August Le Strat v. Minister of National Revenue, [1983] CTC 2769, 83 DTC 695

Tremblay, TCJ:—This case was heard in Winnipeg, Manitoba, on December 9, 1982.

1. The Point at Issue

The point at issue is whether the appellant is correct in deducting business farm losses in the computation of his income for the taxation years 1976 ($10,960.99) and 1977 ($10,519.25).

The respondent contends that the appellant may deduct only the restricted losses provided in section 31 of the Income Tax Act.

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 particularly 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 assumed facts on which the respondent based his assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In reassessing the Appellant for his 1976 and 1977 taxation years, the Respondent made the following assumptions of fact, inter alia',

(a) the Appellant in his 1976 and 1977 taxation years was an electrician working in the provinces of Manitoba and British Columbia;

(b) the Appellant’s income from office or employment during the 1976 and 1977 taxation years was $26,560.59 and $21,101.05 respectively;

(c) during the 1976 and 1977 taxation years the Appellant operated a cattle farm which incurred a loss in the amounts of $7,688.16 and $10,519.25 respectively;

(d) of the amount of $10,960.99 claimed as a farm loss by the Appellant in his 1976 taxation year, the amount of $3,272.83 represented personal or living expenses of the Appellant;

(e) during the 1976 and 1977 taxation years the Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income within the meaning of subsection 31(1) of the Income Tax Act.

3. The Facts

A Admission by the Appellant

3.01 At the beginning of the trial, counsel for the appellant stated that he was abandoning part of the appeal: specifically the sum of $3,272.83 which is considered as personal expenses for the year 1976. This admission reduces the actual business loss for the said year to $7,688.16.

3.02 When the above admission was made, counsel also filed as Exhibit A-1 a summary of the income and loss for the years 1974 to 1978. It reads as follows:

3.03 With Exhibit A-1 and the above admission, it can be said that the assumptions of fact described in paragraphs (a), (b), (c) and (d) of the reply to notice of appeal are admitted as proven.

B Testimony of Mr James E Court

3.04 In the examination-in-chief, Mr James E Court, accountant of the appellant, testified that:

(a) In 1976 the appellant from his employment worked 21 weeks and earned $26,560.59 (Exhibit A-1). In Manitoba he worked 846 /2 hours in 11 weeks. The regular hours were 440 and the overtime hours were 406 /2. In these 11 weeks he earned $14,466.52 (Exhibit A-1);

(b) In 1977 the appellant worked in British Columbia, generating $21,168.55 (Exhibit A-1) as employment income;

(c) For the years 1979, 1980 and 1981, the employment income, the gross farming income and the farm losses were as follows:

The appellant’s income tax returns for the years 1979, 1980 and 1981 were filed as Exhibits A-2, A-3 and A-4 to confirm the above figures.

3.05 In cross-examination, Mr J Court testified that:

(a) The appellant also received unemployment insurance benefits as follows in the said years: 1979 —$1,056,1980 —$4,056, and 1981 —$6,552;

(b) In 1980, the significant increase in the gross farming income of $24,539.34 is explained by the sale of $14,539.34 of cattle and used the optional value of livestock rule. He capitalized $10,000 of his livestock as income. In this 1980 taxation year, he purchased $10,600 worth of livestock;

(c) The computation of the number of hours and weeks given above (para 3.04(a) and (b)) was made from letters received from the employer and the T-4 slips.

C Testimony of the Appellant

3.06 In his examination-in-chief, the appellant testified that:

(a) He was born in Eriksdale, Manitoba, and was brought up on a farm;

(b) He lived on his father’s farm until he got married in 1969. He had been growing hay for the cattle and for seeding crops. It was a mixed farm: grain and livestock consisting of 8 quarter sections (1,280 acres);

(c) In 1969 or 1970, he purchased one-quarter of land for $500. It was about 12 miles from his father’s farm. He bought eight head of cattle and a horse but ordinarily left them on his father’s farm. He did some bulldozing on his own piece of land;

(d) Around 1971, he moved to Chicago when he got a good job. He stayed there 2 /2 years. However, he came back two months of every year to bale the hay and take the crops off on his father’s farm;

(e) When back in Eriksdale, he built a house, a barn and a granary on his own quarter section. He continued to help his father on his farm without being paid;

(f) He also continued to do outside work “to build up” his herd. His outside work then lasted 3 or 3 /2 months per year. He ordinarily worked 80 or 81 hours per week (40 hours at regular rate, and the balance at time and one-half and sometimes at double time);

(g) In 1974, he separated from his wife. He paid her a $10,000 settlement plus support for the two children and all the lawyer’s fees. Before the separation he had 32 cows and calves. He had to sell 16 head of cattle to help him resolve his financial difficulties;

(h) Since 1975 he has been living with his common-law wife, Joan; they have a son;

(i) In 1976, he helped his father on the farm but was not paid for the work. He completed bulldozing 40 acres on his own farm and seeded it for grass. It was used for pasture in the summertime;

(j) He had a verbal agreement with his father. Indeed, according to the appellant his father had told him that when he would die the farm and everything would be left in his name;

(k) In 1976 and 1977, with the money from the outside work, the appellant purchased cattle and machinery and paid for the repairs to the equipment. Each year after 1977, until 1981, he continued to increase his herd;

(l) In December 1981, he started working on a deal which was completed in November 1982: he acquired six quarter sections of land (960 acres) for $20,000 and leased five other quarter sections (800 acres) from the Crown. He borrowed money from the Credit Union and swapped the quarter section he owned. He is now living on his new farm which is located 17 miles west of Eriksdale. In the Spring of 1982, he had 68 cows and calves. Whereas he had to make payments, he sold 32 head of cattle in September 1982 (25 calves and 7 cows);

(m) In 1976, he had two tractors. In 1982 he had two more, “a combine, one big baler, a cultivator, 2 diskers and harrows, augers and one crusher”; (SN p 25)

(n) In 1981, when his father died, he inherited the undivided one-fourth of the goods. His two brothers and sister inherited the balance;

(o) In 1982, the value of the farm was $175,000, which $100,000 is for the land. However, the debt then was $76,000.

3.07 In cross-examination the appellant confirmed his former testimony. Moreover, he testified that:

(a) He was born in 1941;

(b) His father’s farm had 8 quarter sections, which means 1,280 acres. It was an average-sized farm;

(c) Eriksdale is 96 miles from Winnipeg, due north;

(d) His outside work since 1970, was on power lines, operating a bulldozer, climbing towers, erecting and assembling towers. Later he became a foreman;

(e) He started to work outside in about 1961, when he was about 20 years old. He then worked for other farmers. He was around 25 years old when he started as.a heavy equipment operator of a bulldozer to build a road;

(f) He has two brothers and one sister. In fact, they all left home when they were around 20 years old. They practically never came back to help on the farm;

(g) His father had about 60 cows;

(h) The appellant purchased his first tractor for his farm in 1973 for $7,950. The same year he built a barn for roughly $5,000 and bulldozed 40 acres of his farm. When he purchased it, indeed, it was all bush;

(i) In 1974, he worked in Nova Scotia and New Brunswick for S A Tucker Atlantic Ltd;

(j) In 1975, he dois four head of cattle for $1,299;

(k) In 1975, he earned $41,000, of which $19,000 was earned in British Columbia on power jobs. He was then earning $33 per hour. He was away from the farm for about 4 months;

(l) In 1977, and the year after, he purchased poultry — 50 to 60 every spring.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are subsections (1) and (2) of section 31, and the definition of “farming” in section 248. They read 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 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.

31. (2) For the purposes of this section, the Minister may determine that 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.

248. (1) In this Act,

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

4.02 Cases at Law

Counsel referred the Board to the following cases:

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

2. James A Wilf ley v The Queen, [1974] CTC 510; 74 DTC 6422.

4.03 Analysis

4.03.1 The respondent, in reassessing the appellant on the basis of section 31 and allowing a $5,000 loss, admits in fact that the appellant had a farming business with a reasonable expectation of profit.

The only problem here in fact is whether the appellant’s chief source of income is “neither farming nor a combination of farming and some other source of income”.

On this point, it is necessary to quote the well-known decision of the Supreme Court of Canada the Moldowan case at 314 [5215] which reads as follows:

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. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer’s mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

Further, the Supreme Court of Canada also defined the three classes of farmer that the income tax [Act] envisages:

(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 non-business farming are not deductible in any amount.

Moreover, the Court gave more explanation on the first class:

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.

4.03.2 What is the preponderance of the evidence?

(a) On the one hand, not only was the appellant brought up on a farm, but he always continued to have, at least partially, farming activities. In 1969, when he got married he bought a quarter section of land and bulldozed 40 acres (paras 3.06(a), (b) and (e) and 3.07(e)). After the divorce in 1974, and despite his financial problems, he continued to own his quarter section of land, to live on it, and he increased his herd (para 3.06(g) and (k)). In 1977, he purchased poultry (para 3.07(1)). Even if he was five months outside as an employee, he stayed on the farm for seven months;

(b) On the other hand, while he owned a quarter of land he moved to Chicago for 2 Z> years. Only one quarter of his farm was cultivated.

It is the Court’s opinion that farming became his chief source of income when in 1981, he made the first steps to acquire the appropriate assets for the land and machinery. It is, in fact, the objective test which proves that the appellant ceased to be a gentleman farmer and became a real farmer. Therefore for the year 1981 and for the years after, the Court considers that the major appellant’s preoccupation was farming. For the years before 1981, the Court considers that the appellant was a gentleman farmer.

5. Conclusion

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

Appeal dismissed.