Donald Stanley Derbecker v. Minister of National Revenue, [1983] CTC 2120, 83 DTC 115

M J Bonner:—Two unrelated issues arise in appeals from assessments of income tax for the appellant’s 1977, 1978 and 1979 taxation years.

The first issue is whether section 31 of the Income Tax Act applies to limit the deduciton of certain business losses sustained in each of the three years. It was common ground that section 31 does apply if the business was farming.

The business in question involved the purchase of cows of high genetic quality, causing them to super ovulate, collection of the ova, implanting in the uterus of ordinary cows of the ova taken from the high quality cows and the production, some months later, of calves. The ova in question were fertilized prior to implantation in the appellant’s cows by a process of artificial insemination using the semen of bulls of very high quality. Thus, the appellant’s ordinary cows were, during the gestation period, carriers of the offspring of genetically superior strangers. It was an admitted fact that the appellant’s intention was to sell the resultant calves as soon as they could be weaned.

The appellant did not own any farm, nor did he lease farm premises. His cows were boarded at a farm. At the time of implantation and, I gather, during the gestation period they were boarded at premises operated by Modern Ova Trends Ltd (hereinafter called “MOT”), the company which carried out the implantation process.

The appellant owned twenty-five percent of the shares of MOT. He owned either all or virtually all of the shares of a company which operated a stock- yard. He owned and operated a nursing home. He could not be regarded as a farmer or as the proprietor of a farming business, save in relation to the test-tube calf operation described above.

On behalf of the appellant it was argued that the business was not farming because:

(a) the appellant did not personally take part, either in the day-to-day work of caring for the animals or in the breeding operation; and

(b) the appellant did not intend to keep the calves produced for any appreciable period of time following birth and, thus, the operation could not be regarded as “livestock raising” within the extended definition of “farming” to be found in subsection 248(1) of the Income Tax Act.

In regard to the latter submission, reference was made to the decision of the Tax Appeal Board in Richard A Schleissner v MNR, 41 Tax ABC 78; 66 DTC 336, and to the decision of this Board in Fleming Farms Limited v MNR, [1977] CTC 2471; 77 DTC 351.

As I see it, the essence of the operation conducted by the appellant was the ownership, maintenance and breeding of cattle with a view to the sale of their offspring. Such an operation is, in my view, farming within the ordinary meaning of that word. Had artificial insemination and ova transplant operations not been utilized the enterprise would quite plainly have been farming. The nature of the enterprise is not changed simply because novel techniques were employed. My conclusion is in no way inconsistent with the decision of this Board in Fleming Farms Limited, a case which involves a distinctly different factual situation.

It is immaterial that the appellant did not personally take part in the day- to-day operations. The enterprise was his. In this regard reference may be made to the decision of the Federal Court in Fred Juster v Her Majesty the Queen, [1973] CTC 410; 73 DTC 5325; [1974] CTC 681; 74 DTC 6540.

In light of the foregoing, it is unnecessary to consider whether the operation was “livestock raising” within the meaning of the extended definition laid down in section 248 of the Act. I observe that the enterprise in question in the Schleissner case was that of a cattle dealer and was very much different from that in question here.

The second issue relates only to the 1977 taxation year. The relevant facts as alleged in the notice of appeal and admitted in the reply were:

10. On December 1, 1976, the taxpayer sold 1,715 shares of Heritage House Limited (the “shares”) to his daughter, Pamela Derbecker, in consideration for a promissory note in the amount of $96,948.95 which was payable to the taxpayer on demand after December 31, 1976. No demand was made for payment in 1977.

11. By Notice of Reassessment dated March 24, 1981, Revenue Canada included in the taxpayer’s income for the 1976 taxation year the sum of $28,588.50, being the taxable capital gain attributable to the taxpayer’s disposition of the shares, less a reserve for the proceeds not due until after the end of 1976, calculated in accordance with s 40(1 )(a)(iii) of the Act. This gain resulted from a valuation of the shares by Revenue Canada at $201,684 rather than the sale price of $96,948.95.

12. By Notice of Reassessment dated March 24, 1981, Revenue Canada included in the taxpayer’s income for the 1977 taxation year the sum of $26,463.00, being the balance of the taxable capital gain attributable to the taxpayer’s disposition of the shares.

Counsel for the appellant submitted that no demand was made in 1977; that the promissory note was therefore not due until after the end of 1977; and that the appellant was therefore entitled to a reserve under subparagraph 40(1 )(a)(iii) of the Act. In this regard he relied on the decision of the Supreme Court of Canada in Ronald Elwyn Lister Limited et al v Dunlop Canada Limited, 135 DLR (3d) 1. In that case the Court considered actions taken by a creditor to realize on security which it held for payment of a note and debenture which were payable on demand. It was held that the debtor was entitled to reasonable notice of the demand to enable him to pay prior to seizure of the property held as security. Nothing in the Lister case affects the rule that a promissory note on demand is due as soon as it is delivered. I therefore cannot find that the part of the proceeds of disposition of the shares represented by the promissory note was not due until after the end of 1977 within the meaning of subsection 40(1) of the Income Tax Act.

The appeals will therefore be dismissed.

Appeal dismissed.