Fred L Johnson v. Minister of National Revenue, [1978] CTC 2122, 78 DTC 1109

Delmer E Taylor:—This is an appeal against 1973 and 1974 income tax assessments in which the Minister of National Revenue disallowed amounts of $8,085 and $11,251 respectively as farming losses. The respondent relied, inter alia, upon paragraphs 18(1)(a), 18(1)(h), subsection 31(1) and the definition of “personal or living expenses’’ in 248(1), all of the Income Tax Act, SC 1970-71-72, c 63, as amended, and applied to the taxpayer’s 1973 and 1974 taxation years.

Facts

The appellant at the times material was an employee of the Government of Ontario, working in the City of Toronto. In 1972 he made an offer to purchase a farm property of almost 100 acres some 40 miles from the City. Though he had no previous farming experience, on completion of the purchase, in May 1973, he and his family (wife and five children) moved to this rural site. The appellant had suffered a heart attack and the move to some extent was advised by his doctor. The purchase of the property itself nearly exhausted his financial resources, and the time he had available for the farm was early in the morning (before 7:30 am) and late at night (after 6:30 pm) and on weekends. He rented 90 acres to a neighbour, and embarked on a small scale in the cattle-farming business. The financial statements which produced the losses in question are reproduced:

F L JOHNSON “REGISTERED ANGUS”

FARM INCOME AND EXPENSE 1973

INCOME
Rental		$1,000	$
Tax Rebate		163	1,163
EXPENSES
Cattle Purchases		1,894
Feed and Seed		195
Insurance		258
Repairs and Maintenance		71
Taxes		333
Mortgage Interest		2,124
Loan Interest		296
Utilities		133
Telephone		94
Casual Wages		1,450
Truck Expense
Gas and Oil	$240
Repair and Maintenance	223
Insurance and Licence	155	618	7,466
	—
NET LOSS BEFORE DEPRECIATION			($6,303)
DEPRECIATION—House		$ 657
—Buildings		1,223
—Truck		325
—Equipment		27	2,232
			($8,535)
LESS: Personal Consumption			450
			($8,085)

DEPRECIATION FRAME

SCHEDULE EQUIPMENT LAND HOUSE BUILDINGS TRUCK

BUS

PORTION

Addition—1973 $135 $45,213 $6,566 $12,225 $1,082 Depreciation 27 657 1,223 325

$108 $45,213 $5,909 $11,002 $ 757

F L JOHNSON “REGISTERED ANGUS”

FARM INCOME AND EXPENSE 1974

INCOME

Rent $1,000 Cattle 892

892

Tax Rebate 178 $ 2,070

EXPENSES

Cattle Purchases 1,851 Pasture Rent 136 Veterinary Service 148 Feed and Seed 547 General Repair and Maintenance 492 Building Repairs 393 Small Tools and Supplies 199 Casual Labour 1,825 Mortgage Interest 3,844 Loan Interest 371 Utilities 321 Phone 187 Insurance and Taxes 320 Truck Expenses

Gas and Oil $331

Repairs and Maintenance 489

Insurance and Licence 192 1,012 11,646

NET LOSS BEFORE DEPRECIATION ($ 9,576)

DEPRECIATION—House 591

—Buildings 1,100 —Truck 227

—Equipment 82 2,000

($11,576)

LESS: Personal Consumption 325

					($11,251)
DEPRECIATION			FRAME
SCHEDULE	LAND EQUIPMENT HOUSE BUILDINGS TRUCK
			BUS
			PORTION
BALANCE—Jan. 1, 1974	$45,213	$108	$5,909	$11,002	$757
Addition	—	300
		$408
Depreciation	—	82	591	1,100	227
BALANCE	$45,213	$326	$5,318	$ 9,902	$530

Contentions

The appellant’s position was that he was entitled to all of the amounts claimed since he had entered the operation with every intention of making it a viable going concern. At the minimum he should receive consideration under the sections of the Income Tax Act allowing for ‘‘restricted farm losses”.

The respondent contended that the appellant had no reasonable expectation of profit as a result of his farming activities. Therefore, he was not entitled to any deduction (even the restricted farm loss) on the grounds that the expenses claimed were personal.

Evidence

The appellant reviewed the history of the venture for the Board and gave explanations for renting part of the farm to a neighbour, and incurring the unanticipated losses, which he agreed continued, although on a lesser scale, up until the present. He was now practically out of farming, blaming this state of affairs on the income tax situation which brought him before the Board.

Argument

The appellant provided the Board with little in the way of rationale to support his case other than the information already submitted.

Counsel for the respondent asserted that the evidence did not support a conclusion that the taxpayer’s chief source of income was either farming, or a combination of farming and some other source of income, therefore leaving open to him only the prospect of relief under section 31 of the Income Tax Act providing for restricted farm losses. In counsel’s opinion, this too was denied to the appellant since the evidence, particularly that given in the financial statements, showed clearly that he could not have held a “reasonable expectation of profit”. The case of William Moldowan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213, was submitted to the Board as the guiding principle upon which this last assertion of counsel was founded. The following passage from Moldowan (supra) found at page 313 [5215] was quoted with approval by counsel:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v MNR, [1972] CTC 151; 72 DTC 6131. See also paragraph 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.

Findings

The Board agrees that the evidence provides no support for the view that during the years in question the taxpayer’s chief source of income was neither farming, nor a combination of farming and some other source of income. The Board, however, has examined with considerable interest the contention of counsel that the evidence shows that the appellant had no basis whatsoever for a “reasonable expectation of profit”.

In effect, counsel for the respondent would have the Board hold that on the basis of the Moldowan decision (supra), if the efforts expended by the appellant on the farm property did not reflect the prospect of a “reasonable expectation of profit”, the appellant could not qualify even under the restricted farm loss provisions of section 31 of the Act (analogous to section 13 of the “old” Act) and the operation could only be classified as a hobby. I am unable to read that interpretation into the judgment given by the learned Justice in the Moldowan matter. There can be no doubt that the analysis and interpretation of section 31 of the Act is difficult, as is evidenced by the detail provided in the Moldowan decision by the Supreme Court. On the other hand, it is just as clear from the judgment that there is a niche in such interpretation to allow for such restricted losses. That niche seems most appropriately defined on page 315 [5216] of the judgment:

(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 subsection 13(1) in respect of farming losses.* [1]

I can only read that quotation to mean that if the relevant activity of an appellant can be deemed “farming”, then there is a prima facie entitlement to at least the allowances provided under. section 31. It also appears evident to me that just as any entitlement beyond that (allowing full farm losses) must be fully supported by the taxpayer, so any disentitlement by the Minister from such provisions should only be based on the applicability of the provisions respecting “hobby farming”, also indicated on page 315 [5216] of the same judgment:

(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.*

It would seem to me that even when the investment activity and results of farming in certain years does not support the view that an appellant could have had a “reasonable expectation of profit” in those years, this cannot necessarily be construed to mean that the appellant could not have held “any expectation of profit” either in the years in question or in subsequent years. Even the information that the immediately subsequent years continued to show losses would not of itself invalidate the proposition that the efforts and intentions of the taxpayer during the years in question were directed to making a profit.

lt seems evident from the Moldowan decision (supra) that at some point in time, and after some experience, the question might well arise whether farming considered as qualifying for “restricted farm losses” had stabilized and become only “hobby farming” and no longer be qualified. I do not find support for the view that such a position had been reached in the instant case. This taxpayer, no matter how inexperienced, undercapitalized and physically overextended, expected at some future time to eliminate his start-up losses and produce an income from farming. That he was perhaps naive and overly optimistic is possible, but it was these very factors— inexperience, undercapitalization and overextension—which would have inhibited him from using the farm property as a personal recreational retreat, ie a hobby. The property was almost 100 acres, it was some 40 miles from his regular employment, he did have five children, three of whom were boys presumably able to assist in his plan, he bought, raised and sold cattle, harvested some of the feed for the livestock from the farm and leased out the remainder of the farm to a neighbour. I doubt this is a description of a “gentleman farmer” (one intending the operation to be a hobby)—one who would move his family to the country, commute to regular employment each day, and attempt to conduct the farming operations from 5:30 am to 7:30 am each morning and from 6:30 pm until dark each evening, and also fully engage his weekends in the operation.

The decisions in Fred S Goring and F Dennis Goring v MNR, [1976] CTC 2255; 76 DTC 1202: Leonard Mendels v MNR, [1976] CTC 2346; 76 DTC 1256; and Samuel Ravida v MNR, [1977] CTC 2598; 78 DTC 1030, give some views on this subject, and I believe they are consistent with the learned opinions expressed in Moldowan (supra). That farming, or at least a rural way of life, holds great appeal for Canadians seems amply evidenced. It would appear that in response to such deep feelings, the legislators in their wisdom have made specific income tax. provisions affecting farming. The limitations, as safeguards against abuse, are written therein, and taxpayers are entitled to the full benefit up to those limitations. In my opinion, this appellant, rather than being outside the provisions of section 31 of the Act, is probably a good example of an income tax situation in which it is particularly applicable.

The reply to notice of appeal provided by the respondent indicates that the respondent held the appellant to strict proof regarding the deductions claimed by him, in the event that his appeal was upheld. There was no such basis for the disallowance indicated on the assessment notices appealed by the taxpayer for the years in question and indeed no attempt to require substantiation from the appellant was made at the hearing. The Board therefore makes no further comment on this point raised by the respondent.

Decision

The appeal is allowed in part in order that the appellant can claim farming losses up to the limits provided in section 31 of the Income Tax Act, that is $5,000 for each of the years 1973 and 1974. The matter is referred back to the respondent for reassessment accordingly.

Appeal allowed in part.