Raymond G Schaeffer v. Minister of National Revenue, [1981] CTC 2891, 81 DTC 807

John B Goetz:—This is an appeal with respect to the appellant’s 1976, 1977 and 1978 taxation years, wherein the appellant claimed as farming losses the amounts of $7,762.41, $4,036.51 and $7,848.70 respectively. An adjustment for interest for the said years was levied by the Minister on the basis of a reassessment pursuant to the provisions of subsection 31(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The Minister maintains that the taxpayer’s chief source of income was neither farming nor a combination of farming and some other source of income. In assessing the appellant, the respondent relied, inter alia, upon sections 3, 31, 111 and subsection 248(1) of the Income Tax Act.

Issue

The sole issue before me is to determine whether the appellant’s chief source of income was from farming or a combination of farming and some other source.

Facts

The appellant called, as his first witness, a public accountant, one Donald Kentner, who filed as Exhibit A-1 a document known as “Personal Farming and Taxation Data Calendar Years 1973 to 1980”. Part of this document shows “LOSS FOR INCOME TAX PURPOSES” for the following years:

He inserts as an “Add Back” item “LOSS (INCOME) FOR ACCOUNTING PURPOSES’ with the following figures:

He shows a combined income from the appellant’s employment with his companies, S & M Pizza Ltd and Schaeffer Rentals as follows:

He indicated that his “Add back” represented an unrealistic capital cost allowance which he considered “far in excess of actual physical depreciation” and as an illustration pointed out the 1975 taxation year wherein there was a tax loss of $28,699 but was really a mere accounting loss of $4,838. He says that this would apply to all years as indicated above and concluded that “the tax losses have no relationship to the accounting loss”. In this regard I am restricted to interpretation of the provisions of the Income Tax Act and accounting procedures applied there must be followed as opposed to what this witness refers to as a mere “accounting loss”. Mr Kentner was referred to Exhibit R-1, filed by the Minister, which document is entitled “Statement of Income by Source 1972-1978” and reads as follows:

RAYMOND SCHAEFFER

STATEMENT OF INCOME BY SOURCE 1972-1978

	1972	1973	1974	1975	1976	1977	1978
Salary S & M
Pizza	$21,026	$22,100	$29,700	$26,847	$31,230	$18,200	$13,104
Vehicle Rental
Income	11,167	17,704	7,391	23,637	24,991	2,559	24,088
Dividend
Income	1,209	1,213	1,219	1,200	1,200	—	82
Interest Income	2,837	2,794	1,332	333	138	145	6
TCG	2
	$36,241	$43,811	$39,642	$52,017	$57,559	$20,000	$37,000
Farming
Income	(2,894)	(2,500)	(22,708)	(25,670)	(19,427)	(19,765)	(25,740)

The respondent also filed as Exhibit R-2, a document entitled “Raymond G Schaeffer/Statement of Farm Income and Expense” showing a net farm loss for the respective years as follows:

December 31, 1972 — Net farm loss for the year $ 2,894

December 31, 1973 — Net farm loss for the year $ 4,942

December 31, 1974 — Net farm loss for the year $21,771

December 31, 1975 — Net farm loss for the year $22,641

December 31, 1976 — Net farm loss for the year $19,222

December 31, 1977 — Net farm loss for the year $19,404

December 31, 1978 — Net farm loss for the year $29,290

The appellant, with his wife, were the sole shareholders of S & M Pizza Limited which is a business that he had started eighteen years ago and which manufactured 6,000 Pizzas a day for wholesale purposes. This factory employed 45 people as workers in the factory, not including 15 salesmen and driver salesmen. He had depots in St Thomas, Ontario, and also in Toronto and Ottawa. In 1974 a portion of the land upon which his factory was located was expropriated by the Ontario Department of Highways for approximately $80,000. He immediately rented the land back and acquired another property for his warehouse. While operating the pizza business he carried on a business of leasing vehicles, which business owned a complete line of vehicle rental equipment including semi-trailers, tractors and panel trucks which he leased to S & M Pizza Limited (hereinafter referred to as “S & M Pizza”). This was a business run by himself as a personal proprietorship.

In August 1978 S & M Pizza Limited went into receivership and the appellant then sold out all of his lease rental equipment save for one unit and he still owns a restaurant. He sold the rental equipment for approximately $95,000-$100,000. Prior to his going into receivership, he had been made two or three offers for his successful and established pizza business, which he refused. One such offer from a large national firm included his being on the premises full time. This condition he declined as the business seemed to run efficiently and at a profit through the efforts of his key personnel with whom he consulted on a daily basis. In fairness to the appellant, one of his reasons for refusal of such offers to purchase could have been that he had been severely bitten by the “horse bug”.

In 1967 the appellant acquired a 97-acre farm for the sum of $25,000, of which only 45 acres were arable. The balance of the farm was composed of gullies, trees and hills. This land was six miles from St Thomas, connected by a paved road and, within twelve months of the acquisition of this property, the appellant built thereon a home that cost him $80,000. There is no mention of a mortgage and obviously he was a man of means. In 1968 he seeded ten acres of the land to oats and grass and in 1969, 20 acres to soya beans. He stated that his purpose in acquiring the land was for the raising and breeding of standard horses which were used in sulky racing. Naturally, he had a start up cost including the construction of some barns as well as a race track which cost him $7,500. The infield of the track was composed of 7 /2 acres which he seeded to soya beans. At the time of the construction of the track he decided to purchase all his feed including hay from sources other than that which he raised on the farm.

At the most, he owned 12 horses in any one year. He suggested that between 1973 and 1978 he spent 90% of his time on the farm whereas his wife, Elizabeth, swore that after 1972 he spent at least two hours a day at his pizza factory, checking his operations through his key personnel, which included a plant supervisor, a manager and a controller. He had problems with his horses and admitted that he had no training in horse breeding but that his interest in horses arose out of reading an article in the newspaper with respect to the Ontario Sires Stakes Program. It was at this time that he was smitten with the desire to get into the operation of breeding horses, in which he had no experience whatsoever.

Findings

The section that applies in this case is subsection 31(1) 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.

I have read very carefully the judgments of the Honourable L J Cardin, Chairman of the Board, in Charles R McCambridge v MNR, [1981] CTC 2314; 81 DTC 251; and in Hubert Plante and Reynald Plante v MNR, [1981] CTC 2052; 81 DTC 74. I have also read the judgment of Mr Justice Dickson in the case of William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213. As quoted in many other like cases, Mr Justice Dickson stated in reference to subsection 31(1) (which at the time of his judgment was known as subsection 13(1)) at 315 and 5216 respectively:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(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 subsection 13(1) in those years in which he sustains a farming loss.

(2) The taxpayer who does not look 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 subsection 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-busi- ness farming are not deductible in any amount.

I further quote from 314 and 5215 respectively:

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.

The McCambridge and Plante decisions would seem, at first blush, to be in direct contradiction one with the other, but I feel that the facts of this case are much closer to those as set out in Plante and Plante (supra). In the McCambridge case (supra) a dentist became interested in farming in 1972, farming consisting of breeding, raising and selling of cattle and horses. From the facts of that case it is fairly clear that he had changed his occupational direction from dentistry to farming and the issue was whether the appellant in that case could deduct in his 1974 taxation year start up costs. In that decision, the learned Chairman of the Board referred to the fact that the appellant’s net professional income in 1979 was $55,652 as opposed to a gross farm income of $48,200.

The appellant in the present appeal stated that he felt that he spent a considerable amount of time on the farm (where he resided) between 1973 and 1978. I do not accept this as a statement that all the time that he spent at his farm residence related to the breeding of horses or the raising of soya beans, or being engaged in other types of farm operations.

It is readily appreciated that very few businesses establish a profit picture for the first two or three years of operation. This is particularly applicable to the somewhat uncertain success of engaging in the breeding, training, racing and selling of horses. Exhibits R-1 and R-2 referred to clearly show the non-viability of the farming operation and though the appellant may have been smitten by the excitement involved in the raising and breeding of horses, he could not realistically have had a reasonable expectation of profit which indeed, from his own figures, supplied by his accountant in Exhibit A-1, clearly indicated that losses were incurred from 1973 to 1980 inclusive.

I reach the conclusion that, after considering all of the operations of the appellant’s farm from 1973 to 1980 inclusive (although only the 1976 to 1978 taxation years are involved in this appeal), the appellant has failed to satisfy me that he looked to farming (or farming and some other source of income) for his livelihood, or that he was looking to farming as a sideline business. He may have been extremely enthusiastic about efforts in breeding, buying, selling and racing horses, but to me his activities in this regard almost amount to a hobby. It is interesting to note for the relevant taxation years that the number of races in which the appellant entered his horses rapidly declined. In 1976 he was involved in 60 races; in 1977, 28 races; in 1978 merely 6 races. He says this arose because in 1978 it was the year he came up with problems with the operation of S & M Pizza.

I have considered the cases submitted to me by the appellant:

MNR v B A Robertson, [1954] CTC 110; 54 DTC 1062;

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

O. Dorfman v MNR, [1972] CTC 151; 72 DTC 6131;

R C Simpson v MNR, [1961] CTC 174; 61 DTC 1117;

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

S J Cooke v MNR, [1975] CTC 2296; 75 DTC 223;

R E Mullin v MNR, [1979] CTC 2080; 79 DTC 113.

From all of the facts presented to me, I have concluded that it would be totally unreasonable for the appellant to have realistically hoped that his farming operations had any real expectation of profit and his sole and only source of income was exclusive of his farming operations. In light of this I feel that the Minister has dealt with the appellant fairly, pursuant to the provisions of subsection 31(1) of the Income Tax Act and I therefore dismiss the appeal.

Appeal dismissed.