Bio-Test Laboratory Inc v. Minister of National Revenue, [1983] CTC 2348, 83 DTC 295

Guy Tremblay:— This case was heard on September 29 and 30, 1982, in the City of Ottawa, Ontario.

1. The Point at Issue

The point at issue is whether the appellant is correct in deducting, in the computation of its income for the 1977, 1978 and 1979 taxation years, $19,428, $175,419 and $198,445 respectively, as farming losses. The respondent reduced the said amounts to $5,000 per year pursuant to section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, in paragraph 6(a) to (c) of the reply to the notice of appeal, the respondent described the facts on which he based his assessments:

6. The Minister of National Revenue, when making his assessment for the Appellant’s 1977, 1978 and 1979 taxation years relied, inter alia, on the following assumptions:

(a) The appellant company owns and operates a laboratory. It also owns a farm which is used to breed and train race horses. The company receives as well rental income and interests.

(b) The Appellant’s income from the laboratory, its interest income, its rental income and its farming income fdr the 1974 to 1979 taxation years was as shown in the table below:

	Laboratory		Interest	Rental		Farming
Year	Income		Income	Income			Income
					Net			Net
	Gross	Net	Net	Gross	Income	Gross		Income
	Income	Income	Income	Income	(loss)	Income		(loss)
1974	$505,160	$144,051	$ 710	$ 69,117	($20,719)	Nil	($	2,467)
1975	628,345	217,882	Nil	78,872	(25,717)	$ 29,896		(8,733)
1976	811,643	304,821	5,799	86,597	(21,084)	33,418	(18,856)
1977	792,188	202,532	4,216	94,831	(27,426)	44,299	(19,563)
1978	992,909	345,795	1,752	98,516	(14,004)	70,303	(48,347)
1979	914,987	251,226	Nil	102,486	(6,346)	249,048	(114,712)

(c) The Appellant’s chief source of income was neither farming nor a combina- tion of farming and some other source of income.

3. The Facts

3.01 On the one hand the appellant admitted the assumptions of fact of the respondent quoted above in paragraphs (a) and (b).

3.02 On the other hand, the respondent in its reply to notice of appeal admitted paragraphs 1 to 11, 14 and 17 of the notice of appeal. They read as follows:

1. The Appellant is a Company, incorporated under the laws of the Province of Ontario by Certificate and Articles of Incorporation dated May 28, 1971.

2. In computing its income for the 1977, 1978 and 1979 taxation years, the Appellant claimed farming losses of $19,428.00, $175,419.00 and $198,445.00, respectively.

3. On August 27, 1980 the Respondent re-assessed the Appellant and reduced the loss claimable to $5,000.00 for each of the taxation years in question.

4. By Notices of Objection dated November 17, 1980 the Appellant objected to the re-assessments.

5. By Notice of Confirmation dated March 17, 1981 the Respondent confirmed the Said re-assessments.

6. In September 1974, the Appellant acquired the first farm for a purchase price of $115,000.00. Included in the purchase price was a milk quota and 49 head of dairy cattle.

7. The Appellant carried on the dairy farming operation, until 1978 when it disposed of the milk quota and the dairy cattle. (The respondent admitted this point, but added that this operation resulted in a loss for each of the years it was carried on.)

8. In 1977 the Appellant acquired its first horse and since that time the Appellant has continued to increase its capital commitment to the farming operation.

9. In 1977 the Appellant purchased a second farm adjacent to the first farm for $57,000.00.

10. In 1978 the Appellant purchased twelve horses at a cost of $111,925.00 and in 1979 the Appellant purchased an additional twenty horses for a cost of $277,395.00.

11. The Appellant has also spent substantial sums purchasing equipment and improving farm buildings necessary for a horse breeding operation, such that the total cost of land, buildings and equipment related to the farming operation shown on the Appellant’s financial statements for the year ended October 31, 1979 was $313,377.00.

14. During the taxation years in question, the Appellant either employed or contracted for the services of qualified trainers, in addition to employing other full time and part time help.

17. With respect to the farming income, the Appellant elected to compute its taxable income on a cash basis, pursuant to s 28 of the Income Tax Act.

3.03 Moreover, the counsel for the respondent admitted at the beginning of the trial that raising horses is farming and that the farming operation of the appellant is a business.

3.04 Mr Asmat Malik, President of the appellant company and Chairman of the Executive, confirmed all the facts alleged in the notice of appeal which were admitted by the respondent. He testified that:

(a) he is a microbiologist;

(b) he owns 99.9% of the shares of the appellant company. The year-end of the appellant’s taxation year is October 31 of each year;

(c) the appellant was incorporated on May 28, 1971, the main object, pursuant to patent letters, being to operate clinical laboratories (Exhibit A-1 );

(d) on May 24, 1973, the object of the appellant was amended adding the right to purchase and sell properties and erect buildings (Exhibit A-2);

(e) on March 23, 1977, again the object of the appellant was amended to include the right to carry on the business of farming including raising of racing horses (Exhibit A-3);

(f) the clinical laboratory is located in Ottawa on Charlotte Street. However, only /7 of the premises at Charlotte Street is used in the laboratory business. The balance is rented to third parties;

(g) the appellant needed sheep blood for bacteria testing so it was decided in 1974 to buy a farm (see para 6 of the notice of appeal quoted above in para 3.02) to raise sheep and to carry on a dairy farming operation. This farm has an area of 350 acres. For various reasons, the experiments using sheep blood for bacteria testing was rapidly abandoned;

(h) the second farm purchased in 1977 (see para 9 of the notice of appeal quoted above) has an area of 150 acres;

(i) in 1977 and 1978 he spent 50% of his time taking care of the farming operation — in 1979 he spent 75% and since 1980 he now spends 90%;

(j) in 1978 three (3) employees worked on the farm. In 1982, there were five (5) employees;

(k) in the laboratory there are thirty (30) employees. There is the laboratory with the main office and there are three other locations (blood collecting stations) with one person in each. He has not been in some of these stations for six years;

(l) he could not expand the laboratory operation because of requirements of legislation for the Province of Ontario. Therefore the laboratory business is not going to grow;

(m) his intention is to sell the laboratory operation;

(n) he moved his own home from an urban location to a farm;

(o) when he was a youngster in Pakistan and India he had an interest In horses because his grandfather had horses. It was the same operation as the appellant’s, however, it was not that large;

(p) during the years involved funds from laboratory operation were used for the farming operation: payroll and equipment.

3.05.1 For the years 1977, 1978 and 1979 ending October 31st of each of those years, the gross income, the gross margin, the main expenses and the net losses of the farming operation were as follows:

3.05.2 For the years 1980 and 1981, the gross farming income, the gross margin and the profit (loss) were:

In 1982, the net income should be between $50,000 to $100,000. In 1981, with 8 racing horses the purses were around $150,000 and with 12 racing horses in 1982 they should be over $500,000.

3.05.3 The financial statements from 1977 to 1981 were filed as Exhibits A-10 to A-14. The balance sheets for the years 1977, 1979 and 1981 show the cost of inventory, land, building relating to the farming and laboratory activities as follows:

The laboratory operation of the appellant shows in 1980 and 1981 the following figures (Exhibits A-13 and A-14):

Moreover, the evidence shows that in the same years the main shareholder of the appellant received bonuses of $150,000 in 1980 and $200,000 in 1981.

The net rental income for the same years was $4,715 (1980) and $8,294 (1981).

3.06 In his testimony, Mr Roland Armitage, veterinarian and President- Manager of Rideau Carlton Racetrack Ltd, said that he considers the facilities of the Bio-Test farm as the top in Eastern Ontario. According to him it takes from 5 to 7 years to make a horse training, breeding and racing operation profitable. It depends on stock, money and know-how.

3.07 Mr Michel Béchard, general manger of Concordian Standardbred Sales Ltd, whose expert qualities are not challenged, filed an evaluation report (Exhibit A-16) of the 56 horses owned by Bio-Test Farm in June 1981. The total value was $1,246,000. The list of the 56 heads (20 broodmares, 20 weanlings, 6 yearlings and 10 race horses) with the price for each was filed as Exhibit A-17. According to him, Bio-Test Farm is a classy farm and is “the upcoming farm in Ontario”.

3.08 In his examination-in-chief to be qualified as expert witness, Mr James Miller, horse trainer and driver, testified that:

(a) in the field of horse driving there are 7 levels. It takes 13 to 14 years to reach the top level: a Class “A” driver;

(b) he is a Class “A” driver. He drives in Canada as well as in the USA. He has been driving in the USA for 13 years;

(c) he is also a grand circuit driver, “fly around driving in the top stake races”, the purses of which average from $20,000 to $2,000,000. The horses he has trained have won about $10 million. The horses he drove have won about $5 million in purses;

(d) in 1981, among about 25,000 drivers in the world, he was ranked 81 st;

(e) he has trained or driven 3 world’s champions:

(1) Briscoe Hanover: he bought it as a yearling, trained it and raced it as a three-year old. It was syndicated for $1.5 million.

(2) Invincible Shadow: he purchased it for $5,500. He won $300,000 in a year. It was syndicated for $1 million.

(3) Tijuana Taxi: it was syndicated for $1.4 million.

(f) to be syndicated, a horse has to be a world champion;

(g) he is called upon by various horse owners or horse breeders to give them advice in buying and selecting horses. Sometimes, farm owners call upon him to look at the farm and see what they are doing right and what they are doing wrong.

3.09 In his cross-examination to be qualified as expert witness, Mr James Miller testified that:

(a) he drives a sulky in the actual pari-mutuel races;

(b) he was licenced as a Class “A” driver by the US Trotting Association and also by the Canadian Trotting Association;

(c) when he said he “purchased” a horse, he meant that he gave counsel to buy;

(d) his base of operations is at Ben-way Raceway in Orlando, Florida. He “spends six months a year training in Florida and then we ship north and travel the circuit” (SN p 9).

3.10 In examination-in-chief, concerning the facts of this case, Mr Miller testified that:

I train and drive all the racehorses that he sends to Florida for me to train, plus I travel to his farm a couple of times a year to look at new horses or what he should keep and what he should sell, plus try to help him that way for the last three years that I’ve been with him. (SN p 11)

Well, for instance, we go to the yearling sales and select things so that — different fillies and colts so he can upgrade his breeding so that he can have better horses to sell at the sales and he also asked me a couple of times in the last few years to come up and look at his farm and try to help him improve that so that his yearlings that he sends to the sales look a lot better and he’ll get a better price for them. He has upgraded his mares unbelievably in the last few years so that he does get good prices at the sales and he has culled out all the cheaper mares that aren’t producing, something that he has to do. He has come ‘a long way in three years as far as a breeder goes. (SN p 12-13)

(c) the appellant has a horse that is racing at the Meadowlands. This is a $2 million race;

(d) the appellant bought a colt in 1981 (Keystone Exceller). Up to September 1982, he has made $150,000. It is just two years old; next year it could make in excess of $1 million;

(e) the appellant “has also got the fastest bred Canadian horse ever sired in Canada”, it is Bio Prelude. He bred her at his own farm. He tried to sell her, but without success. He kept her. She made $300,000 in purses. “She holds all the Canadian sires records.”

(f) up to September 1982, the winnings of the appellant were pretty close to $600,000;

(g) Q When you visit the Appellant’s farm what type of things do you discuss and look at?

A Well, I’ll just have to try and — you see I’ve been with him for three years and the first year l came up he had like kind of a Mickey Mouse operation. He was trying to get it going and he had a lot of bad facilities and his yearlings didn't look good at the sales, so I told him, “This is a tough business, this breeding business, you’ve got to really work at it to get going.”

So I told him what to do and everything. So this year, in fact, when I went up, and he flew me up again to check them out before they went to the sales and I was really amazed. He’s come a long ways. The yearlings all looked good, they sold good and he’s done a lot. A lot of times when we’ve travelled to different races and tracks, we’d go to other farms —

He has got a little ways to go to catch the top breeding farms in the world, but he has made a giant step in three years. (SN p 16-17)

(h) Q Do you have any idea how long it would take to develop a successful operation?

A Well, the Hanover Shoe Farms of which I — and the Castelton Farms down in the United States are the best and they are about four or five generations of people, but they’re multi-multi-million dollar operations. It takes a long time to build it up, but it is very profitable once you get the quality there.

Q How do you get quality?

A Well, this one filly that he has got, Bio Prelude, now when he breeds her and when her yearlings sell, everyone knows the horse, she’s made a lot of money, she has won a lot of stake races and as long as the father that he breeds her to, which he will probably breed to a horse like Albatross, the stud fee is $75,000 and he’ll breed to a horse like that because he has got to breed her to something like that, because she’s got the credentials on her side and that yearling possibly could bring a half a million dollars.

(i) Q In your opinion when you look at the Appellant’s operation, compare that with perhaps not the top in the world but other operations, how does his operation compare in terms of the facilities he has?

A He has got good facilities. He is building all the time. He has got a ways to go. I wouldn't say he is one of the top operations, but in three years he has come more than double what he was and he’s on the right track.

Q What about the quality of his horses; how do they compare?

A His quality is really up great. His quality as far as his sales, he is selling with the top in Canada right now and I’d say a little under Armstrong, but he’s right with all the rest. (SN p 18)

Q Would it be more important if he could breed any one of his mares to, say, a famous stallion, what would be the effect of —

A No, the mother is just as important as the father. You’ve got to have a producer on both sides. You could raise a mare that hasn't thrown anything in ten years to the best sire and most likely you still wouldn't get anything. They’ve got to be a producer and that’s a chance you take the first time, just buy a yearling and hoping.

But then you go back to the grandmother and if she was a producer then most likely the daughter will be, that’s the difference in the yearling prices too. One that is not a producer will sell for $10,000 and one that is a producer that’s bred to the same horse could bring $150,000. (SN p 19)

3.11 In cross-examination, concerning the facts of this case, Mr James Miller testified that:

(a) he was contacted for the first time by Mr Malik in September 1979. The witnesss agreed to train one horse for the appellant in Florida during the winter;

(b) in April 1980, he went with Mr Malik to the yearling sale. Bio Prelude was bought;

(c) it was also in April 1980 that he went to the appellant’s farm and gave counsel for a better result;

(d) in the fall of 1980, the appellant sent to Florida 6 or 8 horses to be trained by the witness;

(e) Bio Prelude ran 1:56 in the Meadowlands in New Jersey; for a filly it is phenomenal. She has won 20 stake races.

(f) No, like the United States is the biggest breeders in the world in standard- breds. They’ve got the best farms.

Now Canada, the harness racing industry is really getting big in Canada, so that everyone is trying to breed and upgrade, so finally they are getting something that can go down in the United States, like her, and beat the American horses is what I am saying, and so that gives Canada a lift and the breeding.

So by her doing that, like of all the breeders in Canada, even Armstrong’s, which has been here generations, Bio-Test came up with the horse that has went the fastest for Canada in the United States as far as being bred right here. (SN p 27)

(g) Q Now, sir, you indicated that as a breeder the Appellant has some way to go and then you gave an example of a United States farm and you mentioned five generations. Could you amplify what you mean by having a way to go and you are surely not suggesting that it’s going to take five generations of Mr Malik’s descendants before —

A Before you would get to a farm that would make as much money as Hanover and Castleton, yes, in a sense she asked me to compare his farm to top farms and I said I couldn't compare it to Hanover Shoe Farm and that because they have been around so long, but what I am sayings is for three years in the operation he has come a long way, because I know people that have been in the breeding business for ten years and they are still floundering around, but they are not using their heads. It’s a tough business, but once you get there — you know, once you get the mares, which is what he has got, he’s got some nice mares now and building them, and breed them to the right studs then you’re set once you get going.

I’d say another couple of years he’d be one of the top breeders in Canada if he keeps going the way he is going. (SN p 27-28)

3.12 In redirect examination, Mr Miller testified that:

(a) the appellant paid $36 (U S money) per day per horse just for training a horse;

(b) in 1981 (November 1981 to summer 1982) the billings to the appellant were around $350,000 including $120,000 in stake race payments. Mr Miller, indeed, had made the stake payments and billed them to the appellant. In the fall of 1981, the appellant had sent 15 horses to Florida for training;

(c) in a business of this nature:

.. .the more money you can put into it the faster you are going to get to the top, ... the thing is to acquire the right mares ... so it takes a long time to build them and breed them. ... The way I look at it, in three years that I’ve known him he has come like, I’d say he’s progressed about seven or eight of a good breeding farm. I’d say another couple of years he should be all set. (SN p 34)

4. Law—Cases at Law—Analysis

4.01 Law

The main provision of the Income Tax Act involved in this case is section 31(1) which reads as follows:

31 (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amoiunt determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

4.02 Cases at Law

The cases referred to by the parties are as follows:

1. Helen Kasper v The Queen, [1982] CTC 178; 82 DTC 6148;

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

3. Philrick Limited v The Queen, [1977] CTC 217; 77 DTC 5158;

4. Oscar Dorfman v MNR, [1972] CTC 151; 72 DTC 6131;

5. Casimir Van Straubenzee v MNR, [1981] CTC 2692; 81 DTC 552:

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

7. MNR v William R Kellough, [1976] CTC 82; 76 DTC 6060;

8. Stewart J Cooke v MNR, [1975] CTC 2296; 75 DTC 223;

9. Nesthyr Rudniski v MNR, [1975] CTC 2019; 75 DTC 14;

10. Interpetation Act, Chapter I-23, section 26(7);

11. Donald Preston McLaws v The Queen, [1976] CTC 15; 76 DTC 6005;

12. Fermes Miron Farms Inc v MNR, [1970] Tax ABC 206; 70 DTC 1145;

13. James R Leslie v MNR, [1982] CTC 2233; 82 DTC 1216;

14. Robert E Mullin v MNR, [1979] CTC 2080; 79 DTC 113;

15. Hubert Plante and Reynald Plante v MNR, [1981] CTC 2052; 81 DTC 74;

16. Harold Stanton Hadley v MNR, [1981] CTC 2060; 81 DTC 66;

17. The Queen v Fred Juster, [1973] CTC 410; 73 DTC 5325;

18. Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417;

19. Bert James v MNR, [1973] CTC 457; 73 DTC 5333;

20. Fred L Johnson v MNR, [1978] CTC 2122; 78 DTC 1109;

21. Donald J Gillis v The Queen, [1978] CTC 44; 78 DTC 6103;

22. J R Zavitz v MNR, [1978] CTC 3021; 78 DTC 1730;

23. McCleary Drope v MNR, [1978] CTC 2639; 78 DTC 1483;

24. Harry Arnold Brown v The Queen, [1980] CTC 413; 80 DTC 6341;

25. Joseph Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340.

4.03 Analysis

4.03.1 It is not in dispute that the appellant’s operation of breeding, raising, racing and selling horses is farming. Neither is it in dispute that the appellant’s farming operation is a business (para 3.03). The only remaining point in dispute is whether the appellant’s chief source of income for 1977, 1978 and 1979 is neither farming nor a combination of farming and some other source of income pursuant to section 31(1) quoted above.

If the appellant’s chief source of income is farming or a combination of farming and some other source, the appeal must be allowed. If not, the reassessments must be maintained and the appeal dismissed.

4.03.2 First, what is the meaning of “source of income” quoted in section 31?

The Supreme Court of Canada in the Moldowan (supra) case saw a relation between “source of income” and “reasonable expectation of profit” at 5215 of the DTC and at 313 of the CTC. Mr Justice Dickson said:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v MNR, 72 DTC 6131 [1972] CTC 151. See also s 139(1 )(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

The learned judge gave some criteria to be considered to determine whether a taxpayer’s operation has a reasonable expectation of profit:

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.

In the present case, however, it is not necessary to study those criteria because the respondent is allowing $5,000 as expenses and has admitted, in fact, that there is a reasonable expectation of profit in the business of farming.

4.03.3 In construing section 31, the next point to study is the meaning of “taxpayer’s chief source of income” and “combination of farming and some other source of income”. Again in the Moldowan (supra) case, Mr Justice Dickson said:

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. They may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committeed, the profitability both actual and potential.

In the CBA Engineering Limited case ([1971] CTC 504; 71 DTC 5282), Mr Justice Cattanach said:

Section 13 (present section 31) contemplates three possibilities:

(1) the farming losses of a full-time farmer where farming is the chief source of income (or a combination of farming and something else) in which event all losses are deductible.

(2) farming losses incurred in a farming operation with the expectation of profit or the eventual expectation of profit but where farming is not the taxpayer’s chief source of income, nor part of it, in which event the deductibility of losses is limited by section 13, and

(3) an operation which is in the nature of a hobby, pastime or way of life, the

losses from which are not deductible being personal or living expenses.

It is clear, when the farming activity of a taxpayer falls within section 13, that Parliament must have intended that the losses incurred in farming are not to be deducted except in the manner and to the extent authorized by that section. Such intention is evident from the reading of section 13 with the other sections of the Act. It is a specific section designed to cover a specific set of circumstances in Division B dealing with computation of income. Being a specific section it is axiomatic that it takes precedence over a general section.

Mr Justic Dickson in the Moldowan case also contemplated those three possibilities. They are not in contradiction with those of Mr Justice Cattanach. On the contrary, Mr Justice Dickson’s opinion completes and underlines other aspects of the three possibilities:

In my opinioin, 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.

From the two descriptions of the three possibilities, it is obvious that the difference between the first class and the second class is that in the second class the “chief source of income” is not farming nor a combination of farming and some other source — farming is only a secondary income. The taxpayer is then called a gentlement farmer and he is entitled to the deduction in section 31.

In the first class, however, it is obvious that farming must be the chief source of income — “a full time farmer” said Mr Justice Cattanach, and

. .bulk of income or centre of bulk routine” said Mr Justice Dickson. The latter explained, however, that it is possible for a taxpayer of this class to have subsidiary income:

It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000.

4.03.4 In the instant case, it is admitted that farming is a source of income. The problem, however, is whether it is a chief source of income or only an auxiliary source of income.

On the aspect of quantum of the figures, it obviously appears from the evidence on gross and net income from the appellant’s four source of income (laboratory income, interest income, rental income and farming in- come) that farming cannot be, on the evidence, the chief source of income (para 2.02(6)(b), 3.05.1, 3.05.2 and 3.05.3). From 1974 to 1981, there was a farming net income in only one year: $12,797 (1980). It is possible that in 1982 there was another net income. For the same years, the laboratory net income varied from $144,051 (1974) to $212,488 (1981). In the years involved the laboratory net income was $202,532 (1977), $345,795 (1978) and $251,226 (1979).

However, Mr Justice Dickson in the Moldowan (supra) case quoted above in paragraph 4.03.3 explained that in deciding if a source of income is the chief source of income it does not involve pure quantum measurement. Further, he continued as follows:

While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class

(1) classification simply because he comes into an inheritance.

Let us apply to the present case the three criteria suggested by the Supreme Court (para 4.03.3) — the time spent, the capital committed and the profitability, both actual and potential — to test the two distinguishing features of “chief source”:

1. the taxpayer’s reasonable expectation of income from his various revenue sources; and

2. his ordinary mode and habit of work.

4.03.5 Time Spent

The main shareholder of the appellant company, Mr Malik, testified he spent 50% of his time in 1977 and 1978 taking care of the farming operation, 75% in 1979 and 90% in 1980 and 1981 (para 3.04(i)). Moreover, during the years involved there were three other employees; in 1982, there were five (para 3.04(j)). This probably does not include Mr Miller who trained the horses during the winter in Florida. The appellant, however, is a company. The time spent by the employees in the laboratory operation must then be taken into account.

The laboratory operation employed 30 persons. Mr Malik said that he has not been in certain of his blood collecting stations for 6 years (para 3.04(k) ). One can see that in general the time spent (employee-hour) in the laboratory operation is greater than in the farming operation.

4.03.6 Capital Committed

Concerning the inventory it is obvious that the farming operation requires more capital. For instance, in the year 1979 there was an inventory of $213,039 for the farming operation and $4,500 for the laboratory operation. This is rolling capital (para 3.05.3). Moreover, one cannot forget that the appellant’s 56 horses in 1981 had a value of $1,246,000 (para 3.07). Concerning the fixed capital (land, building and equipment) in 1979 and 1981, the committed capital was as follows:

However, only one-seventh of the building on Charlotte Street in Ottawa is used by the appellant for its laboratory operation (para 3.04(f)). Pursuant to the financial statements the land on Charlotte Street is worth $122,000 ($122,000 + 7 $17,428 + $30,000 $47,428). Therefore, for the laboratory operation the actual figure must read:

Let us now compare those figures with those of the farming operation above:

One can see that the capital committee in the fixed capital and in the rolling capital to the farming operation is larger than to the laboratory operation.

4.03.7 Profitability

The actual profitability was adduced in evidence and is summarized above in paragraph 4.03.4.

However, what is the potential profitability:

According to the evidence, in a business of this nature of breeding, raising, racing and selling horses, it takes from 5 to 7 years to make it profitable. However, it depends on stake, money and know-how. The first farm was bought in 1974. In 1982, after 8 years, can it be said that finally it is profitable? One can have a doubt. But is it correct to count from 1974. In fact, the amendment of the object of the appellant company was effective in March 1977 (para 3.04(e)). Moreover, in the fall of 1979, it was only a “Mickey Mouse” organization (para 3.10(g)) according to an expert whose qualifications as an expert were not challenged (paras 3.08 and 3.09). Mr Miller was then hired, and in three years the appellant “has made a giant step” (para 3.10(g) ). In fact, it is only from the fall of 1979 that the appellant has had the know-how. In 1982, the facilities of the appellant are considered as one of the top in eastern Ontario according to Mr Armitage (para 3.06), and it is “the up-coming farm in Ontario” according to Mr Michel Béchard (para 3.07). The qualification sof Mr Armitage and Mr Béchard as experts were not challenged. On the one hand, the Board cannot forget that, despite the winning purses of half a million dollars, there is an expense of $230,000 ($350,000 - $120,000) for training 8 horses during the winter (para 3.12(b)). On the other hand, the training in the south during the winter is a sine qua non condition to success.

4.03.8 After the application of those three criteria, can we say that the appellant’s farming business became in 1977, 1978 and 1979 its chief source of income, and that the laboratory business became only a secondary source of income? That is the point at issue.

The Board’s opinion is that the preponderance of the evidence cannot lead it to answer affirmatively to that question. Indeed the point at issue is not only whether there is a reasonable expectation of profit, but the point at issue is whether the farming business became the chief source of income — and this requires stronger evidence. We can say here that the bulk of income and the centre of work routine came from the laboratory operation despite the fact that the element “capital committee” favours the appellant’s thesis. However, can it be said that the adduced evidence is sufficient to reverse the burden of proof of the actual point at issue? Is it the appellant’s intention to change the chief source of income? That is the appellant’s contention.

4.03.9 Intention to change the chief source of income

The Supreme Court of Canada in the Moldowan (supra) case, concerning a change in the chief source of income, said:

A change in the taxpayer’s mode and habit of work or reasonable expectation may signify a change in the chief source, but that is a question of fact in the circumstances.

Further on the same subject it said:

On the other hand, 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.

The Board understands that when the Supreme Court says “a man who changes. . it means a “taxpayer” which includes a company.

What is the adduced evidence to support the said intention:

First, it seems elementary that to change the chief source of income in operations of this nature, a company must have the legal power to operate a farm. This was done in 1977 (para 3.04(e)). It must also commit the appropriate capital, and make appropriate steps in the organization. This has been also done since 1979 (para 4.03.6).

However, were all those steps made with the intention to change the chief source of income? The appellant said yes because legally it was not possible to develop the investment of the laboratory operation (para 3.04(1 ) ). The evidence on this point, however, was not very strong. It was only an affirmation by Mr Malik. What act or regulation prevents that development? When was this enacted.

The fact that Mr Malik moved his own home from an urban location (para 3.04(n)) to a farm may be significant in certain circumstances, but may also be considered as neutral in se. The adduced evidence was not necessarily in the sense that the said moving was a consequence of the appellant’s intention to change the main source of income. The move could only prove the preference of Mr Malik to live in a country area. Once again the appellant is a company. Mr Malik, the main shareholder, is different. Even if it is true that the intention of a company is expressed by the intention of the administrators and shareholders, in the instance case the moving of Mr Malik and his family to a country area is legally very far from expressing the appellant’s intention to change its main source of income from laboratory operation to a farming operation.

The appellant’s intention of Mr Malik’s selling the laboratory operation (para 3.04(m)) is not confirmed by any facts, documents or circumstances. The preponderance of the evidence concerning the intention to change the main source of income does not favour the appellant’s thesis.

4.03.10 The burden of proof in a case of this nature is not easy to reverse. Were there some facts that the appellant forgot to prove? It is possible. However, after considering the given evidence, the Board must maintain the reassessments issued by the respondent and dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.