James R Leslie v. Minister of National Revenue, [1982] CTC 2233, 82 DTC 1216

D E Taylor:—This is an appeal heard in London, Ontario, on January 19, 1982 against an income tax assessment for the year 1976 in which the Minister of National Revenue taxed as on income rather than on capital account, the gain realized on the sale of a parcel of real property; and against income tax assessments for the years 1977, 1978 and 1979 in which the Minister of National Revenue reduced the farming losses claimed by the appellant from the full amounts to the maximum permitted under the restricted farm loss provisions of the Income Tax Act. The respondent relied, inter alia, on the provisions of sections 3, 9, 31 and 248 of the Income Tax Act, SC 1970-71- 72, c 63, as amended.

The real property involved was a seven-acre parcel of land in Norwich, Ontario, purchased jointly with a Mr Robert Spek in 1976 for a total of $28,000, and sold in the same year for $100,000. After appropriate allowances for minor costs and reserves, the amount at issue for 1976 was based upon one half of the gain realized for this taxpayer.

With regard to the farm losses, it was common ground between the parties that the appellant was in the business of farming near Embro, Ontario, during the relevant years, and lives on the farm in question. The appellant was and is employed in a full-time capacity in Woodstock, Ontario. The appellant purchased the farm in 1976 for a price of approximately $155,000 allocated as follows:

Since purchasing the farm, the appellant has cleared and “tiled” 48 acres which were uncleared at the time of purchase, and now utilizes the total of 100 acres in growing crops and looking after his cattle. Both Embro and Norwich are in the general vicinity (within reasonable commuting distance) of Woodstock.

Contentions

For the appellant:

— The gain in 1976 was on capital account and reported as such, since the appellant and his partner’s original plans to build personal homes on the property were frustrated; the municipality refused to allow a severance of the property due to insufficient water and sewage facilities.

— During the years in question, the appellant’s income was a combination of farming and employment income, and therefore the farming losses are fully deductible.

For the respondent:

(Re 1976)

— The appellant and Mr Spek were motivated to acquire the property by a prospect of turning it to account for profit.

(Re 1977, 1978 and 1979)

— The farming operation was a sideline business, and the full amount of the losses is not deductible from the appellant’s chief source of income, which was from employment.

Evidence

The appellant pointed out that while Mr Spek may have been a real estate agent, he had never acted in that capacity for him, although they were friends. Mr Spek had been aware of the availability of the property in Norwich because he also knew the original owner. Mr Spek was aware that the appellant had indicated an interest in purchasing some property in that area for later use, perhaps as a residence for himself, or perhaps as lots for homes for any or all of his four children. An offer to purchase was made In September 1975 and the deal was closed in about May 1976. According to the appellant, Mr Spek wanted to build a home himself in that area since he already lived there, and the general idea was to divide the seven acres, each person taking about 3 /2 acres. Mr Spek decided to build immediately and that accounted for the clause in the offer to purchase which made it conditional upon zoning changes from agricultural to residential. That had been accomplished. However, when Mr Spek had applied to the local council to sever the property into the two 3 /2-acre portions, and subdivide these respective portions into about three or four lots each of approximately one acre, the council refused the application. The conditions of the purchase and the zoning change did permit partial sales of the property, according to the testimony. No documents related to the purchase, rezoning, applications or sale were filed with the Board. Mr Spek was not called as a witness. A local developer in Norwich contacted Mr. Spek in about the summer of 1976 and made an offer of $100,000 which was accepted. Mr Spek no longer was interested in the property since it appeared the local council would not permit residential construction at that time, even though the property had been rezoned. Only within the last year (1981) has the eventual purchaser obtained clearance for construction from the local council, according to the appellant.

Copies of the financial statements for the farm for the years 1976 through 1981 were filed with the Board as Exhibit A-2. The 1981 statement was only a draft since the income tax return for that year had not yet been filed. A summary of this is provided:

Other financial information which included some statistical data was also provided to the Board and indexed as Exhibit A-3. It is reproduced in total:

It was the appellant’s testimony that at December 31, 1979, his herd of beef cattle amounted to about 150 and, at an estimated value of $500 each, represented some $75,000. In contrast, many of the original 59 head he purchased with the farm had not been top quality, some had been sold for very little, and some had died from disease. it had taken Mr Leslie all these years and all the earnings from his employment, which had always been very good and had reached some $76,000 by 1981 to build up his herd, renovate the buildings on the farm, buy and put in modern equipment and machinery, and in general bring the operation up to the level at which it now stands — capable of handling on a feed-lot operation basis (not open grazing) as many as 250 beef cattle, at any one time. Mr Leslie would enlarge his herd to that level when prices for beef warranted it. It had been the uncertainty and indeed the volatility of the market that had prevented him from doing so before, and had resulted in the losses he had sustained. He was perfectly confident that given reasonable operating circumstances and stable market conditions, he could continue to make a profit. He had been fortunate in that his wife, three sons and a daughter had all maintained an interest in the farm and been of great assistance. Without that aid, he could not have carried on a full-time responsible employment position and also operated the farm.

The appellant estimated that he spent 40 to 45 hours per week working on the farm, and now had reached the point where it would be necessary to consider leaving his employment and devoting all his time to the farm since his family was leaving home, or going to college. An examination of the component elements of the losses in question would show that a major expense of almost $19,000 had been sustained in 1976 to provide tile drainage on the farm. When that was taken in conjunction with the accumulation and value of his cattle herd, the losses really represented investments in assets, including improvements to buildings and equipment resulting from the repairs and good maintenance carried out under his direction. The farm had been run down when he bought it, it was now in excellent condition although there were still things he would like to do. It was also emphasized that the appellant and his family had lived on a much smaller farm (about 10 acres) in the area for many years immediately prior to the purchase of the “Embro” farm which is the property in question. On the smaller farm, the appellant had raised some beef cattle and certain grain and root crops for use both by his family and his cattle. It could not be said that Mr Leslie was just a newcomer to the farming business.

Mr Leslie’s accountant, Mr W M Warnick, CA, detailed for the Board that the appellant had the option of accounting for the farm either on an “accrual” or on a “cash” basis. He had elected the “cash” basis and that resulted in the early years in the losses in question, whereas the “accrual” method would have shown much more moderate losses (perhaps none in certain years) but it would have shown the development of the assets (basic herd, buildings, equipment, etc) to which the appellant referred.

Argument

Counsel for the appellant noted that there was jurisprudence to support a contention that the background and interests of the appellant’s partner in the real estate transaction (Mr Spek) should not adversely affect the appellant’s taxable status. In addition, the prospect of building a family home or family homes on the Norwich property had been noted at the time of acquisition, and could have come about except for the lack of agreement regarding subdividing from the local council.

Regarding the farming endeavour, in his main argument counsel made reference to the case of Casimir Van Straubenzee v MNR, [1981] CTC 2693; 81 DTC 552. According to counsel the losses by the appellant in the instant appeal resulted from his elected method of accounting but, in any event, the fact that losses were incurred did not detract in any way from the appellant’s claim that his “chief source of income (was) . . . a combination of farming and some other source of income” (subsection 31(2)). He had been in farming for many years and had demonstrated his complete dedication to it. On a secondary argument, counsel noted the case of C R McCambridge v MNR, [1981] CTC 2314; 81 DTC 251, presently under appeal. The appellant had shown that his 1981 income tax return would probably show a profit and he was almost at the point now where he could stop working at his regular employment and expect that his full-time work on the farm would provide him with a livelihood. He had been most fortunate that his substantial employment income had permitted him to build up and improve his farming operation over these years.

Counsel for the respondent rejected any implication that the limited and uncompleted residential reasons provided for the acquisition of the Norwich real estate should be accepted by the Board. She also felt that the Board could not neglect the fact that Mr Spek’s main occupational interest (at least to the degree that there was any evidence regarding it) was in the real estate field. Finally, the local council had not rejected any application to simply divide the subject property into two 3 /2 acre parcels, but had rejected an application to subdivide the property into six or seven building lots — quite a different matter. There was no evidence to support a contention that either Mr Spek or the appellant would have been deterred from building a residence on the property.

With regard to the farm situation, counsel reiterated the substantive portion of William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, and emphasized this judgment by reference to several other cases in addition to McCambridge (supra), including:

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

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

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

Paul A Klie v The Queen, [1981] CTC 154; 81 DTC 5061 ;

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

Leslie E Niemi v MNR, [1981] CTC 2267; 81 DTC 249.

Counsel did not provide much enlightenment on the Van Straubenzee case (supra) which would assist the Board in rejecting the support therein found by counsel for the appellant for his client. The basic thrust of counsel’s argument was that the centre of work activity, as well as the main source of funds for his livelihood, was the appellant’s full-time senior responsibility as a production manager — the farm at best occupied only the time he was able to devote to it, in deference to the priority of his job. Counsel recognized that the allowance by the Minister of the restricted farm loss established that the appellant was in the “business of farming”, rather than just “farming”.

Findings

Dealing first with the real estate sale in Norwich, in my view there is no reason to consider seriously the appellant’s assertions. I would concede his counsel’s argument that the business association with Mr Spek might not in itself be sufficient to dismiss that part of the appeal. However, that fact when taken in conjunction with the nebulous purpose for the acquisition in the first place, the lack of evidence to support any “personal residential” plan, and the lack of evidence of any frustration of the basic proposal simply to divide the seven acres in half) leaves the appellant far short of dislodging the onus placed on him to show the Board that there was anything other than a trading intention at acquisition. That part of the appeal will be dismissed.

The “farm” question, however, is a very different matter. As can be seen from the jurisprudence cited (and other cases which will be noted), there is somewhat a lack of precision which may be applied to subsection 31(1) of the Act. Reference has been made earlier to the case of Van Straubenzee (supra) in which the appellant was successful. Van Straubenzee (supra) contains areas of similarity to the instant case. However, as I read the rationale of that case, it turned on the view that during certain years prior to those under appeal, Mr Van Straubenzee had not only been in the business of farming but that, during that prior period, farming had been his chief source of income. In the instant matter, it has not been contended by Mr Leslie that his chief source of income before 1977 had been from farming rather than from his employment. (The Board notes that the year 1976 is not under appeal with regard to the farming losses and, since no mention of that fact, or the reasons for it, was made by either party, it does not enter into this decision.) Therefore, it is not necessary in this matter for me to review the portions of Moldowan (supra) upon which Van Straubenzee (supra) was decided in order to say that whether or not the ratio decidendi in Van Straubenzee (supra) is valid, it is not applicable in the instant appeal. The learned Justices of the Supreme Court of Canada in Moldowan (supra) saw fit in their wisdom to describe subsection 13(1) as “an awkwardly worded and intractable section and the source of much debate”. It might well be asked whether the technical change in section 31 has greatly assuaged the cause of their evident dismay.

Subsection 31(1) of the Act reads as follows:

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 . .. (Italics are mine.)* [1]

In Moldowan (supra), one argument proposed by the appellant was that subsection 13(1) was “meaningless and incomprehensible, and therefore it should not be applied to his detriment”.The learned Justices rejected that argument and proceeded to construe the language of Parliament, defining for us the following three broad categories into which farming activity fell:

(At 315 and 5216 respectively):

(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.

I would also quote from 313 and 5215 of the Moldowan judgment (supra)'

if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer’s income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words “source of income”.

The above phrase “would not make any contribution to the taxpayer’s income in that year” (italics mine) must be viewed within the context of sections 3 and 4 of the Act. In the critical term “income for a taxation year” (section 3), a “loss” would not make a positive contribution. It would make a negative contribution, and that would be a contradiction in terms. Therefore, as I read it, when Moldowan (supra) speaks of “any contribution”, that is synonymous with a positive contribution only. “Income”, therefore, in the above Moldowan (supra) phrase is the accumulation of positive contribution to the livelihood and economic well-being of the taxpayer for the year, as I see it. Clearly, any loss incurred, while it may have been included in a calculation of the “net income” or the “taxable income” did not make any contribution to livelihood and economic well-being. In the Moldowan judgment (supra), just as “profit” is not identical or equivalent to “reasonable expectation of profit’, just so “income” is not identical or equivalent to “source of income”. While “source of income” is equivalent to “business”, “business” Is not identified as equivalent to “income”. While this may appear a very rudimentary interpretation of the terms found in Moldowan (supra), I am not always conscious that there is a full appreciation of it provided during the hearing of an appeal. The single and sole word “income” does not lose its basic value as “profit” or “gain” — (the opposite to “loss”) — just because it may be used as part of the term “source of income”. It would appear to me that the learned Justices could see no specific bar arising out of subsection 13(1) (now 31(1)) even on a very liberal interpretation of the critical words “income” or “loss” when the deduction at issue was the restricted farm loss. Later on in the judgment, it is made clear that this would presuppose the taxpayer was in the “business of farming”. However, the problem arose for the Justices when they were required to give consideration to the phrase “taxpayer’s chief source of income”.

Accordingly, at 314 and 5215 respectively, the Court further dissects the term “chief source of income” in an effort to provide a basis for making not only such a distinction, but such a comparison, and I quote:

The distinguishing features of “chief source” (of income) 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. (Italics mine).

I wish to strongly note the emphasis on “expectation of income”, not on “source of income”. As I see it, that presupposes a “profit”, not a “loss”. The perception that a full farming loss might be deductible from other income does not appear to enter into the deliberations of the Court at this juncture. The question would seem to have been — presuming income from several sources, one of which is farming, what are the criteria which would identify farming as the “chief source”? The Court has already noted that it is not a pure quantum measurement. However, I hasten to point out that later on in the Moldowan judgment (at 315 and 5216 respectively), coming back to this point the Court says “While a quantum measurement of farming income is relevant, it is not alone decisive.”.

The Court clearly concludes in Moldowan (supra) that the dollar amount of income (as opposed to any amount of loss) is to be compared with the dollar amount of other income as at least one relevant factor — it cannot be ignored, a proposition which on occasions is advanced. Again I emphasize that in this phrase the court is speaking of income in the sense of a positive contribution to livelihood and economic well-being, it is not speaking of “source of income”. As I read it, therefore, the Court first examined the criteria one should apply in arriving at “chief source” with a view that all sources had produced “income”, but that one could be shown to be a “chief source”. It is recognized that such an exercise may be academic, in practical terms, since no particular tax value attaches to it when both “farming” and some “other source” produce income — that is, they show a positive contribution to livelihood and economic well-being. However, as I see it, the Court was keenly aware that the criteria determined must have obvious application to a “positive” income situation, or they could hardly be viable for the situation which seemed to be available in the Act, the deduction of a full farming loss from other income.

The learned Justice in The Queen v Zavitz, [1981] CTC 17; 81 DTC 5007, expressed his views on this distinction at 20 and 5010 respectively in this concise and eloquent statement:

In most interpretation thereof I believe the word “combination” is most important. Such word envisages some contribution of income from each of the two sources referred to. The words “other source” denote that there must be some income from farming within the exclusionary provision. The shorter Oxford English Dictionary defines the word combination as:

(a) the action of combining two or more separate things;

(b) Combined state or condition;

(c) a group of things combined into a whole.

If the taxpayer is a part-time farmer whose receipts from his farming operation do not exceed his income expenses therefrom then he has no source of income therefrom and there can be “no combination of farming and some other source”.

Returning to the instant appeal, it appears to me that the impact of the argument of counsel for the appellant is that the Board should, in fact, substitute the larger term “source of income” or “business” for the specific word “income” used in critical comments by the Court in Moldowan (supra). To accede to that argument, the sentences quoted earlier would read:

The distinguishing features of “chief source” are the taxpayer’s reasonable expectation of source of income (or business) from his various revenue sources . and

While a quantum measurement of farming source of income (or business) is relevant, it is not alone decisive.

I fail to see how the sentences structured in that manner would move the appellant’s case forward. Conversely, to consider the word “income” in those phrases in the context of the definition which I suggest arises from the judgment, would leave the sentences structured in this way:

The distinguishing features of “chief source” are the taxpayer’s reasonable expectation of a positive contribution to his livelihood and economic well-being from his various revenue sources and his ordinary mode and habit of work.

and

While a quantum measurement of farming (by way of a positive) contribution to livelihood and economic well-being is relevant, it is not alone decisive.

In my view, this perception of “income” as a positive contribution, and not merely as a “source of income”, is at the root of the Moldowan judgment (supra), when one attempts the distinction required in this appeal between full farming loss and restricted farming loss.

The Court continues at 315 and 5216 in the judgment and puts forward the base from which the appellant Moldowan might reasonably have expected such a positive contribution from his farming operation —

He devoted considerable effort towards launching new ventures. Horse-racing consumed only several hours of his day and that for part of the year only. His commitment of capital was cautious. The nature of the enterprise is risky. It is difficult reasonably to plan to devote energies to it principally in the expectation of a steady living. He suffered constant and increasing losses with the exception of two years in which minor profits were made. Although none of the above is alone determinative, together they suggest only one business venture of several, with nothing distinguishing in the way of “a chief source of income’.

The dismissal of the appeal indicates to me that from such a base of operations, the appellant Moldowan might reasonably have expected the farming losses he did sustain, and a negative impact on his financial situation, rather than any positive contribution to his livelihood and economic well-being, which a chief source of income should be expected to produce. As I interpret the judgment, therefore, taking into account his “ordinary mode and habit of work”, a taxpayer should be able to demonstrate that his expectation of a positive contribution to his livelihood from farming was greater than such an expectation should have been from some other source of revenue, when the matter at issue is the determination of “chief source of income”.

As I see it, it is a difficult task indeed for a taxpayer with sources of income, one of which is farming, to establish that when a loss is sustained in the farming operation, that farming is his chief source of income. It is clearly not an impossibility, nor should such a contention be lightly rejected, since a business loss arising from any source is deductible from other income, given the prerequisite conditions. However, for the business of farming, there is the added hurdle of showing attributes of “chief source”, a standard which is not applied in other business ventures. It is worth noting that section 31 of the Act reads in part:

. .. nor a combination of farming and some other source of income . . . —it does not read

nor a combination of some other source of income and farming.

To some degree, the priority of the word “farming” over “other source” may be read as legislative support for the description accorded the class (1) farmer in Moldowan (supra) to be found at 315 and 5216 respectively:

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.

This appellant is entitled to the restricted farming loss which the Minister has accorded him, but losses in excess of that restriction, he has assumed personally and consciously. However, during none of the years under appeal could that activity have provided a positive contribution to his livelihood, let alone one which could rival or eclipse that from his employment. I am not prepared to accept the limited indication of profit for the year 1981 as the basis for disturbing the Minister’s assessments for the years under review. I would also repeat a comment which has arisen in other decisions — that the businessman farmer, with losses in excess of the restricted limit, has available to him the usual loss carry-back and carry-forward provisions available to other businessmen, as far as I am aware. At least no jurisprudence which would result in a contrary conclusion has been brought to my attention. Economic reality did not, and still does not, provide the major motivation for this appellant’s dedication to the farm — it remains, as indicated, a sideline business no matter how substantial in size when compared with his chief source of income — his employment. The evidence and argument presented for Mr Leslie on the main point that his farming operation during the years under review qualifies him on its own merits for the appellation “a combination of farming and some other source of income”, and the deduction claimed by virtue of that appellation, has not been convincing to me.

A comment is warranted on the testimony of Mr Warnick regarding the method of accounting and reporting for income tax purposes used by the appellant. The thrust of Mr Warnick’s testimony was that had the recording been done using the “accrual” method, the results on the farm operation might have shown to more advantage — smaller losses and perhaps some profits. In large measure, that would be the result of capitalizing items which have been written off as direct expenses. I understand the point made by Mr Warnick and it has merit. Certainly, the choice of the reporting method is up to the taxpayer and there can be no criticism of the route chosen by him. However, the extinguishing of all or any part of the $120,649 losses incurred over the four years in question in this way is only an academic exercise. It cannot be used as justification for the losses claimed. In addition, it should also be noted that the accrual process would have resulted in substantially increased income taxes for the appellant during these same years, a factor which could have seriously depleted his capital available for such “investments”, and have altered materially both his financial capacity and his determination to build up the farming operation.

Summary on Main Argument

There is a slight possibility that some public difficulty may arise in a matter of this kind from a perception that a farming loss is deductible against other income, at least up to the restriction imposed in section 31 of the Act, and may be totally deductible simply because it is a loss from farming. A careful reading of the Moldowan judgment (supra) might lead to quite the opposite view that, while the restricted farm loss is permissible once a “business” accreditation has been established for the operation, losses in excess of that restriction face substantial obstacles before they may also be deducted.

It was noted in the decision on Zavitz v MNR, [1978] CTC 3021; 78 DTC 1730, upheld at the Federal Court level in Zavitz v The Queen, [1981] CTC 17; 81 DTC 5007, that even restricted farming losses may be subject to review after a time when the results do not continue to support a conclusion that the loss arises from a business.

Farming occupies a special place in the taxation system but its availability and utility to shelter other income from tax has serious limitations. Certainly such a “sheltering” of income was not the perception of the taxpayer in the present appeal — I say without hesitation that it is doubtful that any taxpayer could demonstrate a clearer commitment and devotion to agriculture, in time, dollars and dedication, than Mr Leslie has done in this appeal. However, that aspect has been recognized by the Minister in his assessments, but the major contention of the appellant in this matter that farming was his chief source of income, cannot be supported solely thereon. In this appeal, it would appear that the Minister has accepted the losses as fulfilling that “source of income” standard. However, in the views I have expressed above, the emphasis in that standard changes dramatically from “source of income” to “income” when full farming losses are claimed which exceed the restricted amount.

Findings on Secondary Argument

I make reference to the cases of Frank Janosi v MNR, [1981] CTC 2258; 81 DTC 222, and of Wesley H Warden v MNR, [1981] CTC 2379; 81 DTC 322, wherein the Board made some comments generally having some relevance to the present appeal. The problem in those cases was different in that the appellants attempted, but failed, in their basic contention — that they were in the “business of farming”. That was not an issue in the instant appeal. However, as part of their argument, the proposition was broached that they should be permitted, in effect, to capitalize their farming operations out of their other income, until the point could be reached that they could devote their full attention to farming.

With regard to this subsidiary argument, counsel for the appellant cited the case of McCambridge (supra) and, in particular, the comment to be found at 2320 and 256 respectively:

The facts, as I see them, support the appellant’s evidence given under oath that he changed occupational direction as early as 1973 and that from that time on he, in the words of Mr Justice Dickson, committed his energies and capital to farming as a main expectation of income and is not disentitled to deduct the full impact of start up costs.

I would highlight an earlier comment in the same decision, to be found at 2319 and 255 respectively:

There can be no doubt that farming did not provide the bulk of the appellant’s income in the taxation year under appeal. I do not believe however that the appeal should fail on that fact alone.

I am satisfied that, in the instant matter, Mr Leslie’s fervent desire is to devote his energies to farming as soon as that is economically feasible. I am not persuaded that either the relevant sections of the Act, or the jurisprudence, can be interpreted to mean that even such a fervent desire, when contrasted with the economic reality of the operation under review, is sufficient to overcome the obstacles noted earlier in this decision and thereby permit the recurring losses to qualify under the term “start up costs”, as referenced in Moldowan (supra). Rather I lean to the views expressed in Warden (supra) at 2388 and 328 respectively:

The very fact a loss has been incurred in a taxation year from an operation alleged to be a “business” is a strong reflection against the proposition that there was a reasonable expectation of profit. To be successful in an appeal and overcome this obstacle (a loss which he wishes to claim as deductible from “business’’), an appellant should provide substantial proof permitting a conclusion that the loss in question was unavoidable under the circumstances pertaining to that year. “Unavoidable” in the sense that his efforts were directed to making a profit in that year, and that the expectation of reaching that objective (a profit) while attainable, simply eluded him. Since those general criteria apply to an established ongoing business, the proof required must be at least as persuasive, in order to claim a loss, when the argument put forward by a taxpayer is that there was no possibility of a profit in a particular year in question. Simply alleging or even demonstrating that circumstances such as “long-range program”, “new business” or “start-up costs” accounted for the loss, and made it impossible to show a profit, is not an alternate to proving that there was a reasonable expectation of profit.

and

The significant words in both quotations used by the learned Justice are the same

— “start-up costs (losses)”. The import of the remarks I have made is simply that it is a fundamental requirement that the costs involved be clearly shown to be “startup costs”. That designates, as I see it, the existence and demonstration of a systematic and organized program for the earning of profit from a business, and proof that the initial outlays were an integral part of that process, taken into account in the planning, and capable of absorption by the appellant in anticipation of the eventual production of profits. In such a program, an appellant would clearly show that he has consciously decided to write off these start-up costs against a year or years of little or no income, rather than capitalizing them (if some form of asset accumulation is involved), or deferring their deduction until sufficient income is earned in order to absorb them. The absence of such a discernable and comprehensive program upon which to base a claim for deductibility of such losses as “start-up costs” will always put such a claim at considerable risk in my view. The Moldowan (supra) quotations above were made in connection with a “farming business” appeal, and as it may be seen from James R Zavitz v MNR, [1978] CTC 3021; 78 DTC 1730, and from The Queen v James R Zavitz, [1981] CTC 17; 81 DTC 5007, there is a feature about the “business of farming” in which encouragement and flexibility is permitted to a taxpayer in getting established, or in surmounting economic fluctuation — by virtue of the “restricted farm loss provisions” of the Act, which is not permitted to that degree in other business ventures. However, the principle of substantiating the “losses” as “start-up costs” remains the same for any business. The onus remains for a taxpayer to prove the reality and viability of profit, even in the long term. When a taxpayer claims expenses which are in excess of income, then he must assume the difficult task of showing that these “excess” expenses were rational and reasonable — those which a normally wise and prudent man intending to improve, not reduce his financial position, would incur under the circumstances.

The major thrust of this appellant’s presentation (provided earlier), while eloquent and detailed, represents a viewpoint which is unfounded in the jurisprudence as I see it. Expenses in excess of income cannot automatically be claimed by a taxpayer simply because the operation in question has some characteristics of a business venture. The fact that these “business losses” represent added assets or expertise, or may be offset by capital appreciation, thereby increasing the possibility or even potential for profit, does not alter the fundamental burden that faces this taxpayer.

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. . (italics 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 coud 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 te 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.

Decision

The appeal is dismissed.

Appeal dismissed.