SUPREME
COURT OF CANADA
Between:
Her
Majesty The Queen
Appellant
and
John
H. Craig
Respondent
Coram: LeBel, Deschamps, Abella, Rothstein, Cromwell, Moldaver and
Karakatsanis JJ.
Reasons
for Judgment:
(paras. 1 to 48)
|
Rothstein J. (LeBel, Deschamps, Abella,
Cromwell, Moldaver and Karakatsanis JJ. concurring)
|
Canada v. Craig, 2012 SCC 43, [2012] 2 S.C.R. 489
Her Majesty The
Queen Appellant
v.
John H. Craig
Respondent
Indexed as: Canada v. Craig
2012 SCC 43
File No.: 34144.
2012: March 23; 2012: August 1.
Present: LeBel, Deschamps, Abella, Rothstein, Cromwell, Moldaver
and Karakatsanis JJ.
on appeal from the federal court of appeal
Taxation
— Income Tax — Deduction of farming losses — Taxpayer drawing income from
farming and other sources — Taxpayer deducting farming losses from total income
— Whether farm income combined with other income constitutes chief source of
income — Whether totality of farming losses deductible from income — Income Tax
Act, R.S.C. 1985, c. 1 (5th Supp .), s. 31(1) (a).
Courts —
Decisions — Stare decisis — Whether subordinate courts may overrule higher
court precedent — Circumstances in which prior Supreme Court of Canada
decisions will be reconsidered or revised.
Section 31(1) of the Income
Tax Act limits deductible losses “[w]here 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”. In Moldowan v. The Queen, [1978] 1
S.C.R. 480, this Court found that a predecessor to s. 31(1) contemplated
three classes of taxpayer involved in farming. In the first class are
taxpayers for whom farming provides the bulk of income or the centre of work
routine. Loss deductions are not limited for this class. In the second are
taxpayers who do not look to farming, or to farming and some subordinate source
of income, for their livelihood, but carry on farming as a sideline business.
For this class, s. 31(1) limits loss deductions. The third class consists
of taxpayers who carry on some farming activities as a hobby, not as a
business, and whose losses are not deductible in any amount.
In Gunn v. Canada, 2006 FCA
281, [2007] 3 F.C.R. 57, the Federal Court of Appeal adopted a more generous
interpretation of what could constitute a combination of farming and some other
source of income.
In this case, C’s primary source
of income came from his law practice. He also had income from investments, stock
options, and farming (buying, selling, training and maintaining horses for
racing). He deducted losses from the horse‑racing business from his
other income in 2000 and 2001. Based on Moldowan, the Minister
reassessed and limited the deductions on the grounds that the combination of
the law practice and the horse‑racing business was not C’s chief source
of income. Following Gunn, the trial judge allowed C’s appeal, finding
that the loss deduction limitation in s. 31(1) did not apply. The Federal
Court of Appeal dismissed the Minister’s appeal, holding that it was required
to follow its prior decision in Gunn.
Held: The appeal should be
dismissed.
Moldowan was a binding
precedent and the lower courts should have limited themselves to writing reasons
as to why it was problematic rather than purporting to overrule it. This Court
can, however, overrule its own decisions. While this is not a step not to be
lightly undertaken, the Moldowan approach to the combination question is
incorrect and it is appropriate for this Court to revisit this aspect of the
interpretation of s. 31. Section 31(1) provides two distinct
exceptions to the loss deduction limitation. A judge‑made rule that
reads one of them out of the provision cannot stand.
Taking a contextual approach, the
relevant factors to consider are the capital invested in farming and the second
source of income; the income from each of the two sources of income; the time
spent on the two sources of income; and the taxpayer’s ordinary mode of living,
farming history, and future intentions and expectations. If they tend to show
that the taxpayer places significant emphasis on both his farming and non‑farming
sources of income, there is no reason that such a combination should not
constitute a chief source of income, avoiding the application of the loss
deduction limitation of s. 31(1) . Both endeavours must be significant
endeavours of the taxpayer, but they do not need to be connected, and farming
does not need to be the predominant source of income. The determination is a
factual one for the trial judge. The approach must be flexible, recognizing
that not each factor need be significant. The question is whether, looking at
these factors together, the taxpayer places significant emphasis on each of the
farming business and other earning activity, and if so, the combination will
constitute a chief source of income and avoid the loss deduction limitation of
s. 31(1) . Such an interpretation is consistent with the general policy of
the Income Tax Act that, subject to specific exceptions, taxpayers may
offset losses from one business or source of income against profits from
another without limitation.
There is no basis for this Court
to disturb the findings that farming, in combination with C’s law practice, was
a chief source of income, and that the loss deduction limitation in s. 31(1)
did not apply to the facts. The Crown conceded that the horse‑racing
operation was a business, not a personal endeavour, and the relevant factors,
other than demonstrated profitability, clearly pointed to it being more than a
sideline business. C devoted both a material amount of capital and a very
significant part of his daily work routine to the farming business, and he was
an active member of and contributor to the community of standard‑bred
racing.
Cases Cited
Overruled: Moldowan v. The
Queen, [1978] 1 S.C.R. 480; discussed: Gunn v. Canada, 2006
FCA 281, [2007] 3 F.C.R. 57; referred to: Hover v. M.N.R.,
[1993] 1 C.T.C. 2585; Hadley v. The Queen, [1985] 1 C.T.C. 62; The
Queen v. Graham (1985), 85 D.T.C. 5256; Morrissey v. Canada, [1989]
2 F.C. 418; Poirier (in bankruptcy) v. Minister of National Revenue (1986),
2 F.T.R. 11; Watt v. Minister of National Revenue, 2001 FCA 72, 273 N.R.
201; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Stackhouse v. R.,
2007 TCC 146, [2007] 3 C.T.C. 2402; Falkener v. R., 2007 TCC 514, [2008]
2 C.T.C. 2231; Loyens v. R., 2008 TCC 486, [2009] 1 C.T.C. 2547; Johnson
v. The Queen, 2009 TCC 383, 2009 D.T.C. 1245; Scharfe v. The Queen,
2010 TCC 39, 2010 D.T.C. 1078; Turbide v. The Queen, 2011 TCC 371, 2011
D.T.C. 1347; Miller v. Canada (Attorney General), 2002 FCA 370, 220
D.L.R. (4th) 149; Ontario (Attorney General) v. Fraser, 2011 SCC 20,
[2011] 2 S.C.R. 3; R. v. Chaulk, [1990] 3 S.C.R. 1303; R. v. B.
(K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683; R.
v. Salituro, [1991] 3 S.C.R. 654; Minister of Indian Affairs and
Northern Development v. Ranville, [1982] 2 S.C.R. 518; Hamstra (Guardian
ad litem of) v. British Columbia Rugby Union, [1997] 1 S.C.R. 1092; R.
v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609; Queensland v. Commonwealth
(1977), 139 C.L.R. 585; R. v. Bernard, [1988] 2 S.C.R. 833; Canada
Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Stewart
v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645; Canderel Ltd. v. Canada,
[1998] 1 S.C.R. 147.
Statutes and Regulations Cited
Income Tax Act, R.S.C. 1985, c. 1
(5th Supp .), ss. 31 , 248(1) .
Authors Cited
Felesky, Brian A. “‘Hobby’ Farm Losses”, in Report of
Proceedings of the Twenty‑Sixth Tax Conference. Toronto: Canadian Tax Foundation, 1974, 625.
McNair, D. K. Taxation of
Farmers and Fishermen. Toronto: Richard De Boo,
1980.
Thomas, Richard B. “A Farm Loss with a Difference — The Farmer
is Successful!” (1993), 41 Can. Tax J. 513.
APPEAL from a judgment of the
Federal Court of Appeal (Evans, Dawson and Stratas JJ.A.), 2011 FCA 22, [2011]
2 F.C.R. 436, 414 N.R. 396, [2011] 3 C.T.C. 189, 2011 D.T.C. 5047, [2011]
F.C.J. No. 435 (QL), 2011 CarswellNat 586, affirming a decision of
Hershfield T.C.C.J., 2009 TCC 617, [2010] 3 C.T.C. 2341, 2010 D.T.C. 1032,
[2009] T.C.J. No. 505 (QL), 2009 CarswellNat 4372. Appeal dismissed.
Simon Fothergill and Daniel Bourgeois, for the appellant.
Glenn Ernst and Sandon Shogilev, for the
respondent.
The
judgment of the Court was delivered by
Rothstein J. —
I. Introduction
[1]
This is a farm loss case. Where farming is a
source of income for a taxpayer, s. 31 of the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp .), may apply to limit the amount of loss from farming that
can be deducted from the taxpayer’s other income. Section 31(1) (a)
provides that, where a taxpayer’s chief source of income is neither farming nor
a combination of farming and some other source of income, the taxpayer’s
deductible farm loss is limited to $8,750 annually.
[2]
The main issue in this case concerns the
interpretation of s. 31 of the Income Tax Act . The question is under
what circumstances the combination of farming and some other source of income
constitutes a “chief source of income”, allowing a taxpayer to avoid the farm
loss deduction limit in s. 31 .
[3]
A preliminary issue arises, however, namely
whether the Federal Court of Appeal was entitled to disregard this Court’s
precedent in Moldowan v. The Queen, [1978] 1 S.C.R. 480.
II. Facts
[4]
John Craig’s primary source of income was, and
was intended to be, his professional income from his law practice. He also had
income from investments and gains on the exercise of stock options. In
addition, Mr. Craig was in the business of buying, selling, training and
maintaining horses for racing.
[5]
Although the horse-racing business had had some
profitable years, it incurred losses in 2000 and 2001, of $222,642 and $205,655
respectively. Mr. Craig deducted these losses from his other income. Pursuant
to s. 31 of the Income Tax Act , as interpreted by Dickson J. (as he then
was) in Moldowan, the Minister reassessed, limiting the deductible
losses for each year to $8,750, on the basis that the combination of his law
practice and his horse-racing business was not his chief source of income,
because the horse-racing business was a subordinate or sideline business.
[6]
Hershfield T.C.C.J. of the Tax Court of Canada
found, on the basis of Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57,
a decision of the Federal Court of Appeal that did not follow Moldowan,
that the combination of the horse-racing business and his law practice
constituted Mr. Craig’s chief source of income (2009 TCC 617, [2010] 3 C.T.C.
2341). The Federal Court of Appeal also found in favour of Mr. Craig on the
basis that it was required to follow that Court’s prior decision in Gunn (2011
FCA 22, [2011] 2 F.C.R. 436).
[7]
The Minister now appeals to this Court.
III. The
Statutory Provisions at Issue
[8]
Section 31(1) of the Income Tax Act
provides, in relevant part:
31. (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, . . . the taxpayer’s loss, if any, for
the year from all farming businesses carried on by the taxpayer shall be deemed
to be a total of
(a) the lesser of
(i) the
amount by which the total of the taxpayer’s losses for the year, determined
without reference to this section and before making any deduction under section
37 or 37.1, from all farming businesses carried on by the taxpayer exceeds the
total of the taxpayer’s 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 31(1) (a)(i)
exceeds $2,500, and
(B) $6,250,
and
(b) [an
additional amount not relevant here].
The maximum deduction
under s. 31(1) (a) is $8,750, the extent of the deduction allowed to Mr.
Craig.
[9]
Section 248(1) provides:
. . .
“farming” includes . . . maintaining of
horses for racing . . .
IV. Moldowan
[10]
Similar to this case, Moldowan involved a
taxpayer who, in addition to having other sources of income, engaged in the
business of farming, namely buying, selling, and maintaining of horses for
racing. He sought to deduct his losses from his farming business against his
other income. The Minister limited his deductible losses against his other
income under s. 13(1) of the Act (now s. 31(1) ) to $5,000 (then the
limit under that provision). This Court upheld the loss deduction. Dickson J.
(as he then was) found that s. 13(1) contemplated three classes of taxpayer
involved in farming:
(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 carries 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 carries 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. [pp. 487-88]
As Mr. Moldowan’s farming
business was a subordinate source of income in relation to his other sources of
income, he fell into the second class of taxpayer and the farming loss
deduction limitation was applicable.
V. Gunn
[11]
Moldowan provides
guidance as to the interpretation of s. 31(1) . However, there has been
criticism from the judiciary, academics and members of the profession over the
three decades following Moldowan with respect to Dickson J.’s
description of the second class of taxpayer who would be subject to the $8,750
loss deduction limitation. (See, for example, D. K. McNair, Taxation of
Farmers and Fishermen (1980), at p. 135; R. B. Thomas, “A Farm Loss with a
Difference — The Farmer is Successful!” (1993), 41 Can. Tax J. 513, at
pp. 514-15; Hover v. M.N.R., [1993] 1 C.T.C. 2585 (T.C.C.), at
pp. 2598-99, per Bowman T.C.C.J. (as he then was); Hadley v. The
Queen, [1985] 1 C.T.C. 62 (F.C.T.D.); The Queen v. Graham (1985), 85
D.T.C. 5256 (F.C.A.), per Marceau J.A., dissenting; Morrissey v.
Canada, [1989] 2 F.C. 418 (C.A.), per Mahoney J.A.; Poirier (in
bankruptcy) v. Minister of National Revenue (1986), 2 F.T.R. 11, per
Jerome A.C.J.; Watt v. Minister of National Revenue, 2001 FCA 72, 273
N.R. 201, per Sexton J.A.)
[12]
The critics point out that the effect of the
definition of the second class of taxpayer is that the taxpayer’s chief source
of income must be farming, the same as the first class of taxpayer, in order to
avoid the loss deduction limitation of s. 31(1) . In other words, Moldowan
says that if farming is a subsidiary source of income in relation to the
taxpayer’s other sources of income, the loss deduction limitation will apply.
The necessary implication is that in order for the limitation not to apply,
farming must be the chief source of income, the same as for a taxpayer in the
first class established in Moldowan. There is nothing in the text or
context of s. 31(1) from which to infer that, in order to avoid the loss
deduction limitation of the provision, farming in relation to taxpayers’ other
sources of income has to be predominant, and could not be a subsidiary source.
[13]
In 2006 in Gunn, Sharlow J.A. engaged in
a thorough analysis of Moldowan and the legislative history of s.
31(1) . While she endorsed most of Dickson J.’s reasoning, she disagreed with
the portion of his analysis that has given rise to criticism, and that is at
issue in this appeal. At para. 71, she stated:
Based
on Justice Dickson’s view of the combination question, that person cannot avoid
the application of section 31 unless he can establish that his other source of
income is subordinate to farming. But if he could establish that, he probably
would be able to establish that farming is his chief source of income.
[14]
In Sharlow J.A.’s view, Dickson J.’s judge-made
rule was inconsistent with this Court’s modern approach to the interpretation
of the Income Tax Act . At para. 75, she cited Shell Canada Ltd. v.
Canada, [1999] 3 S.C.R. 622, at para. 43:
This
Court has consistently held that courts must therefore be cautious before
finding within the clear provisions of the Act an unexpressed legislative
intention . . . . Finding unexpressed legislative intentions under the guise
of purposive interpretation runs the risk of upsetting the balance Parliament has
attempted to strike in the Act.
[15]
Sharlow J.A. answered the “combination” question
by observing that the ordinary grammatical meaning of the term “combination” is
comprehensible, and in ordinary language means an “addition” or “aggregation”.
Following this interpretation of the term “combination”, Sharlow J.A.
concluded, at para. 83:
In
my view, the combination question should be interpreted to require only an
examination of the cumulative effect of the aggregate of the capital invested
in farming and a second source of income, the aggregate of the income derived
from farming and a second source of income, and the aggregate of the time spent
on farming and on the second source of income, considered in the light of the
taxpayer’s ordinary mode of living, farming history, and future intentions and
expectations.
Applying her
interpretation of the combination test, Sharlow J.A. found that Mr. Gunn’s
chief source of income was a combination of farming and the practice of law.
At para. 92, she stated:
For
the reasons explained in the discussion above, I would have adopted a more
generous interpretation of the combination question in section 31 that requires
an aggregation of the various relevant economic factors (capital, income and
time), leading to the conclusion that Mr. Gunn’s chief source of income is a
combination of farming and the practice of law.
[16]
In the present case, Hershfield T.C.C.J.
followed Gunn, allowed Mr. Craig’s appeal and determined that the
loss deduction limitation in s. 31(1) did not apply. The Federal Court of
Appeal dismissed the Minister’s appeal.
VI. Issues
[17]
The main issue in this appeal is whether this
Court should overrule Moldowan. Before dealing with that issue,
however, it is necessary to address a preliminary concern raised by the Crown.
VII. Analysis
A. Should the Tax Court and the
Federal Court of Appeal Have Followed Moldowan or Gunn?
[18]
There is no doubt that Dickson J.’s interpretation
of s. 13(1) in Moldowan, is a precedent binding on the Federal Court of
Appeal and the Tax Court of Canada. While Gunn agreed with much of what
Dickson J. wrote in Moldowan, on the crucial question of whether farming
as a source of income could be subordinate to another source and still avoid
the loss deduction limitation of s. 31(1) , Gunn departed from Moldowan,
a precedent binding on the Federal Court of Appeal.
[19]
One of the fallouts from Gunn is that it
left the Tax Court of Canada and the Federal Court of Appeal itself in the
difficult position of facing two inconsistent precedents and having to decide
which one to follow. The uncertainty which the application of precedent is
intended to preclude is seen in the decisions since Gunn, in which the
Tax Court has acknowledged Moldowan as the leading case while also
feeling bound to follow Gunn: Stackhouse v. R., 2007
TCC 146, [2007] 3 C.T.C. 2402; Falkener v. R., 2007 TCC 514,
[2008] 2 C.T.C. 2231; Loyens v. R., 2008 TCC 486, [2009] 1 C.T.C.
2547; Johnson v. The Queen, 2009 TCC 383, 2009 D.T.C. 1245; Scharfe
v. The Queen, 2010 TCC 39, 2010 D.T.C. 1078; and Turbide v. The
Queen, 2011 TCC 371, 2011 D.T.C. 1347. And of course the Federal Court of
Appeal followed Gunn in the instant case.
[20]
It may be that Gunn departed from Moldowan
because of the extensive criticism of Moldowan. Indeed, Dickson J.
himself acknowledged that the section was “an awkwardly worded and intractable
section and the source of much debate” (p. 482). Further, that provision had
not come before the Supreme Court for review in the three decades since Moldowan
was decided.
[21]
But regardless of the explanation, what the
court in this case ought to have done was to have written reasons as to why Moldowan
was problematic, in the way that the reasons in Gunn did, rather than
purporting to overrule it.
[22]
The Federal Court of Appeal, on the basis of its
prior decision in Miller v. Canada (Attorney General), 2002 FCA 370, 220
D.L.R. (4th) 149, in which that
court reaffirmed the rule that it would normally be bound by its own previous
decisions, followed Gunn, and not Moldowan. The application of Miller
and the question of whether the Federal Court of Appeal should have followed Gunn
simply did not arise, in view of the Moldowan Supreme Court precedent.
[23]
The Federal Court of Appeal’s purported
overruling of Moldowan does not, however, affect the merits of this
appeal or the core question of whether Moldowan should in fact be
overruled.
B. Should This Court Overrule
Moldowan?
[24]
The question of whether this Court should
overrule one of its own prior decisions was addressed recently in Ontario
(Attorney General) v. Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3. At
paragraph 56, Chief Justice McLachlin and LeBel J., in joint majority reasons,
noted that overturning a precedent of this Court is a step not to be lightly
undertaken. This is especially so when the precedent represents the considered
views of firm majorities (para. 57).
[25]
Nonetheless, this Court has overruled its own
decisions on a number of occasions. (See R. v. Chaulk, [1990] 3 S.C.R.
1303, at p. 1353, per Lamer C.J., for the majority; R. v. B. (K.G.),
[1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683.) However, the
Court must be satisfied based on compelling reasons that the precedent was
wrongly decided and should be overruled. (See R. v. Salituro, [1991] 3
S.C.R. 654, at p. 665; Minister of Indian Affairs and Northern Development
v. Ranville, [1982] 2 S.C.R. 518, at p. 527; Hamstra (Guardian ad litem
of) v. British Columbia Rugby Union, [1997] 1 S.C.R. 1092, at paras. 18-19;
R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609, at para. 44.)
[26]
Courts must proceed with caution when deciding
to overrule a prior decision. In Queensland v. Commonwealth (1977), 139
C.L.R. 585 (H.C.A.), at p. 599, Justice Gibbs articulated the required approach
succinctly:
No
Justice is entitled to ignore the decisions and reasoning of his predecessors,
and to arrive at his own judgment as though the pages of the law reports were
blank, or as though the authority of a decision did not survive beyond the
rising of the Court. A Justice, unlike a legislator, cannot introduce a
programme of reform which sets at nought decisions formerly made and principles
formerly established. It is only after the most careful and respectful
consideration of the earlier decision, and after giving due weight to all the
circumstances, that a Justice may give effect to his own opinions in preference
to an earlier decision of the Court.
[27]
The vertical convention of precedent is not at
issue with respect to the decision as to whether the Supreme Court should
overrule one of its own precedents. Rather, in making this decision the Supreme
Court engages in a balancing exercise between the two important values of
correctness and certainty. The Court must ask whether it is preferable to
adhere to an incorrect precedent to maintain certainty, or to correct the
error. Indeed, because judicial discretion is being exercised, the courts have
set down, and academics have suggested, a plethora of criteria for courts to
consider in deciding between upholding precedent and correcting error. (See R.
v. Bernard, [1988] 2 S.C.R. 833, at pp. 850-61; Chaulk, at p.
1353; Henry, at paras. 45-46.)
[28]
In this case, I am of the opinion that relevant
considerations justify overruling Moldowan. First, Moldowan
essentially read the combination test out of s. 31(1) . In finding that
taxpayers in the second class were subject to the loss deduction limitation
where farming as a source of income was a sideline or subordinate to another
source of income, the necessary inference was that farming had to be the
taxpayer’s chief source of income. However, the section provides two distinct
exceptions to its loss deduction limitation. One is where farming is the
taxpayer’s chief source of income. The second is where the taxpayer’s chief
source of income is a combination of farming and some other source of income.
By requiring that the second exception apply only where the other source of
income was subordinate to the farming source of income, Moldowan
collapsed the second exception into the first. Having regard to the words of
the provision, these are two separate exceptions to the loss deduction
limitation and each must be given meaning.
[29]
Second, there has been significant judicial,
academic and other criticism of Moldowan from its issuance in 1977. In
light of this criticism, it is appropriate for this Court to take notice and
acknowledge the difficulties identified with the Moldowan interpretation
of s. 31(1) .
[30]
Third, since Moldowan, this Court has
held on a number of occasions that unexpressed legislative intention under the
guise of purposive interpretation is to be avoided (Shell, at
para. 43). There is no doubt that s. 31(1) is, as Dickson J. recognized, an
awkwardly worded and intractable section and the source of much debate.
Nonetheless, the section is clear that two distinct exceptions to the loss
deduction limitation can be identified. A judge-made rule that reads one of
the exceptions out of the provision is not consistent with the words used by
Parliament.
[31]
For these reasons I am of the respectful opinion
that the Moldowan approach to the combination question is incorrect and
that it is appropriate for this Court to revisit this aspect of the
interpretation of s. 31 .
C. The Interpretation of Section
31(1)
[32]
I have explained why I am of the view that the
interpretation of s. 31(1) in Moldowan cannot stand. It is therefore up
to this Court now to approach the question afresh.
[33]
While the Moldowan interpretation cannot
stand, it is important to bear in mind that substituting a different
combination test must not render s. 31(1) incapable of application. Dickson J.
was mindful that a simple aggregation of two sources of income would yield just
such a result. As he explained in Moldowan, at p. 487:
It
is clear that “combination” in s. 13 cannot mean simple addition of two sources
of income for any taxpayer. That would lead to the result that a taxpayer
could combine his farming loss with his most important other source of income,
thereby constituting his chief source. I do not think s. 13(1) can be
properly so construed. Such a construction would mean that the limitation of
the section would never apply and, in every case, the taxpayer could deduct the
full amount of farming losses.
[34]
In 1974, prior even to the decision in Moldowan,
tax lawyer Brian Felesky grappled with the very matter that is at issue in this
appeal, summarizing the history of judicial attempts to interpret s. 31(1) (“Hobby
Farm Losses” in Report of Proceedings of the Twenty-Sixth Tax Conference
(1974), 625). He concluded that the judicial approach to s. 31(1) was in the
nature of an “occupation test”. Under this test, the amount of capital, time,
effort and commitment invested into the source of income, and the taxpayer’s general
emphasis on that source of income indicated whether that source of income was
the chief source of income. As he explained, the Income Tax Act
provides that a “source of income” is property, business, or employment, but
the “chief source” is the property, business, or employment from which the
taxpayer reasonably expects the bulk of his income to come.
[35]
Dickson J.’s approach in Moldowan is
somewhat similar, taking into account the taxpayers time spent, capital
commitment and potential profitability. At p. 486, he stated:
The
distinguishing features of “chief source” are the taxpayer’s reasonable
expectation of income from his various revenue sources and his ordinary mode
and habit of work. These may be tested by considering, inter alia in
relation to a source of income, the time spent, the capital committed, the
profitability both actual and potential.
[36]
In Gunn, Sharlow J.A., also an
experienced tax practitioner before her judicial career, adopted the same
general approach as Mr. Felesky, although she does not label it an “occupation test”.
As noted above, she stated:
In
my view, the combination question should be interpreted to require only an
examination of the cumulative effect of the aggregate of the capital invested
in farming and a second source of income, the aggregate of the income derived
from farming and a second source of income, and the aggregate of the time spent
on farming and on the second source of income, considered in the light of the
taxpayer’s ordinary mode of living, farming history, and future intentions and
expectations. This would avoid the judge-made test that requires farming to be
the predominant element in the combination of farming with the second source of
income, which in my view is a test that cannot stand with subsequent
jurisprudence. It would result in a positive answer to the combination
question if, for example, the taxpayer has invested significant capital in a
farming enterprise, the taxpayer spends virtually all of his or her working
time on a combination of farming and the other principal income-earning
activity, and the taxpayer’s day to day activities are a combination of farming
and the other income-earning activity, in which the time spent in each is
significant. [para. 83]
[37]
All of these authorities support the idea that
s. 31(1) does not contemplate a simple aggregation of two sources of income,
but requires a wider inquiry into the amount of capital, time, effort,
commitment and general emphasis on the part of the taxpayer with respect to the
sources of income. There is no requirement that the two sources of income must
be connected in order to meet the combination test.
[38]
However, before going further, two
considerations must be borne in mind. First, it is necessary to interpret the
provision having regard to its text, context and purpose (Canada Trustco
Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 55).
Nonetheless, purposive interpretation cannot justify finding unexpressed
legislative intentions. (See Shell, at para. 43.) Second, the question
as to whether the combination of farming and some other source of income
constitutes the taxpayer’s chief source of income is a fact-based
determination.
[39]
I see nothing in the words or context in s.
31(1) to support the proposition that farming must be the predominant source of
income when viewed in combination with another source, in order to avoid the
loss deduction limitation of the section. It is also not possible to relegate
s. 31(1) to applying only to “hobby” or “gentleman” farmers because, for a loss
to be deductable at all, farming must be a source of income. A taxpayer who is
engaged in farming in a non-commercial manner, with no profit or intention to
profit, does not have a source of income from farming and therefore no loss for
income tax purposes, limited or not (Stewart v. Canada, 2002 SCC 46,
[2002] 2 S.C.R. 645, at paras. 51-54).
[40]
The provision is addressed to losses from
farming businesses. There is no loss deduction limitation where farming is the
taxpayer’s chief source of income. That implies that such a taxpayer is
investing significant funds and spending considerable time in that business.
Otherwise, it is difficult to see such a business as a chief source of income.
[41]
I do not think that characterization of farming
changes under the combination test. The provision still contemplates that the
taxpayer will devote significant time and resources to the farming business,
even if he or she will also devote significant time and possibly resources to
another business or employment. It seems to me that, as long as the taxpayer
devotes considerable time and resources to the farming business, the fact that
another source of income produces greater income than the farm does not mean
that such a combination is not a chief source of income for the taxpayer.
[42]
The approach to the combination question
described by Mr. Felesky, Dickson J. and Sharlow J.A., makes sense. It is
grounded in the words of s. 31(1) , which limits only a taxpayer’s losses “from
all farming businesses” where the taxpayer’s chief source of income for a
taxation year is neither farming nor a combination of farming and some other
source of income. With respect to the combination, a simple aggregation of
income from two sources cannot have been contemplated by the section, meaning
that factors other than two sources of income alone must be taken into
account. The factors identified by Sharlow J.A., namely, the capital invested
in farming and the second source of income, the income from each of the two
sources of income, the time spent on the two sources of income, and the
taxpayer’s ordinary mode of living, farming history, and future intentions and
expectations, are all factors involved in running a farming business together
with another source of income. If these factors tend to show that the taxpayer
places significant emphasis on both his farming and non-farming sources of
income, there is no reason that such a combination should not constitute a
chief source of income, avoiding the application of the loss deduction
limitation of s. 31(1) . The determination is a factual one for the trial judge.
[43]
Such an interpretation is consistent with the
general policy of the Income Tax Act that, subject to specific
exceptions, taxpayers may offset losses from one business or source of income
against profits from another without limitation (Gunn, at para.
20, citing Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, at para. 53).
The only restriction in the case of farming losses is that the combination must
constitute the taxpayer’s chief source of income. This does not imply that
either source of income by the taxpayer need be the predominant source. But it
does imply that they must be significant endeavours of the taxpayer.
VIII. Application
[44]
For s. 31 to apply and for a farming loss to be
deductible at all, farming must be a source of income. At trial, the Crown
conceded that Mr. Craig’s horse-racing operation was a business, as opposed to
a personal endeavour, on the test articulated in Stewart. Accordingly,
the trial judge did not have to engage in a Stewart analysis of the
facts to determine whether Mr. Craig’s horse-racing operation was a source of
income, but accepted that it was a business and not a personal endeavour
(paras. 41-42). I see no reason to disturb this conclusion.
[45]
Since the horse-racing activities were a source
of income, it remains to determine whether to apply the loss deduction
limitation in s. 31(1) . Taking a contextual approach to the combination
question, the relevant factors to consider are the capital invested in farming
and the second source of income; the income from each of the two sources of
income; the time spent on the two sources of income; and the taxpayer’s
ordinary mode of living, farming history, and future intentions and
expectations. The approach must be flexible, recognizing that not each factor
need be significant. The question is whether, looking at these factors
together, the taxpayer places significant emphasis on each of the farming business
and other earning activity; and if so, the combination will constitute a chief
source of income and avoid the loss deduction limitation of s. 31(1) .
[46]
Hershfield T.C.C.J.
found that the relevant factors, other than demonstrated profitability, clearly
pointed to Mr. Craig’s farming business being more than a sideline business (para. 76). Even
though Mr. Craig derived his principal income from the practice of law and the
total hours spent at his law practice exceeded that devoted to the farming
business, he devoted both a material amount of capital and a very significant
part of his daily work routine to the farming business (para. 76). Hershfield
T.C.C.J. found that the horse-racing business was pursued as a major business
preoccupation. Mr. Craig’s mornings, evenings and weekends were consumed by a
dedication to enhancing the potential profitability of the operation, which was
more than a distraction from his normal mode of living or an entertainment or
sport (para. 76). Further, Mr. Craig was involved in his farming business
beyond the stable and track. Hershfield T.C.C.J. gave weight to the fact that
Mr. Craig was an active member of and contributor to the community of
standard-bred racing (para. 77). He worked to improve the integrity of
standard-bred racing so as to improve the potential profitability of his
operation. His knowledge of the horse-racing competitions that were important
for profitability was sufficient to place him as chairperson of the industry’s
appeal board (para. 77). For these reasons, Hershfield T.C.C.J. determined
that the horse-racing operation was a chief source of income on the basis of
its contribution to the combination test in s. 31(1) .
[47]
Having considered the
relevant factors, Hershfield T.C.C.J. found that farming, in combination with
Mr. Craig’s law practice, was a chief source of income, and that the loss
deduction limitation in s. 31(1) did not apply to the facts. There is no basis
for this Court to disturb Hershfield T.C.C.J.’s factual conclusion and his
finding that the loss deduction limitation was not applicable.
IX. Conclusion
[48]
I would dismiss the appeal with costs.
Appeal dismissed with
costs.
Solicitor for the
appellant: Attorney General of Canada, Ottawa.
Solicitors
for the respondent: Goodmans, Toronto.