Beaubier T.C.J. (Orally):
THE REGISTRAR: The first matter this morning is File Number 96- 4792(IT)G, between John Kobitz and Her Majesty The Queen. Mr. Whitmore, counsel for the appellant and Mr. Bouvier, counsel for the respondent.
HIS HONOUR: This appeal, pursuant to the general procedures, was heard at Regina, Saskatchewan, August 24, 1998. The appellant testified. The respondent called Mark Tomczak, the auditor on the case.
The appellant deducted farm losses for 1992 and 1993 which were disallowed under subsection 31(1) of the Income Tax Act. He appealed.
The assumptions in the Reply to the Notice of Appeal read as follows:
13. In so reassessing the appellant for the 1992 and 1993 taxation years, the Minister made the following assumptions of fact:
(a) At all material times, the appellant was employed full-time as a commission salesman for Southey Farm Supply, which is located in Southey, Saskatchewan, approximately 200 kilometers from the farming property;
(b) The time committed to the farming operation was minimized due to the full-time employment of the appellant as a sales representative;
(c) In or about the month of February, 1991, the appellant purchased a residence in Regina in order to be located closer to his place of employment, which residence is significantly closer to his place of employment than the farm property at Saltcoats;
(d) In 1991, the appellant sold a quarter section of farm property;
(e) The appellant rented and occupied the Regina residence prior to his purchase of the said property;
(f) The appellant earned the following amounts from his employment during the 1989 through 1990 taxation years respectively:
| Taxation Year | Income |
| 1989 | $33,840 |
| 1990 | 38,687 |
| 1991 | 40,400 |
| 1992 | 58,009 |
| 1993 | 61,609 |
| 1994 | 64,838 |
| 1995 | 62,967 |
(g) Apart from the 1985 taxation year for which the appellant reported a profit in the amount of $5,179 during the taxation years 1979 through 1995, the appellant reported consistent annual losses from his farming operation;
(h) With respect to that period, the appellant reported farming income (losses) as follows:
| Taxation Year | Gross Income |
| 1979 | $73,238 |
| 1980 | 51,925 |
| 1981 | 75,455 |
| 1982 | 74,769 |
| 1983 | 95,935 |
| 1984 | 99,453 |
| 1985 | 55,219 |
| 1986 | 59,699 |
| 1987 | 51,141 |
| 1988 | 51,001 |
| 1989 | 59,292 |
| 1990 | 65,035 |
| 1991 | 90,583 |
| 1992 | 74,600 |
| 1993 | 40,998 |
| 1994 | 77,643 |
| 1995 | 36,771 |
| Expenses | Net Income (Loss) |
| $80,373 | ($ 7,135) |
| 63,850 | ( 11,925) |
| 88,123 | ( 12,668) |
| Expenses | Net Income (Loss) |
| 89,421 | ( 14,962) |
| 109,051 | ( 13,116) |
| 102,640 | ( 3,187) |
| 50,040 | ( 5,179) |
| 64,335 | ( 4,636) |
| 51,686 | ( 582) |
| 62,153 | ( 11,152) |
| 84,307 | ( 25,015) |
| 98,175 | ( 33,140) |
| 125,747 | ( 35,164) |
| 115,643 | ( 41,043) |
| 99,252 | ( 38,254) |
| 113,713 | ( 36,040) |
| 82,369 | ( 45,598) |
(1) Notwithstanding the significant losses over the previous 15 years, the appellant has no plans to alter the manner or type of farming operation from that of its present undertaking;
(j) The appellant’s chief source of income during the taxation year was neither farming nor a combination of farming and some other source of income.
(k) During the 1992 and 1993 taxation years, the appellant’s farming operation could not reasonably be expected to provide the bulk of income or center of work routine for the appellant,
Assumptions 13(a), (b), (d), (e), (f), (g), (h) and (i) are true. Assumption 13(c) is correct except that the appellant testified that he purchased the residence so that his daughter could live with him in Regina, to study at Was- cana; however, her marks were not high enough for her to be admitted so he lived in the house by himself and worked in Southey, about 60 miles north of Regina. Subsequently, he sold the house and bought another house near Southey.
The remainder of (c) is true. The appellant’s only profit from the farm was in 1985.
The appellant was born and raised on the farm property. He purchased it from his father in 1971 and worked it without outside employment elsewhere from 1972 until 1979. Since then, except for the years 1982 to 1985, he has always been employed in the farm equipment business on a full-time basis as a commissioned salesman. He was always allowed time off in the seeding and harvest seasons to farm and he also farmed on weekends in season.
On the basis of the evidence, the appellant’s capital is almost entirely invested in the farm. His history is in the farm. He stopped any cattle operations in about 1982. Since then, he has operated a grain farm seeded largely to canola and wheat. His equipment turnover is high and appears to be associated with his employment as a farm equipment salesman. Many of his equipment transfers were done on a break-even basis.
In recent years and during 1992 and 1993, his time appears to have been devoted about equally to his job as a farm equipment salesman and to the farm. The question of profitability and in a section -- I’m sorry -- and to the farm when in the farming season.
The question of profitability in a Section 31 appeal was dealt with extensively by the Federal Court of Appeal in R. v. Donnelly (1997), 97 D.T.C. 5499 (Fed. C.A.) . The following quotes from the judgment are germane to this case. At page 5499:
According to Moldowan, the appellant must satisfy two tests in order to succeed. First, he must establish that the farming operation gave rise to a “reasonable expectation of profit” and, second, that his “chief source of income” is farming (the so-called “full-time farmer”). If the taxpayer is unable to satisfy the first test, no losses are deductible (the so-called hobby farmer). If he satisfies the first test, but not the second, then a restricted farm loss of $5,000 (now ($8,500) is imposed under Section 31 of the Income. Tax Act (the so-called part-time farmer).
In the present appeal, the Minister of National Revenue conceded that the farming operation gave rise to a reasonable expectation of profit. That concession was made with the full knowledge that the taxpayer’s farming endeavor had not generated a profit in 21 years (1972-1992). With respect to the Minister’s contention that farming was not the taxpayer’s chief source of income ... the legal test for establishing farming as a chief source of income is, on an evidential level, a more onerous one.
At pages 5501 and 5502:
In the present case, it was incumbent on the taxpayer to establish that what he might have reasonably earned but for the two setbacks which gave rise to the loss, namely, the death of Mr. Rankin and the decline in horse prices.... It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been .... The Tax Court Judge did not engage in an analysis of what profit might have been earned by the taxpayer in each of the three taxation years in question. No doubt this gap was occasioned in part by the taxpayer’s failure to adduce the necessary evidence as reflected in the testimony of Dr. McCarthy. His evidence was directed at whether the horse-farming operation gave rise to a reasonable expectation of profit. He admitted that he had never reviewed the taxpayer’s books nor compared the business revenue and expenses (see Appeal Book, Appendix 1 at 20 and 79-80). He could offer no opinion on the potential profitability of the horsefarming business .... Once again, there is a failure to appreciate the onus that was on the taxpayer to satisfy the Judge below that he would have or could have reasonably earned a profit of “X” dollars but for the unforeseen setbacks. This the taxpayer did not do and it is improbable that he could have met the evidential burden. I say this because the documentary evidence reveals that in those taxation years, where the taxpayer was about to earn a profit, he would simply purchase a horse or two with the result that the farming operation incurred a loss.
The analysis quoted applies equally to the appellant’s case respecting profit.
The appellant’s counsel quoted Graham v. R. (1985), 85 D.T.C. 5256 (Fed. C.A.), in support of his case. In Donnelly, the Federal Court of Appeal discussed Graham in some detail at 5502 and 5503. It concluded at 5503:
In the end, Graham stands or falls on its unique facts. But there is at least one lesson that can be derived from the case. It seems to me that Graham comes closer to a case in which the otherwise full-time farmer is forced to seek additional income in the city to offset losses incurred in the country. The second generation farmer who is unable to adequately support a family may well turn to other employment to offset persistent annual losses. These are the types of cases which never make it to the courts. Presumably the Minister of National Revenue has made a policy decision to concede the reasonable expectation of profit requirement in situations where a taxpayer’s family is always looked to farming as a means of providing for their livelihood, albeit with limited financial success. The same policy considerations allow for greater weight to be placed on the capital and time factors under Section 31 of the Act, while less weight is given to profitability. I have yet to see a case where the Minister denies such a taxpayer the right to deduct full farming losses because of a competing income source. Perhaps this is because it is unlikely a hog farmer, such as Mr. Graham, would pursue the activity as a hobby.
As is well known, Section 31 of the Act is aimed at preventing “gentlemen” farmers who enjoy substantial income from claiming full farming losses; see The Queen v. Morrisey, supra at 5081-82. More often than not, it is invoked in circumstances where farmers are prepared to carry on with a blatant indifference toward their losses being incurred. The practical and legal reality is that these farmers are hobby farmers, but the Minister allows them the limited deduction under Section 31 of the Act. Such cases almost always involve horse farmers who are engaged in purchasing or breeding horses for racing. In truth, there is rarely even a reasonable expectation of profit in such endeavors, much less the making of a chief source of income.
Mr. Kobitz spent more total time on his employment than on farming, but he spent equal time on his employment and his farm in the farming season. His capital commitment was to the farm. The profit history is, practically speaking, one of losses. From the evidence, it cannot be estimated quantitatively what the profit might be in any year.
However, from the evidence, it is clear that there are three factors which the appellant and his accountant employed extensively during 1992 and 1993 and the years around them to fix the appellant’s losses. The first was capital cost allowance which, according to Moldowan [Moldowan v. R. (1977), [1978] 1 S.C.R. 480 (S.C.C.)] must be considered. Second is the round-figured income the appellant showed from farming one-quarter section for his wife. The third is annual inventory adjustments. The appellant did not explain these three factors in detail as they related to his farming operation, although he was cross-examined on them. Because the Court has no basis on which to determine the amount of profit that the appellant might have earned in 1992 and 1993, it cannot determine what the appellant “might reasonably have earned” if he had not suffered losses from frost in 1992 of $41.043 and from frost and root rot in 1993 of $38,254. He sold a quarter section in 1991, which he replaced with a rented quarter section in 1992; however, this meant that he had to pay rent in 1992 that he did not have to pay in 1991.
One of his three largest gross income years was 1991, when he grossed $90,383, of which $20,000 was inventory adjustment; $15,000 was custom work and lease rentals related to his wife’s one-quarter section; and over $2,700 was “income” consisting of the personal share of things like house expenses. Even then, his loss in 1991 was $35,164 because, as is shown in assumption (h), his costs rose to their highest amount ever. His costs remained very high in the two years in question, 1992 and 1993. From 1990 on, his losses have always exceeded $30,000 per year.
In this case, as in Donnelly (and quoting that decision), the Court has no evidence on which “to estimate quantitatively what the profit might have been” had the appellant not suffered the 1992 and 1993 setbacks he described. Thus, the appellant failed to meet the second test required to succeed in an appeal of an assessment under Section 31 of the Income Tax Act.
The appeal is dismissed. The respondent is awarded party and party costs throughout.
Thank you, counsel.
Appeal dismissed.
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