Oscar Dorfman v. Minister of National Revenue, [1972] CTC 151, 72 DTC 6131

Collier, J:—This is an appeal from the Tax Appeal Board which dismissed the taxpayer’s appeal from a reassessment by the Minister in respect to the taxpayer’s income for the year 1966 (reported [1970] Tax ABC 1151).

For that year, the taxpayer sought to deduct a farming loss of $11,604.13. At the trial, the taxpayer accepted the above figure, which was calculated by the Minister, as the correct amount. The Minister, in the reassessment, limited the deductible loss to $5,000 on the grounds the taxpayer fell within subsection 13(1) of the Income Tax Act. I set out subsections (1) and (2):

13. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for the year exceeds $2,500, or

(ii) $2,500.

(2) For the purpose of this section, the Minister may determine that a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

The Tax Appeal Board proceeded on the basis the Minister had made a determination pursuant to subsection (2). It was conceded on behalf of the Minister that he had not.

The issue before me is whether subsection 13(1) applies to this taxpayer for 1966.

The taxpayer is an engaging gentleman, now 75 years old, who has resided in Winnipeg for many years. He still carries on a business in that city under the name of “O Dorfman, Furrier”. He started in 1928 on his own, buying processed furs and working them into garments for garment makers. Over the years he changed the type of materials he worked on, and in fact ceased doing fur trimming a few years ago when a demand arose for mink trimmings. In 1965 he commenced making bedroom slippers, caps and hoods and still does today under the same trade name. He has employed one or two female workers who sew for him. He bought and cut the materials. For convenience, this occupation of his was called, in the evidence, the fur processing or fur manufacturing business.

In 1945 he bought and established a mink farm, which presumably he later sold, because in 1948 he bought in partnership another mink farm, called the “Silverdale Mink Ranch” in Charleswood. He acquired sole control of that business in 1952, and operated it until 1968 when continuing financial losses dictated his getting out of the business. He had employees at the ranch, but he took an active part in the management and physical effort required to run it. He divided his time almost equally between his furrier business and his mink ranching business, as a result putting in long hours.

A chartered accountant kept his financial records. The revenue and expense of the furrier business and the mink ranch were strictly segregated, as was the taxpayer’s other income. None of his employees at the mink ranch did any work in the furrier operation, nor did the furrier employees work at any time at the mink ranch. The mink pelts harvested at the ranch were never used in the taxpayer’s furrier business. They were sold at fur auction sales.

The taxpayer’s accountant prepared a summary of the income or losses of the taxpayer over a 14-year period. The relevant parts of this exhibit are as follows:

The loss figures for the years 1965 and 1966 in respect to the mink ranch as calculated by the Minister, and accepted by the taxpayer, were actually $5,434.22 and $11,604.13 respectively. The rental income came from a building the taxpayer owned. In each of the years 1965 to 1967 inclusive, the taxpayer received $900 old age security pension.

The evidence adduced by the taxpayer indicates the mink ranching business is somewhat hazardous. Disease and fluctuating pelt prices, singly or in combination, can cause losses in any year. The taxpayer’s losses from 1965 to 1967 were caused by high labour costs and low prices. Prices were driven down by a flood of pelts imported from the Scandinavian countries. The evidence is that many mink ranchers were forced to go out of the business, as indeed the taxpayer was in 1968.

I find, on the evidence of the taxpayer and Mr Soudack, that the taxpayer always. had, in his mind, the expectation of making profit from the mink business. This was no sideline or hobby. When prices deteriorated in 1965 he remained in business with the same optimism of the grain farmer: prices will be better next year. I do not think this was unreasonable on the taxpayer’s part.

It is therefore apparent the taxpayer over the years and in 1966 carried out two businesses. He also had rental income, and I think it can be said he was in the rental business as well. He also had a small investment income. Counsel for the Minister agreed that the taxpayer was at all times “farming” within the meaning of the Income Tax Act, but contended that for the year in question the taxpayer’s chief source of income was not farming, nor was it a combination of farming and some other source of income. It is contended that the chief source of income in 1966 was from the furrier business. From. the point of view of net dollars and in hindsight this is true. If, however, one looks at the years 1956 and 1957 (again in hindsight) the taxpayer netted more from farming than from his other activities. In other years, rental income produced more money for him than his other activities.

The Minister relies on three cases: MNR v B A Robertson, [1954] Ex CR 321; [1954] CTC 110; MNR v Grieve et al, [1959] Ex CR 11; [1959] CTC 320; and Simpson v MNR, [1961] CTC 174; 61 DTC 1117. In the Robertson case the taxpayer’s sole occupation was farming, but she had a substantial investment income. In 1951 she sustained a farming loss. The Minister allowed a deduction of only half the loss, applying what was then subsection 13(3) of the Act. The Minister’s assessment was upheld. Potter, J, at one point in his judgment, expressed the view, in respect to the section as it then read, that because there had been no net income realized from the farm in the year under review, farming could not be a source of income. at all; her only other source of income was investments and that source could not be combined with a non-existent source to make a “combination”. Counsel for the Minister here put forward a similar argument (among others). In my opinion the Robertson case is distinguishable, and I adopt the words of Thurlow, J, in the Grieve case where he said (pp 20-21 [328-9]):

In MNR v Robertson, [1954] Ex CR 321; [1954] CTC 110, Potter J, on the evidence before him, drew an inference that the power conferred on the Minister by Section 13 had in fact been exercised. There, however, both the provisions of Section 13 and the power of determination given by subsection (2) were widely different from those applicable to the years 1953 and 1965, the computation on which the assessment in question was based was at variance with the taxpayer’s computation, and Potter, J appears to have drawn his conclusion that the determination had been made not merely from the notice of assessment and a letter referring to subsections

(3) and (4) of Section 13, though not to subsection (2), which had accompanied the notice of assessment, but as well from the Minister’s decision (following the appellant’s notice of objection), in which it was stated that the appellant’s chief source of income was neither farming nor a combination of farming and some other source of income within the meaning of subsection (3) of Section 13 of the Act.

The Grieve case is also, I think, distinguishable. Thurlow, J was there dealing with subsection 13(2). The Minister had made a determination under the subsection and the question was whether that determination was reviewable. Thurlow, J held it was reviewable, but on the facts dismissed the appeal, on the basis it had not been shown the Minister had acted in contravention of some principle of law.

in the Simpson case, Thorson, P found, on the facts, the taxpayer’s chief source of income was a dance hall business, and not farming, and upheld the Minister’s assessment which limited the amount of farming loss deductible. Again, I think that case, too, is therefore distinguishable.

I cannot accept the interpretation put by counsel for the Minister in this case on the words “source of income”: that there must be net income before there can be a source. In my view the words are used in the sense of a business, employment, or property from which a net profit might reasonably be expected to come.

Counsel for the Minister also contended that for there to be a “combination of farming and some other source of income” there must be some relationship of some kind between the sources. He points out the mink pelts here were not used in the furrier business. While Thorson, P did not expressly rule on this argument in the Simpson case (supra), I adopt his comment at page 178 [1119] “. . . I do not see why there must be such a limitation”.

Cattanach, J in CBA Engineering Ltd v MNR, [1971] CTC 504; 71 DTC 5282, considered the meaning and purpose of section 13. I quote from pages 510-11 [5286-7]:

Under Division B, the computation of income, Parliament enacted Section 13 which is a special provision applicable to the deductibility of farming losses where a taxpayer is engaged in farming and the taxpayer’s chief source of income is neither farming, nor a combination of farming and some other source of income.

Section 13 contemplates three possibilities:

(1) the farming losses of a full-time farmer where farming is the chief source of income (or a combination of farming and something else) in which event all losses are deductible,

(2) farming losses incurred in a farming operation with the expectation of profit or the eventual expectation of profit but where farming is not the taxpayer’s chief source of income, nor part of it, in which event the deductibility of losses is limited by Section 13, and

(3) an operation which is in the nature of a hobby, pastime or way of life, the losses from which are not deductible being personal or living expenses.

It is clear, when the farming activity of a taxpayer falls within Section 13, that Parliament must have intended that the losses incurred in farming are not to be deducted except in the manner and to the extent auhorized by that section. Such intention is evident from a reading of Section 13 with the other sections of the Act. It is a specific section designed to cover a specific set of circumstances in Division B dealing with computation of income. Being a specific section it is axiomatic that it takes precedence over a general section.

Section 3 of the Act clearly contemplates that a taxpayer (which includes a company) may carry on more than one business. In the present instance the Minister alleges that the appellant had two businesses, one farming and the other consulting engineering, whereas the appellant maintains there was but one, that of consulting engineering.

Section 13(3) requires that a loss from farming shall be computed by applying the provisions of the Act respecting the computation of income from a business. When there is more than one business, each business is a source of income. Section 139(1 a) of the Act directs that income from a source is to be computed in accordance with the Act, that is to say, by following the provisions of the Act applicable to the computation of income from each source on the assumption that the taxpayer had no income except from that particular source. In so computing income from a source the taxpayer is entitled to no exceptions except those relating to that source.

In my view, what Cattanach, J terms the first possibility applies in this case. I conclude here that the taxpayer’s chief source of income (with the interpretation I suggest those words be given) was a combination of farming and other sources and therefore the limited deduction set out in subsection 13(1) does not apply.

The appeal is therefore allowed and the assessment for 1966 is referred back to the respondent for reassessment accordingly.

The appellant is entitled to costs.