Chester G Harris v. Minister of National Revenue, [1974] CTC 801, 74 DTC 6623

Heald, J:—This is an appeal in respect of income tax assessments for the taxation years 1966 and 1967 wherein the respondent disallowed a farm loss of the appellant in the sum of $1,034.59 in the taxation year 1966 and in the sum of $1,671.32 in the taxation year 1967.

The appellant is 37 years of age. He was born on a farm in Alberta where he lived until he was about 13 years old. At that age he left the family farm to do farm work on other farms as a hired hand. He continued in this employment until he was about 17. For the next 2 years he was apprenticed as a butcher with an Alberta grocery firm, serving at various locations in Alberta. He then spent some 2 /2 years in the RCM Police. In August of 1960 he returned to the grocery firm as a meat cutter. He continued working for either the grocery firm or a meat packing firm at Red Deer, Alberta until about 1966 when he accepted employment with the Health of Animals Branch, Meat Inspection Branch, Federal Department of Agriculture, stationed at Red Deer. This employment with the Federal Government at Red Deer has continued until the present time and has been at all times a full-time job.

The appellant said in evidence that he had been involved in agriculture practically all of his life and that he had always wanted to go farming on his own, and that the only obstacle standing in his way was lack of financial resources, since his only source of income was his rather modest wages from his employment.

He said that about the only way he could get started in farming at a low cost was to attempt to acquire land through a homestead sale from the Government of the Province of Alberta. He was finally successful in acquiring a half section of land (320 acres) by this method on December 21, 1964 when he entered into a homestead sale agreement with the Alberta Government covering said ‘half section which was situated some 64 miles north west of Red Deer. Pursuant to the agreement, appellant obtained possession of the property on January 1, 1965. At time of purchase subject land was solid timber and bush, consisting of some light scrub and some heavy timber suitable for lumber. There was no road, no fences and no buildings on the property at time of purchase. The appellant testified that, in his view, subject property was capable of being farmed economically as a cow-calf operation using range cattle inasmuch as he believed it would raise a good hay crop and would be suitable for pasture after being cleared and cultivated. He said that when he purchased this land, it was his intention to leave his full-time employment within 2 years to make farming his full-time vocation. In 1965 appellant cleared some 2 acres on which he built a small shack suitable for him to live in temporarily when he was at the property. In 1965 he commuted most weekends from Red Deer to the property. He also spent his two week holiday in 1965 working at the farm. In 1966 and 1967 he also spent most weekends and his summer holiday on the farm. During the winter months of those years he hired a third party to clear the bush from some 85 acres of said land and do some of the breaking thereon. During 1966 and 1967 he himself was also engaged in the clearing and breaking of said 85 acre portion. During this period he also purchased a secondhand tractor and the other implements necessary for the breaking and eventual seeding of said parcel. He also erected some barbed-wire fencing on a portion of subject land. He also erected a granary on the property in 1966 and 1967. Thus, the position of the farm at the end of 1967 was that there was 85 acres cleared and ready to be seeded to grass in the spring of 1968.

Appellant received no income from said property during the taxation years 1966 and 1967. However, he did seek to charge the expenses incurred by him in respect of said properties against his income from employment. In 1966 appellant sought to deduct from income the sum of $1,034.59, which may be broken down as follows:

The corresponding deduction claimed for 1967 was $1,671.32 which is broken down as follows:

The sole issue in the appeal is the propriety of such deductions.

In 1968 appellant sowed 85 acres to barley, oats and tame grass. 1968 was the only year he seeded any grain or grass seed. In the fall of 1968 he harvested about 700 bushels of barley and 200 bushels of oats. After 1968, because of the success of the seeding to tame grass, said 85 acres were suitable for pasture. Also in 1968 the appellant purchased some hogs on a share basis with a friend, and the grain produced from the land in 1968 was used to feed the hogs. Also in 1968 the appellant cut some 27,000 board feet of lumber and dry-piled it on a clearing in the bush. However, unfortunately for the appellant, this lumber was all destroyed by a fire on said property in May of 1968. Since that time the appellant has cut other lumber from subject property and has sold it to others (to the extent of $570 in 1972 and $675 in 1973).

After 1968 said 85 acres were used as a pasture for cattle by a neighbour of the appellant’s. In the taxation years 1968, 1969 and 1970 the appellant claimed no farming expenses nor did he show any farming income. The appellant said that he did not continue with his hog venture after 1968 because the market price of hogs was low and the market price of feed grain was high and thus, in his view, a hog operation was not economically viable. He said that he did not engage in a cattle operation during those years because of lack of financial resources. Finally he was able, in 1971, to make a calf-sharing agreement with a friend. By this time an additional 25 acres had been cleared. Under this arrangement, he has been able to acquire ownership over the years since 1971 of 13 cattle and one bull. He was also able to sell 6 calves this fall. In 1971 he and his family moved to the farm from Red Deer and have resided there on a permanent basis ever since. Exhibit 10 filed at the trial summarizes his farming operations during the last 3 years as follows:

Appellant said that he is presently in the process of clearing another 100 acres; that he anticipates farming on a full-time basis by approximately 1976 and that he foresees a profit from the farm and that his goal is to develop a herd of approximately 100 cows, which, in his view, would be sufficient to support him, his wife and their two children. He agrees that to support 100 cows he will need more pasture land. However, he said there was other Crown land near subject land which he was going to try to obtain on a grazing lease basis. He said that the gross revenues from farming had been increasing, not dramatically, but increasing nevertheless, and on this basis he was sure it would soon be a profitable operation. He also estimated that for the taxation year 1974 his farm receipts would just about equal his farm expenses. Since moving to the farm in 1971 appellant has retained his full-time job in Red Deer and has commuted back and forth from the farm to Red Deer.

It is the appellant’s submission that, at all material times, he was engaged in the business of farming from which he anticipated a profit, but in respect of which he has thus far incurred a loss which is deductible under the Income Tax Act as being expenses incurred for the purpose of gaining or producing income and as such, deductible under paragraph 12(1)(a) of the Act or expenses incurred in the business of farming or clearing land deductible under the provisions of subsection 11(16) of the Act.

Subsection 11(16) reads as follows:

11. (16) Notwithstanding paragraphs (a) and (b) of subsection (1) of section 12, there may be deducted in computing a taxpayer’s income for a taxation year from a business that is farming, amounts paid by him in the year for clearing land, levelling land or laying tile drainage for the purpose of carrying on the farming business.

The respondent submits, on the other hand, that subsection 11(16) (supra) has no application to the facts of this case because, in his submission, the appellant was not engaged “in the business of farming or clearing land” as that term is used in said subsection 11(16) (Supra).

The respondent makes a second submission to the effect that deduction of subject losses are prohibited by paragraphs 12(1)(a), (b) and (h) of the Act, said paragraph (h) being modified by subparagraph 139(1 )(ae)(i) of the Act. These sections read as follows:

12. (1) In computing income, no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business,

139. (1) In this Act,

(ae) “personal or living expenses” include

(i) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

Accordingly the basis of this second submission is that even if I conclude that this appellant was in “the business of farming’’, subject expenditures are not deductible because they were not “in connection with a business carried on for profit or with a reasonable expectation of profit” (italics mine).

Dealing initially with the question as to whether this appellant was engaged in the “business of farming”. On the evidence adduced, I am satisfied that the appellant was engaged in the “business of farming”. Appellant’s entire background is one of farming. He said that he had always wanted to go into farming on his own, but that he had been prevented from doing so because of his lack of funds. I found him to be a credible witness and I accept his evidence in this regard. The opportunity to purchase the homestead land from the Alberta Government gave him the opportunity he had been waiting for—the opportunity to buy land at a low price (the entire half section for $2,440).

This is not a case where the farm was purchased as a hobby or as a “holiday retreat” nor was appellant’s farming operation a mere sham or device. Under the agreement of purchase and under the provisions of The Public Lands Act of Alberta,* [1] the appellant was required to break and seed additional acreage each year. Appellant was also required, after the seventh year of the agreement, to live on the property for at least 3 months in every year. The appellant has complied with these terms and has, since 1971, lived on the property year round. His actions, since acquisition, have been consistent with the operation of a business, having regard to the severe limitations placed on him by lack of capital and income (his gross income during these years being approximately $5,000-$6,000). I cannot conceive of anyone acquiring a farm consisting of solid brush 64 miles from his residence as a hobby or a vacation retreat. Furthermore, I cannot believe that the appellant would have legally obligated himself to break and crop the land and to live there permanently if he had not seriously intended to be in the business of farming.

The term “business” is defined in the Income Tax Act in paragraph 139(1 )(e) as follows:

139. (1) In this Act,

(e) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

I agree with Mahoney, J where, in the case of The Queen v D C Matthews, [1974] CTC 230 at 235; 74 DTC 6193 at 6196, he expressed the view that:

. I . Subject to the exclusion of an office or employment, this statutory definition does not, in my view, narrow the broad definition that: “anything which occupies the time and attention and labour of a man for the purpose of profit is business” (Smith v Anderson (1880), 15 Ch D 247, per Jessel, MR at 258).

It seems to me that this appellant has satisfied all of the requirements both of the statutory definition and of the definition of Jessel, MR quoted (supra).

Appellant was engaged in a farming undertaking, which, from the outset, occupied a great deal of his time, attention and labour. I am also satisfied on the evidence that appellant’s purpose was profit. I cannot believe that anyone would spend the back-breaking hours and days and months which appellant spent on this farm in clearing it, felling the trees, piling the lumber and then building his home and seeding the cleared portion as a hobby or for pleasure. Appellant said his purpose was profit, that he eventually expected to make a living on the farm for his family and I accept his evidence in this connection.

Turning now to the respondent’s submission that even if the appellant was engaged in the business of farming, said business was not carried on for profit or with a reasonable expectation of profit. In support of this submission, the case of D A Holley v MNR, [1973] CTC 539; 73 DTC 5417, was cited. In my view, that decision is distinguishable on its facts from the case at bar. In the Holley case (supra) Sweet, DJ found that what the appellant did was more in the nature of a hobby and “a pleasurable activity per se”. In that case, the appellant was a surgeon practising at Quesnel, BC. The farm he acquired was only 8 miles from Quesnel connected thereto by all- weather roads. The facts in that case are entirely different from those here present.

After giving consideration to all the facts and circumstances of this case, I have concluded that there was ‘‘a reasonable expectation of profit” in the appellant’s farming business. Through hard work and diligence, the appellant had made substantial progress in the first 3 years, to the point where he had 85 acres cleared and seeded to grass. By 1971 some 110 acres were cleared and he commenced to acquire a modest herd of cattle. Through the years 1971 to 1973 he had increased his income from the farm although the farming operation was still showing a loss. However, he said that in 1974 the farm income would just about equal the farm expenses. Surely, this is substantial progress, having regard to the appellant’s lack of adequate financial resources. He is presently in the process of clearing another 100 acres. This will give him a total of 210 acres for pasture for his cattle. The evidence was that it takes approximately 3 /2 acres of pasture to adequately sustain one cow. Thus he will shortly be in a position to sustain some 60 head of cattle. His goal is a herd of 100 head but he is already taking steps to acquire additional pasture land. I found his evidence in this connection to be reasonable and realistic. I have no doubt that, in all probability, the appellant’s farming operation will commence to show a profit next year or the year after. As Mahoney, J said in the Matthews case (supra) at page 236 [6197]:

Each case where the realization of profit is so postponed will have to be examined on its own merits to ascertain that the profit is not merely notional and that the expectation of profit is indeed reasonable.

An examination of the facts and circumstances of subject case have convinced me that appellant’s expectation of profit was indeed reasonable. In my view, this appellant has satisfactorily explained the reasons why it is taking so long to make his farming business a profitable venture, the main reason being his lack of funds. It would, in my opinion, be quite unfair to penalize this taxpayer for his lack of adequate financial resources and to infer from that circumstance a lack of intention on his part to engage in the farming business on a commercial basis. This appellant has done everything he could possibly do, within the limits of his own financial resources, to engage in farming and given his determination and his industry, and having regard to the progress he has made through the years, I am satisfied that the expectation of profit is reasonable.

I have accordingly concluded that the deduction of the losses claimed for the taxation years 1966 and 1967 was proper.

The appeal is therefore allowed with costs.