Citation: 2008 TCC 486
Date: 20080829
Docket: 2004-3590(IT)G
BETWEEN:
WILLIAM LOYENS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] These are appeals
from reassessments made under section 31 of the Income Tax Act (“Act”)
for the Appellant’s 1999 and 2000 taxation years. The Minister of National
Revenue (“Minister”) reduced the Appellant’s claimed farm losses of $382,852
and $202,475, respectively, to the amount of $8,750 for each year. The issue is
whether the Appellant’s chief source of income in those years was farming, or a
combination of farming and some other source of income.
[2] The Appellant,
Dr. William Loyens, is 56 years of age and resides with his wife Sylvia on a
farm in Delaware, Ontario. He is a highly successful dentist and has been
operating a dental clinic in the town of Glencoe since 1976. He was raised on a poultry farm and was involved
in farming since the age of 12. His father was working fulltime in construction,
and the Appellant stated that he basically ran the poultry farm until entering
university. In his teens, he owned sheep and an Arabian horse, and became a
chartered member of the Red Valley Saddle Club, competing in various horse-related
sports. He attended the University of Toronto and
graduated from dental school in 1975. In 1976, he bought an existing dental
clinic in the town of Glencoe, and he and his wife moved to Glencoe as well. In the
1980s, he doubled the size of the clinic, building two new operating rooms. The
total capital investment in the dental operation amounted to approximately
$208,000.
[3] In the late
1970s, the Appellant acquired 83 acres of corn and bean land, an adjoining 50
acres a few years later, and finally, a residence located on 20 acres of land,
with the intention of farming. He established a very successful dentistry
practice before engaging in farming in 1990. He envisaged retiring from
dentistry by the age of 55, or as soon as his farming operations would sustain his
family. He has a family history of Parkinson’s which at some point may prevent
him from practicing dentistry.
[4] In addition, in
1989 or 1990, he built a horse barn (48’ by 36’) and fenced in some land to
commence a business of breeding Arabian horses. While he hired a contractor to
install the barn’s main structure, he did much of the remaining work himself.
One year later, he had a training arena built (160’ by 80’), to which he
personally added a viewing room. He later built a connecting barn, an emu barn,
and purchased another 25 acres. There is no doubt he spent considerable time setting
up his horse and emu farm. He reduced his working time at the dental clinic to a
four-day week in order to have more time on the farm. The capital investment
from 1990 to 1999 relating to his farming operation was about $600,000. While the
Respondent submits that only $344,000 can be substantiated, I accept the Appellant’s
estimates.
[5] Upon commencing horse farming, the Appellant’s idea was:
To buy a good
band of brood mares, have our stallion and basically produce horses to sell for
showing later.
During
the years under appeal, he owned approximately 20 horses, and in attempting to
increase their value, he actively promoted them at show rings. From a financial
point of view, his efforts were in vain since throughout a 16-year period, he
sold only nine horses, most of which were for a fraction of the price that he
had expected. He explained how various events negatively impacted the Arabian
horse market, resulting in lower than expected sale prices. While not giving up
on the horse breeding operation, in the early 1990s, he changed his focus to
emu farming.
[6] The Appellant then met with emu producers, and visited a number of emu
farms in Canada and the United States. In May 1990, together with a partner, he bought 100 chicks
at $1,500 each,
and later acquired another 50 chicks and six pair of breeders from Germany.
Initially, his emu activity was strictly for breeding. He was able to generate
significant revenues during the 1993 and 1994 taxation years from selling
yearlings and some of his own chicks from the breeders that he had initially
purchased. However, in 1995, this breeding market collapsed and never returned.
[7] He then
increased his emu flock to 4,000 birds in 1998 to process emus for their meat,
oil and hides. He seriously promoted emu-based products, and hired a marketing
agent to promote and market the products both in Canada and the US. He provided
emu meat gratuitously, and funded a number of functions featuring world class
chefs. Furthermore, he bought some emu-based leather in the United States,
and had clothing designed and presented at small fashion shows. While his
promoting efforts were impressive, he was not able to sell any of these
products because as he stated:
I didn’t have the product to sell
because I wasn’t processing birds yet, I wasn’t large enough. But I was doing
this to basically get exposure, find out what the market would be and just get
a feel as to, in my own mind that I could sell this stuff for sure.
However,
10 years later, very little, if any, of the promoted emu products have been
sold.
[8] According to the Appellant, the meat value of an emu is anywhere from $150 to $200
a bird, which would cover the cost of raising it. He added that the profit of an
emu operation is in the bird’s oil which may sell for $360 per bird, while its
skin may sell for $150 per bird. However, in order to salvage a bird’s oil and
hide, a specialized abattoir is required. Since no such abattoir existed within
the vicinity of the Appellant’s farm, he was only able to process emus for
their meat. By using the local St. Ann’s abattoir, the Appellant felt that he was losing
money because the oil and hides could not be utilized. He attempted to purchase
the abattoir, or construct one himself, to equip it with the necessary tools
required to salvage the hides and oil.
[9] For the construction of an abattoir, the Appellant has been seeking financing since 1999, without
success, in Canada, the United States and offshore. In early 2000, St. Ann’s
abattoir was purchased by another party and, therefore, no longer remained an
option. It
is somewhat of a mystery why the amount
of financing the Appellant sought has increased from $5 million to $25 million,
but in any event, financing was the key to his emu venture in order to
construct an abattoir. There is no reliable evidence that the offshore
financing is or was a realistic possibility.
[10] With respect to the
financing, the Appellant entered into evidence three letters dated October
20, 1998, June 28, 2000 and August 22, 2000. As well, counsel for the
Respondent introduced one such letter, dated February 15, 2006. The four
letters do state that offshore money will be transferred within approximately
30 days, but no details or conditions about the financing are provided,
nor is there any mention of what amount is forthcoming. The Appellant testified
that the contact person for the offshore financing was Ms. Robyn Rae Mattila, with
whom he spoke on the telephone, but never met in person. And of course, Ms. Mattila
was not called to testify on behalf of the Appellant, and more than likely
because she works out of Las Vegas, Nevada. The Appellant does have more recent similar
correspondence from Las Vegas, to which I am not prepared to give any credence.
[11] Also, James
Harrison Lockhart, currently working as a truck driver, was in charge of
negotiating the offshore financing arrangements, and he testified on the
Appellant’s behalf. However, his testimony does not confirm that offshore
financing was ever imminent or, for that matter, that it was authentic. He
stated that he was the point of contact to Ms. Mattila, but that he also had never
met her. He was apparently in telephone contact with a Stephanie Chase, who he stated
is a Federal Reserve licensed trader who had been retained by Ms. Mattila.
Again, Mr. Lockhart has never met Ms. Chase, but he testified that she
worked for Credit Suisse out of Los
Angeles. No documents were submitted to
support this, and nor was Ms. Chase called as a witness. I have serious doubts
about the authenticity of the offshore financing arrangements, and the evidence
simply does not support that financing was ever at hand. The search for
financing has continued for almost 10 years, without any success.
[12] While
Dr. Loyens focused his energy on emu farming, Sylvia looked after the horses. She
was very much involved in her husband’s overall farming activities. She is a
practicing lawyer, who grew up on a family farm and has been involved in
farming all her life. As a child, she was responsible for sheep and a Hereford cow
with a calf. Her farming activities paid for much of her undergraduate studies.
She studied at the University of Guelph and later attended the University of Toronto, where she
graduated with a Bachelor of Science in occupational therapy. After working for
three years, she graduated from the University of Western Ontario Law School in 1981. She
testified that prior to engaging in the farming business in 1990, she with the
Appellant and children lived a comfortable life, and they had a net worth of over
$1.5 million. Among other things, they owned a cottage, a condominium in Hamilton, a
sail boat and an airplane.
[13] In order to
estimate the time spent by her husband at his dental clinic, she referred to his
appointment book and recorded information on a calendar. During the hearing,
counsel for the Respondent pointed out that the Minister had asked for this
appointment book, but was told that it no longer existed or was lost. According
to Ms. Loyens, this was after she transposed the information onto the calendar
and that since then, the appointment book has been lost or disposed of.
Accordingly, the estimated figures provided by the Appellant should be taken
for what they are, estimates. For the years prior to 1999, Ms. Loyens estimated
that the Appellant spent 1,850 hours on the farm and 1,108 hours at the dental
clinic. As shown in the table below, from 1990 to 2002, the Appellant has
generated significant farm losses, while being highly successful as a dentist.
His gross income from his dental practice constantly increased from $476,369 in
1990 to $831,821 in 2002.
|
Taxation Year
|
Gross Farm Income
|
Net farm Income
|
Gross Professional
Income
|
Net Professional
income
|
|
1990
|
$3,406
|
$(33,899)
|
$476,369
|
$175,426
|
|
1991
|
-
|
(58,237)
|
485,456
|
215,594
|
|
1992
|
5,819
|
(75,067)
|
485,456
|
214,811
|
|
1993
|
136,950
|
(64,591)
|
538,600
|
216,645
|
|
1994
|
180,675
|
(15,709)
|
547,952
|
213,922
|
|
1995
|
34,780
|
(127,167)
|
553,473
|
218,123
|
|
1996
|
5,774
|
(150,192)
|
581,371
|
229,688
|
|
1997
|
9,715
|
(177,713)
|
581,596
|
243,977
|
|
1998
|
2,555
|
(204,636)
|
-
|
296,257
|
|
1999
|
34,211
|
(391,602)
|
667,801
|
325,279
|
|
2000
|
10,865
|
(211,225)
|
703,479
|
333,826
|
|
2001
|
7,570
|
(179,929)
|
752,735
|
260,635
|
|
2002
|
57,852
|
(161,192)
|
831,821
|
391,575
|
|
Total
|
$490,172
|
$(1,851,159)
|
$7,206,109
|
$3,335,758
|
[14] As stated, the
Appellant seeks to deduct over $600,000 for farm losses in the taxation years
1999 and 2000. The sole issue is whether the Appellant’s chief source of income
during that time was farming, or a combination of farming and some other source
of income, pursuant to section 31 of the Act.
[15] The Appellant
submits that in about 1990, he had changed the focus of his career, work
routine and lifestyle when farming became the centre of his financial
interests. He relies heavily on a recent Federal Court of Appeal decision in Gunn
v. The Queen.
He submits that the criteria in a section 31 determination, namely capital
committed, time spent and profitability, favour his appeals. He notes that the
capital committed towards the farming business was three times that of the
dentistry, and he and his family lived the lifestyle of farmers, spending more
time working on the farm than at his dental practice. With regard to
profitability, the Appellant stresses the fact that the Respondent has accepted
that his farm operation had a reasonable expectation of profit. Finally, he
submits that applying the decision in Gunn leads to the conclusion that
his chief source of income for the 1999 and 2000 was a combination of farming
and the practice of dentistry.
[16] The Respondent
submits that by applying the tests set out in Moldowan v. The Queen, the Appellant’s farm losses are
restricted to the amount of $8,750 for each year. With regard to the three
determining factors of capital committed, time spent and profitability, the
Respondent stresses that the evidence with respect to the first two is meager,
and does not necessarily favour the Appellant. The Respondent has, however,
accepted that the capital committed to farming by the Appellant was significant,
and that during the years under appeal, the Appellant spent more time at his
dental practice. Primarily, the Respondent submits that profitability remains a key
element and requires a taxpayer to show that his farming
activities will, within a reasonable future, be profitable. Further, that the
Appellant’s farming activities have failed to generate any profit for over a
decade, there is no potential for profitability, and therefore, farm loss
deductions should not be allowed forever.
[17] As stated, the
appeals evolve around section 31 of the Act, the relevant provisions of
which provide as follows:
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, for the purposes of sections 3
and 111
the taxpayer's loss, if
any, for the year from all farming businesses
carried on by the taxpayer shall be
deemed to be the total of …
A formula follows.
31(1.1) For the purposes of this Act,
a taxpayer's "restricted farm loss"
for a taxation year is the amount, if any, by
which …
Again, a method of calculation
follows.
[18] The test for the
application of section 31 is to determine whether farming is the taxpayer’s chief source
of income, and whether the taxpayer’s chief source of income is a combination
of farming and some other source of income. In Moldowan, Dickson J.
stated that:
… in order to have a “source of income”
the taxpayer must have a profit, or a reasonable expectation of profit.
I accept the Respondent’s
concession that the Appellant’s farming endeavors had a reasonable expectation
of profit, and I have no difficulty concluding that in 1999 and 2000, the
Appellant had a farming business. In any event, the reasonable expectation of
profit test no longer applies when determining a taxpayer’s source of income as
envisaged in Moldowan, since the Supreme Court of Canada’s decision in Stewart
v. The Queen.
The
Respondent’s position is simply that the Appellant’s business is not his chief
source, either alone or in combination with his dental practice.
[19] The
analysis set out in Moldowan, which remains the binding authority, requires
an examination of the comparative financial results: (a) the investment of
capital; (b) the relative commitment of time and effort; and (c) the
consideration of the taxpayer’s mode and habit of work, as well as his farming
operations’ actual and potential profitability. This analysis is primarily fact-driven.
A court must assess the three factors cumulatively, and no single factor may be
taken as determinative in isolation. The Appellant meets the first two factors.
It is the third that requires scrutiny without the benefit of hindsight:
(a) With regard to capital committed, I accept that the
Appellant invested approximately $600,000 in his farming operations from 1990 to
1999, and $208,000 in his dental clinic.
(b) The second factor is the time
committed by the Appellant on his farm compared to his dental clinic. In 1999
and 2000, his work time on the farm was at least equal to that in his dental
clinic. I accept the Appellant’s estimates, considering he personally did a lot
of the barn construction. The evidence presented by the Appellant regarding
work hours had flaws but, suffice it to say, he worked very long hours at both
his clinic and his farm.
[20] Finally, the farm’s
profitability, both actual and potential, must be considered. It started with horse
farming in 1990. The evidence clearly establishes that so far, the horse
business was not successful in terms of animals sold and revenues generated in
1999 and 2000, and nor is it successful at the present time. The Appellant sold
only nine horses over a period of approximately 16 years, since, according to
him, the market for Arabian breeding horses collapsed in the early 1990s.
[21] At the outset of
the Appellant’s emu farming, he was able to sell breeding pairs profitably, but
there have not been profitable sales since 1995. He acknowledged that raising
emus for their meat is not financially viable. He added that:
…. the meat covers the cost of
the bird. The leather would cover the cost of the abattoir and the oil would be
the profit.
However,
as mentioned above, without a specially equipped abattoir in the area to salvage
the birds’ hides and oil, only the meat could be marketed. For his emu venture
to become profitable, a specialized abattoir is needed. No expert evidence was
given to substantiate the true market value of the oil and the hides that can
be salvaged from the birds. In any event, to be profitable the emu business
needs a specialized abattoir which requires between $5 and $25 million in
outside financing which is beyond his reach, as stated earlier. Even with an
abattoir, there was no evidence upon which it can be concluded that the emu
business would be profitable. A report by the Federal Department of Agriculture in 1999
portrays a difficult future for the emu industry in Canada.
[22] The Appellant
relies, almost entirely, on the decision of the Federal Court of Appeal in Gunn,
where Sharlow J. stated:
85 The
Judge's answer to the principal question is based on the Moldowan
principles for determining a taxpayer's chief source of income, combined with
the comment from Morrissey v.
R. to the effect that if it is unlikely that the taxpayer's
farming operations will ever be profitable, notwithstanding all the time and
capital the taxpayer is willing and able to devote to farming, the conclusion
must be that farming is not a chief source of the taxpayer's income.
86
In my view, Morrissey
is not an apt precedent for the case of Mr. Gunn. The statement
in Morrissey
referred to above was made in the context of a case in which the taxpayer's own
evidence indicated that he doubted the future profitability of his farm. Mr. Gunn 's evidence was that he anticipated that his farm had a
potential for profit. The Crown adduced no evidence to the contrary, and in
fact admitted the potential for future profit. I can find in the record no
evidentiary support for the Judge's conclusion that Mr. Gunn 's
farming operations showed no potential for profit. That is a sufficient basis
for setting aside the Tax Court judgment. However, there is also a second
reason.
The
present appeals come within the exceptions in Gunn. Had the years under
appeal been 2006 and 2007, I would have concluded that there was no potential
for profit. The focus must be directed to the evidence as it existed in the
years 1999 and 2000.
[23] The Appellant
also relied on the Federal Court of Appeal decision of Kroeker v. Canada. Similar to
this case, Ms. Kroeker contributed capital, time and labour to her farming
activities. In allowing the taxpayers’ appeal, the Court found that the Appellant’s
farm showed profitability. The Court made the following comment:
23 Whatever
credibility is attached to the appellant's testimony, the undisputed facts in
this case speak for themselves. The appellant's capital, time and labour were
"focused" on the farm. The potential profitability of her farm was
such that in 1998, the farm ended up with a profit. Farming was a family
enterprise. Little distinguishes this case from Graham v. R., [1985] 2
F.C. 107 (Fed. C.A.).
[24] Moldowan appears to require that farming be the
taxpayer’s predominate activity and the other source of income shall only be
subordinate. In accordance with this interpretation, one cannot determine
whether a person’s
chief source of income is a combination of farming and some other source of
income simply by referring to statements of profit or loss. The test is both relative and objective and the Court
may employ the criteria indicative of “chief source” to distinguish whether or not
the other source of income is subordinate to farming. Thus, the criterion
already examined in these appeals, namely time spent, capital committed and
profitability must be considered. As I mentioned, the capital committed and the
time and effort spent point in the Appellant’s favor. Although farming did not provide the bulk of the Appellant’s
net income, his primary profession was no less a farmer than a dentist.
[25] In Gunn,
Justice Sharlow formulated a more generous interpretation of the combination
question than the Supreme Court of Canada did in Moldowan, suggesting
that farming does not need to be the predominate source of income. The Federal Court
of Appeal concluded that the farming business had a potential for profit, as did
Dr. Loyens’ farming business, during the years 1999 and 2000. Like Mr. Gunn,
Dr. Loyens had made significant investments and improvements to his farm and
during the relevant years, it had the potential to be profitable. Profitability
was dependent on his obtaining a specialized abattoir which appeared possible
in 1999 and 2000. In hindsight, the farm was unprofitable due to factors that
were not evident in 1999 and 2000. For example, it was not unrealistic for the
Appellant to conclude that the market for emu and Arabian horses would improve
and that he would receive necessary capital to finance the purchase or construction
of a suitable abattoir.
At some point after 2000, a reasonable person would say “enough is enough” and
put an end to the bleeding and large tax loss deductions. I do not believe that
the situation existed in 1999 and 2000, although it probably does now.
[26] There is no doubt
that the Appellant was very involved in farming as a business, and given the
time, effort and money, it was a serious business and no more a hobby than his
dental practice. He believed he had a reasonable expectation of profit from emu
farming, and the Respondent accepts this. In 1999 and 2000, this belief was
reasonable when he had 4,000 emus, and a realistic anticipation of receiving at
least $1,000 from each bird. This would have covered his losses and, no doubt,
the Minister would have quickly shared in the profits. Further, had the
Appellant received the anticipated financing, he would have been in a position
to cover losses. It is difficult to imagine what more the Appellant could have
done to make his farm profitable. He integrated his time and money between his
dental practice and the farm. He is obviously a very able person to have such a
successful dental clinic. Unfortunately, he was not able to duplicate this
success with his farm.
[27] For the taxation
years in issue, I accept that his income was derived from a combination of
farming and another source. The Appellant’s profitable dental business was
supporting his unprofitable farming business. In Gunn, Sharlow J.
accepted that it is not a precondition that the two sources be connected to
answer the combination question. In Kroecker, the Appellant’s husband
worked fulltime on their farm, and she worked fulltime for a farm equipment manufacturer
and part-time on their farm. All of her off-farm earnings went into the
farming partnership. Unlike the present case, the farm began to make a profit
three years after the period under appeal. The Federal Court of Appeal
concluded that farming was the focus of her life and was not a hobby, and was a
commercial source of income. Without doubt, Dr. Loyens’ farming was not a
hobby, and during 1999 and 2000, it could easily be concluded that it was a
commercial source of income.
[28] For the above reasons, the appeals
are allowed, with costs, on the basis that section 31 of the Act did not
apply to the Appellant in the years in issue.
Signed at Ottawa, Canada, this 29th day of August 2008.
“C.H. McArthur”
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