Arthur Bell Holdings LTD v. Minister of National Revenue, [1983] CTC 2533, 83 DTC 486

John B Goetz:—This is an appeal with respect to the appellant’s 1974 and 1975 taxation years.

Facts

The business of the appellant was that of land development and rentals and it is clear from the schedule of farm losses filed that the farming opera tion with respect to horse breeding and racing was a losing proposition from the outset.

Mr Arthur Bell, due to illness, was not able to give evidence at the hearing. Gordon Brown, a chartered accountant who had worked for the appellant since 1974, gave all the relevant evidence. He filed a schedule of farm losses for the years 1969 to 1976 inclusive which reads as follows:

1A

ARTHUR BELL HOLDINGS LTD

SCHEDULE OF FARM LOSSES 1969 — 1976

Year								Available				Date loss
Ending			Farm			Carried		30	June	Loss		Available
30	June		Loss		Claimed	Forward		1976		Expired		To
1969		$	7,500.00	$	5,000.00	$ 2,500.00		$	-	$2,500.00
1970			15,848.67		5,000.00	10,848.67			—	10,848.67
1971			21,299.12		5,000.00	16,299.12			—	16,299.12
1972			38,363.04		5,000.00	33,363.04		33,363.04		—	30	June 1977
1973			37,828.26		5,000.00	32,828.26		32,828.26		—	30	June 1978
1974			28,115.00		28,115.00)		—		—	—
1975			15,309.33		15,309.33) (1)		-		—	—
1976			74,650.42		74,650.42)				—	—
		$238,913.84		$143,074.75		$95,839.09		$66,191.30		$29,647.79

(1) Treated as a business loss, but Revenue Canada has already served notice that 1974 loss is being disallowed and treated as restricted farm loss. This would reduce claim in 1974 to 1976 to $5,000.00 a year and increase restricted farm loss to $184,266.00 as at 30 June 1976.

In its tax returns between 1969 and 1973, the appellant took the full $5,000 deduction,

pursuant to the provisions of section 31 of the Income Tax Act, SC 1970-71-72, c

63, as amended, but in 1974 and 1975 sought to deduct from its income farm loss

expenses in the sum of $28,115 and $15,309.23 for the said taxation years respectively.

These deductions were disallowed by the Minister of National Revenue.

The appellant’s T-2 return for the 1974 taxation year declared dividend, rental, royalty, interest and sundry income in the amount of $170,809 with certain related expenses which resulted in a net business income of $75,527 plus a further gain on the sale of certain fixed assets in the amount of $99,176. It was against this business income that the appellant sought to deduct the net loss of $28,115 from the horse-racing operation, which in that year had a revenue of $1,164 less expenses of $29,279.

In its tax return for the 1975 taxation year, the appellant declared from its business income $213,464 less expenses of $145,373, leaving the appellant a net business income in the amount of $69,091, on top of which there was a further gain on the sale of fixed assets in the amount of $5,340. Against this business income, the appellant sought to deduct the net farm loss of $15,309.23.

The appellant maintains that its chief source of income for the taxation years in question was either farming or a combination of farming and some other source of income and that accordingly the limiting provisions of section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended, should not be applied to the said taxation years.

The respondent argued that the appellant’s chief source of income was neither farming nor a combination of farming and some other source of income, and that its loss from farming had been properly determined to be $5,000 for each of the taxation years in question, pursuant to subsection 31(1) of the Act.

The appellant cited the following cases in support of its position:

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

The Queen v Douglas C Matthews, [1974] CTC 230; 74 DTC 6193;

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

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

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

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

Helen Kasper v The Queen, [1981] CTC 178; 81 DTC 6148.

The appellant relied heavily on the Van Straubenzee and Kasper cases, (supra). The Van Straubenzee case involved the taxpayer receiving a large inheritance from which he derived investment income, portions of which he applied to his farming operations. In the Kasper case, the funds raising money arose from the sale of a business and consequently the appellant in that case was basically engaged solely in farming and had her energies directed to that end. I feel, however, that the facts of the case before me do not fit the last two mentioned cases, although I agree with the decisions reached in them on the facts before the Tribunal hearing those appeals.

Findings

The appellant’s rental income was derived from the rental of apartment blocks, warehouses and land development. This business was carried on actively and with great success. The financial statements filed showed that the business of Arthur Bell Holdings Ltd, as of June 30, 1975, had retained earnings at the end of its fiscal year in the amount of $633,276. Obviously, this was a successful business. If one compares this income to the loss picture from the horse breeding business, it becomes quite apparent that the farming business could not have been carried on without the success of Arthur Bell Holdings Ltd dealing in real estate. The relevant section of the Act is section 31 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 purpose 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 deductions in respect of expenditures described in section 37, 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) $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 deductions in respect of expenditures described in section 37’ 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 amount determined under subparagraph (a)(ii) is the taxpayer’s ‘restricted farm loss’ for the year.

The leading case is that of William Moldowan v The Queen, (supra), a decision of the Supreme Court of Canada. At 315 and 5216 respectively, Dickson, J stated as follows:

The reference in s 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). 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. 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. 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.

Although the appellant finally did make a profit in 1982, this was far beyond the relevant taxation years. At that point in time, or maybe a year or so prior, he may have been in a position to deduct the full amount of his expenses but at the period of time in question in his appeal, I do not think so. The farming operation made no financial contribution to the appellant nor did it show reasonable expectation of profit. Even if, as disclosed, the farming operation would one day constitute the appellant’s only source of income (and this was not suggested during the taxation years in question) it certainly had not reached the point where the horse operation was the appellant’s chief source of income and I think this would preclude the appellant from falling under class (1) described by Dickson, J. Therefore, the deduction for the full amount of operating losses could not be justified. See Hubert Plante and Reynald Plante v MNR, [1981] CTC 2052; 81 DTC 74. I quote from a decision of my colleague, Mr D E Taylor, in James R Leslie v MNR, [1982] CTC 2233; 82 DTC 1216, at 2244 and 1225 respectively:

It would appear from Moldowan (supra) that “start-up costs” as a deduction may not be limited to just the restricted farm loss — the Court speaks of . . deduct the full impact . . (emphasis mine). In McCambridge (supra) it was the determination of the Board that the appellant had changed “occupational direction”, and as a result he could look to “farming as a main expectation of income”. Mr Leslie’s devotion to farming has already been acknowledged, but I doubt it could be said he changed occupational direction, and it could not be argued that he did so . . as a main expectation of income . . He did not look “to farming for his livelihood” but “carried on farming as a sideline business”. Therefore, as I see it, the “full impact” of start-up costs to which Mr Leslie is entitled arises out of Class (2), not out of Class (1) farming. The dichotomy inherent in this situation is striking and noted by the Board — a reasonable expectation of income may provide the basis for deduction as “start-up costs” of the full loss resulting from any other business; whereas for farming, the “start-up costs” must have resulted from the operation as the main expectation of income. It is not evident to me that in this matter the secondary argument of the appellant based on “start-up costs” is any different in its essential character than the primary argument based upon “chief source of income”. The “start-up costs” for farming which this taxpayer is entitled to deduct as operating “losses” are founded in the appropriate classification into which he falls, as outlined in Moldowan (supra) — Class (2), restricted to $5,000 per annum.

See also Earle C Argue v MNR, [1981] CTC 2221; 81 DTC 204, at 2223 and 206 respectively:

During the relevant taxation years the appellant had embarked on a horse raising venture which of course initially was not profitable. He did not change his occupational direction nor did he commit his whole energies and capital to farming aS a main expectation of income, which might ordinarily entitle him to deduct the full impact of his start-up cost. In 1976 and 1977 the appellant, unfortunately, could not be said as having as his chief source of income either farming or a combination of farming and some other source of income to enable him to deduct losses as claimed by him in his 1976 and 1977 income tax returns.

The respondent submitted the following cases, all of which I have considered:

Philias C Castonguay v MNR, [1970] Tax ABC 35; 70 DTC 1056;

C A Burns Limited v MNR, [1981] CTC 2001; 81 DTC 14;

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

Earle C Argue v MNR, [1981] CTC 2221; 81 DTC 204;

Les Immeubles Dramis Inc v MNR, [1981] CTC 2568; 81 DTC 512;

Raymond G Schaeffer v MNR, [1981] CTC 2891; 81 DTC 807;

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

There is no doubt that the appellant was engaged in a farming operation, but, it is also apparent that there was no reasonable expectation of profit and this can only be determined by the facts before me with an objective view and regardless of the wishes or hopes of the appellant with respect to eventual success from the farming operation in the relevant taxation years. I find that the appellant had no reasonable expectation of profit from farming in the years in issue and the Minister, therefore, assessed the appellant properly under section 31 of the Act and I dismiss the appeal.

Appeal dismissed.