Taylor v. The Queen, docket 2000-4733-IT-I (Informal Procedure)

Date: 20010504

Docket: 2000-4733-IT-I

BETWEEN:

KEN TAYLOR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1]            This appeal is from an assessment of the Minister for the 1996 and 1997 taxation years in which the Minister restricted the Appellant's farming losses in accordance with subsection 31(1) of the Income Tax Act ("Act"). The Appellant claimed full farm losses for the years in question.

Facts

[2]            Evidence given in the matter by the Appellant and his accountant confirmed the majority of the presumptions set out in the Reply to the Notice of Appeal ("Reply") with some minor additions. These facts show that the Appellant at all material times was employed full-time at a gas refinery in Bowden, Alberta. During the taxation years 1987 to 1998, the Appellant earned the following amounts from employment:

                Taxation Year                                                         Income

1987                                                                                                                         72,184

1988                                                                                                                         76,461

1989                                                                                                                         77,504

1990                                                                                                                         49,081

1991                                                                                                                         38,556

1992                                                                                                                         41,121

1993                                                                                                                         42,354

1994                                                                                                                         41,721

1995                                                                                                                         46,151

1996                                                                                                                         46,233

1997                                                                                                                         47,633

1998                                                                                                                         49,082

[3]            During the same period of time the Appellant reported farming income (losses) as set out below and also in each of the years claimed capital cost allowance as indicated in Exhibit A-1 admitted into evidence by consent. The history of income reflects the following:

YEAR	T4	GROSS FARM	NET FARM	REFUND	CCA CLAIMED
1987	72,184	22,180	( 6,464)	3,779	10,913
1988	76,461	23,215	(13,337)	6,599	10,132
1989	77,504	27,943	( 4,456)	2,692	9,827
1990	49,081	24,321	(11,094)	3,486	12,171
1991	38,556	45,309	(23,768)	8,382	12,178
1992	41,121	54,009	(12,358)	3,140	18,161
1993	42,354	55,497	(22,654)	6,282	19,977
1994	41,721	69,700	( 2,500)	955	18,619
1995	46,151	48,915	(40,233)	11,520	25,697
1996	46,233	87,805	(49,655)	12,189	30,367
1997	47,644	41,526	(26,331)	8,043	18,211
1998	49,082	41,910	( 7,842)	2,955	28,938
TOTAL	628,092	542,330	(225,692)	70,022	215,191

[4]            The Appellant operated his farm on three-quarter sections of land. He purchased the first quarter section in 1971. The second quarter was inherited by the Appellant's spouse around 1990 and the Appellant purchased the third quarter five years ago.

[5]            The Appellant indicated that the farm was 100 years old, that he farmed it for 31 years. His son now owns part of the farm. It is his hope that his grandchildren will continue to operate the farm. He said: "We committed ourselves to it as a way of life".

[6]            He indicated that they increased the cattle herd from five to one hundred head but in 1996 they sold the herd as there was a bacteria in the land which was transmitted to the cow herd. The only options open to the farms were to grow hay or grain and they chose to grow hay. He pointed out that the crop has to be rotated between hay and grain in order to continue the operation.

[7]            He testified that he had been employed at the refinery for approximately 25 years except for a few months. In the 1996 taxation year and years prior to that date the Appellant operated a cow/calf operation together with his son. The Appellant owned one half of the cows and claimed one half of the losses.

[8]            In the 1997 taxation year the operation changed to a haying operation. It was suggested to the Appellant that in order to support his family and maintain a farming operation he has always been required to work off the farm but he said that he did not know if he had to work. The Appellant agreed that he has made continuous and substantial commitments of capital to the farm as required now amounting to approximately $300,000 worth of equipment.

[9]            When it was suggested to the Appellant that he had not made any change in occupational direction towards farming on a full-time basis he said that he had made more purchases of land increasing the farm from one quarter to three quarters and that he has extreme flexibility in his employment, is entitled to take long vacations and can readily change his hours of work at the plant. He admitted that the change to a haying operation required less of his time than the cow/calf operation, as it was less labour intensive. He admitted that the employment income was his primary source of income.

[10]          Insofar as the Appellant was concerned he believed that the auditor missed the point of this audit. He had been operating the farm for some 31 years, all buildings have been replaced and they have made a capital investment of over $300,000 in machinery. He said that the auditor referred to four vehicles that the business owned in one year but he said that these vehicles were not capitalized by him. They were not part of the farm operation. This was a mistake in facts relied upon by the auditor. Further, the auditor said that the business was over-capitalized and the Appellant disagreed with this. Further, he said that the auditor quoted incorrect hay prices and this affected the decision that he made as a result of the audit. The auditor said that there was no formal business plan in place but the Appellant disagreed with that. He said that he had over 30 years of experience and that he could see that there would be profit in the future.

[11]          He devoted more time to the farm (60 hours a week) than he did to his employment, particularly in the peak seasons. He reiterated that his job hours were flexible and that he had six weeks vacation. He opined that not even full-time farmers farm all of the time. He stated: "This was not an audit for farm purposes". At the end of his direct examination he indicated that hopefully, soon, there would be a profit. Farming was his chosen career.

[12]          He indicated some dissatisfaction with the amount of time this case took to proceed to trial but it would appear from the facts that there was no justification for such a position.

[13]          In cross-examination he was asked the question as to whether or not he believed that he could have survived solely on the farming income and he opined that he thought that he could. However, he did admit that there was no profit to date including the year 1999 and his 2000 year has not been completed as of yet but he thought that there would be a profit in the year 2000.

[14]          He then indicated that if he were to look to the farm for his sole income he would have to increase his debt and perhaps sell some of the assets. Then he said, "farming is my life and always will be".

[15]          The Appellant also placed into evidence Exhibit R-1 which contained some of the financial information above referred to and also an outline of the history and nature of the farming operation and how he considered it to constitute a business. The Appellant resided on the farm all year round. He had never had any restrictions placed on the farm losses heretofore even though he recognized the potential for restriction but always believed that he was a full-time farmer. Farming was a way of life for him even though he had worked full-time as an employee since the age of 20. In order to support his family and maintain the farming operation it has always been necessary for him to work off the farm.

[16]          Michael John Muzychka was a chartered accountant. His position was that the Appellant could have survived on the income that he earned on the farm but he would have to have borrowed money or sell off cattle. He would have to go further in debt. It was his position that the Appellant's chief source of income was farming and employment income in combination. He said that 95% of the losses were as a result of capital cost claims. This witness introduced Exhibit R-1 by consent, which was a Section 31 Report. Exhibit A-1 was also introduced to this witness which set out the restricted farm losses claimed and the capital cost allowance claimed as earlier referred to.

[17]          The witness stated that in the taxation year 1996 there was an optional inventory adjustment taken into account for previous years which, if not included, would have resulted in a small profit in that year and it was the accountant's position that in 1996 the operation made money on a cash basis. The largest gross income was through cattle sales. In all years the net farm loss included capital cost allowance. He then said that the profit in 1996 would have been $6,000 without the inventory adjustment. It did include capital cost allowance.

Argument on behalf of the Respondent

[18]          Counsel for the Respondent referred to the appropriate section of the Act as subsection 31(1). She took the position that the chief source of income of the Appellant during the years in question was neither farming nor a combination of farming and some other source of income under subsection 31(2) and the Appellant cannot claim all of the farm losses incurred in those years. The business was in a loss position for all of those years. She agreed that there was no issue about reasonable expectation of profit in this case and the Minister had accepted that proposition.

[19]          She referred to the case of R. v. Donnelly, [1998] 1 C.T.C. 23, a recent and ruling case on these matters which was decided by the Federal Court of Appeal, particularly referencing paragraph 8 of that decision. It was her position that the farm enterprise could not support itself. In order for the Appellant to be successful here he must be able to show that there was a reasonable expectation of "substantial" profits from farming as referred to by Robertson J.A. at paragraph 12 of that decision.

[20]          It was her position that the income from the farming operation could not be a chief source of income if there was no net income. Farming was not a chief source of income alone or a combination with the employment income. The appeals should be dismissed.

Argument on behalf of the Appellant

[21]          The accountant made argument on behalf of the Appellant. It was his position that the chief source of income of the Appellant in the years in question was a combination of farming and employment income. He admitted that there were continual losses from 1987 up to 1995, just prior to the reassessment years but during that period of time the Appellant was building a herd. He also took the position that the term "income" as referred to in Donnelly, supra, was gross income and not net income. His position was that if you are considering the "net income" position then when you look at the years in question he was selling off the herd and the future was looking better.

[22]          He referred to the case of Miller v. The Queen, 2000 DTC 1502, in support of his position. He also referred to Finch v. The Queen, 2000 DTC 2382 which he said contained the definition of what is meant by the term "chief source of income" as being a combination of farming and some other source of income.

[23]          It was his position that the appeals should be allowed.

Analysis and Decision

[24]          Because of the facts in this case the Court has found this to be a difficult one in which to make a just, reasonable and correct decision. This is not the usual "horse case", or "horse racing case" where the Appellant is typically a professional or a businessman with a substantial amount of income earned outside of any farm operation and who has taken up the farming operation for the purpose of satisfying his own ego, personal interests or fantasy and at the same time seeks to claim horrendous losses incurred which substantially reduce taxes that he has to pay on his other than farming income.

[25]          The Court is satisfied on the basis of the evidence that the taxpayer was part of a traditional farming family in Alberta, he had a deep devotion and commitment to the land, he had a substantial investment in the farm in the sense of capital outlays, he spent a considerable amount of his time on the farm and farm related activities, possibly even a greater amount of time than he spent on his employment. He expected that his children would take up farming and even looked to the day when his grandchildren might follow in his footsteps and the footsteps of his children.

[26]          There can be no doubt that the Appellant in this case considered himself to be a full-time farmer, did not consider farming to be a sideline business for him, a hobby or anything but a full-time business which entitled him to claim full farming losses and which would not restrict him to losses available to a part-time farmer under subsection 31(1) of the Act. However, it is not the intentions of the Appellant that are in issue in this case but whether or not the facts as shown in the evidence dictate that according to Moldowan v. The Queen, 77 DTC 5213, he was a "full-time farmer". To be so considered he must meet two tests. First, he must establish that the farming operation gave rise to a reasonable "expectation of profit" and second, that his "chief source of income" is farming, under the definition in subsection 31(1) of the Act.

[27]          In this particular case there is no issue about the first test because the Minister has agreed that there was a reasonable expectation of profit and in any event, on the evidence the Court is more than satisfied that this Appellant was not a so-called "hobby" farmer. It goes without saying that if the Appellant satisfies the first test but not the second, then a restricted farm loss is imposed under section 31 of the Act as the Minister has done in this case.

[28]          There has been some consideration given as to why the Minister took the position that he did in the years in question, being 1996 and 1997 because the evidence clearly shows that between the years 1987 and 1998 and even into the year 1999 there was no net farm income. No evidence was adduced as to why the Minister took the action that he did in 1995 and 1996 and one can only speculate as to the reason. According to the evidence there was very little change in the way that this operation was conducted for that whole period of time and there was very little evidence that there was any change in direction in any year during that period of time with the exception of the year when the Appellant switched from the cattle operation to the hay operation on the basis that he described in the evidence. Otherwise the operation was conducted in the same way over the whole period of time.

[29]          The evidence makes it clear that the Appellant expended considerable time, energy and capital on this farm operation and it was by no means a "fly by night" operation. One can only consider it to have been a substantial operation in terms of the factors of capital and time spent on the business.

[30]          The Court can only speculate that during the years in question there must have been a change in policy by the Minister or perhaps the Minister was merely testing the waters to see how this type of case would be decided. In any event, just because the Minister allowed full farm losses up to the years in dispute here, does not mean that the decision that he made was sound in law and was correct nor does it mean that because he allowed those losses in those years that the Minister was incorrect in law and in fact in disallowing the losses in the years in question. That is a question for the Court to decide on the basis of existent law as it relates to the facts established in this case.

[31]          As indicated in Donnelly, supra, which case discussed a long line of cases dealing with this issue, Mr. Justice Robertson pointed out at page 5:

A determination as to whether farming is a taxpayer's chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer's other income source in terms of capital committed, time spent and profitability, actual or potential. The test is both a relative and objective one. It is not a pure quantum measurement. All three factors must be weighed with no one factor being decisive. Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act. The extent to which the evidential burden regarding the profitability factor or test differs from the one governing the reasonable expectation of profit requirement is a matter which I will address more fully below.

[32]          Justice Robertson further indicated that the Court must consider the cumulative factors of capital committed, time spent and profitability to determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. He went on to refer to ruling cases on this matter back to Moldowan, supra.

[33]          In the case at bar there can be no doubt from the evidence, as indicated above, that the Appellant committed substantial capital and time to the farming operation. However, the Court has a considerable problem with the third element, which has been referred to by Justice Robertson in other cases as "substantial profitability either actual or potential". This specific issue was not dealt with to any extent by the evidence nor in argument on behalf of the Appellant. Indeed the financial information as presented in the evidence indicates substantial losses in all of the years in question with the exception of 1987, 1989 and 1994 when one considers the amount of gross farm income in comparison to the expenses. In each year the Appellant took into account capital cost allowance which he is required to do in determining the net farm income.

[34]          It is little consolation to the Appellant, therefore, that without capital cost allowance or without claiming an inventory adjustment in the year 1996 that he might have made a profit. The financial facts speak for themselves in that regard.

[35]          The Court must ask itself, what is the evidence presented by the Appellant which indicated that in the years in question this farm operation had a reasonable expectation of potential profitability in light of the fact that the business indeed suffered losses in all of those years? The only evidence adduced by the Appellant and his accountant in this regard was the evidence of the Appellant himself that he believed that he would have been able to survive on the income of the farm alone if he had decided to give up his employment and concentrate completely on the farm. However, even by his own admission this would only have been possible had he been able to sell off some of his capital assets or if he had borrowed money which would have put him further in debt. Further, he indicated that he was hopeful that in the future he would be able to show a profit although he offered no evidence as to any basis for this hope and did not point to any specific change in direction in the way that he operated the business which would make such a conclusion a reasonable one. Such evidence falls far short of meeting that burden imposed upon the Appellant as a result of the requirements imposed by the appropriate section.

[36]          As indicated by Justice Robertson in Donnelly, supra, at page 6:

It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.

In the case at bar there was no evidence offered which would suggest that anything out of the ordinary took place in the years in question which would have prevented this business from making a profit or what profit the taxpayer might have earned had these events not occurred. Further, he was required to introduce evidence which show that that amount would have been considered substantial in comparison to his other income.

[37]          In Donnelly, supra, Mr. Justice Robertson in discussing Graham v. R. (1985), 85 DTC 5256 (Fed. C.A.) opined that:

In the end, Graham stands or falls on its unique facts. But there is at least one lesson that can be derived from the case. It seems to me that Graham comes closer to a case in which an otherwise full-time farmer is forced to seek additional income in the city to offset losses incurred in the country. The second generation farmer who is unable to adequately support a family may well turn to other employment to offset persistent annual losses. These are the types of cases, which never make it to the courts. Presumably, the Minister of National Revenue has made a policy decision to concede the reasonable expectation of profit requirement in situations where a taxpayer's family has always looked to farming as a means of providing for their livelihood, albeit with limited financial success. The same policy considerations allow for greater weight to be placed on the capital and time factors under section 31 of the Act, while less weight is given to profitability. I have yet to see a case where the Minister denies such a taxpayer the right to deduct full farming losses because of a competing income source. Perhaps this is because it is unlikely a hog farmer such as Mr. Graham would pursue the activity as a hobby.

[38]          This quotation gives the Court some difficulty because of the facts of this case as well as the Court's understanding of the facts set out in Miller, supra, which is precisely the case that is before this Court. The only difference may very well be that this Court is not satisfied that the Appellant was a full-time farmer forced to make additional income in the city to offset losses incurred in the country. Throughout the whole period of operation as set out in the evidence and indeed before that, the Appellant was not one who was relying upon the farm operation as his chief source of income and then because of a shortfall was forced to look for work at the refinery in order to offset some of these losses. Throughout the period of time and before the Appellant was involved in outside employment, was receiving considerable outside income and obviously not relying upon his farm to support his family but, on the other hand was relying upon his employment income to prop up the farm operation.

[39]          Under the same consideration, the Court in Donnelly, supra, when referring to Graham, supra, seems to be suggesting that policy considerations of the Minister allowed him to place greater weight on the capital and time factors under section 31 of the Act while less weight was attached to profitability. That may very well be fine for the Minister but it is difficult for this Court to see how it can attach any lesser weight to the profitability factor and more weight to the time spent and capital factors in light of the burden placed upon the Appellant in a case of this nature as referred to in this decision and as earlier indicated. The difference in this case and the type of case referred to by Justice Robertson may very well lie in the fact that the Court is satisfied here that this was not a case where the Appellant was looking to the farm for his chief source of income when he went to seek employment. In such a case, farming would be his chief source of income and not a "sideline". His employment was a sideline to his farming operation.

[40]          In discussing Graham, supra, Mr. Justice Robertson pointed out that this was the only case where a taxpayer has succeeded before the Court of Appeal in arguing that his farming business provided his chief source of income, despite employment in another area. He went on to distinguish Graham by saying that the Court had applied an out moded test which was further redefined in subsequent jurisprudence: see Morrissey v. R. [1989] 1 C.T.C. 235. He said, "in Graham the Court applied the two-stage analysis. Was there a reasonable expectation or profit, and if so, what was the taxpayer's "ordinary mode and habit of work?" At page 5263 the Court concluded that, "in the very unusual circumstances of this case", Graham, the taxpayer's employment did not preclude the trial judge from finding that the main preoccupation of the taxpayer was farming. Further, Justice Robertson concluded that Graham, supra, could be distinguished on its facts. However, the facts in Graham are very similar to the facts in the case at bar and this Court concludes that it is not so easy to distinguish the case at bar from Graham on the facts.

[41]          The Appellant, in support of his contention, cited the case of Brian Roy Finch v. The Queen, 2000 DTC at page 2382 where Judge Beaubier allowed the appeal in a factual situation which was somewhat similar to the facts in the case at bar. However, this Court is satisfied that it can distinguish the facts in the case at bar from Finch on several grounds. The learned trial judge there concluded that Mr. Finch's off-farm work was as a direct result of Farm Credit Corporation's requirement that Mr. Finch obtain $20,000 in off-farm income in 1989. His off-farm income was nowhere recognized in the mediation that followed, particularly in 1992, by both provincial and federal government agencies. To them the job was subordinate to the farm and Mr. Finch was a farmer within the meaning of Canada's Farm Debt Review Act.

[42]          Further, the learned trial judge concluded that the Finches had profits and losses in their previous 20 years of farming, they had complete practical training; their course of action was to develop a cow/calf operation, to operate an organic grain farm and to use off-farm income to help pay off debt and operate the farm. He concluded that the venture had a reasonable expectation of a reasonable profit as calculated by the Appellants. This Court cannot come to such a similar conclusion in the case at bar.

[43]          The most favourable case as far as the Appellant's position is concerned is that of Miller, supra. These facts are almost on all fours with the case at bar. However, in that case Judge Bowman decided that the Appellant could not be denied relief on the basis of the profitability factor alone and he referred to a line of cases which supported that position such as Morrissey, supra, The Queen v. Poirier, 92 DTC 6335 and Connell v. The Queen, 92 DTC 6134 which required that no single factor can be determinative.

[44]          In that case Judge Bowman obviously concluded that Mr. Miller was a full-time farmer who had to work to provide the cash to maintain and expand the farming operation. In essence he found that Mr. Miller was a full-time farmer who worked at Safeway. He concluded that the doctor, in Donnelly, was a doctor who dabbled in raising racehorses.

[45]          Therein lies the difference between that case and the case at bar. Here, the Court is satisfied that the history of the operation dictates that the Appellant looked to his employment as his chief source of income and to the farm as a sideline, in spite of his deep devotion to it and the commitment that he had made to that type of life over the years.

[46]          It was interesting to note from the exhibit that was put into evidence that the Appellant himself gave some consideration to the fact that the Minister some day might consider him to be a part-time farmer and to that extent may very well have believed and justifiably so, that he was living on the edge and that one of these days the axe would fall. In 1995 and 1996 it did fall and the Minister concluded that the Appellant was a part-time farmer.

[47]          As indicated by Mr. Justice Robertson in Donnelly, supra, at page 5, and as earlier indicated in this judgment:

Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source; invariably, employment or professional income.

[48]          In light of such a strong pronouncement, this Court does not believe that it is open to it to decide that a taxpayer who is part of a traditional farming family with a deep devotion and commitment to the land should be treated any differently than any other persons who seeks to make such deductions when considering the substantial profitability test. If that is to be done it must be on the basis of a policy decision by the Minister, so that the Court never sees such a case, or on the basis of a change in the Act.

[49]          Regretfully, although the Court has great sympathy for the Appellant, the Court must dismiss the appeals and confirm the Minister's assessment.

Signed at Ottawa, Canada, this 4^th day of May 2001

"T.E. Margeson"

J.T.C.C.

COURT FILE NO.:                                                 2000-4733(IT)I

STYLE OF CAUSE:                                               Ken Taylor and Her Majesty The Queen

PLACE OF HEARING:                                         Calgary, Alberta

DATE OF HEARING:                                           April 24, 2001

REASONS FOR JUDGMENT BY:                      The Honourable T.E. Margeson

DATE OF JUDGMENT & REASONS FOR JUDGMENT:              May 4, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Margaret McCabe

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

                                                                                               

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2000-4733(IT)I

BETWEEN:

KEN TAYLOR,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on April 24^th, 2001, at Calgary, Alberta, by

the Honourable Judge T.E. Margeson

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Margaret McCabe

JUDGMENT

The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed and the Minister's assessment is confirmed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 4^th day of May 2001.

"T.E. Margeson"

J.T.C.C.