Cattanach, J:
1 These are appeals from a decision of the Tax Review Board which had dismissed the appeals by the plaintiff herein to that Board from the assessments to income tax by the Minister of National Revenue in respect of the plaintiff's income for his 1969, 1970 and 1971 taxation years.
2 In the three taxation years the plaintiff, in computing his income, had deducted farming losses in the respective amounts of $16,288.54, $19,752.62 and $18,576.80.
3 In assessing the plaintiff as he did the Minister limited the plaintiff's deductible losses to $5,000 in each year on the ground that the plaintiff fell within subsection 13(1) of the Income Tax Act which reads:
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
4 In commenting on the possibilities contemplated by section 13, in CBA Engineering Limited v Minister of National Revenue, [1971] F.C. 3, [1971] C.T.C. 504, 71 D.T.C. 5282, I said at page 10 [510, 5286]:
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.
The third possibility is not applicable in the present appeals.5 The rival contentions between the parties to the present appeals are that of the plaintiff that he falls within the first enumerated possibility and that advanced on behalf of the Minister that the plaintiff falls within the second enumerated possibility. In short, the contention of the Minister is that farming is not the plaintiff's “chief source of income”, the plaintiff having only two sources of income. There is no dispute between the parties as to the facts but rather the dispute lies in the proper inferences to be drawn from these facts.
6 The plaintiff, who was born in 1913, has been a farmer during all of his working life. His father had been killed in the first World War and at the age of eight the plaintiff hired out as a chore boy to neighbourhood farmers. He went to school only part time but his lack of formal education is compensated for by a native intelligence. He continued to work as a farm labourer until 1935 when he rented 80 acres on which he operated a market garden until 1940 when he joined the armed forces in World War II.
7 On his discharge from the army in 1946 he leased a farm in Toronto Township with an option to purchase. He exercised that option in 1950 and, with the aid of veteran's allowance, purchased the farm. On that farm he initially raised poultry and hogs with modest success. To help get on his feet he supplemented his earnings by working part time from 1951 to 1953 in an aircraft factory. Later the plaintiff concentrated on raising butcher hogs and he found it more profitable to butcher his hogs himself and sell the pork through a farmers' market. However, the health authorities precluded the plaintiff from slaughtering the animals on the farm for subsequent sale by insisting that the animals must be sold to a provincially licensed slaughter house. Accordingly the plaintiff added feeder cattle to his farming operation and rented additional acreage down the road on which he grew wheat and hay for feed.
8 The farm buildings were not good. The house had no plumbing, electricity or central heating. These the plaintiff installed. The barn was dilapidated and was torn down and replaced with a temporary structure.
9 In 1968 the plaintiff received an unsolicited offer to buy his farm for a price of $430,000, or approximately $4,200 an acre, with a down payment of $100,000. There was a deposit of $25,000 and a balance of $75,000 to be paid on closing. The sale was closed on April 13, 1968. As indicated, the down payment was $100,000.
10 After the necessary adjustments the balance was $331,600 for which the plaintiff, jointly with his wife, took a first mortgage with interest at 7% per annum. It might well be that the plaintiff was entitled to only half of the principal and interest but the appeals were argued on the basis that the entire proceeds belonged to the plaintiff and accordingly I do not concern myself with any other possibility. The principal is payable semi-annually in amounts of $3,000. The term of the mortgage is 5 years with provision for a renewal for a further 5 years. The mortgage was renewed and accordingly it will be fully paid in the fall of 1978.
11 There is a significant clause in the offer to purchase which permits the plaintiff to occupy the farm and farm it for a period of 4 years from the date of closing with the privilege of vacating at any time. This clause was inserted at the insistence of the plaintiff for the very obvious reason, as explained by him, that it would afford him the opportunity of continuing to farm the farm for a maximum period of 4 years and in the interval to search out another farm. If he found a suitable farm within that period, he could move at that time.
12 The down payment of $100,000 received by the plaintiff was soon exhausted. There was a real estate commission of $20,000 and legal fees in the amount of $3,000, leaving a net of $77,000 to the plaintiff. He paid old farm debts incurred in a total amount of $27,000. He purchased new farm equipment at a cost of $10,000 and cattle at a cost of $2,000. These two expenditures are worthy of note. They would not have been necessary if the plaintiff was not firmly committed to continue as a full-time farmer. He expended $39,000 on past and future farming operations. He made a gift of $13,000 to his wife and charitable donations of $20,000. He bought a new automobile for $5,000, likely a necessity. These expenditures account for the entire $100,000.
13 The plaintiff looked at two farms and decided that a farm in close proximity to Guelph, Ontario was the more suitable. It consisted of 165 acres of which 150 acres were workable. There were several good buildings on the farm including a house, barn and two implement sheds, amongst other buildings for other farming purposes. The farm was a mile and one-half from the city limits of Guelph. At the time the plaintiff was 55 years of age and had five children. His eldest son attended the University of Guelph to study agricultural engineering with particular emphasis on water conservation. It was the plaintiff's expectation that his eldest or other of his sons might wish to continue the farm.
14 The cost of the farm was $150,000, or about $800 an acre. The plaintiff made an offer of purchase in June 1969 which was accepted and the purchase was closed in August 1969. The vendor undertook to fall plough 40 acres. The plaintiff and his family moved onto this new farm in September 1970. In the interval the plaintiff went back and forth between the farms, thereby working both farms, for which reason I have made the comment that a new automobile was likely a necessity rather than a luxury. He then devoted his efforts to the new farm.
15 To finance the purchase of the new farm the plaintiff borrowed some $54,000 from his bank, $50,000 of which loan was used for the down payment and $4,000 was used to purchase still further equipment and livestock. The plaintiff gave the vendor back a first mortgage for $100,000, the balance of the purchase price, with interest at 8% per annum payable half-yearly and the principal is also payable half-yearly in the amount of $1,000 for each semi-annual payment of principal. The mortgage is for a term of 5 years, with provision for renewal for a further 5 years. The mortgage will be fully paid in December 1979. At that time the plaintiff will be obliged to pay $80,000 which I compute to be the unpaid principal.
16 Mr Gelberg, a chartered accountant, was called as a witness on behalf of the plaintiff and he prepared in tabular form a schedule of the plaintiff's receipts and expenses for the years 1969 to 1974 from the income tax returns filed by the plaintiff for those years. That schedule is reproduced.
1968 1969 1970 1971
F.arming
receipts $17,324 $25,048 $16,173 $ 8,029
Interest
receipts 11,728 22,897 22,477 22,057
-------------------------------------------------
Total
receipts 29,052 47,945 38,650 30,086
-------------------------------------------------
Farming
expenses 32,586 35,753 22,947 14,299
Interest
expenses 863 5,385 12,845 12,207
-------------------------------------------------
Total
expenses 33,449 41,138 35,792 26,506
-------------------------------------------------
Net (Loss)
Gain $ (4,397) $ 6,807 $ 2,858 $ 3,580
=================================================
1972 1973 1974 Total
Farming
receipts $ 5,635 $11,824 $21,673 $105,706
Interest
receipts 21,685 21,217 20,797 142,858
-------------------------------------------------
Total
receipts 27,320 33,041 42,470 248,564
-------------------------------------------------
Farming
expenses 13,962 26,771 26,116 172,434
Interest
expenses 11,924 12,675 14,118 70,017
-------------------------------------------------
Total
expenses 25,886 39,446 40,234 242,451
-------------------------------------------------
Net (Loss)
Gain $ 1,434 $ (6,405) $ 2,236 $ 6,113
=================================================
Farming receipts $105,706
Farming expenses 172,434
---------
Farming loss $(66,728)
=========
Interest income $142,858
Interest expense 70,017
---------
$ 72,841
=========17 As I appreciate the argument on behalf of the Minister, it amounts simply to this: the plaintiff's income from the interest on the mortgage on the sale of his first farm exceeds the plaintiff's gross receipts from farming and far exceeds the net proceeds from farming which have been in a loss position. That being so, the submission on behalf of the Minister is that the plaintiff's “chief source of income” is not farming and accordingly the limitation of losses in subsection 13(1) is applicable. That submission is susceptible of meaning that the words “source of income” is coincident with the meaning of the words “source of profit”. (It goes without saying that this submission also includes that the plaintiff's chief source of income is not a combination of farming and some other source of income, ie, his investment income.)
18 It has been held in many instances that a source may be a source of income in a particular taxation year even though in that year the taxpayer suffers a loss. That being so, the simple mathematical task of comparing the net incomes from two sources is not a conclusive test for determining which of the two sources of income is the chief source. To so determine resort may be had to other criteria.
19 In William Moldowan v The Queen, [1975] C.T.C. 323, 75 D.T.C. 5216, Mr Justice Ryan in this respect had this to say at page 333 [5219]:
The critical question is whether farming or farming in combination with some other source was the appellant's chief source of income during the taxation years in question. Once one accepts that a source may be a source of income in a particular year though, through it, the taxpayer suffers a loss in that year, one loses the possibility of simply comparing net income from each source as the test for determining the chief source. One must therefore seek some other guide; and while it is true that a source may be a source of income in a particular year though it did not yield a profit in that year, it nonetheless appears to me pertinent to look at each of the taxpayer's sources from the point of view of capacity for present or future profit or for both when one is seeking to determine his chief source of income in that year. The relative importance of sources as sources of income would seem to me to be in most part a function of their capacity to produce gain. In my opinion an appropriate path to a resolution of this difficult problem is to give significant attention to the taxpayer's ongoing income-earning activities in a practical and businesslike way and in this way to determine which of the taxpayer's sources of income, in the ordinary run of his affairs, but taking account of his plans and his activities in implementation of his plans (see, for example, Wilfley v The Queen, [1974] C.T.C. 510, 74 D.T.C. 6422), is the chief source of his income in the sense of its usual or its foreseeable profitability or of both. In seeking an answer, gross income, net income, capital investment, cash flow, personal involvement, and other factors may be relevant considerations.
20 A criterion Mr Justice Ryan mentions is to look at each of a taxpayer's sources from the point of view of capacity for both present or future profit.
21 In the present instance the plaintiff had from 1964 to 1968 engaged in farming as his sole source of income and it was not until 1968 when he sold that farm, being importuned to do so by an unsolicited offer of purchase at a price so attractive that he could not refuse, that he became the holder of a first mortgage securing the payment of an amount of $331,600 at 7% per annum. This afforded him investment income in the first year of $23,212. That investment income would be reduced by $210 on each half-yearly payment of interest during the 10-year term of the mortgage. By my computation the plaintiff would have at the end of the mortgage term a cash payment of the unpaid principal in the amount of $271,600.
22 In 1968 the plaintiff could have retired from farming, if he had chosen, and enjoyed an investment income of approximately $20,000 a year for ten years at least. Had he done so he would no longer have been a farmer and the investment income would have constituted his sole source of income.
23 He did not choose to do so. Instead he purchased another farm as was his intention when he sold his first farm. The way was made easier because he was possessed of resources from the sale of his first farm. He also purchased more machinery and had done so before he purchased the second farm and when he purchased the second farm he laid out some $4,000 more for still more machinery, a total of $14,000 for farm implements. Viewed realistically, what happened was that the plaintiff exchanged one farm for another. That exchange was advantageous to him. He got a better farm and funds which could and were devoted to measures as required to carry on the new farm. The fact that the plaintiff became possessed of investment income was merely an incident of his exchange of farms.
24 On acquiring the second farm the plaintiff changed his basic farm operation from feeder cattle and butcher hogs to a hog-growing and cow-calf operation. His eldest son had graduated as an agricultural engineer and took employment as an advisor on water conservation. He did not continue on the family farm which the plaintiff had held out as a prospect to his son but did not actually anticipate.
25 Because of the normal cycle of reproduction and the expected expense of a new manner of farming in which the plaintiff engaged after careful consideration and planning, he anticipated that there would be a minimal loss which he could readily bear from his new affluence. He set for himself an objective of 20 breeding sows and 25 breeding cows which he felt he could handle comfortably himself and which he estimated in 1975 would yield him an income of $27,000 and that his expenses in that year would be reduced to $10,000, thereby yielding him a net income of $17,000. His records for his 1975 year indicated that he had achieved his objective.
26 In his first years of 1968 and 1969 in operating the farms his gross farming receipts exceeded his investment income, although his new farm expenses were high. In the years 1970, 1971, 1972 and 1973 his gross farming receipts were less than his investment income but the plaintiff explained this loss of farming receipts by disasters which affected his herd. Some sows proved infertile and did not reproduce as expected. Later, in 1972 I believe it was, he was obliged to clean out his entire swine herd and start afresh. It was at that time, with the experience that he acquired, he set his objective of 20 sows and 25 cows from which he estimated an annual income of $27,000 with constantly diminishing costs so that in 1975 his net farming income was $17,000 (his costs in that year being $10,000).
27 Thus the criterion mentioned by Mr Justice Ryan as to the future capacity of the plaintiff's farming operation has been fulfilled. It will produce a substantial net income and at the same time the plaintiff's investment income from the first mortgage on his former farm will end in 1978. In that year he will receive the substantial unpaid balance which he is entitled to employ as he wishes. He might invest it and derive investment income or he might use it in part to pay the unpaid principal on the mortgage on his second farm thereby reducing his farming expenses still further, and if he should do so he would also reduce his investment income, or on other capital expenditures on his farm. That choice is his to make.
28 Furthermore, the plaintiff testified that he devoted 7 days a week for the full 52 weeks of each year exclusively to the farming operation. I would expect that rearing animals would require constant attention and no doubt he was at their call 24 hours in each day. There is no doubt whatsoever that the plaintiff is and has been a full time farmer all his life and will, in all likelihood, continue as such. His personal involvement in farming is total which is yet another criterion in considering which of two sources of income is the chief source.
29 The point was also made on behalf of the plaintiff that his farming expenses were actually less than those shown and claimed by him in his 1968, 1969 and 1970 taxation years. For example, in those years capital cost allowances were claimed on his farming machinery in amounts of approximately $6,000. He claimed those capital cost allowances as an expense because he was entitled to do so by the Income Tax Act and regulations thereunder. In fact, the farm machinery did not depreciate by that amount. The plaintiff testified that he would not sell that machinery because it was worth its original cost to him. Therefore, he stated that this particular expense is in reality fictitious and that the farming expenses should be reduced by that amount, as well as an inventory claim for cattle which is in the same category as the capital cost allowances, and from the plaintiff's viewpoint, do not represent an actual outlay and accordingly brings his net farming income in such a closer proximity to his investment income as to be approximately equal thereto.
30 In view of these considerations I am led to the conclusion that farming was, in fact, the plaintiff's “chief source of income” within the meaning of those words as used in subsection 13(1) of the Income Tax Act, from which it follows that the plaintiff is entitled to deduct, in computing his income in the taxation years in question, the total amount of the farming expenses as claimed by him.
31 In view of the conclusion I have reached on the question of fact in these appeals it is not necessary for me to consider the question as to whether the plaintiff's “chief source of income” is a “combination of farming and some other source of income”. If it were incumbent upon me to do so I could not refrain from pointing out that in these appeals there are but two sources of income. That being so, it seems to me to follow that the plaintiff's total income, from these two sources, must be a combination of farming and some other source of income. Different considerations might prevail if there were more than two sources of income thereby resulting in different possible combinations.
32 In Robert Charles Simpson v Minister of National Revenue, [1961] C.T.C. 174, 61 D.T.C. 1117, the taxpayer had three sources of income. The then President of the Exchequer Court held that on the facts before him the taxpayer's chief source of income was his interest in a dance hall, and that being so his chief source of income was other than farming and other than a combination of farming and some other source of income. However, Mr Justice Thorson went on to say at pages 178–9 [1119–20]
In view of the finding I need not deal with the submission of counsel for the respondent that the expression “combination of farming and some other source of income” in Section 13(1) must mean a combination of farming and some other source of income that is physically related to farming beyond saying that I do not see why there must be such a limitation. The statement of the condition for the applicability of the section that the taxpayer's chief source of income must be “neither farming nor a combination of farming and some other source of income” is simply another way of saying that the taxpayer's chief source of income must be a source that is not only a source other than farming but is also a source that is other than farming and some other source of income taken together. The use of the word combination does not, in my opinion, imply any more than that.
This statement by the President was obiter dictum.33 In MNR v Grieve et al, [1960] Ex. C.R. 11, [1959] C.T.C. 320, 59 D.T.C. 1186, Mr Justice Thurlow said at pages 23–4 [331, 1191–2]:
... It was conceded in the course of argument, and I think quite properly so, that the taxpayer's chief source of income was not farming, and the case was thus narrowed down to a submission that the taxpayer's chief source of income was in fact a combination of farming and investments. However, on the whole of the material, including that put forward on behalf of Mr Grieve, there does not appear to have been any connection or relation whatever between his farming as a source of income in any year and the estate or investments from which the bulk of his income was derived upon which one could say that his chief source of income was a combination of the two, beyond the mere fact that he was the recipient or owner of the estate or investment income and was also the recipient or owner of the farming profits or the sufferer of the farming losses. That fact alone does not, in my opinion, inevitably lead to the conclusion that Mr Grieve's chief source of income was a combination of such sources of income within the meaning of s 13(1), and I can, therefore, see no reason for disagreeing with the Deputy Minister's determination for either 1953 or 1954 that Mr Grieve's chief source of income was neither farming nor a combination of farming and some other source of income.
34 In Oscar Dorfman v Minister of National Revenue, [1972] C.T.C. 151, 72 D.T.C. 6131, my brother Collier said at page 154 [6134]:
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, I adopt his comment at page 178 [1119] “... I do not see why there must be such a limitation”.
In the light of that comment he concluded by saying [at 155 [6135]]:... 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.
I note that Mr Justice Collier uses the word “sources” in the plural.35 In Bert James v Minister of National Revenue, [1973] C.T.C. 457, 73 D.T.C. 5333, my brother Gibson, after first referring to antecedent legislation where there was the necessity of a connection between transactions entered into for profit and a taxpayer's chief business which was not re-enacted in the Income Tax Act, 1948, chapter 52, said at page 464 [5337]:
Such is the only reference in the Income Tax Act from its inception to the necessity of there being a “connection” between businesses for the purpose of deducting losses; and I find no statutory authority for the proposition that in order for it to be possible to make a determination under section 13 of the Act, whether or not the chief source of income for a taxation year of a taxpayer is a “combination” of farming and some other source of income that there must be some “connection” between the business of farming and the business from which such other source of income is derived.
36 In Moldowan v. The Queen (supra) Mr Justice Pratte in considering the question what is the meaning of the expression “combination of farming and some other source of income” said at page 326 [5218]
I do not share the view that a taxpayer's chief source of income may be “a combination of farming and some other source of income” even if there is no “connection” of any sort between the farming activities of the taxpayer and his other source of income. In my opinion, the word “combination” means more than “addition”; it implies, in my view, a certain degree of association or integration. It is only if two sources of income are, in some way, integrated or interconnected that it can be said that their combination constitutes one source of income.
37 Mr Justice Urie, also in the Moldowan case, reached a conclusion on this question diametrically opposed to that of Mr Justice Pratte. Mr Justice Urie accepted and agreed with the reasoning of Mr Justice Gibson in the James case. After quoting the extract from the James case which I have also quoted herein he added at page 329 [5222]:
With that conclusion I agree and merely add that if it were intended that there should be some sort of a connection between farming and the other source of income with which its income might be combined, Parliament could very easily have used language clearly to express this intention. Instead, it used the word “combination”. The Shorter Oxford Dictionary, 3rd ed, defines “combination” as follows:1. The action of combining two or more separate things. 1613.
2. Combined state or condition; conjunction 1597.
3. Concr. A group of things combined into a whole. 1532.
There is no implication from this definition of the necessity for a connection between the things which are combined. In fact the opposite appears to be the case. To so imply would require that additional words be read into the section and would strain the natural meaning to be given to a word. Neither result is desirable. I thus conclude that neither the legislative history nor the dictionary definition require that there be a connection between the businesses or source of income making up the combination.
38 As I said at the outset of this digression, I am not obliged to reach a conclusion on the conflicting expressions of opinion as to whether there need be a degree of association between a taxpayer's farming activities and his other source of income in order for there to be a “combination” of the two within the meaning of subsection 13(1). Because two judges of the Federal Court of Appeal have reached contrary opinions, I would be free to choose the opinion based on the reasoning which appeals to me as being the more logical until such time as a higher court definitely resolves the question.
39 If I were to accept the opinion that there need not be an integration or connection between two sources of income in order that there is a “combination”, then that also would bring the plaintiff in these appeals precisely within the first possibility contemplated by subsection 13(1) which I outlined in CBA Engineering Limited v. MNR (supra) as is contended by the plaintiff.
40 In view of the finding of fact that I have made that the plaintiff's chief source of income is farming, he therefore falls within the first possibility for that reason standing alone and I am not obliged to accept either conclusion as to what constitutes a combination of farming and some other source of income to resolve these appeals and I do not do so. Even if I were to accept the opinion of Mr Justice Pratte, it may well be that, on the facts peculiar to the present appeals, there is such a degree of association, integration or interconnection that is contemplated by Mr Justice Pratte as being necessary to constitute a “combination”, but I need not, and I do not, so decide.
41 For the reasons expressed, predicated upon the finding of fact that farming was the plaintiff's “chief source of income” within the meaning of subsection 13(1) during the taxation years under review, it follows that the appeals are allowed and the assessments for the plaintiff's 1969, 1970 and 1971 taxation years are referred back to the Minister for reassessment so that the total farming losses claimed by the plaintiff are deducted in computing his taxable income in those years.
42 The plaintiff is entitled to his taxable costs.
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