Patrick v. R., [1998] 4 CTC 2108

Garon T.C.J. .

These are appeals from income tax assessments for the 1993, 1994 and 1995 taxation years. By his reassessments for the taxation years in question, the Minister of National Revenue (the “Minister”) refused to allow in full the deduction of farm losses claimed by the Appellant in the respective amounts of $7,592, $13,647 and $12,707. Rather the Minister only allowed the deduction of restricted farm losses amounting to $5,046 in 1993, $8,073 in 1994 and $7,604 in 1995, in accordance with section 31 of the Income Tax Act (the “Act’), 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 in the years in issue.

The general question in issue in each of these appeals is whether, to paraphrase the language of section 31 of the Act, the Appellant’s chief source of income was farming or a combination of farming and some other source of income during each of the three years in question. In view of the case law and the facts in the present matter, the question could be framed more precisely. In common parlance, was farming for the Appellant a sideline business? If the answer to the latter question is in the affirmative, the Appellant is only entitled to the deduction of restricted farm losses, as determined by section 31 of the Act. On the other hand, if the Appellant is equated with a full-time farmer, he may deduct in full his farming losses during the years in question.

In making the reassessments in issue, the Minister relied on the assumptions of fact set out in paragraph 6 of the Reply to the Notice of Appeal. Paragraph 6 reads thus:

6) In reassessing the Appellant, the Minister made the following assumptions of fact:

a) the facts hereinbefore stated and admitted;

b) in 1984, the Appellant purchased 55 acres of farmland near

Kemptville, Ontario;

c) the Appellant began a horse breeding operation at the said farm in 1985 and continued that activity throughout 1993, 1994 and 1995;

d) in 1993, 1994 and 1995 the Appellant was employed full time with E. B. Eddy Forest Products Limited (E.B. Eddy);

e) the Appellant earned the following amounts as income from employment with E.B. Eddy:

YEAR	INCOME
1993	$48,510.00
1994	$48,942.00
1995	$49,972.00

f) the Appellant reported farming income (losses) during 1993, 1994 and 1995 as follows:

	TAXATION GROSS		EXPENSES	NET INCOME
	YEAR	INCOME		(LOSS)
	1993	$9,017.00	$16,609.00	($ 7,592.00)
	1994	$7,439.00	$21,086.00	($13,647.00)
	1995	$4,567.00	$17,274.00	($12,707.00)
g)	the Appellant’s chief source of income during 1993, 1994 and
	1995 was neither farming nor a combination of farming and
	some other source of income;
h)	the Appellant is not entitled to claim losses with respect to the
	farm operation in excess of $5,046.00, $8,073.00 and $7,604.00
	in 1993, 1994 and 1995 taxation years respectively.

At the hearing of these appeals, the Appellant admitted subparagraphs d), e) and f) of paragraph 6 of the Reply to the Notice of Appeal. Subparagraphs b), c), g), and h) of same were denied. With respect to subparagraph

a) of paragraph 6, no position was taken by the Appellant. In the case of subparagraph 6 b) of the Reply to the Notice of Appeal, the Appellant admitted that in 1984, he purchased farmland near Kemptville, Ontario, but stated that the total area of the plot of land in question was 33 acres and not 55 acres, as alleged in that subparagraph.

The Appellant was employed with E.B. Eddy Forest Products Limited (“E.B. Eddy”) for 37 years. He started with the company in 1959 working in a mill. The mill was closed in 1979, and he was trained to work as a power house operator. He ceased being employed by E.B. Eddy effective January 1, 1996. The Appellant started on shift work for E.B. Eddy in 1985 or 1986. He worked at that job three 12-hour shifts per week, or 36 hours per week. This works out to approximately 1,500 hours per year

The Appellant testified that initially he only raised horses for racing. In 1984, he expanded into boarding horses and training race horses. However, the horse racing industry was hard hit by the recession in the early 1990’s. The Appellant tried to grow strawberries in order to make more income. Unfortunately for him, that venture did not turn out well. He treated farming as his full-time livelihood, and spent more time on the farm than at his job. The Appellant gave evidence that he and his wife together put in excess of 2,900 hours on the farm each year in question. During the peak season, the Appellant worked between eight and 16 hours per day. In the winter, it would average out to three to four hours per day. His wife put in three hours per day consistently throughout the year. All of the holiday time which the Appellant took from his job was spent working on the farm.

With respect to the Appellant’s investment in the farming operation, the evidence establishes that he built a nine-stall boarding stable in 1985 and acquired many pieces of equipment for the farm. He put in five paddocks and a quarter mile race track. The Appellant estimated that he invested, including the farm, $225,000 to $250,000 in the farming operation over the years.

The following data relative to T-4 earnings and net farm loss over the years 1987 through 1992 are of interest:[1]

This evidence must now be examined in light of the principles established by the case law in applying section 31 of the Income Tax Act.

As pointed out by Justice Dickson, as he then was, in the leading decision of the Supreme Court of Canada in the Moldovan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), there are three classes of farmers under the Income Tax Act. Justice Dickson expressed himself thus at page 5216:

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 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.

In order to determine into which class a particular farmer falls for the purposes of the Income Tax Act, the following observations of Justice Dickson in Moldovan, at page 5215 are of particular interest:

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.

The Minister has admitted that the Appellant does not fall under category 3, since he allowed the deduction of restricted farm losses pursuant to subsection 31(1) of the Act. In his opinion, the Appellant carried on farming in the years in question as a sideline business and thus comes within category 2.

As appears from the foregoing excerpts from the judgment of the Supreme Court of Canada, the determination of the question whether a taxpayer’s chief source of income is farming involves a comparison between farming and the taxpayer’s other sources of income. In this regard, three factors are of particular significance and must be weighed carefully, no single factor being decisive. They relate in relation to a source of income to the time spent, the capital invested and the actual and potential profitability during a given period.

With respect to the time spent by the Appellant, I find that the Appellant spent a substantial amount of time on farming activities. I accept his evidence that he spent more hours working on the farm that he did in his full- time employment with E.B. Eddy in the years in issue. The Appellant’s wife also carried out farming duties of some significance consistently throughout each of the years in issue. There is no evidence however, that the Appellant changed occupational direction in the years in issue or shortly before 1993. He continued to be engaged in full-time employment for E.B. Eddy.

Turning now to the capital invested in the farming business, the Appellant testified that he had between $225,000 to $250,000 capital invested in his farming operation. This figure includes land, farm machinery and equipment and facilities necessary for racing horses. In this connection, I have found that the Appellant’s evidence is lacking in precision. I have not been persuaded that the Appellant has invested the amount of capital that he claimed. Also, financing for the farming activities was provided by the Appellant’s employment income.

Finally, the matter of actual and potential profitability must be looked at. The gross income from the farm in the three years in issue was small and on a downward trend. The losses experienced in those three years were relatively large in relation to the gross income for the same period and they had been preceded by a string of other losses over a period beginning in 1987 and ending in 1992. On the evidence, I find that the prospects for the potential profitability of the farming business in the future were at best slim. The Appellant testified that huge sums of money could be made on race horses given the right luck. This, in my view, is too tenuous a ground from which to infer future profits. I have not overlooked the point that the Appellant also tried to diversify his operations by planting hay and strawberries. In brief general terms, no concrete evidence has been adduced which could have established that there was a likelihood that the farming business could generate income that was “substantial” in relation to other sources of income, to adopt the term used by Justice Robertson in R. v. Donnelly (1997), 97 D.T.C. 5499 (Fed. C.A.) at page 5501.

In my assessment of the entire evidence relative to the three factors mentioned earlier, I find that the Appellant’s chief source of income for the years in issue came from his employment with E.B. Eddy and that the farming operation was merely a sideline business.

For these reasons, the appeals from the income tax assessments for the 1993, 1994 and 1995 years are dismissed.

Appeal dismissed