscored the commitment to and realized farming achievements of the appellant and his wife.

The appellant’s projections (Exhibit A-7) indicates that by 1985 the gross farming revenue would approximate that of net off-farm revenue and that the farm operation would then show a net profit, taking into account the projected expenditure relating to operations, maintenance and capital and which is concurrent with a detailed projected sheep development program. By 1986 the gross farm revenue was projected to double that of gross off-farm revenue. His farm business planning variance analysis (Exhibit A-8) indicates he was not far off in his projections as to the 1982 and 1983 years.

While appreciating that none of the above is alone determinative of the issue, viewed collectively it can be fairly said that this appellant was a taxpayer whose chief source of income for his 1980 taxation year was from farming or a combination of farming and some other source of income.

Accordingly the limitations of section 31 of the Act do not apply and the appeal is allowed.

Part IV Additional Jurisprudence Cited and Considered

FCTD — Kasper v The Queen, [1982] CTC 178; 82 DTC 6148; Plante v The Queen, [1983] CTC 341; 83 DTC 5378; Graham v The Queen, [1983] CTC 370; 83 DTC 5399.

TRB (as it then was) — Hadley v MNR, [1981] CTC 2060; 81 DTC 66; Argue v MNR, [1981] CTC 2221; 81 DTC 204; McCambridge v MNR, [1981] CTC 2314; 81 DTC 251; Leslie v MNR, [1982] CTC 2233; 82 DTC 1216.

TCC — Nikolaisen v MNR, [1984] CTC 2057; 84 DTC 1027; Kerr & Forbes v MNR, [1984] CTC 2071; 84 DTC 1094; Wilson v MNR, [1984] CTC 2158; 84 DTC 1164; Doyle v MNR, [1984] CTC 2205; 84 DTC 1174; Buchanan Forest Products Ltd v MNR, [1984] CTC 2281; 84 DTC 1253; Roney v MNR, [1984] CTC 2701; 84 DTC 1431.

Appeal allowed.