Crawford Foods LTD v. Minister of National Revenue, [1979] CTC 2511, 79 DTC 517

Guy Tremblay:—This case was heard at Saskatoon, Saskatchewan, on October 13, 1978.

1. Point at Issue

The point is whether the Wynyard Brooder Farms and the Wynyard Broiler Farm operated by the appellant in the Wynyard area of Saskatchewan.

(a) constitute farming business;

(b) constitute separate businesses from the other operations of the appellant;

and whether the appellant is correct in using the cash method provided in subsection 28(1) of the new Income Tax Act to compute the income for the business for the 1972, 1973 and 1974 taxation years.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 The appellant is a company incorporated pursuant to the laws of the Province of Saskatchewan and is registered to carry on business in the Province of Saskatchewan. The company is engaged in the hatching, raising and processing of poultry in the Wynyard area of Saskatchewan and has been so engaged since 1953.

3.02 In fact, in 1954 the company continued a business of creamery and a business of processing poultry started in 1945.

3.03 In 1960, the appellant company bought the CPR road house in Wynyard, built two storeys inside it and used the building for the raising of chicks. It was called the Wynyard Brooder Farm. It is located approximately two miles north of the processing plant.

3.04 In 1965, another building was built for the raising of chicks. It is located two and one half miles north-east of the processing plant. It was called the Wynyard Broiler Farm.

3.05 The operations of the appellant in 1972 can be summarized as follows:

(1) The Sunnyland Hatchery Plant located in Kelleher;

(2) The Brooder Farm Plant located in Wynyard;

(3) The Broiler Farm Plant located at Wynyard;

(4) The eviscerating plant at Wynyard;

(5) The processing plant at Kandahar;

(6) The cold storage plant at Saskatoon.

In fact, all those activities were operated on different premises and by different employees.

3.06 Of the chicks produced by the hatchery, 20% to 25% were sold to the Broiler and Brooder Farms. The rest of the chicks were sold to licensed growers all around the area. They were licensed by the Provincial Broilers Chicken Marketing Board (page 18 of the transcript).

3.07 The number of birds raised on the appellant’s farms was 643,864 in 1973 and 710,879 in 1974.

3.08 When the birds are matured, they are sold and transported from the Broiler Farm or the Brooder Farm to the eviscerating plant for processing. The processing of poultry is the main business of the appellant.

3.09 At this point, a “sale is recorded in the company’s centralized accounting system so that the farm operations’ financial results can be accurately reflected on financial statements”. In the transcript (page 43) Mr A L Shaw, CA, described the accounting system:

Q. Now, can you tell us from your own experience as to what manner the financial records, or what the financial record system of the company is, of the company Crawford Foods is?

A. Yes. There is one accounting office that records the transactions for all of the separate operations. The source documents are prepared at the location of the separate operations and the transactions are then recorded at the central accounting office in the various journals that are used. On a monthly basis, the journal information is summarized and posted to a general ledger which is segregated by operations. From the general ledger monthly operational financial statements are prepared by the controller at Crawford Foods and at year end for the years ’72, ’73 and 74, an audit has been done of Crawford Foods and financial Statements were prepared by their chartered accountant.

Talking about the Brooder and the Broiler Farms, he said:

They carry on the same business but they are—their records are kept separately for accounting purposes as well.

First of all, the poultry would be transported from the farm to the processing plant. When the live chickens arrived at the processing plant they would be weighed. From that time there would be some sort of inspection and there would be a record of any diseased birds and those that died on arrival, and from that information a poultry purchase form would be completed by Crawford Foods.

The poultry purchase invoice will be recorded in the poultry purchases journal of Crawford Foods Ltd, and the entry that would be made there would be a charge to the poultry purchases and it would be credited to the broiler farm or the brooder farm, whichever the source of that transaction was.

There would be similar transactions in that same poultry purchase journal no matter who the party was that Crawford Foods purchased birds from. The only distinction is that the entry would be to the credit of the third party rather than the broiler farm or the brooder plant.

The poultry purchases journal for each transaction would then be added and cross-balanced, summarized for that particular month and posted to the general ledger.

3.10 The evidence also showed that the transfer price of the birds is the current market price paid to other poultry producers. The market price in fact is set by the Provincial Chicken Marketing Board.

3.11 No money, however, was transferred from the processing plant to the raising plant nor from the raising plant to the hatchery plant. “A book entry has the same effect” according to Mr Shaw (page 64 of transcript, lines 20 and 21).

According to Mr Shaw, the same method is applied in a number of associated companies. In some cases, the same bank account is even used for all the associated companies. Also one general ledger may be kept for all the companies, as in the case of the appellant company, for the various operations. However ‘‘an expenditure, for example, for the broiler farm would be reflected in the section of the general ledger for the broiler farm under the category of the expense” (page 74 of transcript, line 16).

3.12 Exhibits A-4 and A-5 show, among other things, the net income for the years 1973 and 1974 of the Brooder and the Broiler Farms:

3.13 After filing the 1972 income tax return on the accrual basis, the appelant amended it, electing to exclude inventories of poultry being raised on the Brooder Farm and the Broiler Farm as allowed by subsection 28(1) of the new Act. Indeed, the taxpayer entitled to use that method does not take into account the value of inventory in the computation of net income.

3.14 The 1973 and 1974 income tax returns were filed on the same basis as the amended 1972 return wherein the cash basis was used in respect of the raising of poultry on the Brooder Farm and the Broiler Farm.

3.15 It is only for the purpose of the Income Tax Act that the cash basis method was used in computing the income of the Brooder and Broiler Farm.

3.16 The appellant has been reassessed by the respondent for the 1972, 1973 and 1974 taxation years by way of reassessment dated December 19, 1975, on the basis that subsection 28(1) of the new Act is not available to the appellant. These reassessments were confirmed by the Appeals Branch of the Department of National Revenue as per notification dated February 24, 1977.

3.17 The reassessments increase the incomes as follows:

$27,760.19 for 1972, $34,165 for 1973, and diminish the loss for the year 1974 from $100,780 to $46,496.46.

4. Law—Jurisprudence—Comments

4.1 Law

The main sections of the new Act involved in the present case are subsection 28(1) and section 248 (definition of farming) which reads as follows:

Farming business.

(1) For the purpose of computing the income of a taxpayer for a taxation year from a farming business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method (in this section referred to as the “cash” method) whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(a) all amounts that

(i) were received in the year, or are deemed by the Act to have been received in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would if the income from the business were not computed in accordance with the cash method, be included in computing income therefrom for that or any other year, and

(b) such amount, if any, as may be specified by the taxpayer in respect of the business in his return of income under this Part for the year, not exceeding the fair market value at the end of the year of livestock (other than animals included in this basic herd within the meaning assigned by section 29) owned by him at that time in connection with the business

minus the aggregate of

(c) all amounts that

(i) were paid in the year, or are deemed by this Act to have been paid in the year, in the course of carrying on the business, and

(ii) were in payment of or on account of an amount that would, if the income from the business were not computed in accordance with the cash method, be deductible in computing income therefrom for that or any other year, and

(d) the amount, if any, specified by the taxpayer in respect of the business in accordance with paragraph (b) in his return of income under this Part filed for the immediately preceding taxation year;

and minus any deductions for the year permitted by paragraphs 20(1)(a) and (b).

248. Definitions.

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employemnt under a person engaged in the business of farming.

4.2 Jurisprudence and Doctrine

The parties referred to Interpretation Bulletins 145 and 156, and cited the following cases:

1. Fleming Farm Limited v MNR, [1977] CTC 2471; 77 DTC 351;

2. CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282;

3. MNR v Imperial Oil Limited, [1960] CTC 275; 60 DTC 1219;

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

4.3 Comments

4.3.1 Appellant carried on farming

It is clear to the Board that the appellant carried on farming during the years 1972, 1973 and 1974. The definition of “farming” quoted above “includes . . . raising of poultry”. The non-contradicted evidence clearly is to the effect that the Brooder and Broiler Farms raised poultry (pargraphs 3.06, 3.07 and 3.08 of the Facts).

4.3.2 It is also clear to the Board that farming is not the only business of the appellant company. The main business is the processing of poultry. The different operations are listed in paragraph 3.05 of the Facts.

4.3.3 The argument of the respondent is that the activities of the Brooder and Broiler Farms were not separate businesses from the other operations but were an integral part of and incidental to the appellant’s main business. Consequently subsection 28(1) of the new Act must not be applied and cash basis method must not be used. The accrual basis method properly reflects the appellant’s income.

4.3.4 Which facts indeed characterize a business from another?

In the Fleming Farm Limited case cited above, Mr Roland St-Onge, QC, Member, separated the business of the corporation Fleming Farm: operation of production of eggs and hatchery operation. He considererd them as two different businesses and not as a vertical integration. The hatchery operation had its own employees and was located on separate premises.

From another point of view, the Fleming Farm case, as the other cases cited above cannot be properly applied to the present case, because it was not subsection 28(1) which was involved but sections 31 or 125.1 and Regulation 1201 concerning the depletion allowance of will. The Court mainly had to decide about “source of income”, “processing operations”. Even if in those cases the Court had to decide if there were different businesses, it had to consider the wording of legal sections which are not involved in the present case.

4.3.5 In the present case, it is the Board’s opinion that the Brooder and Broiler Farms’ operations are separate businesses from the other operations.

First, raising poultry indeed is per se something completely different from hatchery or processing operations. Secondly, it is operated on different premises with different employees. The accounting system, even if centralized for the whole company, was to the effect that “the farm operation results can be accurately reflected on financial statements” as Mr Shaw said (paragraph 3.09 of the Facts). Mr Shaw’s entire testimony given in paragraph 3.09 was not contradicted.

Moreover, it is the Board’s opinion that an accounting system is something which describes in figures the financial operations and results of a business. For a prudent businessman it is necessary to have an accounting system. It is indeed the main accessory of a business. However, the principal remains the business. The accounting system remains accessory, even if a necessary one. Consequently, whatever the kind of system used by a businessman or a company, it does not change the nature of the business and is not an element to determine the nature of a business.

The fact that the Income Tax Act obliges or permits the use of such or such accounting system is another thing which does not affect the principles explained above. Subsection 28(1) permits, among others, to use the cash basis method when there is a farming business.

It is the Board’s opinion that the appellant was right in applying subsection 28(1) of the new Act in the present case.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.