Earle C Argue v. Minister of National Revenue, [1981] CTC 2221, 81 DTC 204

John B Goetz:—This is an appeal by the appellant with respect to his 1976 and 1977 taxation years. The appellant claimed as farm expenses the sums of $13,273 for 1976 and $11,268.19 for 1977.

The respondent maintains that the appellant’s chief source of income for the relevant taxation years was neither farming nor a combination of farming and some other source of income that he was engaged as a full-time hairdresser in those years. In assessing the appellant, the respondent relied, inter alia, upon sections 3 and 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant stated at the time of the appeal that his occupation was that of farmer. He was 35 years of age, had three children, ages 10, 7 and 4, and lived on a property he had purchased outside the City of Regina. In 1968 he owned a business known as Town & Country Hairdressing and his full occupation was that of hairdresser. He continued in this business until 1972 when he established his own business known as Hair Hunters Fashions (1970) Ltd, of which he owned 50%. He still carries on the hairdressing business in Whitmore Shopping Centre where he has four or five operators working for him.

In 1974 he decided to go into the business of raising thoroughbred horses, having been born on a farm which involved mixed farming. At that time he purchased 22 acres on #1 Highway East, directly across from TV Station CKCK, as well as land and buildings for the sum of $55,000 and he moved physically to this acreage at that time. In 1974 he spent a full eight hours a day hairdressing, five days a week. In 1975 he acquired a tractor, a mower and two mares. He says he fed the horses at night and in the morning.

By 1976 he had purchased a quarter section of land eight miles east of the City of Regina, on #1 Highway for the sum of $34,000, and at the same time he purchased four more mares. In 1977 he expended the sum of $7,757 for a 40’ x 50’ barn built on the quarter section of land. He also purchased a truck for $850 and horses for $4,582. Funds for these purchases came from his occupation of hairdressing.

In paragraph 3 of the reply to notice of appeal, the respondent pleads as follows:

3. Between the years 1974 and 1977 the appellant reported the following income and expenses with respect to the raising of race horses on this property;

Year	Income	Expenses
1974	$ 55	$ 3,097.00
1975	nil	11,268.19
1976	1,200	13,273.00
1977	2,000	16,587.00

The relevant section to be considered is section 31 of the Act 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 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.

(2) For the purpose 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. (Italics mine).

The appellant further adduced evidence that in 1978 he sold a colt for $5,000 which came from a mare that had come second in the Saskatchewan derby, which is a race for all Canadian two-year olds. Undoubtedly, the appellant is keenly interested in the future of horse breeding and raising and gave considerable evidence as to his success in his business subsequent to 1979. By 1980 he had employed a man for the summer to operate the one- quarter section of land and his income that year from racing was $1,400. By this time he had acquired a substantial inventory of horses and he evaluated his farm business at $500,000 and all the property had been paid for. He had turned down substantial offers for the purchase of both pieces of land acquired by him in earlier years. He says: “By three years from now, I will go fully into farming’’. He says that as of 1980 his equipment were worth between $40,000 and $50,000 and his horses are $108,000. However, he says he is in the hairdressing business because of the income but that he prefers horse raising to hairdressing. Quite obviously, the purchase of the two pieces of land by the appellant, when he did, was indeed an astute move on his part.

In William Moldowan v Her Majesty The Queen, [1977] CTC 310; 77 DTC 5213, Mr Justice Dickson, says at pages 314 and 5215 respectively:

Whether a source of income is a taxpayer’s “chief source” of income is both a relative and objective test. It is decidely not a pure quantum measurement. A man who has farmed all 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.

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, followed the purport of sections 3 and 31 of the Act, and because of the fact that the appellant’s chief source of income was neither farming nor a combination of farming and some other source of income, allowed him $5,000 in each of the years 1976 and 1977 as proper farming losses in accordance with the provisions of subsection 31(1) of the Act.

I am forced, therefore, by a strict interpretation of section 31 of the Act to dismiss the appeal with respect to farming losses for the years 1976 and 1977.

Appeal dismissed.