Anthony G Pendergast v. Minister of National Revenue, [1983] CTC 2403, 83 DTC 341

The Chairman:—Mr Anthony Pendergast is appealing from an assessment of taxable income with respect to the 1979 taxation year. In his income tax return, the appellant sought to deduct a farming loss of $21,733 from his net income and an amount of $6,153 as non-capital losses of other years. By notice of assessment, the respondent restricted the deductible farm loss to $5,000 and disallowed the balance of $21,733 claimed. The appellant’s claim of $6,153 as a deduction for non-capital losses of other years was also disallowed.

The respondent’s position was that the appellant’s chief source of income for 1979 was neither farming nor a combination of farming and some other source within the meaning of subsection 31(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended and the deductible loss from the appellant’s farming operations was therefore properly restricted to the amount of $5,000.

The appellant contended that the respondent erred in applying the provisions of section 31 of the Act in restricting his farm losses. He submitted that his chief source of income in 1979 was either farming ora combination of farming and his employment income.

A summary of basic facts are set out in the appellant’s notice of appeal which read as follows:

Statement of Facts

1. The taxpayer resides on a farm at Rural Route 1 Colgan, Ontario. Prior to its acquisition by the taxpayer in 1971, the farm was owned by the taxpayer’s father and used in a farming business carried on by him.

2. The taxpayer lived on the farm for the first 18 years of his life and worked with his father in the farming business. During his eighteenth year, he left the farm and moved to Toronto. In 1967, the taxpayer and his wife moved back to the farm and he commenced full-time farming operations.

3. During 1979, the taxpayer carried on a mixed farming operation on his farm (approximately 78 acres) and on an additional 150 acres of land which he leased from third parties in the immediate area. The farming operations consisted of raising cattle and pigs, growing hay and grain and other cash crops, and an egg operation. In that year, the taxpayer invested approximately $50,000 in a new barn and bulk feeder complex. This permitted him to increase the size of his pig operation from 15 to 120 and allowed him to establish egg operations with 500 hens producing about 250 dozen eggs per week.

4. Also during 1979, the taxpayer was employed by Burns Fry Limited in Toronto, as an office manager. The taxpayer’s normal routine consisted of performing farm chores in the early morning prior to leaving for work in Toronto, chores in the evening on return to the farm and full-time farm activities on weekends. He devoted his four week vacation period to the harvesting of cash crops in the July- August period. The taxpayer is assisted in the operation of the farm by his wife and two of his four children. The taxpayer’s wife devoted about two hours a day to farm chores and an additional three hours a day, seven days a week to the egg operation, being collecting, cleaning, grading, packaging the transporting the eggs to various customers.

5. Attached as Schedule A to this appeal, is a breakdown of gross income and expenses from the farm operations in the years 1975 through 1979, together with estimated figures for the years 1980 through 1983.

6. The taxpayer is committed to farming and it is the centre of his life and work routine. The job as office manager was maintained to provide the cash flow necessary to make the farming operation viable during the period over which the farming operation was being increased to stand on its own.

Implied in the respondent’s assessment is the admission that the appellant was engaged in the business of farming with a reasonable expectation of profit. The issue, simply stated, is whether farming or a combination of farming and some other source of income were the appellant’s chief source of income in 1979.

By applying the criteria used by Mr Justice Dickson of the Supreme Court of Canada in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, in distinguishing three classes of farmers, the issue can be further narrowed.

The facts do not support nor is it contended that the appellant was carrying on farming operations as a hobby and the third class of farmers described by Mr Justice Dickson at 315 and 5216 respectively is not applicable.

The two other classes under which the appellant may fall are:

(1) a taxpayer, for whom the 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.

The appellant will be successful if he can establish that farming may reasonably be expected to provide the bulk of his income or the centre of his work routine.

Findings of Fact

From the time the appellant left the farm in 1958 and moved to Toronto, his principal occupation was in relation to brokerage houses: in the earlier years with Dominion Securities, then with Burns Fry Ltd in 1967 and subsequently Nesbitt Thompson and Pitfield.

In 1976 he returned to Burns Fry Ltd and in 1979 was office manager and a shareholder of that corporation. He resigned from Burns Fry Ltd in 1981, sold his shares and returned to Nesbitt Thompson for some months until the end of 1981. The evidence is that, at that time, he was seeking employment closer to his home.

The appellant married in 1963 and moved back to the farm in 1967 with a young family. In 1973, although the evidence is unclear as to whether he purchased it or it was gifted to him, the appellant acquired the farm in Colgan, Ontario, some 42 miles from the Burns Fry Ltd’s office which represented 75 to 90 minutes travelling time. The appellant’s office hours were from 9:00 hrs to 17:00 hrs.

The farm consisted of 78 acres of land and, in the years prior to 1979, an additional 150 acres were leased from third parties. The farm operation consisted of raising cattle, pigs, growing hay and grain, an egg operation and growing of other cash crops.

The farm buildings and equipment were improved over the years and a new barn was constructed in 1979 (Exhibits A-1 to A-5). The evidence was that help was hired during the harvest season and the children lent a hand when they were old enough to do so. The appellant worked on the farm on weekends and 3 weeks out of his 4-week vacation during the summer months, the fourth week being spent at his cottage at Wasaga Beach.

In the years prior to 1979, the appellant had filed his tax returns on a restricted farm loss basis. However, in 1979 he claimed full farm losses. Before the Board can allow the deduction claimed, the appellant must establish that farming could reasonably be expected to provide the bulk of his income and was indeed the centre of his work routine.

With respect to the appellant’s work routine, the evidence is clear that his full-time employment was with brokerage houses since 1958; although he may have had some interest in the farm operations, his principal occupation left him relatively little time to devote to farming. In 1979, as office manager and shareholder of Burns Fry Ltd, the appellant’s activity on the farm continued to be marginal. There was no evidence that the appellant contemplated a change in his principal occupation and that he intended at that time to make farming the centre of his work routine. No change whatever was made in the appellant’s occupational direction at any time.

The appellant’s income from sources other than farming for each of the years 1977, 1978, 1979 and 1980 was $27,066.77, $33,579.01, $44,294.04 and $54,191.42 respectively. The appellant was not a registered salesman and was not paid on the basis of a commissioner. His total income however included amounts of $700, $4,650 and $26,787.50 as dividends in 1978,1979 and 1980 respectively (Exhibit R-1, Tabs 3, 4 and 9).

As the appellant’s income from other sources increased, the farm expenses also increased: $8,336 in 1977; $23,961 in 1978; $42,079 in 1979 and $65,000 in 1980. In 1976, 1977 and 1978 the appellant incurred expenses for renting 150 acres of additional pasture land in the amounts of $1,500, $1,100 and $1,200 respectively. In 1979 however, the appellant ceased renting the extra acreage, thereby considerably reducing available pasture land (Exhibit R-1, Tabs 1, 2, 3 and 4).

In 1978 and 1979 the appellant also decreased his holdings of cattle and increased his holdings of pigs and chickens. Nevertheless, while the expenses increased markedly from 1977 to 1981, farm income was substantially less than had been estimated.

It may be useful to reproduce here Schedule A attached to the appellant’s notice of appeal and filed as page 14, Tab 4 of the respondent’s Exhibit R-1:

It is interesting to compare Schedule A with the actual and the estimated deficit for the years 1979-82 produced by the appellant as Exhibit A-6:

ACTUAL AND ESTIMATED EXCESS (DEFICIT) OF INCOME OVER EXPENSES FOR THE YEARS 1979-1982

(estimates projected in 1981)

	1979	1980 1980	1981 1981		1982 1982
	Actual	Actual	Actual		Estimate
Income
Crops and Seed	$ 3,668	$ 5,998	$	320	$	500
Livestock—cattle	14,832	10,542		2,890	21,000
—swine		17,608		3,252	12,000
—poultry				586		1,000
Eggs	1,355	8,512		8,747	16,000
Other	491	367		172		500
	$20,346	$43,027	$15,967		$51,000
Expenses
Livestock—cattle	10,346	13,300		1,924		3,000
—swine	2,235	8,664		3,531		3,500
— poultry	2,477	700		3,178
Interest—real estate	3,242	3,199		4,564		5,200
—operating	241	4,001		3,946		5,000
—barn	981	8,222		8,850		5,600
Feed & straw	3,727	9,668	11,110		12,000
Custom & contract work	3,892	5,161		4,697		4,000
Other	6,568	11,476	11,416		12,000
Capital cost allowance	8,370	7,816		8,589		8,000
	42,079	72,207	61,805		58,300
Excess (deficit) of
income over expenses	($21,733)	($29,180)	($45,838)		($7,300)
Capital Investment
Balance, beginning
of year	$14,835	$60,482	$56,014		$52,655
Additions
Class 6—barn	49,054	437
8—fences, cages	4,963	2,911		325
10—truck, tractors				4,905
	68,852	63,830	61,244		52,655
Capital cost allowance	8,370	7,816		8,589		8,000
Balance, end of year	$60,482	$56,014	$52,655		$44,655

1982 Estimate based on the following assumptions:

— continued high interest rates throughout period

— interest on mortgage will be renewed annually at prevailing high rates — weak commodity prices for cattle and swine

— increase in egg production

— utilization of own produced feed and straw to feed herds

In 1980 the farm income was less and the expenses greater than was anticipated but in 1981 the income was considerably less than had been estimated and the expenses were still high. Neither the actual figures nor the appellant’s projection for 1982 and 1983, in my opinion, support the proposition that farming could reasonably be expected to produce the bulk of the appellant’s income.

That the appellant has over the years invested a considerable portion of his earnings on the farm is as indisputable as the fact that the appellant is in the business of farming.

The appellant’s statement of assets and liabilities for each of the calendar years ending in 1979, 1980 and 1981 is as follows:

STATEMENT OF ASSETS, LIABILITIES AND FARM CAPITAL FOR THE CALENDAR YEARS ENDED 1979, 1980, 1981

	1979	1980	1980	1981	1981
ASSETS
Current
Cash		$	1,000	§$	577
Fixed
Barn (depreciated value)	$ 50,661	45,988		41,390
Equipment (depreciated value)	8,221		8,906		7,385
Truck & tractor (depreciated
value)	1,600		1,120		3,880
	60,482	56,014		52,655
Other
House (approx market value)	50,000	50,000		50,000
Land (approx market value)	90,000	90,000		90,000
	140,000	140,000		140,000
Total assets	$200,482	$197,014		$193,232
LIABILITIES AND FARM CAPITAL
Liabilities
Bank loan—operating	$ 20,000	$ 24,000		$ 28,000
—barn	45,000	49,000		31,000
Mortgage	29,272	28,874		28,646
Total liabilities	94,272	101,874		87,646
Farm capital
Beginning of year	116,330	106,210		95,140
Additional capital	11,613	18,100		56,284
	127,943	124,310		151,424
Excess (deficit) on revenue
over expenses	(21,733)	(29,170)		(45,838)
End of year	106,210	95,140		105,586
Total liabilities & farm capital	$200,482	$197,014		$193,232

On the basis of the evidence, it appears to me that the appellant invested in the farm property in order to provide for himself and his family a life-style of their choosing on a property which had belonged to the appellant’s father and on which the appellant had been raised. Although the appellant was in the business of farming, there is no evidence that farming in 1979 or at any time prior to or after that date could reasonably be expected to provide the bulk of the appellant’s income. Nor was farming the centre of the appellant’s work routine in 1979. An intention or plan on the part of the appellant to change his occupational direction in the future in order to make farming the centre of his work routine was not convincingly demonstrated.

In my opinion the appellant does not come within the class of farmers who are free from the limitation of subsection 31(1) of the Act. He falls squarely in the second class of farmers described by Mr Justice Dickson in Moldowan, (Supra) in that he did not look to farming and to some subordinate source of income for his livelihood. In 1979 the appellant looked to his salary and investment for income for his livelihood and farming was a sideline business and not the centre of his work routine.

For these reasons, judgment will go dismissing the appeal.

Appeal dismissed.