Jean McCaw, Robert McCaw v. Minister of National Revenue, [1983] CTC 2324, 83 DTC 292

The Chairman:—The appeals of Robert McCaw and his spouse Jean McCaw, from assessments with respect to the 1977, 1978, 1979 and 1980 taxation years, were heard on common evidence. In issue is the deductibility of certain expenses claimed by the appellants to have been incurred as a result of farming operations carried on in partnership. The partnership as I understand it was on a 50/50% basis for the years 1976 to 1979 inclusively and 75/25% basis in 1980, Robert McCaw having the greater interest. In seeking to deduct full farm losses of $4,737.02 in 1977, $7,073.19 in 1978, $9,655.15 in 1979 and $12,867.94 in 1980 and on the basis of their respective interest in the partnership Jean McCaw claimed as her share of farm losses amounts of $2,368.51, $3,536.60, $4,827.58 and $3,216.98 respectively for each of the years under review and Robert McCaw claimed amounts of $2,368.51, $3,536.60, $4,827.58 and $9,650.96 as his share of the farm losses for the same period.

The respondent disallowed the deductions on the grounds that the appellants were not engaged in the business of farming and that the expenses were not incurred to earn income but were personal living expenses and therefore not deductible under paragraph 18(1)(a) and paragraph 18(1 )(h) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

The respondent pleading in the alternative submitted that if the appellants were engaged in the business of farming, their farm losses should be calculated and restricted in accordance with subsection 31(1) of the Income Tax Act.

The appellants, both of whom have farming background were, prior to the pertinent years, employed as full-time teachers. Indeed, Robert McCaw taught horticulture for the Durham Board of Education and was a member of the Growers’ Association.

In October of 1975 the appellants, in partnership, acquired a 10-acre farm for $19,000. A downpayment of $2,000 was made on the property and a $17,000 mortgage was repaid over a period of five years.

In the Spring of 1976 the appellants moved to the farm and commenced operating it. In June of 1977 Jean McCaw discontinued her employment as a teacher and farmed the property on a full-time basis. Robert McCaw worked on the farm in the mornings and evenings and during the summer months until 1981 at which time he retired from the teaching profession.

Some 5 to 6 acres of the appellants’ farm were an apple orchard. Contrary to the Minister’s assumption, the rest of the farm was not made up of fallow as stated but consisted of one and one half acre of strawberry, raspberry and asparagus plants which were in existence and were producing at the time of acquisition. To this cash crop, the appellants added mixed farming and grew corn, carrots, beets, tomatoes, cabbage, etc. The appellants also invested in livestock which consisted of chickens, ducks, geese, sheep, goats and pigs.

The appellants’ alleged intention in acquiring the farm was to earn income from it and they expected an immediate profit from the sale of the apples and other fruit crops and a profit from the livestock was expected within a period of five years, once the herds had grown and offspring could be marketed.

In the Fall of 1976 pigs and goats were purchased for breeding purposes. In 1978 sheep were added to the livestock which also included 25 laying hens and 100 meat birds. During the period under review the sheep and pigs produced and the lambs and piglets were sold. However, during an exceptionally cold winter spell, some 40 piglets were lost by freezing. The unseasonable weather also destroyed many apple trees.

Other than the initial cost of the farm, the appellants invested additional capital. They purchased an additional 7 acres of land; among other improvements, they increased the size of their barn facilities, installed additional heaters, excavated a duck pond and built a greenhouse for an early start of their market garden products. In 1980 Jean McCaw withdrew her superannuation in the amount of $5,320 in order to purchase farm equipment.

The amount of money invested by the appellants on the farm, the nature of the work and the activities involved in the operation of the farm can hardly be said to be the exercise of a pleasant hobby nor can the expenditures be accurately described as personal living expenses.

No profit was in fact realized in the first five years of operation, as stated by the respondent in his reply to the notice of appeal The figures are not contested:

4 (f) The farming operation incurred the following farming losses:

Year	Income	Income	Expenses	Loss	Loss
1976		$2,360.00	$ 4,129.69	$ 1,769.69
1977		$2,350.00	$ 7,087.00	$ 4,737.02
1978		$3,760.01	$10,833.20	$ 7,073.19
1979		$1,741.83	$11,396.98	$ 9,655.15
1980		$2,782.55	$15,650.49	$12,867.94

The 1981 taxation year also showed a loss of some $9,000. The operation was obviously not financially successful for the period under review. Could the appellants have had a reasonable expectation of profit at the time of acquisition and during the relevant period?

Although the question whether the appellants had a reasonable expectation of profit should be answered objectively as suggested by the respondent the existence of a reasonable expectation should not be determined on the basis of hindsight.

The relatively small amount invested, the size of the land at 17 acres, the systematic improvements to the farm over the years, the gradual acquisition and breeding of livestock, and the sale of its modest fruit crops could not be expected to yield the immediate large profit that a large initial investment in a large operation might have earned within a few short years. For the appellants however, the profit that they could reasonably expect to earn from the small operation might well have been sufficient for their needs and, in my opinion, that is sufficient to meet the requirements of the Income Tax Act, which simply requires that there exist a reasonable expectation of profit and not a reasonable expectation of a large profit.

It is regrettable in my view that the appellants felt they had to abandon their farming operations because they were told by the assessor that the farm could never be self-supporting unless considerable finance was borrowed and invested so as to make the farm a larger operation. The 5 or 6 acre orchard produced up to 21 tons of apples sold for juice and the one and one-half acres of strawberry, raspberry and asparagus plants which the assessor had not noticed also produced marketable fruit.

While the operation was not financially successful in the years under review, I am satisfied that the appellants, at the relevant times, could have had and did have a reasonable expectation that their farm would turn a profit at a time when they needed it. The fact that it did not do so does not establish that their expectation of profit was not reasonable or justified.

Having found that the appellants operated the farm as a business with a reasonable expectation of profit the question now is whether section 31(1) restricting the farm losses is applicable.

In the decision of the Supreme Court of Canada in William Moldowan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213, Mr Justice Dickson describes the three classes of farmers envisaged by the Income Tax Act. Mr Justice Dickson states at 315 and 5216 respectively:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his nonbusiness farming are not deductible in any amount.

The appellants’ farm was operated in a partnership in which the work routine of one of the partners, Jean McCaw, her way of life and principal source of income during the pertinent taxation years was centred on the farming operations. In my opinion she would come in class 1 as described by Mr Justice Dickson and would be free of the limitations of her farm losses under subsection 31(1).

Robert McCaw while still employed as a teacher devoted a considerable portion of his available time doing chores on the farm. It was Robert Mc- Caw’s intention to work on the farm on a full-time basis only after retirement. Indeed part of his teaching salary had to be spent on the gradual improvement of the farm. For the years under review farming was not the centre of Robert McCaw’s work routine nor could farming be expected to provide the bulk of his income during that period and was in my opinion only a subordinate source of income and a sideline business for him. I have come to the conclusion that Robert McCaw falls in the second class described above and the provisions of subsection 31(1) are applicable to him. His farm losses therefore should be restricted in accordance with that section of the Act.

Judgment therefore will go allowing the appeals and referring the matter back to the Minister for reconsideration and reassessment on the basis that for the 1977, 1978, 1979 and 1980 taxation years the farm losses claimed by Jean McCaw are fully deductible and the farm losses claimed by Robert McCaw are deductible only to the extent permissible under subsection 31 (1 ) of the Income Tax Act.

Appeals allowed.