Miller v. The Queen, docket 98-80-IT-G

Date: 19991104

Docket: 98-80-IT-G

BETWEEN:

BRIAN MILLER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman J.T.C.C.

[1] These appeals are from assessments for the 1993, 1994 and 1995 taxation years. The issue is whether the appellant's farming losses incurred in those years are to be restricted by subsection 31(1) of the Income Tax Act. It is admitted that the farming operation carried on by Mr. Miller and his family is a business with a reasonable expectation of profit. The sole issue is whether Mr. Miller's chief source of income is "neither farming nor a combination of farming and some other source of income".

[2] For the reasons that follow I have concluded that Mr. Miller is entitled to deduct his full farming losses in the years in question. He does not fall within the restrictive provisions of subsection 31(1).

[3] The case bears a striking resemblance to one that I decided three years ago, Martin v. The Queen, 96 DTC 1915.

[4] Mr. Martin had farmed all his life but had to teach school as an adjunct to his farming to enable him to carry on the farming operation. Mr. Miller is a full time farmer who has to work in the Safeway store in Regina to enable him to hold and to operate the family farm on which he grew up. He has worked on it all his life and acquired it from his father in 1980.

[5] In Martin, I set out the basic principles upon which I proceeded in that case and upon which I propose to proceed here. At pages 1916 and 1917, the following appears:

Each of the cases involving subsection 31(1) of the Act turns on its own facts. Before I review the facts it is useful to outline briefly the basic principles upon which cases of this type must be decided. The first is that, according to the leading case of Moldowan v. The Queen, 77 DTC 5213, farmers in Canada fall, for the purposes of income tax, in three categories: full time farmers, part time farmers and hobby farmers. Dickson J. put it this way at p. 5216:

In my opinion, the Income Tax Act as a whole envisages 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 s. 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who 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 s. 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.

At pp. 5215-5216 Dickson J. also observed:

Whether a source of income is a taxpayer's "chief source" of income is both relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time pent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

The second rule that must be observed is that the factors mentioned by Dickson J. must be considered cumulatively, and not disjunctively. In The Queen v. Morrissey, 89 DTC 5080, Mahoney J., speaking for the majority of the Court said at p. 5084:

With respect, I do not agree that Moldowan suggests disjunctive consideration of pertinent factors in quite the way the learned trial judge has dealt with them. The discussion in Moldowan begins as follows:

Whether a source of income is a taxpayer's "chief source" of income is both a relative and objective test. It is decidedly not a pure quantum measurement.

Moldowan also says, dealing with the difference between classes 1 and 2, "while a quantum measurement of farming income is relevant, it is not alone decisive". While the determination that farming is a chief source of income is not a pure quantum measurement, it is equally not a determination in which quantum can be ignored.

The same view was expressed by the Federal Court of Appeal in Connell v. The Queen, 92 DTC 6134 and The Queen v. Poirier, 92 DTC 6335. In the latter case the Court stated at p. 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.

From this it is clear that in determining whether a person's chief source of income is or is not farming, no single factor -- time, mode of living, profitability, capital committed -- may be taken as determinative. No single factor -- either its presence or its absence -- can be taken as governing in isolation.

...

Farming has had for Mr. Martin -- as, I daresay, for farmers all over Canada -- its ups and downs. Drought, fire, excessive rain, fluctuating prices and escalating costs, have taken their toll. Yet still he hangs in, like so many other members of this integral part of the Canadian economic fabric.

What is the composite picture that emerges? A typical Canadian farmer. Not a wealthy professional or executive who dabbles in exotic cattle or horses with a view to enhancing his social standing but as a hard working Canadian farmer who cleans stables, harvests grain, fixes broken machinery, cares for sick cows and pigs and lives through the major and minor tragedies and heartbreaks that have beset farmers for millennia. Mr. Lockwood described him as a farmer who teaches and not a teacher who farms and I think this is an accurate characterization. The scale of his farming operation was comparable to that of persons who do nothing but farm and who do not have another job. Why is he denied his losses? Because he had another job that made it possible for him to engage in a full time farming operation. Whatever may be the type of person at whom subsection 31(1) is aimed, it is not Mr. Martin. Whatever may be the object and spirit of subsection 31(1), it is not to destroy the backbone of our farming community.

Mr. Martin's mode of life, commitment of time, commitment of capital, and dedication to farming all point inexorably to the conclusion that Mr. Martin is a full time farmer within Class 1 of the Moldowan categories. Yet the Crown would deny him that on the basis of one factor, the lack of profitability. There are two reasons why this factor cannot determine the result in this case. In the first place although pleaded as a separate allegation, the so-called "no reasonable expectation or profit" point was not pressed by the Crown and no evidence was advanced to substantiate it. I must therefore assume, as Mr. Martin undoubtedly did, that there was a reasonable expectation of profit.

Even more importantly, to permit this factor to prevail against all of the other factors would be to ignore the principles laid down by the Federal Court of Appeal in such cases as Morrissey, Poirier, and Connell, which require that no single factor can be determinative.

[6] I turn now to the facts relating to Mr. Miller. He is 52 years of age. He was born and raised on the farm which he now operates. From early youth he worked on the farm doing the sort of jobs appropriate to his age — stone picking, driving implements, seeding, harrowing, combining, baling and hauling, tending cattle — all of the type of things that one would expect of a boy growing up on a farm and forming part of the family unit that operates a farm — a typical Canadian phenomenon that has been around for generations.

[7] In 1980, the appellant took over the family farm which consisted of three quarter sections.

[8] I set out paragraphs 6 to 20 of the notice of appeal. They are either admitted or have been established in evidence. They demonstrate the commitment of capital that Mr. Miller made to the farming operation:

6. The Appellant had significant capital in his farming operation by January 1, 1993:

Description Opening UCC

class 6 $16,797.57

class 8 $29,763.65

class 10 $24,636.01

7. The Appellant purchased the following capital assets in 1993:

Description ($)

Combine $40,915.00

Grain Box $ 6,303.60

Grain Truck $15,200.00

Case Tractor $74,665.00

8. The Appellant's liabilities at December 31, 1993 were:

Description ($)

Bank of Montreal $44,593.61

Line of Credit $56,525.36

9. The Appellant purchased the following capital assets in 1994:

Description ($)

Steel Quonset $13,950.00

Swath Roller $ 650.00

Swather $17,013.00

Weed Trimmer $ 399.98

28ft Drill $ 575.00

Cellular Phone $ 545.00

10. The Appellant's liabilities at December 31, 1994 were:

Description ($)

Case $35,629.48

Line of Credit $64,062.45

11. The Appellant purchased the following capital assets in 1995:

Description ($)

Bin Sweep $1,474.98

Pick up Reels $3,550.00

Hay Rake $5,049.00

12. The Appellant's liabilities at December 31, 1995 were:

Description ($)

Case $26,543.63

Line of Credit $55,518.47

13. The Appellant purchased the following capital assets in 1996:

Description ($)

Bins $11,651.00

Auger $ 3,650.96

Gyromower $ 425.00

Garden Tractor $ 2,600.00

14. The Appellant's liabilities at December 31, 1996 were:

Description ($)

Case $15,000.00

Line of Credit $46,200.00

15. The Appellant had significant capital in his farming operation as at December 31, 1996:

Description Closing UCC

class 6 $32,823.88

class 8 $45,592.62

class 10 $27,460.47

16. The Appellant has no Registered Retirement Savings Plans because he has invested all his retirement capital into the farm operation.

17. The Appellant's employment income from Safeway was necessary to finance the capital requirements of the farm. The Appellant's employment income decreased in 1996 because he is not meeting Safeway's requirements to achieve a bonus. This is due to time spent on the farm and not at Safeway's.

18. The Appellant's employment income is:

Taxation Year ($)

1993 $74,426.76

1994 $86,432.59

1995 $79,786.16

1996 $60,310.00

19. The Appellant's gross farm income is:

Taxation Year ($)

1993 $33,365.21

1994 $33,689.83

1995 $22,057.23

1996 $40,509.63

20. The Appellant's farm loss is:

Taxation Year ($)

1993 ($40,802.00)

1994 ($37,226.81)

1995 ($50,798.36)

1996 ($23,367.18)

[9] It is significant that a substantial part of the losses for each year results from capital cost allowance claimed by the appellant on farm machinery and equipment purchased by him. Ironically, the more capital he devotes to the farming operation the greater his losses. The refunds of tax which the appellant receives are all put back into the farm. Counsel for the respondent invites me to draw an adverse inference from this fact. I think precisely the opposite inference is justified.

[10] The farm is about a 1¼-hour drive from Regina. Mr. Miller as well as his wife and son spend virtually all their time at the farm when they are not working at Safeway. It is a typical farm family: all members — the appellant, his wife Ardis and his son Scott — work as a team. Mr. Miller's intention since he took over the original three quarter sections has been to expand and this he has done. In 1997, he bought two more quarter sections. In 1999 he bought two more quarter sections and in May of 1999, he bought five more quarter sections. Part of the price was raised by borrowing but a substantial part was raised by the exercise of stock options that he had with Safeway.

[11] It has been his plan since 1980 when he took over the family farm to expand in the manner in which he has been doing. He could not carry on the farming operations, put the capital into it to expand it without the money earned in another job.

[12] I was favourably impressed with his profound knowledge of all aspects of farming in Western Canada, including fertilisers, farm equipment, economics and crop rotation. His son, to whom he intends to give the farm when he retires, expects to take over the farming operation in due course and is studying agriculture as well as working on the farm.

[13] The evidence discloses a traditional farming family in Saskatchewan, a deep devotion and commitment to the land and a determination to maintain that tradition in spite of the difficulties with which agriculture has been beset in recent years in Canada, particularly in the west — such as droughts, floods and low prices.

[14] It is rare that one sees a case to which section 31 is more inapplicable. Mr. Martin was one such case. Mr. Miller is unquestionably another. Mr. Miller is a full time farmer who has to work to provide the cash to maintain and expand the farming operation. He falls within class 1 of the analysis of Dickson J. in Moldowan v. The Queen, 77 DTC 5213.

[15] I shall not repeat the analysis of the cases that I made in Hover v. M.N.R., 93 DTC 98. I understand that that case has been appealed to the Federal Court, Trial Division and it will, no doubt, be heard in due course. It involved a finding that Dr. Hover combined his substantial income from dentistry with an even more substantial, time-consuming and capital intensive farming operation.

[16] In Hover, I referred to The Queen v. Roney, 91 DTC 5148 where Desjardins J.A. said at page 5155:

In light of the evidence before us, I do not think that the respondent, in the taxation year 1975, was a person whose major preoccupation was farming. He was someone who was testing the water, so to speak. For him, farming was a sideline.

[17] In commenting on this passage, I also said in Hover at paragraphs 62 to 64:

62 The same cannot be said of Dr. Hover. Farming was for him no sideline nor was he merely testing the water. He had plunged fully and without reservation into the water. As early as 1984, and increasingly thereafter, it was for him a major preoccupation. If Class II farmers are those who carry on farming as a sideline business, as Moldowan and Roney suggest, I cannot conclude that Dr. Hover falls into that category. His commitment of time, capital, energy and dedication to farming precludes such a finding.

63 The Act does not specifically require that the other source of income be either subordinate or sideline. It would seem that if farming can be combined with another source of income, connected or unconnected, it can as readily be combined with a substantial employment or business as with a sideline employment or business. Indeed, if the other source were merely subordinate or sideline it would not prevent farming alone from being itself the taxpayer's chief source of income without combining it with some other unrelated subordinate source.

64 Given the amount of income that the dental practice produced and the amount of cash it contributed to the farming operation it cannot be described as either subordinate to farming, in terms of the revenue that it produced, or a sideline business. It was an essential adjunct and complement to the farming operation. Without it the farming operation could not have been commenced nor could the substantial capital expenditures and start-up costs have been incurred. In this sense it formed an integral part of the combination. While I am of course bound to follow the principles enunciated by Dickson, J., I must attempt to apply them to the facts before me and I must conclude, if I am to give effect to the word "combination", that by "subordinate" he intended to include a source of income that although substantial is integral to the very existence of the farming operation.

[18] This case bears a certain resemblance to Hover in that farming was no sideline for Mr. Miller, nor was he merely "testing the water". He had been fully immersed in the waters of farming from early childhood. Nor was this a change of occupational direction as Dickson J. said in Moldowan. It is far stronger than that. It is a continuation of the same direction as that in which he has been pointed all his life.

[19] A recent case of the Federal Court of Appeal is R. v. Donnelly, [1998] 1 F.C. 513. It puts section 31 in its proper perspective. It involved a wealthy doctor who took up raising racehorses, and lost large amounts of money. One needs only to state those facts to realize why he lost. He was, one of those persons who, as Robertson J.A. said, "earned their income in the city and lost it in the country". This cannot be said of Mr. Miller, whose situation is not even comparable. Dr. Donnelly was a doctor who dabbled in raising racehorses. Mr. Miller is a full time farmer who works at Safeway. It is instructive to re-read what Robertson J.A. said in paragraphs 19 to 21 of the Donnelly judgment at pages 526 to 527:

[19] 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.

[20] As is well known, section 31 of the Act is aimed at preventing "gentlemen" farmers who enjoy substantial income from claiming full farming losses: see Morrissey v. Canada, supra, at pages 420-423. More often than not it is invoked in circumstances where farmers are prepared to carry on with a blatant indifference toward the losses being incurred. The practical and legal reality is that these farmers are hobby farmers but the Minister allows them the limited deduction under section 31 of the Act. Such cases almost always involve horse farmers who are engaged in purchasing or breeding horses for racing. In truth, there is rarely even a reasonable expectation of profit in such endeavours much less the makings of a chief source of income.

[21] It may well be that in tax law a distinction is to be drawn between the country person who goes to the city and the city person who goes to the country. In future, those insisting on obtaining tax relief in circumstances approaching those under consideration should do so through legislative channels and not through the Tax Court of Canada. The judicial system can no longer afford to encourage taxpayers or their counsel to pursue such litigation in the expectation that hope will triumph over experience.

[20] This passage clearly describes the type of person at whom section 31 is aimed and the type of person at whom it is not.

[21] Agriculture in Canada and particularly in the western provinces is going through a difficult time. It will survive through the courage, sacrifices, initiative, optimism and dedication of people like Mr. Miller and his family. Section 31 was never intended to destroy such people but if it is applied indiscriminately to genuine farmers such as the Millers, it will.

[22] The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the deduction of the appellant's farming losses in 1993, 1994 and 1995 is not restricted by section 31 of the Income Tax Act.

Signed at Toronto, Canada, this 4th day of November 1999.

"D.G.H. Bowman"

J.T.C.C.