Robinson (W.C.) v. Canada, [1991] 1 CTC 556

Reed, J.:—The taxpayer appeals a decision of the Minister which disallowed his claim for full farm losses for the years 1978-1980.

Subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") provides:

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 deduction under section 37 or 37.1, from all farming business 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) 1/2 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 deduction under section 37 or 37.1” 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 the subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

The Minister claims that the taxpayer's farming activities fall within this section.

The starting point for any farm loss case is the decision of the Supreme Court in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213. In that case it was stated at 315 (D.T.C. 5216) that the Income Tax Act 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 . . .

(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 as a sideline business

(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...

It is not contended by the Minister that the plaintiff is a class 3 farmer (a hobby farmer). It is contended that he is a class 2 farmer (farming is a sideline). The plaintiff contends that he is a class 1 farmer (a chief source farmer).

Facts

The plaintiff grew up in a farm community. During the latter part of his childhood his father worked the family farm. The plaintiff had farm responsibilities as well, particularly when his father's health was poor. That farm was modest in nature: 16 head of dairy cattle; some hog raising (eight to ten animals); 50 acres of owned land; 200 acres of rented land. The farm was located near Oakville. By the time the plaintiff was coming to the end of his high school years much of the adjacent farm land had been taken over by developers and was no longer in farm use.

The plaintiff upon finishing high school decided not to join his father in farming the Oakville property. He decided to continue his education. He took courses in animal husbandry and related subjects at the Ontario Agricultural College in Guelph. As a teenager he had belonged to organizations such as the 4-H Club and Junior Farmers. He worked in farm-related jobs weekends and summers while a student. He clearly had and has an abiding interest in farming; he values the lifestyle associated with it. In any event, at university, the plaintiff choose to pursue studies which would fit him for a career in teaching. I have no doubt that the decision was motivated, as it is in many cases, by knowledge that farming as a means of livelihood requires a great deal of capital investment; teaching seemed a more assured and practical route to a reasonable income.

The plaintiff was very successful, first as a university student and, then, later as an educator. He started his teaching career at a high school in Newmarket in 1961. He taught there for three years. His primary fields were physics and chemistry although he taught other subjects as required (mathematics, business, history). In 1964 he moved to Grimsby District High School taking a position as department head. The move necessitated the selling of the house which the plaintiff and his wife had bought in Newmarket. They purchased another in Burlington.

In 1967 his father died and the Oakville farm property was left to the plaintiff's mother (50 per cent), and to the plaintiff and his sister (25 per cent each). The plaintiff undertook to pay off some debts left by his father. He was compensated by being given a slightly higher interest in the Oakville farm property: 32 per cent while his mother retained 46 per cent and his sister 22 per cent. The plaintiff alleges that from this time on he was heavily involved in running the Oakville farm.

By 1971 the plaintiff was living in Burlington but working in Milton. He and his wife sold their Burlington house and moved to Milton. The plaintiff then obtained a position in Georgetown, as vice principal of the high school. His wife's brother owned a farm property just south of Georgetown which had an old farm house on it (built 1867) and which had been vacant for many years. The barn on the property was described as a shell. The property comprised 70 acres. The plaintiff and his wife bought this property in 1973 for $120,000. The plaintiff paid $60,000 in cash (obtained from the sale of the Milton house) and the plaintiff's brother-in-law took back a mortgage for $60,000. The plaintiff and his wife commenced renovating the barn and house and upgrading the farm. By November of 1973 the plaintiff had moved (17 head) dairy cattle from the Oakville farm to the Georgetown property.

The plaintiff states that from 1973 on he was running two farms: the Georgetown farm and the Oakville farm. The best milk producing cows were kept on the Georgetown premises. The cows which were not good producers were kept at Oakville together with the calves that were being raised for veal. There were also 40-50 hogs being raised during the years in question, on the Oakville property. The plaintiff's mother resided on the Oakville farm and looked after it on a day-to-day basis. The plaintiff paid her a small salary for this purpose. Rent was also paid, to his sister and mother for the use of this farm.

The plaintiff, his wife and his son state that the plaintiff's usual work routine was for him to rise at 5:00 a.m. in the morning and, with the help of his two sons, do the milking chores and feeding of the cattle at Georgetown, until approximately 7:30 a.m. The plaintiff then left for his vice-principal's job returning home at the end of that working day (approximately 4:30 p.m.). He would then go to Oakville to check on what was required at that location and return home to Georgetown to do the evening chores, again with the help of his sons, from approximately 6:30 to 9:00 p.m. Weekends and holidays, in the summertime, would find him doing field work and in the winter, maintenance tasks. The plaintiff and his wife have not taken holidays in 30 years. The plaintiff asserts that he never sat down for family meals. His wife attests to his boundless energy. The plaintiff asserts that his present work routine is still not appreciably different from what it was in the earlier years.

After purchasing the Georgetown property the plaintiff commenced making improvements thereon not only to the house but to the farm operation as a whole. He obtained an operating loan from the bank. He built a silo; he increased the size of the barn; he put in milking stalls and a pipeline milking system; he increased the size and quality of the dairy herd; he bought additional milk marketing quota; he purchased equipment (some of it used); he rented additional acreage (200 acres). This enumeration of improvements is not exhaustive of those which were made.

By 1975 the plaintiff had the assistance of his two sons in running the Georgetown farm for which they were paid a small salary. It is clear that the elder son had a very considerable interest in farming. That son, now, has his own farm near Arthur, Ontario. In 1978 the plaintiff approached the bank for additional financing and was advised by its agri-business division to borrow substantial capital ($200,000), to purchase new equipment and livestock to turn the farming operation into a commercially viable one. The plaintiff did not accept their advice but continued to improve the farm on what might be called a piecemeal basis. Some of the farm losses he incurred were caused by attempting to operate a fairly large acreage with midsized equipment. Some, particularly in the years subsequent to 1980, were caused by high interest rates and the need to hire full time assistance.

The taxation years under appeal in this case are 1978-79-80. The farm income, the farm expenses, the farm losses and the plaintiff's employment income for the years 1976 to 1987 were as follows:

During this whole period of time the plaintiff worked for the Halton Board of Education as an educator. In 1973, as noted above, he was a vice principal at a high school in Georgetown. In 1978, he again moved jobs, taking a position at the General Brock vocational school in Burlington. He was shortly thereafter promoted to principal at that school. In 1978, his wife, also a teacher by profession, began returning to that vocation since her children were by then old enough to allow her to do so. She began supply teaching.

Although it is the 1978-1980 taxation years which are under discussion, the taxpayer's career path after that time is also relevant. He remained at the General Brock school as principal until 1986. He then took a position at a school in Oakville for two years, after which he spent a short time (six months) working at the Halton Board of Education (the “Board Office”) in Burlington. He then moved to a school in Milton and lastly went back to the Board Office where he is presently still employed. As I understand the teaching profession, positions in the Board Office are considered to be promotions over positions in the schools.

Some time subsequent to taking the job at General Brock in Burlington the plaintiff moved back to a Burlington residence. The Georgetown farm was sold in 1988 for $450,000. The plaintiff's mother died in 1987 and he inherited her share of the Oakville farm (his sister had predeceased the mother). The plaintiff presently continues to run a small dairy operation on the Oakville farm which is producing a small profit. That farm property is now worth approximately eight to ten million dollars.

The Law

It is necessary, then, to turn to the relevant law which is to be applied to this taxpayer's situation. As noted, the Moldowan case, supra, Classified farmers into three categories: those for whom farming constitutes a chief source of income; those for whom farming is a sideline business; those for whom farming is a hobby. The Supreme Court indicated that the test to be applied in distinguishing between these categories is an objective and relative one. It also indicated that it was "decidedly not a pure quantum measurement”. This must be the case because if it were otherwise an individual with a large non-farm income could almost never fall into the first category while someone in essentially similar circumstances but with a more limited non-farm income would be able to do so.

Also, as I understand the Supreme Court decision in Moldowan, supra, the phrase "chief source of income" in subsection 31(1) means "chief source of taxable income" or chief source of net income after all the expenses relating to the income from that particular source have been deducted. I draw this conclusion from the fact that the Supreme Court said that in order to have a source of income the taxpayer must have a profit or a reasonable expectation of profit. This factor is important in this case because in all years between 1976 and 1987 the plaintiff's gross farm income exceeded the plaintiff's employment income. If one defines chief source of income by reference only to quantum and to gross income then the plaintiff's situation would clearly fall outside subsection 31 (1).

The characteristics which are used to decide whether a taxpayer is a farmer for whom farming constitutes a chief source of income rather than a taxpayer for whom farming is a sideline business have been summarized as requiring an investigation into "the taxpayer's reasonable expectation of income [profit] from his various revenue sources” and“ his ordinary mode and habit of work" (page 314 (D.T.C. 5215-16)). I understand this to be a two-branch test to which various factors, some overlapping, are relevant. The first branch, as I understand it involves an examination of the nature of the farming operation in question: its profit and loss experience; its capability as capitalized to draw a profit after capital cost allowance has been deducted (ibid.); whether a business plan exists and when the enterprise is expected to become profitable, (e.g., particularly if it is currently in a start-up phase); the degree of expertise and training possessed by those engaged in the enterprise; whether the losses incurred are continuing or can be explained as having occurred as a result of some unexpected event.

The second branch involves an examination of the taxpayer's lifestyle and his attitude towards the profitability of the farm: hours spent in the farming operation; the amount of capital committed to the operation; whether starting the farm enterprise involved a change in the taxpayer's mode and habits of work (e.g., Graham v. The Queen, [1983] C.T.C. 370; 83 D.T.C. 5399 (F.C.T.D.); affd [1985] 1 C.T.C. 380; 85 D.T.C. 5257 (F.C.A.); whether the farming operation is the centre of the taxpayer's work routine (Graham v. The Queen, supra) or whether some other activity dominates that routine and is being used to support the financial viability of the farm; whether the taxpayer is pursuing a course of action designed to make the farm operation significantly profitable within a reasonable period of time.

As I read the decisions of the Federal Court of Appeal in Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 (F.C.A.) and Roney v. M.N.R., [1991] 1 C.T.C. 280; 91 D.T.C. 5148 (F.C.A.), what I have called the two branches of the Moldowan test are not alternatives but must both be satisfied. They are to be considered conjunctively not disjunctively. In the Morrissey case, supra, it was held that, despite extensive time and effort spent by the taxpayer on the farming operation, its profitability was improbable and therefore the Moldowan test had not been satisfied. At page 242 (D.T.C. 5084) it was said:

. . . when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

In the Roney decision, supra, it was held that although the taxpayer had proven that the farm was potentially profitable it was not the taxpayer's major preoccupation. At pages 286-87 (D.T.C. 5153-55) it was said:

The ability of the farm to provide large profits, the viability of the ongoing business, the capital injected, the moving of the family, the retaining of employees, and the business experience accumulated by the respondent with his companies do not constitute a complete list of the relevant factors enumerated by Dickson, J. in Moldowan. While I recognize the difficulty in applying the test, which is both a relative and objective one, and the fact that the criteria mentioned by Dickson, J. are by no means exhaustive, I am far from being convinced that, in the circumstances of this case, a proper assessment was made in light of the proper criteria.

The ratio in Moldowan, supra, is that the reference, in subsection 31(1) of the Act, to a taxpayer whose source of income is a combination of farming and some other source, contemplates a man whose major occupation is farming. \t recognizes that such an individual may have other pecuniary interests such as income from investments or income from a sideline employment or business. These however remain auxiliary or subsidiary to his chief source of income. A quantum measurement of farming income, although not alone decisive, is relevant and cannot be ignored.

In the taxation year 1975, two-thirds of the respondent's time was still spent with his companies and one-third only was spent on farming activities. The capital invested was no doubt a sizeable one. "An entrepreneur” said the respondent in his testimony" doesn't go into to [sic] invest the type of money I committed to this operation, unless he intended to make a profit". His investment into the farm business amounted roughly to about a fourth of his capital. . . . except for the potential profitability, all the other criteria are adverse to the position taken by the respondent.

[footnotes omitted]

The Court in Roney, supra, then proceeded to discuss the Graham case, supra: the fact that the taxpayer in that case had taken a job in a rural area so that he could operate a farm and that he had adjusted his working hours with his employer (Ontario Hydro) so as to accommodate his farm responsibilities. The Court went on to conclude that the taxpayer in Roney, unlike Graham, was not a person whose major preoccupation was farming.

Conclusions

In the present case, the plaintiffs farm operation clearly was not actually profitable. In addition, the evidence does not establish that the farming enterprise, as it was being operated by the taxpayer, was potentially profitable. The evidence does not support a finding that there was a reasonable expectation of it being significantly profitable in a reasonable time frame. There is no independent expert evidence in this case from which it could be concluded that the farm was being run with a view to making it a profitable operation. There was no independent expert evidence demonstrating that the farm was moving towards profitability but then caught in an unexpected downturn of the market (as for example occurred in the case of beef cattle a few years ago). There was no expert evidence demonstrating that the various expenses claimed were reasonable or usual given the size of the operation. The plaintiff admits that the operation was undercapitalized. He admits that he was not concerned about the losses because some of them were" paper losses”; he was content to break-even. The long history of losses gives some indication as to how the business was being run and the taxpayer's attitude to it. The taxpayer's employment income was being used to support the unprofitable farming operation. The farming operation was being run as a sideline business.

Since the evidence does not support a favourable finding with respect to what I have called the first branch of the Moldowan test I do not need to consider the second. I would indicate, however, that despite the extensive evidence given with respect to the plaintiff's dedication to and time spent on the farms I think the plaintiff must have downplayed the amount of time and effort he put into his job as an educator. It stretches credibility to think that he could have been as successful in this field, as he clearly was and yet have devoted only a minimum amount of time to it.

For the reasons given the plaintiff's claim is dismissed.

Appeal dismissed.