Terrence S Gray v. Minister of National Revenue, [1978] CTC 3101, [1978] DTC 1814

Guy Tremblay:—This case was heard at Montreal, Quebec, on May 18,1978.

1. Point at Issue

The point at issue is whether the respondent is well founded in disallowing the amount of $1,093.44 claimed by the appellant as a farm loss for the 1972 taxation year.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment was not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 The appellant is a former hockey player. He realized that his years of association with the sport could be terminated at any time and, therefore, wished to prepare himself to earn a decent livelihood and properly support his family after his years in hockey were finished.

3.02 He had observed another hockey player in the Sudbury area who had a quarter horse operation which was very successful. It gave him the idea to do something in the same field.

3.03 On April 30, 1971, the appellant bought some farming land in North Lancaster, Ontario. The only solid structure erected thereon was a servicable barn. There was also an old house which was not habitable. The purchase of this farm was to launch himself in the business of breeding and raising quarter horses for sale.

3.04 During the 1971, 1972 and 1973 taxation years the appellant incurred some expenses. The expenses concerned insurance, taxes and interest. As it appears on Exhibit R-1, during the year 1972, the total of those expenses was $1,093.44. The quantum of the expenses is not in dispute. For the said period, no revenue was derived from the farm. According to the evidence, the appellant himself made some repairs to the barn. The evidence, however, did not give the amounts of money spent for the repairs. No claims are made in the computation of the appellant’s revenue.

3.05 In 1973 the appellant purchased a mare from Mr Bob Rice of River Road, Ormstown in Quebec. According to Mr Rice, who at that time was in the business of quarter horses (50 to 60 horses), a foal can be sold up to $5,000. The intention of the appellant was to apply the funds derived from the sale of the said foal to purchase another mare.

3.06 As part of the arrangement of the purchase of the mare, Mr Rice planned for the said mare to have been serviced in order that the resultant foal could then be trained as a quarter horse and sold at a fair price.

3.07 The mare “Dasty’s Bay” was serviced by “By Whom”, a stallion with a “terrific background” according to Mr Rice. Its registered number was P-4649. It won ribbons in exhibitions.

3.08 The expenses concerning the mare were as follows:

3.09 During the period of time that the mare was on the farm, the appellant had an arrangement with the farmer in the adjoining farm, Mr Scott Gowne, to take care of the mare when he could not do so himself. In exchange for his services, Mr Gowne took hay which was growing on the appellant’s farm and also used the barn to store some of his animals (sheep).

3.10 Six months after the stud services, “Dasty’s Bay” threw the foal. According to Mr Rice, such occurrences are common on his own farm. Of 21 mares, 17 threw their foals. Mr Rice had to give up that line of business. He said however that in the States of Nebraska and Iowa, the richest people carry on that kind of business.

3.11 During 1972, the appellant resided in Chateauguay, Quebec. At Christmas and New Year’s time, however, he spent his holidays in New Brunswick. He did the same thing in 1971 and 1973. This is the reason why, in his 1971, 1972 and 1973 income tax returns, he wrote that the province of residence on December 31st was New Brunswick.

3.12 According to the evidence given by the appellant and confirmed by his neighbour, Mr Frank Gowne, the appellant lived on his farm periodically during the summer, sometimes twice or three times a week, and after that, two weeks without coming. The appellant never slept there.

3.13 By notice of reassessment dated October 31, 1975, the respondent disallowed the farm loss of $1,093.44.

3.14 A notice of objection was filed on December 24, 1975.

3.15 Following the notification of the Minister dated May 10, 1977, confirming the notice of reassessment, the appellant lodged a notice of appeal dated June 17, 1977, before the Tax Review Board.

4. Law—Jurisprudence—Comments

4.01 The main subsections of the new Act complied in this case are 9(2), 18(1)(a), 31(1) and 248 Definitions “Farming” and “Personal or living expenses”. These sections read as follows:

9(2) Loss from business or property.

Subject to section 31, a taxpayer’s loss for a taxation year from a business or property is the amonut of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

31. Loss from farming where chief source of income not farming.

(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, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deductions in respect of expenditures described in section 37” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

248. Definitions

“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.

“Personal or living expenses” includes .

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries.

4.02 Jurisprudence

The jurisprudence cited by the parties is the following:

1. John Lawlor v MNR, [1970] Tax ABC 369; 70 DTC 1248;

2. Fred S Goring and F Dennis Goring v MNR, [1976] CTC 2255; 76 DTC 1202:

3. MNR v William R Kellough, [1976] CTC 82; 76 DTC 6060;

4. John R Unger v MNR, [1969] Tax ABC 846: 69 DTC 597;

5. Joel Investment Corp v MNR, [1969] Tax ABC 51; 69 DTC 73;

6. Gerald R Vallentyne v MNR, [1969] Tax ABC 1086; 69 DTC 746;

7. Davalmar Inc v MNR, [1978] CTC 2746; 78 DTC 1526:

8. Fred L Johnson v MNR, [1978] CTC 2122; 78 DTC 1109;

9. Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417;

10. Donald Preston Mc Laws v Her Majesty the Queen, [1976] CTC 15; 76 DTC 6005;

11. Estate of Robert Mody v MNR, [1972] CTC 2089; 72 DTC 1112;

12. Donald Carom v MNR, [1977] CTC 2085; 77 DTC 67:

13. William Moldowan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213;

14. Donald J Gillis v Her Majesty the Queen, [1978] CTC 44; 78 DTC 6103.

4.03 Comments

Considering the general meaning of “farming” and the definition quoted above, the activities of the appellant involved in this case are farming.

Concerning the type of farmers and the type of farm losses contemplated by the income tax legislation, the statements of Judge Cattanach of the Federal Court of Canada in the case of CBA Engineering Limited v MNR, [1971] CTC. 504; 71 DTC 5282, and the statements of Judge Dickson of the Supreme Court of Canada in Moldowan v Her Majesty the Queen (supra), are most helpful.

Those two statements, even if they are to the same effect, are complimentary to one another and the Board thinks it is not useless to quote both.

Dickson, J states at 5216 of the Moldowan case:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming, Subordinate source of inocme, for his livelihood but carried on farming, as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

Cattanach, J states at 5286 in the case of CBA Engineering Ltd:

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 of profit or the eventual expectation of profit but where farmnig 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 that the appellant does not enter in the class (1). He is not a man whose major preoccupation is farming. The crux of the matter is whether the appellant’s interest in farming is a sideline business or a hobby.

The difference may be minimal. According to the. jurisprudence cited, the different items to be considered are inter alia, time spent, intent, capital committed, profitability of both actual and potential.

The most important cases cited above are the most recent. They are summarized in the headnote as follows:

(1) The case of Donald Preston McLaws, judgment rendered by the Federal Court of Canada, Trial Division:

Prior to 1961, the taxpayer, a lawyer by profession, and his wife owned and operated a farm for the purpose of racing and breeding thoroughbred horses. In 1961, the taxpayer entered into a partnership with others to carry on the same horse farming operations in order to improve their line of racing horses. The partnership owned no assets except the horses which were boarded at the taxpayer’s farm for a fee. From its inception, the partnership suffered losses which the Minister allowed the partners to deduct as farming losses from their other. income. subject to the limitation of section 13(1). However, in the 1970 taxation year, the Minister disallowed the taxpayer’s share of the farming losses which amounted to $1,390 contending that (i) they were personal and living expenses within the meaning of section 139(1)(ae), and alternatively, (ii) they were expenses incurred on property unconnected with a business carried on for profit or with a reasonable expectation of profit within the meaning of section 12(1)(a). The taxpayer appealed.

Held: The appeal was allowed. The expenses in question were not personal and living expenses. Although the taxpayer was not a full time farmer, his farming activities could hardly be considered a hobby. His considerable financial success in other commercial ventures exemplified his astuteness in business. It was inconceivable that such a successful businessman would spend money with any motive other than profit. From the evidence it was clear that the expenses were incurred in connection with a business carried on with a reasonable expectation of profit.

(2) The case of William Moldowan was heard by the Supreme Court of Canada and the judgment rendered in May 1977:

The appellant taxpayer, a businessman who received substantial income from employment and several business investments, also engaged in horseracing activities. In 1963 he realized a small profit of $1,593 from his farming activities, but thereafter he sustained a succession of losses, peaking $21,097 and $20,810 in 1968 and 1969 respectively. He engaged in training, boarding and racing horses for himself and others. After 1969, he reduced his farming activities. In computing his income for the 1968 and 1969 taxation years he deducted the full amount of the losses suffered in those years. The Minister only allowed the restricted farming losses of $5,000 in each of the respective years pursuant to subsection 13(1) of the former Act on the basis that the taxpayer’s chief source of income was neither farming nor combination of farming and some other source of income. The taxpayer appealed contending that he was actively engaged in horse racing which was a source of income to him. In affirming earlier decisions of the Board and the Trial Division the Federal Court of Appeal dismissed the taxpayer’s appeal and held that the latter never seriously expected his farming activities to yield more than an income of insignificant importance in relation to his income from other sources. Therefore, his chief source of income was neither farming nor a combination of farming and some other source of income with the result that he was only entitled to the restricted farming losses. The taxpayer appealed further.

Held: The appeal was dismissed. While the taxpayer devoted a considerable amount of his time to his other business ventures, his horse-racing activities consumed only a few hours per day for only a part of the year. His horseracing operation was not a business carried on for profit or with a reasonable expectation of profit. Therefore, his chief source of income was neither farming nor a combination of farming and some other source of income with the result that he was only entitled to the restrictive farming losses.

(3) The case of Donald J Gillis was heard by the Federal Court of Canada, Trial Division, and the judgment rendered in December 1977:

In 1968, the taxpayer, a professor of engineering, bought a farm, and from 1969 to 1973 inclusive engaged in various mixed farming activities on the land. He grew grain and potatoes and kept standard bred horses which he intended to breed. During these years he purchased a combine, a tractor, a disc-harrow, a plow, a chain saw and other farming implements. In the 1969 to 1973 taxation years inclusive he had income of nil, $451, $761, $437, and $316 respectively. His net losses in these years were, $4,154, $3,234, $3,103, $2,501, and $2,901 respectively. The taxpayer deducted these losses from his income in each of the relevant taxation years. The Minister disallowed the deductions. The taxpayer’s appeal to the Board was dismissed (unreported) in June 1976. In August the Registrar of the Tax Review Board sent the taxpayer a copy of the decision by registered letter. This letter and subsequent registered letters were returned. On November 4, 1976 a letter, with a copy of the decision reached the taxpayer by ordinary mail. The taxpayer appealed the Board’s decision on March 1, 1977. As a preliminary matter the Minister argued that the taxpayer’s appeal was statute barred since he had failed to file it within 120 days of the date of the original letter mailed in August 1976. The taxpayer submitted that the 120 days ran from November 4, 1976 and that therefore, the appeal was filed within the limitation period.

Held: The appeal was dismissed. The limitation period ran from the date of the first mailing in August 1976 and accordingly, the appeal was filed beyond the limitation period. However, the Minister agreed to waive the requirement of fourteen days’ notice of a motion to extend time for appealing and the taxpayer’s subsequent motion for an extension of time was allowed. In reference to the main issue the Court held that the farming losses were not deductible. The taxpayer did not carry on a business on his farm and could not have had a reasonable expectation of profit. The isolated sales of potatoes and grain did not turn a hobby undertaking into a business one. The expenses incurred in the relevant taxation years were therefore, personal and living expenses and not deductible.

(4) The case of Donald Carom was heard by the Tax Review Board and the judgment rendered in April 1977:

The appellant taxpayer, a medical doctor, devoted most of his time to the practice of his profession, but had other business interests. He also had several hobbies. In 1973, he acquired two horses in partnership for the purpose of racing and thereafter for use as studs. The horses were slightly injured when acquired and, unfortunately, the wounds never healed properly with the result that they were sold in 1974 at a loss without satisfying the purposes for which they were acquired. The taxpayer deducted his share of the losses in computing his income. The Minister disallowed the deduction on the basis that it constituted. personal and living expenses within the meaning of 18(1)(h) of the Act. The taxpayer appeal contending that he was engaged in race-horse farming and was entitled to the restricted farming losses pursuant to 31(1) of the Act; alternatively he argued that he was entitled to a deduction of a capital loss as a result of the disposition of the horses in an arm’s length transaction.

Held: The appeal was dismissed. The evidence established that the activities of the taxpayer and his associates, during the existence of the partnership, were not sufficient to characterize the business as one carried on for profit or a reasonable expectation of profit. The losses were, therefore, personal or living expenses which were not deductible. On the basis of this conclusion, the alternative argument of the taxpayer also failed since personal or living expenses related to personal-use property, loss from the disposition of which was nil pursuant to paragraph 4(2)(g)(iii) of the Act.

(5) The case of Fred L Johnson was heard by the Tax Review Board and the judgment rendered in January 1978:

In 1972, the taxpayer, who was an employee of the government of Ontario, purchased a farm of 100 acres some 40 miles from his place of employment. He rented out 90 acres, and engaged in small scale cattle farming on the other 10 acres. He would work on the farm early in the morning prior to leaving for work and again in the evenings upon his return from work. The taxpayer had no farming experience prior to purchasing the farm. In 1973 and 1974 the taxpayer’s farming operations resulted in losses of $8,085 and $11,251 respectively. In computing his income in these taxation years he deducted the losses in full. The Minister reassessed the taxpayer and on the basis that neither farming nor a combination of farming and some other source of income was his chief source of income, disallowed the deductions. The taxpayer appealed arguing that since he had commenced the farming operation with the intention of making it a viable going concern, the losses were deductible. Alternately, he argued he was entitled to claim for a restrictive farm loss in each year. In. reference to this alternate argument the Minister contended that the taxpayer was not entitled to even a restrictive farm loss since there was no basis whatsoever upon which the taxpayer could have a reasonable expectation of profit from his farming operations.

Held: The appeal was allowed in part. The evidence provided no support for the view that during the years in question the taxpayer’s chief source of income was farming or a combination of farming and some other source of income. However, even when the investment activity in and results of farming in certain years did not support the view that the taxpayer could have had a reasonable expectation of profit in those years, this does not necessarily mean that the taxpayer could not have had any expectation of profit in those years. The taxpayer although inexperienced, undercapitalized, and physically overextended, expected at some time in the future to eliminate his start up losses and produce an income from farming. The taxpaye, was therefore, allowed restrictive losses of $5,000 in each of the years in question.

4.04 Items analyzed

(a) Intent

In the present case, the Board is convinced that the appellant really had the intention in 1971, 1972 and 1973 to make a business in breed- ing and raising quarter horses. He had met another hockey player who had success in that field. He bought a farm and incurred some expenses. In 1973, he bought a mare which threw its foal.

(b) Time spent

The time spent on the farm was about two or three days every two weeks, during the summer time, ie, fifteen weeks, ie, about 19 days spent on the farm.

(c) Capital committed

The appellant purchased a farm. The evidence did not give the amount paid for it. He incurred some expenses (insurance, taxes and interest). The appellant made some repairs but it seems that the amount was not very important because he did not claim the expenses as deduction. He incurred other expenses in 1972. In 1973 the amount concerning the purchase of the mare, the stud services and the food totalized $1,000. The Board must Consider that the work done by the neighbour and who was compensated by the use of the appellant’s farm (see paragraph 3.09 of the Facts) may be computed as expense.

(d) Profitability

The evidence given is that there was no actual profit at all. The appellant claims a loss.

Concerning potential profit, the testimony of Mr Rice (see paragraph 3.10 of the Facts) is to the effect that this kind of business seems to be more profitable in Nebraska, USA than in Canada.

4.05 In the Board’s opinion, in the present case the intent and the capital committed meet the requirements of the jurisprudence.

According to the evidence it is clear that the time spent and the profitability do not meet the requirements of the jurisprudence.

In the present case the potential profitability would have been necessary to convince the Board. The appellant had not reversed the burden of proof.

4.06 Residence

It is clear, according to the evidence, that the appellant had his residence in the province of Quebec. A temporary trip to visit relatives in another province at the end of the year does not make it a residence to a taxpayer in this province.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.