A W Prociuk:
1 The appellant appeals from the respondent's reassessment dated July 5, 1972 in respect of the taxation year 1969 wherein a loss in the sum of $22,825 incurred on a special sale of livestock claimed by the appellant as separate and distinct from his farming operation as a Charolais cattle breeder, was disallowed. The respondent added the said loss to his farming operation loss of $20,501.16 and allowed the maximum deductible from his other income in the sum of $5,000 pursuant to section 13 of the Income Tax Act as it then was in force.
2 At the commencement of the hearing of this appeal, learned counsel for the appellant moved to amend the notice of appeal to permit him to argue a second ground of appeal that in the light of the appellant's farming operations the said section 13 has no application and that the entire farming loss ought to be allowed. Learned counsel for the respondent did not oppose the motion and the same was granted.
3 The appellant, aged 40, was born and raised on a farm in Eastern Saskatchewan where he still has an interest. His knowledge of farming is quite extensive. On completion of his senior matriculation he enrolled in a medical laboratory technician's course at the University of Saskatchewan at Saskatoon which he completed and obtained his certificate. For a number of years prior to 1969 and until the present date he has been the principal shareholder, president and manager of Medical Arts Laboratory Ltd of Saskatoon, Saskatchewan, which is a successful business. His income from this source in 1969 was $55,000.
4 The appellant testified that he had intentions for many years prior of going into farming as a Charolais cattle breeder as soon as he was in a position to do so—financially and timewise. In 1968 he acquired 640 acres of land on the outskirts of Saskatoon, and erected and improved the necessary farm buildings thereon, including a farmhouse into which he and his family moved as their permanent residence.
5 In December of 1968 he acquired eleven cows and one bull of the French Charolais line for breeding purposes. His total initial cost was approximately $100,000 for lands, buildings, farming equipment and the above-mentioned cattle.
6 In March of 1969 the appellant was approached by Dr M G Kunkel of Charlo Stock Farms to assist him in providing animals for a Canadian Premiere Sale arranged by him for October 7 of that year. The appellant stated that he had no cattle of his own to sell, but that he agreed with Dr Kunkel to go into a 50-50 partnership in procuring the additional cattle required for the sale. The appellant engaged the services of Mr Rudy Enzmann, of Charcan Services Ltd as his agent to purchase the animals for this purpose in the United States. He also arranged for a special bank loan to finance this purchase. The 25 or so head of cattle so purchased were placed on the appellant's farm and kept separate and apart from his own stock. They were halter-broken, fitted and groomed and specially fed specifically for the said sale. The appellant stated: “These animals were kept in corrals—they were not treated the same as my herd.”
7 Because of a severe economic recession in Charolais cattle sales in the fall of 1969 the appellant sustained a loss, in the sum stated earlier, in this Premiere Sale. His own farming loss amounted to $20,501.16.
8 The appellant treated these two losses separately and sought to deduct the sale loss as a business loss from a venture in the nature of trade pursuant to the definition of “business” in paragraph 139(1)(e) of the Act as it then was in force, and his own farming loss as a straight farming loss from his other income. The respondent treated both as a farming loss and allowed $5,000 as the maximum allowable under section 13 of the Act, which reads as follows:
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(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.
(3) For the purposes of this section, “farming loss” means a loss from farming computed by applying the provisions of this Act respecting the computation of income from a business mutatis mutandis.
9 The appellant was ably examined in chief and cross-examined. He stated that this was the only time that he bought and sold cattle; that he participated in it as an investor; and that it is not a good practice to bring in cattle to your own sale as a Charolais breeder. The sale was not a breeder sale. He has not ventured into that type of a business again because it does not enhance his reputation as a Charolais breeder which he operates under the name and style of “N R Charolais Farm”.
10 As to his farming operations, he stated that he sustained losses in 1970, 1971 and 1972, but made a small profit in 1973 and expected a substantial profit in 1974. At the date of the hearing of this appeal, he testified that he had already received $37,000 from 1974 sales and expected approximately another $100,000 in cash sales in the fall. His estimate of the value of his herd of some 170 head in 1974 was between $250,000 to $270,000. The farming operation has been steadily enlarged since 1969. He now farms 1,300 acres of land—400 acres in grain and 900 acres in hay. He has four tractors, haying equipment, a swatter, baler, diskers, and other farm implements, three trucks, two additional barns, and the necessary corrals. Exhibit A-1 filed is an aerial photograph of his farmstead. It strikes me as a substantial and impressive layout consistent with the operation he described during the examination in chief and under cross-examination.
11 As to the operation of his medical laboratory, he states that, since the commencement of his farming operation, it pretty well runs itself, subject to his supervision. He spends 90% of his time on the farm, where he has one full-time employee plus seasonal labour increase as required.
12 Having reviewed the evidence before me and the relevant circumstances I am inclined to the view that the loss incurred on October 7, 1969 at the Premiere Sale was a loss in respect of a separate and isolated transaction which had nothing to do with his farming operation as a Charolais breeder.
13 In the case of Schleissner v. MNR, 41 Tax A.B.C. 78, 66 D.T.C. 336, at page 90 [343] Mr W O Davis, QC, the presiding Member of the Tax Appeal Board as it was then constituted, stated as follows:
One would be disposed to regard the “raising” of cattle as starting from the early stage of breeding and then continuing on to include the birth of the offspring and the nurture and care of the progeny until the calves had also attained maturity for whatever purpose they were intended. At the very least, the term would seem to contemplate something more than a 30 to 60 day sojourn in a feeding lot while waiting for export. To refer to their care during such a brief stay as “livestock raising” appears to be attributing to such a period a greater importance than is warranted.
There will therefore be a finding that, in the buying and selling of cattle from outside sources for export as described in the evidence herein, the appellant was not engaged in farming and, as this operation constituted the appellant's main source of income in the year 1961, the income therefrom cannot be averaged with that of the four preceding years as contemplated by the provisions of Section 42 of the Income Tax Act.
14 The evidence of the appellant was clear, unequivocal and forthright. The sale took place at a time when he had no stock raised by him to sell as he had just commenced his farming operation. The loss in my opinion is properly deductible from his other income.
15 The next point is whether or not the provisions of section 13 of the Income Tax Act apply to the appellant's farming loss. I am satisfied on the evidence that the appellant from the outset embarked on a large-scale farming operation which required a substantial outlay of capital, hard work and constant personal attention. The rate of annual expansion of this operation clearly indicates that the appellant did not contemplate at any time to engage in this program merely as a hobby farmer nor could it be said that this operation was a device for reducing his taxable income. While the farm did not produce a net profit for the first four years, it was a source of income from which a net profit might reasonably be expected to come.
16 In the case of Oscar Dorfman v Minister of National Revenue, [1972] C.T.C. 151, 72 D.T.C. 6131, at page 154 [6134] Collier, J stated as follows:
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.
17 The evidence is clear that the appellant has arrived at a point where he is in receipt of net profits from his farming operation. The fact that in the taxation year under appeal he sustained a loss does not of itself warrant the application of the provisions of section 13 of the Act. Having considered the evidence in its totality, that is, the course of the appellant's farming operation from the date of its inception to the date of hearing of this appeal and the able submissions made by both counsel, I am of the opinion that the appellant's chief source of income was a combination of income from his farm and from the Medical Arts Laboratory Ltd as another source of income and that the restrictive provisions of section 13 of the Act do not apply.
18 Accordingly the appeal is allowed.
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