Cooke v. Minister of National Revenue, [1975] C.T.C. 2296, 75 D.T.C. 223

The Chairman (orally: June 20, 1975):

1 This is an appeal by Stewart J Cooke against reassessments by the Minister of National Revenue for the 1970 and 1971 taxation years. The point in issue is whether or not the appellant is entitled to deduct his farming losses in their entirety in those years or whether he is limited, within the options of subsection 13(1) of the former Income Tax Act, to the amounts set out therein.

2 The first issue raised by the respondent in argument was whether or not the Board had jurisdiction to deal with the matter on the basis of the ruling issued by the Rulings Division of the Chief Source of Income Committee of the Department of National Revenue that the appellant's chief source of income for the years in question was “neither farming nor farming and some other source of income”.

3 I think the courts have held on several occasions that, where the Minister has proceeded on legal grounds, the courts would not overturn the finding except in unusual circumstances. However, it is not an absolute bar such as exists in certain other sections of the Act, and I am thinking in particular of section 138A, if it is a ministerial decision which the court or the Board feels was not made on complete evidence. Therefore, after obtaining knowledge of the complete facts, as I think my colleague, the Assistant Chairman, said in the first instance in the case of Moldowan v Minister of National Revenue, [1973] C.T.C. 2294, 73 D.T.C. 228, if the Board is satisfied there were certain facts not available to the Minister in arriving at his decision, the Board is justified, having heard the evidence, in determining that the ruling is not binding against the taxpayer.

4 I have come to that conclusion in this case because the assessor, Mr Dykstra, an auditor with the Belleville District Taxation Office, indicated that he had forwarded the information that he had to Ottawa but that he was not able to forward a statement by the taxpayer who is now the appellant. The reason for that was that the appellant had suffered a broken jaw in an injury sustained while working on his farm and therefore, in my view, the taxation officials did not have before them all the facts that were available at the time the decision was made.

5 I come now to the facts of the case and a determination as to whether or not, on the evidence that has been produced before me, I can find that the appellant is bound by the limitations of section 13.

6 The appellant is a chartered accountant, who gave up a job with the Department of National Revenue in 1964 “to go farming”, as he put it. He said he was tired of living a city life and he wanted to raise his three boys on a farm. He had 230 acres of his own and 150 acres which he had leased with an option to purchase. His plan was to run 50 brood cows and raise their offspring to a weight of about 1,000 pounds and then sell them. This is what is commonly known as “a cow-calf operation”.

7 He said they should market 45 out of 50 and this would give him a sufficient gross sum to make a profit and increase his herd.

8 He had purchased equipment; I think he said he invested some $60,000 in farm equipment and, in one year, he took off 10,000 bales of hay. He did most of the work himself with the help of his wife and children and, after continuing along in their way, had finally reached a point, after four drought losses, where he decided he had to switch from straight farming to the cow operation which I have just described.

9 He started with about 30 Western heifers which he purchased with borrowed money. In 1969 the bank called the loan, at a time when he had 100 head and was about to make his first profit. He had to sell off these cattle at short notice to pay the bank and, although there was some profit made in connection with the basic herd, it was a capital gain. He was almost wiped out and had to start over again.

10 He started over with ten head and one bull and planned to breed the ten head. In 1971 he had five more head of cattle and he presently has 80, and admits that it will probably be another four, five or six years before he can see a profit from this operation.

11 In the meantime, he has continued to operate as a chartered accountant, in the months of January, February, March and April, mainly, and most of his work consists of making out tax returns. He had a gross income of about $15,000 in fees from his chartered accountancy business. His clients numbered around 100 and seldom varied. He had one client for whom he did work on a basis of 52 weeks a year and this accounted for about 50% of his gross income. He said he did not advertise his chartered accountancy business except in a small newspaper in Stirling, Ontario, and said he could not devote more time to increasing his income as a chartered accountant without cutting down on the time devoted to working on the farm.

12 He continued to carry on with his farming and is carrying it on at the present time.

13 He was reassessed in 1970 and 1971, after a series of losses dating, I think, almost from the beginning. He says that in 1970 there was a surge in interest rates which increased his loss. I think he also claimed some capital cost allowance which also served to increase his loss. He says that his prime expense is interest on borrowed money.

14 He has a residence on the land which was built at a cost of $100,000 in 1968 with money given to his wife by her father for that purpose.

15 He said about 50% of his accounting clients are farmers and, being himself a farmer, he has a better appreciation of their problems. He is also a representative of an association of farmers and has had occasion to make representations on their behalf to the provincial authorities.

16 The question is whether or not this man is caught by the following phrase which appears in section 13 of the former Income Tax Act:

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, ...

17 It is admitted by both parties in this case that the appellant was farming. It is also admitted by both parties that the arithmetic is not in question. The question, then, is whether or not his chief source of income was from a combination of farming and some other source. If it was, then he is entitled to deduct all his losses against his other income. If it was not, then he is limited by the formula set forth in subsection (1) of the old Act.

18 In the recent case of Moldowan v The Queen, [1975] C.T.C. 323, 75 D.T.C. 5216, which was decided on June 2 last in the Federal Court of Appeal by Mr Justice Pratte and Mr Justice Ryan who gave the reasons for the majority with Mr Justice Urie dissenting, Mr Justice Pratte said at page 325 [5217]:

Section 13 presupposes that farming may be a taxpayer's chief source of income for a taxation year in spite of the fact that the taxpayer may have incurred a farming loss for that year. A business does not cease to be a business in a year (and a source of income does cease [ sic] to be a source of income in a year) for the sole reason that it does not yield a profit in that year. Section 13(1) does not refer to the “chief source of the taxpayer's income” but to the “taxpayer's chief source of income”. In my view, as long as a taxpayer carries on the business of farming, farming remains one of the taxpayer's sources of income regardless of the fact that the farming business may in certain years result in losses and regardless of the fact that the taxpayer may have no reasonable hope of operating his farming business at a profit in those particular years.

19 He then goes on to discuss chief source of income and a combination of farming and some other source of income and, in my view of his judgment, it really boils down to looking at each case on its facts and determining whether or not the man was farming.

20 There is no question, from a perusal of the extract that I have just read aloud, that farming is a business. In the last few years we have overcome the great wealth of decisions that held that a person could not be engaged in farming unless he had a reasonable expectation of profit. I think that was finally laid to rest as the sole criterion in the decision in Bert James v Minister of National Revenue, [1973] C.T.C. 457, 73 D.T.C. 5333, a decision by Mr Justice Gibson, in which he held the same opinion as did Mr Justice Urie in his dissenting judgment in the Moldowan case (supra) when he said, at page 332 [5224]:

... reasonable expectation of profit is ... one of the indicia to determine whether or not a taxpayer is engaged in the business of farming, not in the determination of the taxpayer's chief source of income.

21 This man has gone into a farming area. He has invested substantial amounts of money. He has also invested a tremendous amount of work of his own and of his family. He has a son who is presently attending the University of Guelph, the former Ontario Agricultural College, and who plans to return and work the farm with him. I cannot conceive, and I think it was Mr Justice Heald in a recent decision who said that he could not conceive, of a man going into a wilderness and clearing an area unless he seriously intended to farm. (See Chester Harris v Minister of National Revenue, [1974] C.T.C. 801, 74 D.T.C. 6623.) It is one thing to sit back to be a gentleman farmer and have someone else do the work and allow the taxpayer to write off against other income the farming losses but, in my view, it is a completely different thing when the taxpayer himself is expending not only his money but his energy in an attempt to build a farm that will, in due course, be his chief source of income.

22 It is true that he is flying in the face of the current trend away from family farms, and I think it ill behoves any court or board to place additional obstacles in his path. I think that the Income Tax Act, as drafted, is sufficiently difficult to interpret without boards or courts trying to add what they feel are explanatory interpretations that do nothing more than confuse the issue. I do not think that there is anything sinister or difficult in the wording of subsection 13(1). When one looks at the facts of this case, this man's chief source of income, in my view, is a combination of his expectation of profit from the business source of farming and his income from his chartered accountancy business. Really, I suppose, his chief source of income is his own initiative and willingness to work on the farm as well as at his accountancy business in order to supply the necessities of life for his family.

23 In my view, the taxpayer does not fall within the limitation of section 13 of the old Income Tax Act, and there is a true source of income in his farming operation, albeit somewhat far down the road at this particular time.

24 I would therefore allow the appeal and vacate the assessment.