Robert E Mullin v. Minister of National Revenue, [1979] CTC 2080, 79 DTC 113

Delmer E Taylor:—This appeal was heard in Toronto, Ontario, and is against an income tax assessment in which the Minister of National Revenue disallowed an amount of $4,221.14 claimed as a farming loss for the taxation year 1974. In the reply to notice of appeal, the respondent relied, inter alia, on paragraph 18(1)(h), subsections 31(1) and 248(1) of the Income Tax Act, SC 1970-71-72, chapter 63 as amended.

Facts

During the year in question, the appellant’s address was RR #1, Barrie, Ontario, and he was employed full time as a forester by the Government of the Province of Ontario.

Contentions

According to the appellant, it was contended that:

—the farm in question (RR #1, Barrie, Ontario) had been purchased in 1970;

—during 1970, 1971 and 1972, he proceeded to build up the farm, fences, fields and buildings;

—after a discussion with Revenue Canada in 1974, he commenced to claim the “restricted farm loss” starting with the taxation year 1973 (not disallowed, therefore not appealed);

— he anticipated profits before the year 1977.

The respondent contended that:

—the amount of $4,221.14 did not relate to the expenses of properties maintained in connection with a business carried on for profit or with a reasonable expectation of profit;

—the amount of $4,221.14 claimed as a deduction represented personal or living expenses of the appellant.

Evidence

The appellant submitted to the Board three tables which showed respectively:

Table I. The Farm Plan in terms of numbers of cattle by annual projections (1973 through 1979)

Table II. The Expected (theoretical) costs and returns of the Farm Plan (1973 through 1977)

Table III. Actual Farm Costs and Returns (1973 through 1977).

It was the evidence of Mr Mullin that although these tables had been prepared recently for the purpose of this hearing, the information contained in them had been available to him in 1970 and the tables represented the basis upon which he had entered into farming. The expected profit of $713 (shown on Table III for the year 1977) would have been realized except for two factors which it had not been possible to anticipate—a greater number of male than female calves over the years 1973 to 1977, and the drop in beef prices during the same period. The farm comprised 50 acres, all of which were in poor condition at the date of purchase, and the buildings were also badly run down. His son who had been studying agriculture at college during the early 1970’s had helped him, particularly with respect to soil analysis and crop planning.

During cross-examination, the appellant gave additional details regarding the operation and elaborated upon the nature of the three tables he had filed with the Board. His information was specific and straightforward. Counsel for the respondent, through the appellant, identified and filed the following:

Exhibit R-1: Copy of “STATEMENT OF FARMING INCOME AND EX- PENSES” (T2042) for 1973;

Exhibit R-2: Copy of “STATEMENT OF FARMING INCOME AND EX- PENSES” (12042) for 1974;

Exhibit R-3: Copy of “STATEMENT OF FARMING INCOME AND EX- PENSES” (12042) for 1975;

Exhibit R-4: Copy of “STATEMENT OF FARMING INCOME AND EX- PENSES” (12042) for 1976;

Exhibit R-5: Chart of summary of figures contained on Exhibits R-1 to 4.

Exhibit R-5 above showed a profit for the year 1977 of $712.76 but it was quickly established by counsel that the appellant had liquidated his entire herd of cattle during 1977. The losses for the other years were as follows: 1973—$5,120.32; 1974—$5,942.28; 1975—$5,081.68; and 1976—$4,874.99.

Argument

The appellant summarized his case in this way:

Why did we go into farming? Because at that time it was a promising business. We had good land. We had the location. We had the advice and we had the prospects. What were our expectations? Well, like everyone else, we were optimistic. We thought that with that area of land at that time it was a chance of making a profit. Why did it not turn out that way? Well, it was a short fall, first of all biological, because we were short on a number of females. Secondly, the main cause was because of the tremendous increase in farming costs and third, because of a drop in sales price, which I don’t think anyone predicted in 1973 or 1974. The farm was Originally purchased in order to aid my retirement income. It was hoped that by the time I retired, which is in about a year or two, that I would have had an outstanding herd of beef that would have added to my income then on.

Counsel for the respondent pointed out that the projections contained in Tables I, Il and III submitted by the appellant bore very little relationship to the actual results as shown by Exhibits R-1, R-2, R-3 and R-4, all submitted by the appellant with the appropriate year’s income tax return. The appellant could not have devoted much time to the farm since he was employed full time. In the view of counsel, there was no indication of a reasonable expectation of profit, certainly as one would interpret the decision in William Moldowan v Her Majesty The Queen, [1977] CTC 323; 77 DTC 5213.

The appellant pointed out that he had made allowances for what he considered personal or living expenses before he had filed the financial statements for the farm during each of the years 1973, 1974,1975 and 1976, and he had claimed the losses shown to the maximum allowable under the Act.

Counsel for the respondent agreed that the activity of the appellant fitted within the definition of “farming” to be used in the Income Tax Act but claimed that whether or not it was a business was not crucial to the assessment. The test was whether or not the expenses were personal living expenses, and they should be so classed (personal living expenses) in this case. Counsel stated .. it is not whether or not the operation constitutes a business, that is the statutory prerequisite to deductibility, but whether or not the activity was carried on with a reasonable expectation of profit”. In support of his contention that the efforts of a taxpayer could be both “farming” and a “business”, but not necessarily a “business carried on with a reasonable expectation of profit” and therefore not deductible, counsel relied upon the decision of Deputy Judge Dubinsky in Donald J Gillis v Her Majesty The Queen, [1978] CTC 44; 78 DTC 6103.

Findings

It might appear that counsel for the respondent has determined that the activities of the appellant during the year under review should be classified both as farming and as a business, and that the only point to be decided by this Board is whether or not the “farming business” was carried on with a reasonable expectation of profit—and therefore on that basis the expenses incurred would be deductible. While counsel relied strongly upon Gillis (supra), it is worth reviewing the definitions provided in Moldowan (supra) regarding such matters, which definitions are found at [1977] CTC 315 and 77 DTC 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 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 sources of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his nonbusiness farming are not deductible in any amount.

With reference to the above decision, I would point out the phrase “carried on farming as a sideline business” (italics mine) which provided for a restricted farm loss, and the phrase “carried on some farming activities as a hobby” (italics mine), later described as “non-business farming” the result of which was not deductible. There is little in that decision which would permit the narrow distinction put forward by counsel.

In Gillis (supra), the learned Justice not only reviewed Moldowan (supra), but quoted from and reflected upon selected portions from McLaws v The Queen, [1976] CTC 15; 76 DTC 6005; Holley v MNR, [1973] CTC 539; 73 DTC 5417; and CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282. Summarizing his views, he states as follows at [1978] CTC 55 and 78 DTC 6110 respectively:

In order for this taxpayer to obtain the benefit of any farming losses which he sustained, that is to say, for him to fall into the second of the categories envisaged by S 13(1), he must needs have carried on his farming venture as a business. To put it differently, in order for his farming to have constituted a ‘source of income’ against which (in accordance with the spirit of the Income Tax Act) he would be entitled to off-set legitimate expenditures incurred in producing the income, he must have had —if not a profit—at least the reasonable expectation of profit.

As I read Gillis (supra), it says that for the appellant’s farming venture to have been carried on as a business, he must have had at least the reasonable expectation of profit. I would conclude therefrom that carrying on a “business” presupposes ‘‘a reasonable expectation of profit”. The position of counsel in the instant case, that this taxpayer could be carrying on a business but not doing so with a reasonable expectation of profit, does not appear to me to be supported by the Gi/lis decision (supra): Consequently, if I were to interpret counsel’s position literally—that the farming in this appeal was indeed a business—it would be in order for me to allow the appeal without further examination. However, if the assertion and argument of the respondent in reality is that the farming activity conducted by this appellant did not have a reasonable expectation of profit (and was then by definition not a business), the queries raised and the course of examination followed by the Board in Fred L Johnson v MNR, [1978] CTC 2122; 78 DTC 1109, would be in order. Even approaching the matter from this latter viewpoint, I do not see any distinction of merit between Johnson (supra) and the instant appeal, and it would still be in order to allow the appeal. Indeed there are additional factors which might strengthen a finding that this appeal should be allowed. The Johnson appeal (supra) covered two years whereas this appeal is for one year only; and the Gillis appeal (supra) (later in 1977 than Johnson (supra)) covered a total of five years (1969 through 1973), and information was provided continuing through 1976, therein providing the learned Justice with a considerable time span within which it might be expected the appellant had an opportunity to show some evidence that the operation was indeed a business—defined for my purposes in this appeal as a commercial venture with a reasonable expectation of profit. Obviously the Judge concluded that notwithstanding the energy, devotion and optimism of the appellant, the results showed his efforts were in the nature of a hobby and not a business.

It might be argued that in the instant appeal, since summaries of the farming income and expenses have been made available to the Board on Exhibit R-5 for the years 1973 through 1977 (which includes the year 1974 under appeal), and the loss results are not dissimilar to those in Gillis (supra), the same result (dismissal) should ensue. I do not agree.

A perusal of the details on the above-noted summaries of income and expenses shows that the farming operation in this appeal was indeed of a commercial nature as contrasted with the activities described in Gillis (supra). Further, the objective of this appellant was to produce a “breeding herd” from the cattle he owned and he had made some progress toward that objective, including keeping his own breeding bull, quite a different interim result from that evident in Gi/lis (supra). Finally on the same note, in 1977 this appellant disposed of his entire herd, coming to the conclusion, perhaps belatedly, that the operation did not have a reasonable expectation of profit. In contrast to the perspective which I take in this appeal with regard to the single year 1974, it would appear that in Gi/lis (supra) there was neither evidence of a reasonable expectation of profit during the years under appeal, nor evidence that in the three years subsequent to 1973 the appellant had reached that conclusion and considered winding up the operation. According to the evidence in Gillis, the efforts of the appellant continued right up until the date of the appeal, uninterrupted, unabated and unchanged, beside being unprofitable. A determination by the Court that the primary motivation of the appellant was something other than a reasonable expectation of profit was the inevitable result of that appeal. I find no similar situation in this appeal before the Board. The appellant Mullin carried on a farming business and should be entitled to the deduction claimed during the year in question. Additional support for this view may be found in a judgment of the Chairman of this Board, the Honourable L Cardin, QC, in McCleary Drope v MNR, 11978] CTC 2639; 78 DTC 1483.

Decision

The appeal is allowed and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed.