James a Wilfley v. Her Majesty the Queen, [1974] CTC 510, 74 DTC 6422

Collier, J (orally):—When the plaintiff filed his income tax return for the 1969 taxation year he elected under section 42 of the Income Tax Act, RSC 1952, c 148 and amendments, to pay tax on the basis of averaging his income for the years 1965 to 1969 inclusive. It was his position that his chief source of income for those years was from farming. The Minister of National Revenue did not accept this election. In the notice of assessment dated July 8, 1970 it is stated:

Your Election to Average is invalid as your chief source of income is not from farming.

In the defence it is pleaded:

. . . the Plaintiff is not entitled under the provisions of Section 42 of the Income Tax Act to elect to average his income as claimed by him, on the basis that the Plaintiff’s chief source of income during 1969 and the four immediately preceding taxation years was not farming.

The relevant portion of subsection 42(1) is as follows:

42. (1) Where a taxpayer’s chief source of income has been farming .. . . during a taxation year (in this section referred to as the ‘‘year of averaging”) and the four immediately preceding years for which he has filed returns of Income . . .

The dispute here is, therefore, whether the plaintiff’s chief source of income during the taxation years sought to be “averaged” was farming. That, to my mind, is basically a question of fact to be determined on the evidence in each particular case. It is then relevant and necessary to review the plaintiff’s past occupation, employment, and earnings history.

The plaintiff was born in 1926. He was raised on his grandparents’ farm in Brooks, Alberta. After primary education he attended agricultural school in Olds, Alberta during 1947 and 1948. Following that he returned to the family farm.

In 1951 he commenced employment with the Massey Ferguson Company. For approximately nine years he sold and serviced farm equipment. About 1960 he became employed by Atco Industries Ltd, eventually becoming sales manager. That company sold industrial and other type trailers. He ceased his employment with that company about the end of February 1966.

The plaintiff appeared to me to be an honest and straightforward witness. The evidence indicates him to be hard working and a man of enterprise. He said his intentions always were to be a cattle farmer and on a substantial scale. I accept those statements. All this took time and, of course, money. He was married with a growing family. The opportunity to go into the business had to be there. One cannot suddenly branch into farming, particularly financially successful farming, overnight.

In 1963 the plaintiff acquired 82 acres of land near Brooks, Alberta for $12,000. In 1965 he obtained a further 1,080 acres at a cost of $40,000. In the same year he leased 80 acres. By the end of 1965 he owned or leased 1,242 acres. These purchases were financed by cashing in on his life insurance, using his savings, the remains of his salary, obtaining credit or loans, and buying land on the instalment plan.

Up until the early part of 1966, as has been related, the plaintiff was employed by At-co Industries Ltd or a predecessor company. His earnings from that company were as follows:

1963— $16,450

1964— $18,100

1965—$19,300

1966— $12,168

He testified he put whatever money he had left from those earnings, after providing for the needs of himself and his family, into the cattle ranch or farm.

He started his farming operations, as might be expected, in a gradual way. In 1963 he did not run any cattle. He had only 82 acres of land and he did all the necessary development work in his spare time. He hired his father, a widower, to help and provided him with living accommodation on the land, and a small remuneration. The farming operation showed gross expenditures of approximately $4,200 and a net loss of $3,631.45. A similar situation prevailed in 1964, with expenditures of $5,370 and a net loss of $4,770.23. No cattle were run.

In 1965 the large additional acreage was obtained. Cattle were purchased; the amount expended was $13,655.81; 38 head were sold. The cattle involved in this year were the plaintiff’s only. Overall expenditures amounted to approximately $23,000. The net loss was roughly $20,000. In that year the operation was what was termed in the evidence as a “cow-calf” operation, to distinguish it from an allied cattle feeding business started later.

The plaintiff expected it would take two or three years before the business became, as he said “viable”. I took ‘that to mean the period of time required, not necessarily to make a net profit, but to ensure the operation could be successfully carried on as his prime and only endeavour.

In 1966, after leaving Atco, the plaintiff commenced building cattle feeding lots. He himself moved to Brooks. His family, chiefly for schooling reasons, maintained a home in Calgary. By some time in 1967 the cattle feeding operation had been safely established. The plaintiff’s own cattle were specially fed, then marketed. Cattle owned by others was brought in, fed, and marketed. A company, Lakeside Feeders Ltd, was incorporated on April 7, 1966. It became the vehicle to carry on this aspect of the plaintiff's endeavours. The company at times thereafter bought, fed, and marketed some cattle on its own account. Its largest production, however, was on the “custom” basis, including the plaintiff’s own cattle. Lakeside Feeders Ltd was for practical purposes controlled solely by the plaintiff. He, in his own mind, operated it as part of his overall cattle business. In its first fiscal year ending in August 1967 it incurred a net loss. For the next two following fiscal years it showed profits, before tax, of approximately $24,000 and $35,000 respectively.

To complete this portion of the history of the plaintiff’s business activities, he took in what he termed a “partner” in the latter part of November 1969. A company, Lakeside Farm Industries Ltd was formed and the plaintiff’s cow-calf business transferred to that company. As part of the transaction, the plaintiff sold 491 head of cattle to the company on December 1, 1969 for $83,470. A down payment of $43,470, not necessarily in cash, was received. The balance of $40,000 was payable in equal amounts over the ensuing five years.

After leaving Atco, and after Lakeside Feeders Ltd was formed, the plaintiff drew the following sums from that company:

1966— $6,000

1967— $7,200

1968— $7,800

In 1969 the plaintiff drew or received $9,600. The viva voce evidence was unclear as to whether this amount came from Lakeside Feeders Ltd alone. The T4 slips which formed part of Exhibit 12 showed the amount as having been paid by that company.

The plaintiff drew this money out of Lakeside Feeders Ltd in order to support himself and his family. As Mr Wilfley said, he had to have money from somewhere in order to subsist. It mattered not to him whether it came from the cow-calf aspect of the dichotomy, or the cattle feeder aspect. So far as the plaintiff was concerned, it came from his “farming” operations.

The following table, which is essentially the arrangement of figures prepared by Mr Odishaw, and which is substantially set out as part of Exhibit 11, sets out the dollar and cents position of the plaintiff during the years 1965 to 1969:

Not included in the table is the accrual right to $40,000, the balance owing on the sale of the 491 head of cattle by the plaintiff in 1969.

The defendant says:

1. The amounts received from 1966 through 1968 from Lakeside Feeders Ltd, totalling $36,600, cannot be said to be income from farming. That was salary from a company which, in any event, was not in the business of farming as defined by the Income Tax Act.

2. One must look at the whole of the financial picture for the five years. When this is done it is apparent the true farming operations produced a net overall loss of $16,131.45. On the other hand, the other source of dollars (not in the submission of the defendant from “farming”) contributed, over the same five years, the total sum of $69,415.47.

3. The conclusion therefore must be that the plaintiffs chief source of income for the years in question was not from farming but from other than farming.

In my opinion, the net dollar and cents position, when viewed through five years of hindsight is not the only, or conclusive criterion, to be considered in determining the question of fact: Has the chief source of income been farming?

If mathematical considerations only apply, then one must look at not only the dollar and cent result, but at the dollar and cent flow. From the table I have set out, it appears the “flow” from farming was approximately $466,000 in receipts and $472,000 in expenditures. This compares with a non-farming dollar flow of something over $69,000.

In my opinion, all the surrounding facts and circumstances must be considered. From 1963 to early 1966 the plaintiff channelled a great deal of his time away from his job into the development of the operation at Brooks. He put in as much money as he could to develop his intended business. If he had been fortunate enough to sever his employment with Atco in 1964, and borrow or otherwise obtain the moneys necessary in 1965 and 1966 to support himself and his family and at the same time gradually develop his cattle business, his nonfarming income from a dollar and cent basis would, of course, have been dramatically less and would not have attracted so implacably the defendant’s thrust that the plaintiff’s chief source of income for the years in question was other than farming.

In my view, as was said in O Dorfman v MNR, [1972] CTC 151; 72 DTC 6131, and B James v MNR, [1973] CTC 457; 73 DTC 5333, there may be sources of income even though in a given year or years there may have been no net “profit” in those years. Those two cases dealt particularly with section 13 of the old Income Tax Act, but, to my mind, the decisions are applicable in construing the words ‘‘chief source of income” as used in subsection 42(1).

In the instant case, the whole direction of the plaintiff’s activities from 1963 on was towards farming as his sole occupation and his probable chief source of income for the future. I need not recite again the gradual investment in land and other assets, and the development of the whole operation.

The evidence, however, goes further than mere intention, to actual physical and financial activities. From the beginning of the period to the end of the period under review, there was a building up of gross revenue from farming, to an ultimate net profit in 1969, while during the same period the plaintiff’s receipts from other sources diminished. If one excludes from non-farming income the moneys received from Lakeside Feeders Ltd, then the non-farming income in the years 1967 to 1969 dwindled substantially.

Mr Odishaw indicated in argument that (in his view at least) this case really turned on the $36,600 received from Lakeside Feeders Ltd in the years 1966-1969 inclusive. He contended for the defendant this was non-farming income and when it was added to the other nonfarming income, the mathematical disparity between farming income and non-farming income was so great that subsection 42(1) could not apply to this plaintiff.

I am not convinced the Lakeside Feeders Ltd remuneration is conclusive one way or the other. I do not think it necessary to. decide whether or not it can be classed as “farming income”. (See, for a somewhat analogous situation: R v Kuhl, [1973] CTC 846; 74 DTC 6024.) Looking at all the facts, and from a practical point of view, I conclude the plaintiff’s chief source of income for the years in question has been farming.

The appeal is allowed. The assessment for the year 1969 is referred back to the Minister. The plaintiff is entitled to the averaging provisions set out in section 42 of the Act and the Minister is directed to reassess for the taxation year 1969 on that basis.

The plaintiff is entitled to his costs of this action.