|
Citation: 2004TCC288
|
|
Date: 20040413
|
|
Docket: 2003-72(IT)I
2003-73(IT)I
|
|
BETWEEN:
|
|
JANET FEDORVICH and DANIEL FEDORVICH,
|
|
Appellants,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Mogan J.
[1] The appeals of Janet Fedorvich
(Court File 2003-72) and Daniel Fedorvich (Court File 2003-73)
were heard together on common evidence. The two Appellants were
married in 1972 and attended these appeals as husband and wife.
For convenience, I shall refer to the husband Appellant as
"Daniel" and the wife Appellant as "Janet".
The taxation years under appeal are 1999 and 2000. In those two
years, each Appellant reported a loss from a farming operation
which they carried on in partnership. The farming partnership
loss was allocated 75% - 25% as follows:
|
|
1999
|
2000
|
|
Daniel
|
$50,622
|
$52,839
|
|
Janet
|
16,874
|
17,613
|
[2] Daniel and Janet are both
qualified school teachers employed full-time in the Province of
Alberta. In the years under appeal, their loss from farming was
set off against their income from teaching in the computation of
income under Division B (sections 3 to 108) of the Income Tax
Act. When issuing reassessments to the Appellants for 1999
and 2000, the Minister of National Revenue (i) disallowed certain
expenses which the Appellants had attributed to farming, and
allocated such disallowance 75% to Daniel and 25% to Janet; and
(ii) restricted the amount deductible as a farm loss under
section 31 of the Act. The effect of the reassessments may
be summarized as follows:
|
1999
|
Daniel
|
Janet
|
|
Farm Loss reported
|
$50,622
|
$16,874
|
|
Disallowed Expenses
|
8,583
|
2,861
|
|
Net Farm Loss
|
42,039
|
14,013
|
|
Restricted Loss (section 31)
|
8,750
|
8,256
|
|
Loss Disallowed
|
33,289
|
5,757
|
|
|
|
|
|
2000
|
Daniel
|
Janet
|
|
Farm Loss reported
|
$52,839
|
$17,613
|
|
Disallowed Expenses
|
14,767
|
4,923
|
|
Net Farm Loss
|
38,072
|
12,690
|
|
Restricted Loss (section 31)
|
8,750
|
7,595
|
|
Loss Disallowed
|
29,322
|
5,095
|
[3] Section 31 of the Act
restricts the deductible loss from a farming business in
accordance with a formula if a particular condition with respect
to "chief source of income" is satisfied. Section 31
has been the subject of much litigation and the relevant words
are:
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) the lesser
of ...
The formula which follows the above words permits a maximum
"deemed" farm loss of $8,750 depending upon the amount
of the actual loss. If a taxpayer's chief source of income is
either farming or a combination of farming and some other source
of income, there is no restriction on the amount of farm loss
which may be taken into account for income tax purposes. But if
the taxpayer cannot meet the "chief source of income"
test, then his or her loss from a farming business will be
restricted in accordance with the formula in section 31. In the
reassessments under appeal, the Minister has acknowledged that
the Appellants operate a farm business (i.e. it is not a hobby).
Therefore, the only issue is whether the Appellants can meet the
"chief source of income" test.
The Facts
[4] Daniel was born in Edmonton around
1948. His father was in the purebred hog business and he (Daniel)
has worked on a farm since he was three or four years of age. He
has driven horses and done haying. He left home at 18 to go to
university and started teaching in 1967 after two years of
teacher training. He met Janet in 1969 and they were married in
1972. She was born at Fairview, Alberta (just west of Peace
River) around 1954 but lived on a farm near Worsley. Her father
was a grain and cattle farmer, and later only a grain farmer. She
grew up doing the usual farm chores. Her grandparents were also
cattle farmers. The Appellants have two married daughters. One
lives in Edmonton with two grandsons and the other lives in
Dawson Creek with two granddaughters.
[5] After the Appellants were married,
they lived in Worsley and other places but came to Leduc County
in 1982 and have lived there ever since. Daniel started teaching
full-time in 1967 and was still teaching full-time in 2003. He
obtained his university degree in 1979 by taking summer courses.
Janet got her Bachelor of Education degree in 1988 and is a
full-time teacher at the high school level teaching mathematics,
science and biology. In 1986, the Appellants purchased a
three-acre parcel of land outside Devon, south and west of
Edmonton. In 1988, Daniel started raising chickens on their
three-acre site. He sold the chickens and eggs through friends
and neighbours by word of mouth. The Spruce Grove Zoning
by-law permitted only a limited number of chickens per acre
and so Daniel and Janet switched to a cow/calf operation in
1994.
[6] When the Appellants started the
cow/calf operation, they could not afford to buy land because a
quarter section near Devon was selling for $850,000 in 1994.
Proximity to Edmonton may have been a factor in the high cost of
land near Devon. They rented 80 acres about a 30-minute drive
from their home and purchased 23 head of cattle in 1995. They
wanted the acreage to ensure feed available for their cattle.
They had to give up the 80 rented acres when the owner of
adjoining land blew up his dam and they lost their source of
water. In 1996, they rented 35 acres near the Enoch Reserve about
a 20-minute drive from their home; and they moved their 23 head
of cattle to the new location. They tried renting land to grow
hay but the contractors were not always available when the time
came to harvest; and they could lose hay by not harvesting in
time. After 1996, they decided to purchase hay at $20 per
bale.
[7] The Appellants had their share of
ill fortune. In 1995, they purchased a purebred bull but the
following spring only one-half of the cows were pregnant. They
exchanged the purebred bull because it was not good for breeding
but their second bull was killed by lightning. In 1997, there
were 27 calves born but five died from scours, an illness which
dehydrates cattle. Also, one of their best calves died suddenly
apparently from poison hemlock. In 1997 and 1998, they were
required to haul water because the dugouts were dry.
[8] In 1999, the Appellants moved
their cattle operation to a new location where they were still
farming at the time of hearing in 2003. In paragraph 12 of the
Notices of Appeal, it is described as 300 acres of rented farm
land. It was described by the Appellants' witness, Pascal
Hamel, as rented pasture and a site with two barns. According to
Daniel's evidence, they had 50 cows, 10 heifers and 4 bulls
in 1999 and 75 cows, no heifers and 4 bulls in 2000.
[9] Exhibit A-3 is a letter which the
Appellants sent to Canada Customs and Revenue Agency in March
2002 in support of their Notices of Objection. The letter
describes many farm activities which require the Appellants'
attention during five periods of a calendar year. January to
April is a primary calving time when Daniel and Janet try to
provide constant attention, if required, from after school (4:30
p.m.) until the next morning (7:30 a.m.) when they leave for
school; and of course on weekends. May and June are spent
fertilizing pasture and hay lands; cultivating and seeding cover
crops like oats and barley; vaccinating cattle and repairing
fences. July to September are spent haying both first and second
crops. October and November is time for fall calving; baling
straw and hauling feed; and winter feeding begins. December is
busy feeding animals mainly on weekends.
[10] There is no doubt that 60 or 70 head of
cattle require much attention on a constant basis. In addition to
the efforts which Daniel and Janet are required to put forth,
they have also purchased substantial equipment which is listed in
Exhibit A-1 and was described orally by Daniel in evidence.
Set out below is a list of the equipment and its cost.
|
1995
|
|
Case 1070 tractor
|
$25,000
|
|
Bucket
|
4,900
|
|
Chev ½-ton pick-up
|
41,200
|
|
Stock trailer
|
6,900
|
|
1998
|
|
Hay wagon
|
$3,000
|
|
2000
|
|
Case 5088 tractor
|
$21,700
|
|
(former tractor destroyed by fire)
|
|
|
Hay binder
|
31,600
|
|
Baler
|
4,500
|
[11] Notwithstanding the efforts put forth
by the Appellants and the equipment they purchased, their farming
operations have shown consistent losses. Exhibit A-2 is a
table showing financial details of the Appellants' farming
operation for the years 1994 to 2002 inclusive. Column B shows
gross revenue and column E shows net income or loss. There is no
column showing the total expenses and depreciation which would,
each year, convert the gross revenue into a net loss. I have
determined the total expenses and depreciation for each year by
computing the difference between gross revenue (a positive) and
net loss (a negative). The table below displays those three
amounts for each year.
|
|
Gross Revenue
|
Expenses and
Depreciation
|
Net Loss
|
|
1994
|
$2,610
|
$14,663
|
$12,053
|
|
1995
|
8,978
|
52,599
|
43,621
|
|
1996
|
11,011
|
39,872
|
28,861
|
|
1997
|
10,111
|
38,899
|
28,788
|
|
1998
|
17,620
|
64,209
|
46,589
|
|
1999
|
25,608
|
93,104
|
67,496
|
|
2000
|
45,931
|
116,356
|
70,425
|
|
2001
|
45,560
|
84,909
|
39,349
|
|
2002
|
37,319
|
89,463
|
52,144
|
[12] In the Respondent's Reply to each
Notice of Appeal, the Respondent has set out in subparagraph
11(d) the farming losses reported by the Appellants in the years
1990 to 1993 inclusive. Those losses are reported in the ratio
75% to Daniel and 25% to Janet for 1990, 1991 and 1993. The
amounts for 1992 are not in that ratio and one of them may be in
error. Comparing the combined losses with the gross revenue, I
have again extrapolated the total expenses and depreciation for
the years 1990, 1991 and 1993, omitting 1992 because of what I
regard as uncertain amounts.
|
|
Gross Revenue
|
Loss - Daniel
|
Loss - Janet
|
Expenses and
Depreciation
|
|
1990
|
$7,600
|
$11,012
|
3,670
|
$22,282
|
|
1991
|
9,350
|
11,009
|
3,669
|
24,028
|
|
1992
|
11,581
|
8,670
|
3,879
|
-
|
|
1993
|
7,452
|
11,229
|
3,743
|
22,424
|
The above table and the one in paragraph 11 provide an easy
comparison of revenue with expenses. The two years under appeal
are 1999 and 2000. In the four-year period 1996 to 1999 farm
expenses were 3.5 times farm revenue and, in 2000, farm expenses
were 2.5 times farm revenue.
Analysis
[13] The law concerning "chief source
of income" under section 31 of the Income Tax Act
always starts with the Supreme Court of Canada decision in
Moldowan v. The Queen, 77 DTC 5213. Dickson J. (as he then
was) writing for the Court stated at page 5216 that the
Act envisaged three classes of farmers:
(1) A taxpayer, for
whom farming may reasonably be expected to provide the bulk of
income or the centre of work routine. Such a taxpayer, who looks
to farming for his livelihood, is free of the limitation of
subsection 13(1) in those years in which he sustains a farming
loss.
(2) The taxpayer who
does not look to farming, or to farming and some subordinate
source of income, for his livelihood but carried on farming as a
sideline business. Such a taxpayer is entitled to the deductions
spelled out in subsection 13(1) in respect of farming
losses.
(3) The taxpayer who
does not look to farming, or to farming and some subordinate
source of income, for his livelihood and who carried on some
farming activities as a hobby. The losses sustained by such a
taxpayer on his non-business farming are not deductible in any
amount.
The reference in subsection 13(1) to a taxpayer whose source
of income is a combination of farming and some other source of
income is a reference to class (1). It contemplates a man whose
major preoccupation is farming, but it recognizes that such a man
may have other pecuniary interests as well, such as income from
investments, or income from a sideline employment or business.
The section provides that these subsidiary interests will not
place the taxpayer in class (2) and thereby limit the
deductibility of any loss which may be suffered to $5,000. While
a quantum measurement of farming income is relevant, it is not
alone decisive. The test is again both relative and objective,
and one may employ the criteria indicative of "chief
source" to distinguish whether or not the interest is
auxiliary, A man who has farmed all of his life does not become
disentitled to class (1) classification simply because he comes
into an inheritance. On the other hand, a man who changes
occupational direction and commits his energies and capital to
farming as a main expectation of income is not disentitled to
deduct the full impact of start-up costs.
[14] Since 1977, there have been many, many
cases all attempting to apply what the Supreme Court stated in
Moldowan. In 1985, the Federal Court of Appeal allowed a
taxpayer's appeal in Graham v. The Queen, 85 DTC 5256.
The decision in Graham appears to be what I would call the
high water mark for taxpayers. Subsequent decisions of the
Federal Court of Appeal in Morrissey (89 DTC 5080),
Roney (91 DTC 5148), Connell (92 DTC 6134),
Poirier (92 DTC 6335), Timpson (93 DTC 5281)
and Donnelly (97 DTC 5499) have interpreted
Moldowan in a more restrained manner with respect to the
deductibility of farm losses. For example, Moldowan speaks
of three factors when comparing difference sources of income:
time spent, capital committed and profitability. In
Poirier, the Federal Court of Appeal stated at page
6336:
It must be remembered that it is the cumulative impact of the
various factors for determination that governs, not any one
factor taken disjunctively: Morrisey v. The Queen [89 DTC
5080], [1989] 2 F.C. 418 (F.C.A.) and Connell, supra
(F.C.A.).
[15] If we are to look at the cumulative
impact of all factors, and not to look at any one factor
disjunctively, it follows in my mind that no single factor may be
regarded as decisive. When deciding Donnelly against the
taxpayer, Robertson J.A. writing for the Court stated:
Any doubt as to whether the taxpayer's chief source of
income is farming is resolved once consideration is given to the
element of profitability. There is a difference between the type
of evidence the taxpayer must adduce concerning profitability
under section 31 of the Act, as opposed to that relevant
to the reasonable expectation of profit test. In the latter case
the taxpayer need only show that there is or was an expectation
of profit, be it $1 or $1 million. It is well recognized in tax
law that a 'reasonable expectation of profit' is not
synonymous with an 'expectation of reasonable profits'.
With respect to the section 31 profitability factor, however,
quantum is relevant because it provides a basis on which to
compare potential farm income with that actually received by the
taxpayer from the competing occupation. In other words, we are
looking for evidence to support a finding of reasonable
expectation of 'substantial' profits from farming.
[16] In Kroeker v. The Queen, 2002
DTC 7436, Desjardins J.A. writing for the Court qualified (at
paragraph 21) what had been said in Donnelly about
substantial profits by noting that the taxpayer in
Donnelly was involved in raising horses for racing. In
Kroeker, the Respondent had admitted that farming was
"the focus of her life", referring to the taxpayer.
Again in Taylor v. The Queen, 2002 DTC 7596, the Federal
Court of Appeal did not accept the adjective
"substantial" as describing the profit which might be
expected from farming. I also note in Taylor that the
Federal Court of Appeal has succinctly worded (in paragraph 2)
the precise issue which is before me in these appeals: whether
the Appellants are persons for whom farming may reasonably be
expected to provide the bulk of income or the centre of work
routine (a class 1 farmer), or persons who carry on farming as a
sideline business (a class 2 farmer).
[17] I will first consider the factor time
spent. Daniel and Janet are both full-time teachers; and so
they have a significant commitment during the school year. They
are also responsible for the feeding and care of their cattle,
particularly at calving time. It is a balancing of obligations.
Daniel and Janet do not teach at the same school. Their home is
on their three-acre site near Devon. For Daniel, the distance
from home to school is 36 kilometres; and the distance from his
school to their pasture land (300 acres) is 51 kilometres. Their
home is between Daniel's school and their pasture land.
Therefore, it is 36 kilometres from home to Daniel's school
and 15 kilometres from home to the pasture land. Daniel leaves
home at 8:00 a.m. and school gets out at 3:35 p.m. He gets home
from school around 4:00 p.m.; changes his clothes; eats an apple
or banana; and drives to the pasture arriving there around 4:30
p.m. He stated that he worked at the pasture until after dark but
that phrase can be misleading because, near Edmonton, it would be
dark by 4:30 p.m. in December but daylight until 10:00 p.m.
in June.
[18] Janet has different distances to
travel. She teaches high school at Gunn, Alberta, near a native
reserve. Her school is about 100 kilometres from her home; and
the pasture land is about 85 kilometres from her school. The
pasture land is between her school and her home and so
(consistent with Daniel) the pasture land is 15 kilometres from
her home. Janet leaves home for school about 7:30 each morning.
After school, she frequently stops at the pasture land because it
is on the way home. She tries to be in attendance at the birth of
each calf but is not able to attend if a calf is born during
school hours. She stated that she was frequently at the pasture
land but the third witness, Pascal Hamel, who resides on land
adjoining the Appellants' pasture, stated that he saw Daniel
at the pasture more frequently than Janet. He recalled seeing
Janet only one to three days each week.
[19] In addition to her regular teaching
duties, Janet taught evening classes (one evening per week) in
1999 and 2000. She also taught summer school in 1999 and 2000,
8:00 a.m. to 12:00 noon. Daniel taught summer school in 2000. In
cases like this, there is a natural tendency for all taxpayers to
maximize (and perhaps exaggerate) the time spent at farming and
minimize the time spent at other income-earning activities.
Daniel and Janet impressed me as responsible individuals. I can
easily imagine them as dedicated to their teaching profession and
their cattle. In addition to regular school hours, they would
have to prepare lessons; set and mark tests and exams; attend
staff meetings; and be available for parent/teacher interviews.
Although the obligation to feed and care for cattle is real and
constant (particularly at calving time), I am not persuaded that
Daniel or Janet spent more time at farming than at teaching.
[20] Having regard to the second factor of
capital committed, paragraph 10 above contains a list of
equipment purchased by the Appellants at an aggregate cost of
approximately $138,000 including a second tractor to replace the
one destroyed by fire. I do not know if the first tractor was
insured. There was no evidence with respect to the cost of the
cattle owned in 1999 and 2000 but Daniel stated that, in 2000,
the value of a mature cow was a little more than $1,000.
Therefore, 75 cows would have a value of about $80,000. Daniel
stated that their three acres near Devon had a value of about
$250,000 or $83,000 per acre.
[21] Devon may be regarded as a suburb of
Edmonton and, therefore, the value of land near Devon is not
based on farm use but on its proximity to a large city. In
cross-examination, Daniel was asked if he and Janet had
ever inquired about teaching positions near Drayton Valley (about
50 miles west of Devon) where farm land may be purchased at a
lower cost than around Devon or Spruce Grove. Daniel said
that they had never made that inquiry. The Appellants have
invested significant capital in equipment and cattle but their
desire to live near Edmonton precludes their owning pasture land
for their cattle. The value of their three-acre residential site
in 2000 appears to have been greater than the value of their
equipment and cattle.
[22] Considering the third factor of
profitability, the tables in paragraphs 11 and 12 above show that
the Appellants have reported losses from farming in all years
from 1990 to 2002 inclusive. In 1994, they changed from chickens
to a cow/calf operation. Commencing in 1995, the losses have been
higher than in the early 1990s. In the eight-year span from 1995
to 2002, the Appellants suffered farming losses in the aggregate
amount of $377,000 or, on average, $47,125 per year. Janet said
that in 1999 and 2000, her teaching salary was around $40,000 per
year. Because Daniel has been teaching many years longer than
Janet, I assume that his teaching salary in 1999 and 2000 was
more than $50,000 per year.
[23] Returning to Moldowan, Justice
Dickson commenced his description of a class 1 farmer as "a
taxpayer for whom farming may reasonably be expected to provide
the bulk of income or the centre of work routine". Those
words do not apply to Daniel and Janet in 1999 or 2000. I find
that, in those years, farming could not reasonably be expected to
provide the bulk of their income; and it was not the centre of
their work routine. Counsel for the Appellants urged me to follow
the decisions of this Court in Martin v. The Queen, 96 DTC
1915 and Finch v. The Queen, 2000 DTC 2382. In
Martin, Judge Bowman allowed the taxpayer's appeal but
Mr. Martin had purchased his first farm in 1964; and then
purchased two other farms in 1978 and 1981, respectively. When
Mr. Martin appealed the years 1989, 1990 and 1991 on the question
of "chief source of income", he had been farming his
own land for 25 years.
[24] In Finch, Judge Beaubier allowed
a taxpayer's appeal when Mr. Finch had started full-time
farming in 1979. In the late 1980s, the Farm Credit Corporation
in Saskatchewan threatened to foreclose its mortgage on Mr.
Finch's farm unless he got full-time employment off the farm.
He took such employment in order to service (i.e. pay down) the
mortgage on his farm. When Mr. Finch was reassessed for 1992,
1993 and 1994 on the basis that farming was not his "chief
source of income", he appealed and was successful. He had
been a full-time farmer (no outside employment) from 1979 to 1989
and had sought employment outside the farm only to save it from
foreclosure by the mortgagee.
[25] I am impressed by the fact that in
Martin and Finch, the taxpayer's home in each
case was integrated with the land used for farming. Although Mr.
Martin was a teacher like the Appellants herein, he had farmed a
long time; owned all of his farm lands; and could do his farm
work directly from his home. I find that for Daniel and Janet in
the years under appeal, farming was a sideline business. The
appeals are dismissed.
Signed at Ottawa, Canada, this 13th day of April, 2004.
Mogan J.
Email this Content