C.B.A. Engineering Limited v. Minister of National Revenue, [1971] CTC 504, [1971] DTC 5282

CATTANACH, J.:—These are appeals by the appellant herein against its assessments to income tax for the taxation years 1964 and 1965.

The question for determination raised in these appeals is whether the appellant was farming as part of its business or as one of its businesses and consequently whether the deductibility of its farming losses from income from other sources is limited to $5,000 in accordance with the provisions of Section 13(1) of the Income Tax Act.* [1]

The appellant is a joint stock company incorporated in 1956 pursuant to the laws of British Columbia. It carried on the business of consulting engineering in the fields of bridge construction, dam construction, hydro electric development, soil and foundation tests and in the dyking and drainage of lands covered by water or subject to flooding and the reclamation of those lands.

The appellant company emerged from a venture of Dutch interests in reclaiming land in the Fraser River Valley in the area of Pitt Meadows. A company was incorporated under the name of Pitt Polder Limited which employed engineers to reconstruct dykes in the area, install more effective pumping and drainage systems. In order to retain those engineers for a longer time than was needed for the completion of the Pitt polder project other engineering projects were sought for them. When larger projects became available to those engineers such as, in the first instance, the engineering design of the Port Mann bridge over the Fraser River, the appellant company was formed. At first the shares in the appellant were all owned by Pitt Polder Limited. As the projects undertaken by the appellant became more numerous and important the shareholding changed. Engineers, in addition to those originally engaged in the polder project, were employed by the appellant and the engineers became the shareholders, as well as did other business interests, to the extent that the shareholding of Pitt Polder Limited was reduced to 15% in preference shares thereby assuring Pitt Polder Limited a regular income from dividends.

The appellant became increasingly successful. One of its major works was the design of the Arrow dam for the B.C. Hydro and Power authority on which it was engaged from 1960 to 1969.

The business of the appellant was that of a general engineering company primarily in the field of civil engineering works. In order to keep a constant flow of work the appellant sought to enter into foreign work. Foreign work was out of phase with Canadian work and would serve to counter-balance work based solely in Canada.

The ethics of the engineering profession prohibit direct advertising but do not preclude the use of professional cards nor the publication and circulation of brochures extolling the services

(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

(11) $2,500.

an engineer or engineering company can offer to prospective clients.

In order to place itself in a more favourable position in seeking work from clients in foreign lands the appellant decided to extend its engineering consulting business to include agricultural engineering. The type of work sought by the appellant was in the field of civil engineering but the various jobs upon which it submitted plans or proposals had different contents. For example in a land reclamation project the appellant considered it advantageous to be knowledgeable about the agricultural use to which the reclaimed land could be ultimately put. The purpose was to inspire confidence in the prospective client by being able to offer a complete integrated resource development service rather than a mechanical engineering service exclusively so that the appellant would be chosen to do the work.

With this end in view the appellant secured an amendment to its memorandum of association to include the following paragraph in its objects :

To carry on the business of farming consultants and agricultural consultants and to report on, and undertake research with respect to farming and agriculture and to operate farms in connection therewith.

The appellant engaged the services of a consulting agriculturalist who was also an agronomist specializing in soils and crops, with high qualifications and an international reputation.

The appellant then leased 1,000 acres of reclaimed land from Pitt Polder Limited for a 14-year term at a comparatively modest annual rental.

The appellant then began a program of up-grading the dykes and drainage ditches and over a six-year period brought 700 acres under cultivation.

There is no question that the engineers employed by the appellant became more skilled in connection with the building of dykes, the placement of pumps therein, effective methods of drainage and that they acquired more knowledge of the hydrology of the lower Fraser River, but no work of an experimental nature was carried on. Rather it was an application of known skills and the end result was a farm no different from other farms in the immediate area.

It was suggested in evidence and in argument that the farm was to serve as a “show-case” for prospective clients demonstrative of the agricultural engineering skills possessed by the appellant. However it was conclusively established in evidence that the farm did not serve this purpose. There were no visits to the farm by any prospective clients except a casual few who happened to be in Vancouver.

On the other hand, the operation of this farm was featured in brochures circulated by the appellant to prospective clients, as was the availability of the services of a consulting agriculturalist and the brochures highlighted the experience of the appellant’s engineers in this particular field. These features were also emphasized in the presentation for works on which the appellant was bidding.

The consulting agriculturalist recommended the planting of a number of different crops on the land. First legumes were grown to improve the fertility of the soil. A hybrid corn was grown successfully and with a much higher yield than normally. This success was so marked that neighbourhood farmers followed the example of the appellant and produced corn crops. It is anticipated that winter wheat and blueberries will be grown in commercial quantities.

At this point I should mention that the appellant’s embarkation into agricultural engineering or at least its employment of the consulting agriculturalist has been beneficial to the appellant and to its clients in several major construction projects. During the construction of dams, bridges and the installation of hydro lines large areas were stripped of top soil and vegetation. The resulting scarring was unsightly and dangerous because in mountainous areas the stability of the soil was lost. On the recommendation of the appellant’s consulting agriculturalist a mixture of grass seed appropriate to the soil was sown by a method of aerial broadcast, also recommended by the appellant’s agriculturalist, which restored the appearance and stability of the denuded soil. However, I must add that this restoration was accomplished by the knowledge of the agriculturalist rather than from any knowledge acquired in the operation of the farm.

To defray the cost of the operation of the farm the appellant conducted a feed lot operation on the leased land. This operation has developed into a profitable one after the initial years. The fodder grown on the farm is almost sufficient to obviate the purchase of feed.

The appellant claimed as deductions for losses in respect of its farming operations on the leased land the amounts of $13,474.81 and $43,321 in its 1964 and 1965 taxation years respectively.

As to the 1964 taxation year the Minister limited the appellant’s deduction of the loss in that year to $5,000 under Section 13(1) of the Income Tax Act rather than $13,474.81 as claimed by the appellant.

As to the 1965 taxation year the Minister limited the deduction of the appellant’s loss of $43,321 to $11,502, that is to the amount of $5,000 under Section 13(1) of the Income Tax Act in addition to an amount of $6,502.

The amount of $6,502 is made up of a loss of $5,773 in respect of the appellant’s feed lot operation and $730 claimed by the appellant as a capital cost allowance also in respect of the appellant’s feed lot operation.

It is obvious that the Minister, by allowing the amount of $6,502 referred to in the paragraph immediately above, did not consider the operation of a feed lot as falling within the meaning of the word “farming” in Section 13 of the Act. This is not an issue before me.

There is no dispute between the parties as to the accuracy of the figures involved. The sole dispute lies in the propriety of the Minister limiting the appellant’s deductible expenses incurred

in its operation of the ‘farm” to $5,000 in each of its taxation years under review.

It is expedient, therefore, that I should summarize the rival contentions advanced on behalf of the parties as I understand them.

On behalf of the appellant it was contended,

(1) that on the facts the purpose of the appellant in carrying on the farming operations was to generate more consulting engineering business and as such the expenses so incurred were an outlay or expense made for the purpose of gaining or producing income from the consulting engineering business of the appellant and so within Section 12(1) (a) of the Act;* [1]

_. (2) that the appellant was not engaged in ‘‘farming’’ within

the meaning of that word as used in Section 13 of the Act because

(a) even if the activity conducted by the appellant may fall within the definition of ‘‘farming’’ by Section 139(1)(p) of the Act,* that is not conclusive in the application of Section 13 if in reality the expense was incurred in furtherance of the engineering business, and

(b) Section 13 of the Act has no application unless the appellant was in the ‘‘business’’ of farming in that it had the intention of making money from farming. On the other hand it was contended on behalf of the Minister that if the loss was incurred in ‘‘farming’’ as defined in Section 139(1) (p) that loss must be computed in accordance with Section 13(3) and may only be deducted from other income of the appellant to the extent prescribed by Section 13(1). Once the loss is determined to have arisen from farming in the circumstances contemplated in Section 13(1) the purpose of the farming operation is of no consequence. The question to be determined is what is being done and not why it is being done. Added to this it was pointed out that it has been consistently held that a company may engage in more than one business.

On the evidence adduced I have no hesitation in concluding that the appellant was motivated in extending its engineering consulting business to include the agricultural aspects thereof by the reasonable expectation that in doing so it would generate more business for itself in all engineering fields and that the operation of the farm at Pitt Meadows was incidental to that overall purpose. While the farm did not serve as a show-case, nevertheless it did serve to provide experience for the appellant’s engineers and this experience, as well as the farm operation, was truthfully featured in the brochures circulated by the appellant and in its presentations on prospective work. This led to the appellant being selected for several minor works and, as the president of the appellant testified, also resulted in the appellant being ‘‘short listed” among the applicants for work so that it became one of a dozen of the applicants being considered rather than one in a thousand, so that the chance of the appellant being selected for work was enhanced manifold.

I accept as a fact that the appellant in undertaking the operation of the farm was actuated by those business considerations and I would conclude therefore that expenses incurred by the appellant in the operation of the farm were expenses incurred for the purpose of producing income from the consulting engineering business of the appellant.

*139. (1) In this Act,

(p) “farming”’ includes tillage of the soil, livestock raising or exhibiting, maintaining of horses: for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

However, this conclusion does not resolve the matter. I must consider whether the provisions of Section 13 preclude the deduction of such expense as an expense incurred for the purpose of producing income within Section 12(1) (a).

In such consideration it is expedient to recall the basic scheme of Part I of the Income Tax Act. That Part is divided into Divisions: Division A provides for the liability for tax, Division B provides for the computation of income, and Division C provides for the computation of taxable income which is defined in Section 2(3) as income for the year as computed under Division B less deductions permitted by Division C.

By Section 3 (which is within Division B) the income of a taxpayer for a taxation year is its income from all businesses. By Section 4 income for a taxation year from a business is the profit therefrom. Therefore to determine the income of a business, the profit therefrom must be determined which involves the setting off against the revenue derived from the business the expenditures laid out to earn that revenue.

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 authorized 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 compu-

tation 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(la) 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.

The crucial issue, upon which the matter turns, is whether what the appellant did constituted farming within the meaning “* of that word as used in Section 13.

There is no dispute between the parties that the appellant’s chief source of income is neither farming, nor a combination of farming and some other source. On the evidence it would be impossible to sustain such a dispute.

Farming is defined in the Shorter Oxford Dictionary as ‘‘the business of cultivating land, raising of livestock, etc.” and by Section 139(1) (p) ‘‘farming’’ is defined as follows:

(p) “farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

' The word “includes” as used in Section 139(1) (p) is so used

to enlarge the meaning of the word ‘‘farming’’ and must be construed as comprehending the word “farming” in its natural dictionary import and also those things which the section declares it shall include.

What the appellant did on the land it leased was undoubtedly farming within the above definition. It tilled the soil and planted ‘ crops. It realized revenue from those crops. While the losses

incurred far outweighed the revenue received, there is no reason not to believe that the appellant entertained an expectation that the farm would eventually realize a profit, as did the neighbouring farmers from whose. farms the appellant’s farm does not differ materially, if its farm continued to be worked in a husbandlike manner as it was under the guidance of an agriculturalist employed by the appellant. Furthermore, the appellant was not averse, but. was in fact anxious, to put the land leased to profitable use otherwise it would not have embarked upon the feed lot operation and farming is another means to the same end.

I conclude that the appellant was engaged in farming as contemplated by the statute and, therefore, I cannot accede to the appellant’s contention that the operation of the farm was part of the appellant’s engineering business.

While it is true that the appellant’s motive in operating the farm was for the ultimate purpose of increasing its income from its engineering business, that does not alter the fact that what the appellant did was the conduct of a farming business.

Having so concluded it follows that the appellant falls precisely within the provisions of Section 13 of the Act and, in my view, that is conclusive of the matter for the reasons I have expressed above.

Therefore, in my opinion, the Minister was correct in assessing the appellant as he did and accordingly the appeals are dismissed with costs.