Tom O. Jacobsen, Appellant, v. The Minister of National Revenue, Respondent, [1999] 1 CTC 2044

Garon T.C.J.:

These appeals are from reassessments of the Minister of National Revenue with respect to the 1986 and 1987 taxation years. In computing his income for these two years, the Appellant deducted from his other income the full amount of the losses he had incurred in each year in his farming operation. By his reassessments, the Respondent allowed the deduction of farm losses to the extent of $5,000 per year on the basis that the Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income.

The Appellant was the main witness at the hearing of these appeals. The Appellant’s wife, Mrs. Pauline Jacobsen, and their son, John Wayne Jacobsen, also gave evidence briefly in respect of some aspects of this case. The Respondent did not call any witness.

The Appellant is presently 50 years old. He was raised in Brooks, a small town in Alberta. He graduated from high school and took construction engineering technology at S.A.I.T. in Calgary. The Appellant worked in Medicine Hat for two or three years as a carpenter foreman. His father was in the construction business. The Appellant bought the shares of his father’s partner when the latter retired, and joined his father in the construction business as a partner. When his father died, he went on to work as a construction supervisor for a firm in Calgary called Atco Corporation, a corporation engaged in modular camp construction. He was service and warranty manager for western Canada for Atco Corporation for a few years before he joined its sales department and became in charge of leasing for that firm for western Canada. He worked for Atco Corporation for about seven years, from 1968 to 1975, and lived in Calgary during that time with his family.

In 1975, he moved with his family to Red Deer in order to work for a firm by the name of Travelaire Trailer, called Travco, a company engaged in portable camp business, a competitor of Atco Corporation. He was the general manager of Travco and responsible for manufacturing, sales, warranty and service. He became a shareholder of Travco as he had acquired shares of the capital stock of this firm for $10,000. This amount was repaid to the Appellant when he was required to turn in his share when Travco was taken over by a larger corporation. He quit the employment of Travco in December 1989.

In 1975, while working for Travco, the Appellant bought a 160 acre farm in the vicinity of Red Deer, where he settled with his wife and their four children. This farm is referred to as the Blackfalds farm. It was a mixed farm. In that farm the Appellant had 60 to 80 acres in crop. He gradually bought farm equipment, such as tractor, some harrows, a cultivator. He also acquired some livestock; a horse, a few cows, ducks and chicken. He first acquired purebred livestock in 1977. He then bought 17 purebred Hereford cows with some odd calves for $7,000 from Mr. Norm Thompson.

The Appellant paid at that time a neighbour to do the actual farming as he was working for Travco from 8:00 a.m. to 5:00 p.m. As far as the rest of the work is concerned, the Appellant was doing chores in the morning before he went to work. His sons, who at the time were around 13 and 14 years of age, were helping. The Appellant was doing the heavy work. The Appellant and his family lived on that farm until 1979.

Because Travco experienced problems in managing the Red Deer plant, that company decided to build a new plant in Nisku, which is closer to the Edmonton International Airport, and shut up the Red Deer plant. The company then began operating under the name of Travco. As a result of the moving of the plant of Travco, the Blackfalds farm was sold in 1978. At approximately the same time, that is, in September 1978, the Appellant bought a farm west of Wetaskiwin, about 20 minutes south of Nisku, for $117,000. This farm is referred to as the Hossford farm.

In 1979, he moved to the Hossford farm and felt that this farm could get larger, especially with the possibility of renting the neighbouring land. Half of the Hossford land was pasture and the other half was cultivated. Prior to purchasing the Hossford farm he only consulted the realtor, who had himself been raised in the area. He was advised that the land in the area was mostly “number one soil” and was suitable for raising crops. The realtor did not mention that it was not suitable soil for a cattle operation.

Buildings on that farm were run-down. The house that was on the farm was called a “shack” by the Appellant. The Hossford farm was rock-free and had black deep top soil. The problem with the latter farm is that there was a lot of clay in it. So when it rained it stayed for weeks and weeks and the soil became almost like plasticine. This situation caused a lot of health problems to the purebred herd. The cows were walking in about five or six inches of mud and had dirty udders. The Appellant stated that they were fighting scours, a disease that calves pick up from dirty udders. Also, two show cattle were lost on account of the so-called Black Leg disease, which is transmitted through the soil, where it can lie dormant for years.

The Appellant and his wife decided to go into Hereford farming as opposed to any other type of cattle because they were persuaded that purebred cattle business could be more profitable. Purebred cattle sell for considerably more money than market cattle. Also, because of the success they had with the first two Herefords they bought, their preference was to go with polled Herefords, a non-horned version of the Herefords. Hereford cattle, according to the Appellant, is the most recognized purebred breed in Canada at the present time. The Appellant realized that in purebred cattle business genetics is very important.

The Appellant made important improvements to the Hossford farm. He altered the house considerably, built a double garage, a porch, corral panels, made a heated area to be used at calving time. At the same time he bought a bale wagon for $4,000 in 1979, a one ton truck in 1980 in order to take the cattle to the market. In 1980, the Appellant also acquired a garden tractor, a baler, a mower and tiller for a total price of $20,000 approximately.

It is noteworthy that after the Appellant acquired the Hossford farm the Appellant had to do every year a three-year financial forecast of the farming operation in order to meet the requirements of the bank. This forecast always showed a profit. The Appellant really thought he could make a profit in a year or two after his arrival at the Hossford farm. One of his friends, Mr. Chuck Davis, who is a purebred operator, helped him making his first forecast for the bank. Mr. Davis had 40 to 50 years of experience in the field, and owned a farm 15 miles west of the Appellant. The Appellant sold a couple of cows on the advice of Mr. Davis who preached quality instead of quantity. So it is in 1981 or 1982 that the Appellant decided to change his plans from quantity to quality, in the management of his farming operation.

After these discussions with Mr.Davis, the Appellant was aware of the risks associated with the breeding operation. With this new philosophy he expected to have a gross revenue in the range of $35,000 to $40,000 in 1981 and subsequent years. His gross revenue in each of the years men- tioned below, as it appears from Exhibit A-l , tab-2, was as follows:

This is far from the projection of $35,000 to $40,000 gross income that he planned to make during many of these years.

In the years 1980 and 1981, the Appellant leased for three years from a neighbour, Mr. Fryman, a quarter section of land situated between his property and that of one of his sons, Jay, who had bought a quarter section of land shortly before. The Appellant then turned the old Fryman farm into crop production. The leasing of the Fryman land permitted the Appellant to stop buying feed at that point. The Appellant had enough equipment to do the grain production with the exception of the combine harvester, which equipment he did not feel justified to buy on account of its huge cost.

In 1983, the Appellant bought a new tractor for some $33,000. It was a bigger tractor which could pull bigger equipment. Bigger equipment was required because the Appellant was farming more land. The Appellant also explained in some detail the success he had in 1988, particularly with a bull called Checkmate. He was calf champion in a couple of shows. He decided to keep Checkmate rather than sell it on account of its superior physical attributes.

At the end of 1984, the Appellant was heavily indebted. The Appellant attributes this situation mainly to the fact that he expanded into grain farming. Many pieces of machinery were purchased for that purpose. He had a loan through the Alberta Agricultural Development Corporation. The Appellant experienced financial difficulties after he bought a $10,000 bull, which turned out to be a dud, and missed a couple of payments with the Alberta Agricultural Development Corporation.

His farm was appraised, as a result of which he was given a line of credit of up to $185,000. The maximum amount he used in respect of this line of credit was $162,000. He took steps towards consolidating his debts. He paid off his loan with the Alberta Agricultural Development Corporation, plus interest, with considerable penalties as he had fallen behind in his payments. He also paid off John Deere Farm Equipment for some machinery that he had at the time financed. He was able to consolidate its debts with the Toronto Dominion Bank, with which he had worked out over the years very satisfactory arrangements. The consolidation mortgage was on the Hossford property. It is noteworthy that in 1986 and 1987 he incurred interest expense in the respective amounts of 10,743 and 48,150.

In the spring of ’86 he rented with the help of his wife the Moonen/Johnson property, with an option to purchase. It was an ideal property to run a purebred cattle operation. He bought the Moonen/Johnson property in early 1987 for $125,000, and ended up with about a $100,000 mortgage. Because of the turn-down of the economy he sold the Hossford farm only in the fall of 1988 for $150,000 after this farm had been actively listed throughout 1987 and in 1988 until its sale. There was therefore a period when the Appellant owned the two farms, and consequently had to make periodic payments on two mortgages.

The Appellant explained how for 1986 he planned to have gross revenue from selling his cattle. The Appellant also gave explanations as to why the forecast revenue could not be reached in 1986. He expressed himself as follows:

Certainly some fluctuation in our inventories were caused because of our financial problems and obligation to the bank and paying out, as I told you, we got in trouble in those mortgages and we had to peddle off some cattle at wholesale prices to help meet those bank commitments, and that’s probably why the revenue is down, and I would suspect my numbers went down at that point somewhat too.

In the Appellant’s Notice of Objection filed for the 1986 taxation year, paragraph 3, reads as follows:

The losses included unanticipated costs due to weather condition, disease, et cetera.

The bad weather in 1986 prevented him from selling feed and straw. A couple of cows died during 1986, which lowered the revenue. This also happened in 1987. They also had some deaths in the previous years, often owing to the soil conditions. The Appellant lost approximately $5,000 in 1985 or 1986 because 5,000 bushels of barley he was going to sell turned bad. This was caused by the bad advice he had received from an experienced farmer.

In 1986 a rent expense of $6300 was claimed. This possibly included the rent paid to the Frymans. He was also renting the Moonen/Johnson property in 1986. It appears that the rent paid to the Frymans in 1983, 1984, 1985, which is in the range of $1,100 per year, was not included in the farm statement filed with the Minister of National Revenue.

During the years under appeal, 1986 and 1987, the Appellant was working for Travco at a salary of $50,000 per year and he could not afford to leave Travco in these years, even though health problems developed at that point. A normal day for the Appellant involved getting up at 6:00 a.m., going out and doing the morning feed chores, twice a week; that took him around an hour. He then would grab a fast breakfast and drive to the office at 8:30 a.m. and he would usually stay at the office until 4:00 p.m. or 5:00 p.m. depending, among other things, on what was going on at the farm. He was at home around 5:00 p.m. - 5:30 p.m., and most of the night he will do the farm chores. When he could not make it he would phone his wife, who would do the pail chores and one of his sons would do the rest of the work.

His wife had a background in veterinary medicine and went in 1982 to Olds School of Agriculture to take a two-week course in animal husbandry, genetics and artificial insemination. She did most of their own animal treatment as far as veterinarian service was concerned. She also looked after the animal records and did the artificial breeding. They shared the shifts for the calving and one of their sons did the heavy work on farming. The Appellant did the travelling, promoting and purchasing for the farm.

The Appellant used his holidays for farming for three or four weeks during each of the haying and harvesting seasons. He had been very involved with the Northern Alberta Hereford Club Board of Directors since 1975 and had been their president, vice-president, secretary and treasurer in the past. He has also been on the Alberta Hereford Board for the past six years. He has been their director and was in charge of international marketing for livestock because of his business experience. He had to negotiate with the Department of Agriculture of the Alberta Government.

During the haying season he would run the baler until 10:00 or 11:00 at night after he came back from work. He was relieving his son who most of the time had used the tractor since noon. Every summer, there are usually two crop periods, lasting two weeks each. The first crop is usually in June, while the other is in mid-August. Some times there is a third one in late September. During these periods, the Appellant was riding his tractor from five to ten or eleven during the week and all day Saturday and Sunday.

Outside the haying season he also had to work at night to cultivate the land, prepare the seedbed for the seed and do all his own seeding, fertilizing and weed spraying. On a typical day when he did not have to do haying or to work on the grain farm, he would have to work an hour in the morning and a couple of hours at night putting fresh bedding, checking cows and doing the grain chores.

During the calving season, which is in February and March, he and his wife took turns every four hours to go into the barn to check if any cows needed some assistance. It is to be noted that prior to the calving season his wife was busy detecting which cows were in heat in order to inseminate them at the right time. The evidence shows that in 1986, 11 female calves and 11 bull calves were born, while in 1987, 13 female calves and 16 male calves were produced.

In 1989 and during the following years the Appellant made a lot of improvements to the Moonen/Johnson property. There was only a mobile home on that property when he and his wife moved in. He bought a new house in late 1989, constructed by Checkmate Construction Corporation, a firm of which the sole shareholder was his son.

The Appellant left Travco in December, 1989 on good terms and started to work for his son’s company. The Appellant and his wife also purchased the Remax office in Wetaskiwin. That created a lot of business for his son’s company, his mother referring to him a number of clients. On some occasions people buying farms through the Appellant’s wife acquired cattle from the Appellant himself. The Appellant was only an employee for his son’s company. The Appellant was paid by Checkmate Construction Corporation $48,600 in 1990, $36,000 in 1991, $33,000 in 1992. He was putting in 30 or 35 hours a week with Checkmate Construction Corporation. There was therefore a three-way connection between the Appellant’s farming business, his wife’s business and that of his son through Checkmate Construction Corporation.

The Appellant’s objective in the early nineties was to have "a solid 30 cows herd”. To have more cows would have required a larger piece of land than what the Appellant owned. The Appellant had made some farm income projections as detailed in Exhibit A-l , tab-5. Briefly, the Appellant estimated that his net farm income before capital cost allowance would amount in 1994 to $3,053, in 1995 to $18,096, in 1996 to $15,202 and in 1997 to $31,402. Thus, he thought the farm would yield income over the next few years. He explained how he intended to make a profit from his farm. The Appellant actually made a profit of $6,684 in 1991 after depreciation.

The Appellant kept a paper record of most of the cows that he owned. This information went into the computerized system of the Canadian Hereford Association. The Appellant currently has 22 cows, 15 calves. The value of this herd at the time of the November 1994 hearing, was approximately $80,000. In 1989 or 1990, the Appellant’s herd was the only one to have the required vaccinations and which could be exported to Denmark and some other European countries. The Appellant expected that he will not need to draw salary from his son’s company in a couple of years from now.

The Appellant also explained that the reason why he had so many years of losses, was because he went into grain farming. For him there is no money to be made in grain farming. He also attributes the losses to the soil condition of the Hossford property, which condition caused diseases to the cattle.

In the course of the Appellant’s cross-examination, it was mentioned that for the taxation years 1975 to 1979 the Appellant only claimed restricted farm losses. After 1979, he hired a chartered accountant and was advised that he should claim full farm losses. He did so and Revenue Canada accepted the deduction of such losses.

It is to be noted that the Appellant was raising grain until he moved to the Moonen/Johnson farm in 1988. Mr. Jacobsen also stated that his cattle had not contracted any disease since they moved to the Moonen/Johnson property.

Before completing this account of the facts, I should mention that different schedules were put in evidence. I refer in particular to the more important ones. An Income Statement Analysis, 1979 to 1983; a Schedule of Capital Invested, 1978 - 1993; Farm Summary, 1979 to 1993 with farm schedules attached; Farm Income Projections for the years 1994 to 1997 inclusive; Inventory Purebred Breeding Stocks in Production, 1976 to 1983; and finally a document entitled Comparative Farm Income Statement with respect to the years 1982 to 1993 inclusive.

Analysis (L6/R4952/T0/BT0) test_marked_paragraph_end (2650) 1.030 0228_1137_1303

Having regard to the evidence adduced at trial the precise question to be determined is whether the Appellant’s farming activities constituted a chief source of income in combination with his employment income in the years in issue. It is well established in the leading case of the Supreme Court of Canada in the Moldowan v. R.,! that three factors in particular must be analyzed with respect to such an issue. I am referring to the time spent by the taxpayer on farming activities, the capital committed in the farming undertaking and the potential profitability of the operation.

With regard to the time spent by the Appellant on farming activities, I am satisfied on the basis of the evidence that the Appellant spent considerable time not only in the years in issue but in preceding and in subsequent years. He devoted at least as much time to the farming operation than to his employment. There is no question that farming was a major preoccupation at the relevant times for the Appellant. Among other things, he had been involved since 1977 with the Board of Directors of Northern Alberta Hereford Club. In more recent times, he has been on the Board of Directors of Alberta Hereford Association. During the relevant years he also arranged for his wife and his sons to add their own contribution and work on the farming operation to his own efforts and activities. From the evidence it appears throughout the years that the farming operation was at all times properly attended to.

I gathered from the representations of counsel for the Respondent that there is no real dispute that the Appellant met this particular criterion regarding his major involvement in the business of farming.

I now advert to the factor relating to the capital invested in the farming undertaking. The evidence is clear that the Appellant invested considerable sums of money over the years in the farming operation. The Schedule of Capital Invested, to which reference was made earlier, supports this finding. During the years 1980 to 1984 in particular the Appellant purchased the farm equipment necessary for his farm to be operated on a sound basis. I am not, of course, overlooking that in 1987 he acquired the Moonen/Johnson property for $125,000, a farm which appears to be ideal for the type of purebred breeding operation that is carried on by the Appellant. The capital invested appears to be sufficient, although the Appellant’s objective in terms of the number of cows that he should have in the years in issue had not been attained fully. It was not suggested by the Respondent that this enterprise was under-capitalized. The Appellant’s operation, therefore, meets, in my opinion, the second factor.

The third criterion which relates to the potential profitability of the undertaking must now be examined.

Counsel for the Respondent has forcefully argued that the Appellant has not established that in the years in issue that farming was a chief source of income for the Appellant. Counsel for the Respondent submitted that the projections made by the Appellant with respect to his farming activities were unrealistic. She pointed out in particular that revenues from the sale of cattle were too high and certain types of expenses were too low. I agree that the Appellant’s forecast of revenues and expenses covering a number of years referred to in the evidence did not come close to the reality.

Counsel for the Respondent further suggested that the change in the occupational direction has occurred shortly after the two taxation years in issue. I was given to understand that the Respondent would likely have come to a different conclusion if the years in issue had been the years immediately following the 1986 and 1987 taxation years. I do not agree that if there was a change in occupational direction it occurred after the years in issue. In my view, in 1986 and 1987 the basic ingredients capable of making farming a chief source of income for the Appellant were in place. In point of fact, the Appellant had decided to dispose of the Hossford farm early in 1986, and was not able to sell the property before the fall of 1987, after that property had been listed for sale for at least 18 months. Also, the Moonen/Johnson property had at first been leased in 1986 with an option to purchase, which was taken up early in 1987. The evidence establishes clearly that this property was ideal for a purebred breeding operation. The attractive features of this property for the aforementioned purpose have not been challenged.

Also, during the two years in issue the Appellant experienced serious health problems and he became determined to quit his employment with Travco, but because of financial difficulties he recognized that he could not do so immediately. As a matter of fact, he quit Travco some time later, more precisely in December 1989. At that time, he also had in mind working for his son’s construction company, Checkmate Construction Corporation. He became employed by that company in January 1990. This employment with Checkmate Construction Corporation gave him, in terms of time, more flexibility and more freedom, and in this way permitted the Appellant to devote more time to the farming operation. The Appellant recognized, at the time, that his employment income with Checkmate Construction Corporation will be lower than that received from Travco, and in the result gross income from farming will become more significant in the overall picture.

The Income Analysis, 1979 to 1993, shows a small net income for 1991 and substantial gross income for the years 1990 and 1992, and small losses for the years 1992 and 1993. While it is true that the losses sustained by the Appellant in 1986 and 1987 were considerable because the Appellant was required to make payments on the two mortgages encumbering the Hoss- ford property and the Moonen/Johnson property. Also the Appellant was in arrears in respect of certain payments, as a result of which he had to incur serious financial penalties.

Looking at the overall picture of the Appellant’s farming activities over a number of years, I find that in 1986 and 1987 the Appellant had put in place the required elements, the foundation, permitting his farming operation to be a chief source of income.

For these reasons, the appeals are allowed, with costs, and the assessments for the 1986 and 1987 are referred back to the Respondent for reconsideration and reassessment on the basis that farming for the Appellant was a chief source of income in these two years in combination with employment income.

Appeal allowed.