Carl a Laufer v. Minister of National Revenue, [1984] CTC 3052, 85 DTC 16

Brulé, TCJ:—This appeal relates to the appellant’s 1977 to 1980 taxation years inclusive in which he is claiming to deduct full farming losses during this period.

The respondent allowed the appellant restricted farm losses as permitted in subsection 31(1) of the Income Tax Act and, as a result, there is no dispute that the appellant was in the business of farming during the relevant period.

In order to deduct farm losses the appellant must establish that his operations meet the requirements of a business and one of these requirements is that there be a reasonable expectation of profit. Accordingly, the facts in each case are paramount to determine if this requirement is met.

In The Queen v Matthews, [1974] CTC 230; 74 DTC 6193, Mr Justice Mahoney stated at 236 [6197]:

Each case where the realization of profit is so postponed will have to be examined on its Own merits to ascertain that the profit is not merely notional and that the expectation of profit is indeed reasonable.

The leading case on this subject is W Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, a decision of the Supreme Court of Canada. Mr Justice Dickson summarized the important factors in considering whether or not an individual can qualify as being in the business of farming without restrictions, and said at 313 [5215]:

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. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

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.

A determination may be made after considering the factors set out in the Moldowan case as applied to other cases under consideration.

In the present case the appellant, an insurance company executive, with limited farming experience decided in 1975, in view of circumstances as they then existed at his place of employment, to embark on a career as a farmer. He sold his residence in Winnipeg and purchased a farm, still however, maintaining his employment. He then began to accumulate machinery, make improvements and place more land under cultivation. In 1975 and 1976 others planted crops and the appellant only assisted. By 1977 he appeared ready to do all the farming with the help of his family.

In order to make all the necessary physical improvements and have the proper equipment the appellant spent more than $250,000, for which he accounted, in addition to many dollars in operating expenses during the years in question. These funds came from the equity in his home, his salary, his wife’s salary who returned to work, his savings and the limited income from the farm.

Certain setbacks to a successful operation occurred in 1977 when flooding destroyed 60 acres of crops, and in 1978 and 1980 when drought resulted in poor yields of grain.

The appellant did, in the period, increase acreage under cultivation from 155 to 225 and did repair and upgrade the buildings and purchase more equipment, all consistent with an intention to become a full-time farmer. Because of circumstances at his employment, a proposal to retire was delayed as the appellant was named president of the corporation. This, he maintained, allowed him more freedom in his work schedule and he told the Court that all his time, other than irregular office hours, was devoted to the farming operations.

There were many other points introduced in evidence and questioned by the Minister’s counsel but these are not necessary to detail.

The appellant’s gross farm income, farm losses and employment income for the 1977 through 1981 taxation years was as follows:

In 1982 the appellant realized a small operating profit from the farm. In no year did he claim any capital cost allowance. The gross income shows a definite increase while losses were tending to reduce.

When one applies the tests suggested by Dickson, J in the Moldowan case, (supra), one finds that the appellant and his family spent all their available time in making the farming operation a viable one; the appellant had committed all available capital (which, as mentioned above was substantial) to the farm; the profitability actually was not present in the years in question but became modestly so in 1982 and had the potential for the future; and, finally, the appellant had made a complete change in his lifestyle with preoccupation, physical energy and concern toward a goal of being able to retire early and become a full-time farmer. In the Moldowan case, (supra), Dickson, J said at 315 [5216]:

. . . 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.

In this case the appellant satisfied the requirement and did produce a source of income.

Counsel for the appellant put before the Court several cases in support of his argument and, for the record, I will list these but do not consider it necessary to review each:

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

2. Robert D P Blake v MNR, [1984] CTC 2152; 84 DTC 1162

3. Buchanan Forest Products Limited (Formerly Buchanan Brothers (Ontario) Ltd) v MNR, [1984] CTC 2281; 84 DTC 1253

4. Robert J McCaw and Jean McCaw v MNR, [1983] CTC 2324; 83 DTC 292

5. Bio-Test Laboratory Inc v MNR, [1983] CTC 2348; 83 DTC 295

6. Anthony G Pendergast v MNR, [1983] CTC 2403; 83 DTC 341

7. Paul E Graham v The Queen, [1983] CTC 370; 83 DTC 5399

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

9. Charles H Roney v MNR, [1984] CTC 2701; 84 DTC 1431

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

Counsel for the Minister in addition to citing Kerr & Forbes v MNR, [1984] CTC 2071; 84 DTC 1094, stressed strongly the Moldowan case, (supra), and the reference at 315 [5216] “to farming as a sideline business” which would only qualify the appellant to claim restricted farm losses.

One concern I have is whether or not the appellant’s employment could be considered “sideline”. I do not place any significance on the amount of compensation received by the appellant from employment in relation to his farm income. In view of this, it would seem difficult to accept that the appellant’s employment with the insurance corporation was a sideline employment. I do believe, however, that the appellant’s centre of work routine was his farm activities. His major preoccupation in the years under appeal was farming. While no exact numbers were presented in evidence as to hours worked at each endeavour, it was stated by the appellant that the normal work hours at his company were 7.5 per day but that he did not have any set hours. From his evidence it was obvious, taking into consideration weekends, holidays, early morning and evening, that he devoted more hours on the average to the farm operations.

The appellant’s source of income in the years under appeal was a combination of farming and his employment at the insurance corporation, as contemplated by subsection 31(1) of the Income Tax Act. As a result, his activities were comparable to those of the appellant in the Graham case, (supra), and in particular to “sideline employment”.

I find that the appellant has met the tests set out in the Moldowan case, (supra), and he has exhibited a reasonable expectation of profit. I therefore allow the appeal in respect to the 1977, 1978, 1979 and 1980 taxation years, and refer the assessment back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant’s source of income was a combination of farming and employment, and deductions claimed ought not to be restricted by the provisions of section 31 of the Income Tax Act.

Appeal allowed.