Kenneth B Bright v. Minister of National Revenue, [1984] CTC 2988, 84 DTC 1804

Cardin, TCJ:—By notices of reassessment dated March 24, 1981, the Minister of National Revenue disallowed amounts of $4,837, $5,000 and $5,000 claimed by Kenneth B Bright as restricted farm losses for the taxation years 1977, 1978 and 1979 respectively.

However, at the hearing the respondent filed with the Court a consent to judgment dated August 21, 1984, whereby the parties agree that the appeal for the 1977 taxation year be allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled, in accordance with the provisions of subsection 31(1) of the Income Tax Act, RSC 1952, c 148, to deduct the farming loss of $4,837 he incurred from farming operations in the 1977 taxation year. The consent to judgment is attached to these reasons as Schedule “A”.

The issue now is whether the appellant had a reasonable expectation of profit and was in the business of farming in 1978 and 1979. The appellant is a full-time employee of General Motors in Oshawa, Ontario, where he has been employed for some fifteen years. During the years pertinent to this appeal, and indeed in subsequent years, the appellant was employed as an inspector of an automobile assembly line and his average salary over the years was some $20,000 a year.

Although the appellant was born on a farm, he had no real farm experience, having left the farm at the age of four years. In 1972, however, he purchased 20.1 acres of land situated next to the farm where he was born and in close proximity to his uncle’s 175-acre farm. The farm property consisted of a house which the appellant made his residence and a barn which the appellant enlarged and improved with a view to wintering cattle. The previous owner cultivated the land with hay and grain which are the crops the appellant still continues to grow as feed for his cattle.

The principal source of the appellant’s farm income is the sale of beef and pork. In the year he acquired the farm, the appellant purchased six head of cattle as a basic herd. He did some breeding of cattle but also bought young calves which he sold when they were two to three years old. In 1976, the appellant began to purchase swine and has continued to raise pigs since then.

The appellant filed as Exhibit A-2 what is principally a record of the cattle and pigs purchased and sold from 1972 to 1983. The appellant’s market for beef and pork is largely for freezer meats purchased by individuals. The market is such that no advertisement is necessary, according to the appellant.

The appellant’s work week at the GM Plant (which is 10 to 11 miles from his farm), is 40 hours. The working hours are divided into the day shift from 7:00 am to 3:30 pm, and the evening shift from 6:00 pm to 2:30 am. The appellant alternates between the day shift and the evening shift every two weeks. The appellant’s evidence is that he is able to work four to five hours every day on his farm, and for longer periods on weekends and holidays. The work is done largely by himself, but at harvest time he has help from his uncle and then he helps his uncle in return in the bailing of the hay. Over the years, he has increased his productive acreage by renting in all some 40 additional acres of arable land which, together with his acreage represent some 60 acres of hay-producing land which he harvests himself so as to reduce the cost of feeding the cattle.

From a financial point of view, the appellant purchased the farm in 1972 for $48,500. The required finance was obtained from the sale of a house which he had in Oshawa, from an inheritance which his wife received, and from his own savings. The farm property was acquired without any mortgage.

The statements of farming income and expenses show that no profit from the appellant’s farm operations were realized from 1972 to 1983, and losses in an average amount of $6,000 were incurred in each of those years. From 1977 to 1982, the farm income ranged from $5,000 to $10,000 a year. In 1983, the farm income rose to $15,000 and the loss was reduced to $1,008.51.

On that record can the appellant objectively be said to have had a reasonable expectation of profit in 1978 and 1979? In what period of time must a reasonable expectation of profit become a reality? To what degree must the current economic situation, as it affects farmers particularly, be taken into account in determining whether or not a taxpayer’s farm operation has a reasonable expectation of profit?

On the basis of the evidence, the appellant’s relatively modest income from employment, the sizeable capital invested in the farm property, the number of hours he must have to spend in order to look after a considerable herd of animals winter and summer, and the very nature of his farming operation prevent me from considering the appellant a hobby farmer engaged in some enjoyable form of sport with a view to reducing his income from another source.

On the other hand, it appears from the appellant’s financial statements covering a period of over 10 years that his farm operations have not yet proven to be economically viable. In these circumstances, must a taxpayer be precluded from the benefit of the relief evidently intended by Parliament for those who looked to farming as a secondary source of income but who have sustained losses for a considerable period of time in what, in fact, is a bona fide farm operation?

I am satisfied that the appellant was in fact engaged in real farming operations and spent considerable capital, time and energy in organizing his operations so as to realize a second income during the current years and later after his retirement.

I am convinced that the appellant, in 1978 and 1979, did truly and reasonably expect to make a profit from his farm operations. Indeed, the sale of cattle and swine in 1983 and up to August 15, 1984 increased substantially. Although it may appear that the expected profits are long delayed, the limited amount of capital which the appellant could invest at any one time in building up his herds and the cost of increasing his productive acreage in a period of high interest rates which adversely affect even long-established farmers are factors which cannot be ignored, in my view, in deciding in what period of time genuine farming operations must show a profit in order to be seen as having a reasonable expectation of profit and permitting the deduction of restricted farm losses as intended by Parliament.

There can be no doubt that the case of William Moldowan v The Queen, ([1977] CTC 310; 77 DTC 5213), is the leading authority with respect to farming losses. The reason why the Supreme Court decision in Moldowan, (supra), is so valuable in my opinion, is that it not only provides guidelines in distinguishing between the three main classes of farming operations, but it also allows the courts sufficient flexibility to consider other facts and circumstances surrounding the three main types of farming described in Moldowan which may have an important bearing in arriving at a judicious determination of what is a sensitive issue.

At 313 and 5215 of Moldowan, (supra), Dickson, J, as he then was, stated as follows:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews (1974), 28 DTC 6193.

The learned Justice indicated clearly that a wider interpretation can be given to the expression ‘‘a reasonable expectation of profit” and, in my opinion, the intent of Parliament and the reasons it provided for the deduction of restricted farm losses are very important considerations in deciding the issue.

I find that the facts in the instant appeal do meet the criteria necessary in making an objective determination that the appellant did have a reasonable expectation of making a profit from the operation of his cattle farm in 1978 and 1979,

The appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the restricted farm loss claimed by the appellant in the 1977 taxation year (Consent to Judgment), as well as the restricted farm losses claimed for the 1978 and 1979 taxation years are deductible pursuant to subsection 31(1) of the Income Tax Act.

Appeal allowed.

SCHEDULE“A”

IN THE TAX COURT OF CANADA

IN RE the Income Tax Act

Between:

KENNETH B BRIGHT,

Appellant,

— and —

THE MINISTER OF NATIONAL REVENUE,

Respondent.

CONSENT TO JUDGMENT

Whereas the Appellant herein in filing his income tax returns for the 1977, 1978 and 1979 taxation years sought to deduct the amounts of $4,837.00, $5,000.00 and $5,000.00 respectively as farm losses.

Whereas the Minister of National Revenue by Notices of Reassessment dated March 24, 1981, in respect of the 1977, 1978 and 1979 taxation years disallowed the deductions sought by the Appellant on the basis that in the 1977, 1978 and 1979 taxation years the Appellant had no reasonable expectation of profit and was not in the business of farming.

Whereas the Appellant, by Notice of Appeal dated May 13, 1982 has appealed from such reassessments.

Whereas the Minister of National Revenue has satisfied himself that by the 1977 taxation year it could not be conclusively determined that in the conduct of his farming activities the Appellant had no reasonable expectation of profit.

Whereas in the circumstances the Minister of National Revenue is prepared to concede that it could not be said, in respect of the 1977 taxation year that the Appellant was not carrying on a farming business.

Whereas the parties are desirous of settling the Appellant’s appeal as it relates to the 1977 taxation year.

Whereas the officials of the Department of National Revenue have satisfied themselves that the present settlement is one designed to implement an agreement reached by the parties as to what the assessment should be when the law is applied to the facts.

Now Therefore the Parties Consent to Judgment allowing the Appellant’s appeal for the 1977 taxation year and referring the matter back to the Minister of National Revenue for reassessment and reconsideration on the basis that in the 1977 taxation year the Appellant is entitled to deduct the farming loss of $4,837.00 he incurred from farming in accordance with the provisions of Subsection 31(1) of the Income Tax Act.

DATED at TORONTO, this 20th day of August, 1984.

McCarthy & McCarthy

Solicitors for the Appellant.

Per:

T Simpson

DATED at TORONTO, this 16th day of August, 1984.

R Tassé

Deputy Attorney General of Canada.

Per:

J Paul Malette