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Citation: 2004TCC2
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Date:20040622
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Docket: 2002-4897(IT)I
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BETWEEN:
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RICHARD SOBON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The Appellant was employed by the
Canadian Pacific Railway ("CPR") in 1980.
[2] In the relevant years the
Appellant was employed by the CPR as a construction
superintendent and he worked out of the CPR office in
Vancouver.
[3] In 1982 the Appellant purchased a
farm (the "Farm") consisting of 10.2 acres at a
cost of $113,500.00. The Farm was located near Vernon, B.C. A
house and several buildings were located on the Farm.
[4] The Appellant drove from the Farm
to the CPR work site on Sunday nights and worked a four-day week
with 10-hour shifts per day. The Appellant usually returned to
the Farm on Thursday nights. The CPR work site would be located
on the CPR main rail line somewhere between Vancouver and Field,
British Columbia.
[5] Commencing in 1992 the Appellant
carried out research on the feasibility of raising ostriches as a
commercial business. The Appellant testified that he became a
member of the Ostrich Association of British Columbia and
discussed various aspects of producing ostriches with members of
the Association.
[6] The Appellant spent $20,000.00 -
$25,000.00 repairing the buildings located on the Farm and
building pens to make the Farm suitable for raising
ostriches.
[7] In 1992 the Appellant purchased
seven female and two male ostriches.
[8] Approximately 25% of the eggs laid
by the female ostriches owned by the Appellant were fertile and a
number of ostrich chicks were raised by the Appellant.
[9] In the indicated years the
Appellant had the following ostriches on the Farm:
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Male
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Female
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Chicks
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1996
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2
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7
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30
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1997
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2
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6
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30
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1998
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2
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6
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30
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[10] The Appellant sold the ostrich meat.
The Appellant also sold some of the ostrich eggs, some breeding
ostriches and the ostrich hide.
[11] The Appellant testified on
cross-examination that the ostrich meat was not inspected by
Federal Department of Agriculture officials. The Appellant said
that in order to sell ostrich meat in some restaurants in British
Columbia the meat has to be inspected by officials of the
Department of Agriculture. The Appellant said that he primarily
sold the ostrich meat and other farm products to people with whom
he worked.
[12] In 1992 the breeding and raising of
ostriches in British Columbia was a relatively new business. The
Appellant testified that when he became involved in the ostrich
business in 1992 the market price of a breeding ostrich had
increased significantly in value from the price that was paid for
breeding ostriches in previous years.
[13] The Appellant also testified that in
1997 and 1998 some of the ostrich farmers in British Columbia
began to dump the ostrich meat on the market. This action by the
ostrich farmers caused the market price of ostrich meat to drop
in value.
[14] The Appellant also testified that there
was an E-Coli problem in Vernon in 1998 and this was another
factor that reduced the market price of ostrich meat.
[15] On cross-examination by counsel for the
Respondent the Appellant said that in 1997 and 1998 the Farm was
set up to run between 100-120 birds. However, the Appellant
agreed that the market for ostrich meat was not strong enough at
that time to absorb that many ostriches. In addition the
Appellant admitted that he would only produce what he could
actually sell on the market.
[16] In computing his income for the 1997
and 1998 taxation years the Appellant deducted the following farm
losses:
Farm Losses Deducted
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1997 Taxation Year
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$30,634.12
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1998 Taxation Year
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$35,624.66
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[17] The Minister of National Revenue (the
"Minister") allowed the Appellant to claim restricted
farm losses as follows:
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1997 Taxation Year
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$8,750.00
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1998 Taxation Year
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$8,750.00
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B. ISSUE:
[18] Is the Appellant entitled to claim farm
losses of $30,634.12 and $35,624.66 in determining his income for
the 1997 and 1998 taxation years? (Note: The
Appellant's Notice of Appeal referred to the farm loss issue
plus a number of disallowed expenses. At the commencement of the
hearing the parties agreed that the sole issue before the Court
was the tax treatment of the farm losses in 1997 and 1998.
C. ANALYSIS:
[19] The Minister concluded that the
Appellant is not entitled to deduct farm losses in excess of
$8,750.00 per year for the 1997 and 1998 taxation years.
[20] Commencing in 1992 the Appellant's
gross and net farming income were as follows:
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Year
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Gross
Revenue
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Total Farm
Loss
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Farm Loss
Claimed
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Farm Loss
Allowed
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1992
1993
1994
1995
1996
1997
1998
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1,525.00
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732.00
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7,339.00
8,169.00
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18,164.00
16,041.00
9,037.00
35,446.00
30,634.00
35,624.00
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7,020.00
18,164.00
8,750.00
5,768.00
8,750.00
30,634.00
35,624.00
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8,750.00
8,750.00
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Total
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$17,765.00
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$144,946.00
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$114,710.00
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(See Exhibit R-4)
[21] From 1999 to the year 2002 the
Appellant's farm income, farm expenses and farm losses may be
summarized as follows:
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Farm Income
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Farm Expenses
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Farm Losses
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1999
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$ 13,760.30
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$ 42,477.60
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$28,717.30
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2000
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6,604.97
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24,439.64
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17,834.67
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2001
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3,664.85
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19,909.53
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16,244.68
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2002
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5,324.47
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15,880.95
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10,556.48_
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Total
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$29,354.59
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$102,707.72
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$73,353.13
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(See Exhibit A-7)
[22] From 1996 to 2002 the Appellant
received the following salary from the CPR:
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1996
1997
1998
1999
2000
2001
2002
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$55,673.00
53,940.00
55,887.00
43,757.00
52,101.01
62,138.79
$58,257.28
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[23] It will be noted that the Appellant
suffered total farm losses of $218,299.13 ($144,946.00
+$73,353.13) in the years 1992 to 2002 and received farm income
in those years of only $47,119.59 ($17,765.00 + $29,354.59).
(Note: The farm income might be inflated since in 1997 the
Appellant also received rental income when he rented part of the
house on the Farm. In 1998 the Appellant also reported income
from the sale of some surplus poles.)
[24] Subsection 31(1) of the Act
limits the Farm losses that may be claimed where a taxpayer's
chief source of income is neither farming nor a combination of
farming and some other source of income.
[25] In Moldowan v. The Queen[1] Mr. Justice Dickson (as
he then was) recognized three categories of farmers:
1. A full-time farmer.
(This type of farmer is free of the limitations contained in
section 31 of the Act and may deduct all farm losses
suffered against other income.);
2. A farmer who operates
his farm as a sideline business but who also is employed or
carries on another business activity. This type of farmer is
subject to the limitations contained in section 31;
3. A hobby farmer. The
farm losses sustained by this type of taxpayer are not deductible
against other income.
[26] In applying section 31 the Courts have
used the following tests:
(a) time spent on the farm;
(b) capital committed to the farm;
and
(c) actual or potential profits from the
farm.
The Appellant may satisfy the tests outlined in paragraphs (a)
and (b). However, we must carefully consider the actual or
potential profit that the Appellant could realize from the
Farm.
[27] In The Queen v. Morrissey,[2] the Federal Court
of Appeal held that actual or potential profit must be
demonstrated in order to succeed under section 31. Mr. Justice
Mahoney said at page 5084:
On a proper application of the test propounded in
Moldowan, when, as 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 that he was farming with a reasonable expectation of
profit is tantamount to an admission which itself may not be
borne out by the evidence, namely, that it is at least a source
of income.
I have set out, fairly I hope and certainly at
some length, the basis for the Respondent's policy-based
argument that the test of Moldowan ought to be applied as
it was by the trial judge to achieve Parliament's desired
result. I should not have done so had I not been persuaded that
the government's intentions as told to Parliament in 1951 and
1952 may indeed not have been realized. Parliament chose to draw
the line between gentleman farmers and real farmers in terms of
source of income. It may not have intended to treat taxpayers
like the Respondent as it intended to treat gentleman farmers,
nor to deny gentleman farmers any relief at all. There may be a
serious argument for remedial action, however I have not been
persuaded that the Moldowan test is so elastic as to
permit it to be judicially provided. The judiciary must interpret
what Parliament has said, which is not necessarily what it may
have intended to say.
I would allow the appeal with costs and set aside
the judgment of the Trial Division and dismiss the
Respondent's action with costs.
[28] I have also referred to a number of
other court decisions including The Queen v. Roney[3] and
The Queen v. Poirier[4]
[29] In this situation the Appellant has
suffered farm losses of approximately $218,000.00 from the years
1992 to 2002 and he only received income from the Farm of
$47,119.59.
[30] The Appellant has never realized a
profit in the 10 years that he raised ostriches on the Farm.
[31] Further it is apparent from the
comments of the Appellant that the Farm could never generate a
profit as it is presently operated.
[32] From an analysis of all of the relevant
facts, I have concluded that it could not be said that the
Appellant's chief source of income in 1997 and 1998 was
either farming or a combination of farming and some other source
of income. The Appellant is therefore not entitled to claim the
Farm losses claimed by him in determining his income for the 1997
and 1998 taxation years
[33] The appeal is dismissed without
costs.
Signed at Vancouver, British Columbia, this 22nd day of June
2004.
Little J.
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