Buchanan Forest Products Limited (Formerly Buchanan Brothers (Ontario) Ltd) v. Minister of National Revenue, [1984] CTC 2281, [1984] DTC 1253

Cardin, TCJ:—Buchanan Forest Products Limited is appealing from assessments of tax with respect to the 1976 and 1977 taxation years. In each of these years, the appellant claimed farming losses in the amounts of $19,630 and $83,496 respectively. In his assessment the Minister of National Revenue disallowed the appellant’s claim for full farming losses and allowed, in accordance with subsection 31(1) of the Income Tax Act, only restricted farm losses of $5,000 for each of the years under review.

The issue

The Minister, in allowing restricted farm losses, tacitly accepted that the appellant had a reasonable expectation of profit and was in the business of farming in 1976 and 1977. The issue therefore is whether the facts of this appeal justify allowing the appellant full farming losses.

Summary of facts

The appellant corporation, then known as Buchanan Brothers (Ontario) Ltd, is a private company incorporated in 1965 (Exhibit A-l).

Kenneth Buchanan, the president and the spokesman for the appellant corporation, testified that the Buchanan Brothers had been in the farming business in Western Ontario since the middle 1950’s. Over the years, logging and trucking were added to the appellant’s farming activities. The required cutting rights were obtained and by 1975 the predominant activities of the appellant corporation were logging and trucking. The appellant’s logging activities consisted in the cutting and selling of wood from their cutting rights to major pulp industries, or cutting and trucking wood for major wood pulp companies which held the cutting rights. The appellant also became involved in the operation of wood-related industries.

It was alleged that by 1975 the timber cutting business experienced a heavy cut back in the sale of wood. It was also alleged that the price of agricultural products was rising and that a decision by the appellant’s Board of Directors was made to reactivate the corporation’s farming activities.

To that end, the appellant corporation purchased a farm in Eastern Manitoba and by purchasing adjacent parcels of land, succeeded in assembling some 4,000 acres of land for which an amount of $300,000 was paid. The Manitoba farm was to operate as a major corporate farm.

Redundant machinery and equipment was purchased from the appellant’s Ontario farm operations and moved to Manitoba. It was hoped that the appellant’s employees on the Ontario farm could be used to operate the Manitoba farm. Mr Brian Driver, one of the appellant’s corporate logging foremen, was moved to oversee the Manitoba operations. Indeed, in 1976 Mr Driver moved to Manitoba with his family and the Manitoba land was levelled and prepared for the growing of crops.

The appellant’s Ontario employees, however, did not wish to work in Manitoba and local help was hired for the Manitoba operations at higher salaries than what had been anticipated. The soil was found to be lacking in moisture; the price for farm products deteriorated and the housing accommodations were poor. All these factors resulted, in 1977, in the ultimate discontinuance by the appellant of its Manitoba farming operation.

In order to determine whether subsection 31(1) of the Act applies to the facts of this appeal, various tests, suggested in several Court decisions, must be considered.

It is now accepted that the simple addition of various sources of income will not result in what is meant by a combination of farming and some other source of income in describing a taxpayer’s chief source of income within the meaning of subsection 31(1) of the Act. Nevertheless, the various amounts of the other usual sources of income in relation to the amount of the appellant’s farm income must be taken into account if the importance to the taxpayer of farm income is to be determined.

The other tests: time spent by the appellant with respect to different sources of income; the capital invested; the cash flow and other similar tests must also be considered and compared with the same tests also applicable to the taxpayer’s farming income.

The underlying factor in these comparative tests which can make the interpretation of subsection 31(1) of the Act easier is the obvious fact that subsection 31(1) was intended to help bona fide farmers recoup from other sources of income, farm losses incurred as a result of a poor harvest or other financial obstacles in the taxpayer’s normal operation of its farm.

Subsection 31(1) of the Act, in my view, never intended that taxpayers other than genuine farmers might enhance their business income from employment income or income from property by deducting losses from hobby farming or questionable farming activities.

Taylor, J in Leslie v MNR, [1982] CTC 2233; 82 DTC 1216, at 2241 and 1223 respectively, expressed this proposition more neatly in stating that:

It is worth noting that section 31 of the Act reads in part: . . . “nor a combination of farming and some other source of income’’.

It does not read: nor a combination of some other source of income and farming.

In the case at bar the Minister has accepted that the appellant was in the business of farming. What remains to be decided is whether the appellant falls in the first or second class of farmers described by Dickson, J in the Supreme Court decision in Moldovan v MNR, [1977] CTC 310; 77 DTC 5213, at 315 and 5216 respectively.

In that decision the first class of farmers is described as:

(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.

The taxpayer who clearly comes within the description of the first class of farmers may of course have one or more other sources of income but farming must in principle at least be seen as one of the taxpayer’s principal sources of income on which he relies for his livelihood.

In practice, the difficulty is in drawing a line between the overall importance of the other sources of income in relation to the taxpayer’s farm income. The difference may only be one of degree, requiring a judgment call on the facts of each case. A taxpayer who undoubtedly is in the business of farming is, as in this instance, not necessarily or automatically in the first class of farmers.

By way of example, if a taxpayer’s source of income from what is admittedly to be a business of farming is a relatively small percentage of his other sources of income; if the taxpayer does not spend a major part of his time in the business of farming; if his committed capital for farming is insignificant compared to capital invested in other sources of income and the profitability of his farming operations, both actual and potential, are substantially less than the potential income from other sources, then the taxpayer’s farm operations, would be subordinate to some other source of income and the taxpayer would come under the second class of farmers and be subject to the restrictions of subsection 31(1) of the Income Tax Act.

Conversely, if the taxpayer’s sources of income other than farming meet all the required tests and the income from other sources are quantitatively and qualitatively as substantial as the taxpayer’s normal farm income, then, in my opinion, farming operations would still be a major source of the taxpayer’s income and would not be a sideline business. The bulk of the taxpayer’s income could still reasonably be expected to come from his farming operations and the centre of his work routine with the result that the taxayer would come under class (1) and the deduction of full farming losses would be justified.

Findings

The appellant is appealing only in respect of the disallowance from expenses of $19,630 and $83,496 for 1976 and 1977 respectively. All of the appellant’s submission in its notice of appeal is aimed at establishing that the appellant was engaged in farming in 1976 and 1977 and that full farm losses should have been allowed.

The respondent has admitted that the appellant had purchased 4,000 acres of land in 1976 for $300,000; that the appellant had purchased machinery and had paid wages to employees working on the Manitoba farm. In short, the Minister admits that the appellant was in the business of farming in 1976 and 1977. The only question now is whether the appellant came under class (1) or class (2) of the categories of farmers described by Dickson, J (Moldowan). The appellant in seeking full farm losses, is submitting that it is engaged in a major corporate farming business and was in the first class of farmers. The respondent assessed the appellant as a class (2) farmer and allowed restricted losses under subsection 31(1) of the Act.

The pertinent facts are not disputed. It is a fact that the Buchanan brothers were in the logging and trucking business, operating out of their family farm from the late 50’s to date. On April 20, 1965, the Buchanans incorporated as a company called Buchanan Brothers (Ontario) Ltd (Exhibit A-1). The objects in the letter of incorporation referred to wood cutting, logging, trucking and related activities but did not mention farming.

For purposes of subsection 31(1) of the Act, no distinction exists between an individual farmer and a corporation engaged in farming. To come within the first class of farmers (Moldowan), the appellant has the onus of establishing that he could reasonably expect to receive the bulk of his income from farming and that farming was the centre of his work routine. Failing that, the appellant would come under the second class of farmers and his farming activities considered as a sideline to some other source or sources of income.

There can be no doubt that for several years before 1976 the appellant was principally engaged in cutting, logging and tractor operations. It is admitted that the appellant reactivated its farming operations; invested capital in the acquisition of land and equipment; incurred operational expenses and was indeed engaged in farming in 1976 and 1977. On the basis of the evidence both written and verbal, the appellant’s principal operation was still logging and trucking from which it could reasonably expect to earn the bulk of its income.

Indeed, while the appellant’s farming operations in 1976 and 1977 showed no profit whatsoever, its income from logging and trucking in 1976 and 1977 was $1,718,813.189 and $2,415,284.18 (Exhibit R-2).

Some of the more tangible factors which, nevertheless, are pertinent in determining the importance to the appellant of its farming operations and the impact they had in the appellant’s overall income are: the Manitoba land was purchased in the course of a trip by one of the Buchanan brothers to Manitoba with respect to the appellant’s wood operations; and, although the land was made ready for sowing, very little attention seems to have been paid to the quality of the soil which was found to be unsuitable for raising of crops only after purchase. The farming operations were discontinued in 1977; the appellant had been advised by a chartered accountant, Mr York, to discontinue the farm operations shortly after its acquisition; the appellant purchased more land in Manitoba in 1978 but no evidence was adduced that the additional land was acquired for the purpose of farming. All these factors, in my opinion, do not support the appellant’s submission that full farming losses should be allowed.

Even allowing for time to achieve full farming operations and taking into account reasonable start-up costs, I find it very difficult to accept that the appellant could reasonably expect in the circumstances to earn the bulk of its income from its farming operations in comparison to the appellant’s activities and successes in the logging business.

Notwithstanding losses incurred in the logging business: $103,054.86 in 1972 and $116,774.93 in 1973 (Exhibits A-4 and A-5), considerable income was earned in 1975 and 1976. From the written evidence and particularly the document entitled “Facts and Reasons’’ attached to the appellant’s notice of objection, there can be no doubt that the appellant’s principal operations in 1976 and 1977 (and in previous years) were clearly in the logging business. Although some of the facts in the appellant’s documents are not directly material to the present issue, the appellant’s activities with Multiply Plywood sold in 1972, the operation of logging camps between 1972 and 1975, the transactions with respect to McKenzie Forest Products and Hudson Sawmill in 1977 are very significant. They clearly establish that logging was the appellant’s principal occupation; that the bulk of the appellant’s income was not from farming but from logging and that logging and not farming was the centre of the appellant’s work routine.

I hold therefore that the appellant’s chief source of income was neither from farming nor a combination of farming and some other source of income and that the Minister did not err in allowing the appellant only the restricted farm losses provided for in subsection 31(1) of the Income Tax Act.

The appeal is dismissed.

Appeal dismissed.