Robert Wayne Spicer v. Minister of National Revenue, [1978] CTC 2346, 78 DTC 1268

A W Prociuk (orally: January 19, 1978):—The appellant, Robert Wayne Spicer, of Carstairs, Alberta, appeals from the respondent’s reassess- ment of his income for the taxation years 1969, 1970, 1971 and 1972, wherein the appellant was disallowed to deduct the inventory costs of cattle in each year in his occupation as a farmer and a feedlot operator from his gross income.

The respondent reassessed on the basis that the appellant did not have title to the cattle he looked after, fed and finished off in readiness for marketing, since the cattle belonged to Carstairs Livestock Feeders Association Limited (hereinafter referred to as “the Association”).

The respondent pleads bailment in that the appellant was merely a bailee and as such received certain benefits from the bailment relationship. The appellant took exception to these allegations and stated that he, at all times, was the beneficial owner of the cattle he bought, fed, looked after and later marketed, and the only claim the Association had, for all practical purposes, was a lien or a charge on the cattle to secure the loans which were made to the appellant by the Association to enable him to purchase the said cattle. Once the loan was paid off the Association released its claim on any remaining heads of cattle which were subject to the contract originally executed to secure the loan.

Exhibits A-1 and A-2, filed on behalf of the appellant, are facsimilies of application for livestock (application for membership), and a contract between the Association and the member regarding the procedure and the manner of dealing with the cattle purchased, respectively.

Because of statutory restrictions and/or requirements, there is no mention of a loan or an indebtedness. This is in actuality the nub of the situation.

The appellant and Mr Lome Krause testified in support of the appeal. The respondent subpoenaed Mr Clarence K Crockett, secretarytreasurer of the Association, in support of his, that is in support of the respondent’s, contention, but it soon became apparent that Mr Crockett’s evidence fully corroborated that of the appellant and Mr Krause.

The appellant commenced farming around 1965 in the Carstairs area on a part-time basis and on a full-time basis in 1968 when he went into cattle business on a fairly extensive scale. At the material time he farmed some 1,700 acres part of which was under cultivation for forage crops and the remainder for pasture. At first he borrowed money from the bank for the purpose of buying cattle. The bank required extensive statements from the appellant and took collateral security in accordance with its procedure under section 88 of the Bank Act.

When he desired to substantially increase his herd the borrowing from the bank became very difficult. He then turned to the Association which had been incorporated under The Feeder Association Guarantee Act of the Province of Alberta some years prior.

The Association consists of farmer members each of whom pays into the Association 5% of the loan each member applies for. This sum remains with the Association. The sole purpose of the Association is to make it easier for its members to obtain loans for cattle purchases than it would be for members to deal directly with a bank.

The Association arranges for a bulk loan from a chartered bank, the said loan being guaranteed by the Province of Alberta, through the Department of Agriculture and then the Association allocates individual loans to those of its members who applied. It charges the members the same rate of interest as it pays the bank, plus /2 of 1% to cover administration costs. The member would then proceed to purchase the cattle he wants and notifies the secretary-treasurer of the Association. The cattle so purchased are then branded with the Association brand for identity purposes and the vendor of the cattle is paid by the Association on behalf of the member. The member then takes possession of the cattle and looks after them.

The Association sets up minimum standards of care, feeding and health of animals. It also employs a supervisor who periodically inspects the cattle to ensure that proper care is maintained. There is a provision in the contract, between the member and the Association, that if the member should fail to look after the cattle properly, the Association may take possession of same, sell them to recover its loan, and in case of a deficiency, the member is bound to cover that deficiency.

In the contract the Association asserts that it has title to the cattle in respect of which a loan was advanced to a member. This, undoubtedly, facilitates possession of the cattle if such circumstances should come to pass. The member is completely in charge of. his own operation. In addition, the Association supervisor, being experienced in cattle raising, advises those members who require such assistance. This is a gratuitous service to the members of the Association.

The Association as such owns no inventory of stock, has no facilities for feeding and raising cattle, nor is it in any way directly involved in such procedures. When the time comes for marketing the cattle the Association is notified by the member. The member arranges his own transportation to the market; the cattle are sold and the cheque covering the sale is made payable to the Association and the member jointly. The Association deducts its portion to cover the loan, accrued interest and administrative costs and the remainder is turned over to the member. The appellant testified and stated that this was the procedure that was followed throughout.

Mr Krause, the District Agriculturist, and formerly supervisor of Provincial Feeders Association, stated that each member had full responsibility for his cattle. The Association’s brand on the cattle is merely for identity of animals in the event they would have to be picked up to recover the loan or in the event of mistreatment of the cattle by the member.

Sometimes loans are prepaid, in which case the member is given a brand release on that stock and he is then able to sell the cattle with the proceeds being paid to him directly.

Mr Crockett’s testimony was, in essence, a corroboration of what the appellant and Mr Krause stated. He said:

In reality we are not the owners of the cattle, our members are. Our purpose is to assist people to obtain cattle who couldn’t do it themselves. All we want is our money back. The contract (that is Exhibit A-2) is collateral security.

I am satisfied from the evidence I heard that that document is in effect a chattel mortgage couched in different language to comply with the statutory requirements. From the evidence it is difficult to determine what caused the assessors of the respondent’s District Office to proceed on the premise that they did for the purposes of reassessment. Even one telephone call to any officer of the Association would have been sufficient to place the matter in proper perspective. I have doubts whether the appellant himself was seriously questioned as to what the real facts are surrounding his cattle farm operation.

It is regrettable that a clause in the contract stating that the Association is the owner of the cattle without any further meaningful investigation as to the true nature of the situation has resulted in the expenditure of time and cost to both parties in the preparation and the conduct of. this appeal. The appellant has been successful in totally demolishing the assumption of fact on which the respondent based his reassessment and is entitled to succeed. The appeal is allowed and the matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.