Date: 19991021
Docket: 98-2442-IT-I
BETWEEN:
BERNICE T. PAGET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] These are appeals with respect to the 1994 and 1995
taxation years.
[2] In computing income for the 1994 and 1995 taxation years,
the Appellant deducted the amounts of $26,239.13 and $25,623.93
respectively as farming losses.
[3] The Minister of National Revenue (the
"Minister") reassessed the Appellant for the 1994 and
1995 taxation years by Notices of Reassessment dated
October 6, 1997 to disallow farming expenses in the amounts
of $4,239 and $2,709, which have not been appealed, and to
restrict the Appellant's remaining farming losses in
accordance with subsection 31(1) of the Income Tax
Act (the "Act").
[4] The Appellant appeals the reassessments and submits the
reassessments are incorrect on the grounds that the Minister has
wrongfully restricted the taxpayer's farming losses pursuant
to section 31 of the Act.
[5] The Appellant operates a farm in Hartland, New Brunswick.
The farm is operated year round on a full time basis. The
Appellant's farming operations consist of raising beef cattle
and growing crops. By the taxation years in question, the
Appellant had invested over $350,000 in capital. The farm was
originally 200 acres of land and now exceeds 700 acres.
The farm is well organized, the Appellant does some of the
bookkeeping, participates in the making of the farm decisions and
does some physical work that does not involve heavy manual
labour.
[6] The Appellant is employed as a registered nurse. She
earned, from her job as a nurse, income of $41,100.60 in 1994 and
$43,069.23 in 1995. The Appellant states that the income she
receives from her nursing job helps operate the farm and that
without it the farm would not have been able to operate since the
beef market was in a down turn.
THE MINISTER'S ASSUMPTIONS
[7] In assessing the Appellant, the Minister relied on the
following assumptions:
a) at all material times the Appellant was employed full time
as a nurse;[1]
b) the Appellant earned $41,110.60 and $43,069.23 from her
full time employment as a nurse during the 1994 and 1995 taxation
years respectively;1
c) the Appellant reported farming income (losses) as
follows:
Taxation Gross Net
Year Income Expenses
Income
1994 13,297.94 39,537.07 (26,239.13)
1995 38,825.51 64,449.44 (25,623.93)1
d) the Appellant's spouse has been farming since 1968 and
he owned and operated the farm at issue from 1975 until 1988 when
he declared personal bankruptcy;[2]
e) the Appellant purchased the assets of the farm in 1988 and
19891 and her spouse continued to operated the farm as
a full time farmer;[3]
f) the Appellant's spouse was not an employee of the
farming operation during the 1994 and 1995 taxation
years;1
g) the Appellant's spouse is responsible for the majority
of the primary duties relating to the operation of the farm
including: maintaining the livestock, planting and maintaining
the crops, maintaining the equipment, negotiating sales,
purchasing supplies and bookkeeping;[4]
h) the Appellant provided capital for the farm
operation;1
i) the farm operation was operating similar to a business
partnership;[5]
j) the Appellant's chief source of income during the 1994
and 1995 taxation years was neither farming nor a combination of
farming and some other source of income.4
EVIDENCE AT TRIAL
[8] During 1988 and 1989, the Appellant purchased the assets
of the farm. She used personal savings as well as borrowed funds
to acquire the assets. The purchase of assets included the
purchase of seven head of cattle. From 1989 to 1999, the herd has
grown from 7 to 156. Other farmland was acquired through lease,
purchase and land clearing.
[9] In 1988, the Appellant changed her position as head nurse
at the Carleton Memorial Hospital in Woodstock, New Brunswick to
that of a shift nurse at the same hospital. The significance of
this change was that as head nurse she worked five days per week
(20 days out of 28 days) whereas as a shift nurse, she
worked 12 days out of every 28 days. The time not on
duty as a nurse was and still is spent on her farming and
household activities.
[10] The Appellant used her nurse's income to supplement,
augment and build the farm business.
[11] The farm is operated with the assistance of her spouse,
her children and a part time employee. The farm, for the years in
question, is a full time year round farming business.
[12] The exhibits filed by the Appellant as part of the
evidence show the significant increase in livestock inventory and
land acquisition. The capital value growth of the farm assets has
grown from $89,300 in 1989 to $468,350 in 1999. Future
projections for the year 2000 indicate net profitability
(Exhibit A-6).
[13] While losses have been significant and continuous the
farm has developed, grown and somewhat stabilized into a viable
business.
ANALYSIS
[14] The Minister submits that the Appellant's chief
source of income during the years in question was neither farming
nor a combination of farming and some other source of income and
that therefore according to subsection 31(1) of the
Act, the deductible farming losses should be
restricted.
LEGISLATION
[15] Subsection 31(1) of the Act reads as
follows:
(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
(i) the amount by which the total of the taxpayer's losses
for the year, determined without reference to this section and
before making any deduction under section 37 or 37.1, from all
farming businesses carried on by the taxpayer exceeds the total
of the taxpayer's incomes for the year, so determined from
all such businesses, and
(ii) $2,500 plus the lesser of
(A) 1/2 of the amount by which the amount determined under
subparagraph (i) exceeds $2,500, and
(B) $6,250, and
(b) the amount, if any, by which
(i) the amount that would be determined under subparagraph
(a)(i) if it were read as though the words "and
before making any deduction under section 37 or 37.1" were
deleted;
exceeds
(ii) the amount determined under
subparagraph (a)(i).
(emphasis added)
JURISPRUDENCE
[16] Hence, the Court must decide what the taxpayer's
chief source of income consists of. In The Queen v.
Timpson, 93 DTC 5281, MacGuigan J.A. for the
majority of the Federal Court of Appeal stated that deciding
whether or not the taxpayer had a reasonable expectation of
profit was only part of the test as it is useful in determining
if it is "a source of income" but is of no help when
determining if it is "a chief source of income". He
then stated at page 5282:
We find this case to be on all fours with Poirier where
we said (at 6336):
It is ... now clear that what is required for a determination
that farming is a chief source of income is a favorable
comparison of farming with the other source of income as
to such matters as the time spent, the capital committed, and
the profitability, both actual and potential. ...
Applying the present view of the law to the facts in the case
at bar, it is patent to us that farming was in a subordinate
position to the respondent's employment occupation. Farming
comes closest to a rough equality on the time factor, but it lags
far behind on the capital and income tests.
(emphasis added)
[17] In First Farm Inc. v.The Queen,
93 DTC 1237, this Court reviewed Hover v.
M.N.R., 93 DTC 98 (T.C.C.). It is said at
page 1239:
In terms of a reasonable expectation of profit, Bowman, J. of
this Court in Hover v. M.N.R., 93 DTC 98, at
page 106 has stated:
Once it is conceded, either by the very fact of applying
section 31 or otherwise, that a business exists, the
taxpayer's reasonable expectation of profit ceases to be a
factor in determining whether he is to be subject to the
restrictions of section 31. It is true that the concession
implicit in the fact that the Minister applied section 31 is not
necessarily binding on the court if the facts clearly establish
that there was no hope of ever making a profit.
(emphasis added)
[18] Bowman, J. in Hover, supra, pages 107-108
commented on sources of income as follows:
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.
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 expenditure
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.
(emphasis added)
[19] In Hover, supra, Bowman, J. further held at
page 110:
I have therefore concluded on the evidence that the
appellant's chief source of income was a combination of
farming and dentistry and that section 31 does not apply to the
determination of his income for the 1984, 1985 and 1986 taxation
years.
[20] To support the Respondent's position, counsel for the
Respondent cited Dixon v. R., [1998]
1 C.T.C. 2167 (T.C.C.). In that case, the Appellant was
a nurse who decided to start a farming operation which consisted
of breeding, training and racing standardbred horses. Her nursing
income was around $47,000 per year and she invested about
$162,000 into the farm. Judge Bowman of this Court found
that her farming operation could not be her chief source of
income nor a combination of farming and some other source of
income. He stated at page 2171:
It was her principal occupation, the focus of her activities
and her livelihood. However much time and money she spent on
farming in 1994 and earlier years, it had not reached the point
at which it can be said that she had changed occupational
direction and committed her energies and capital to farming as a
main expectation of income, to use the words of Dickson J. in
Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.).
[21] In this case, however, considering the findings that the
Appellant invested considerable capital in the farm and that she
became a shift nurse instead of a head nurse in order to spend
more time on the farm, it can be said that "she had changed
occupational direction and committed her energies and capital to
farming as a main expectation of income".
[22] In Henderson v. The Queen, 98 DTC 1904
(T.C.C.), the Appellant was a civil engineer who decided to start
a cattle farm. As an engineer, his income was in excess of
$150,000 and he stated at the hearing that he hoped that some day
the farm would yield a gross annual income of $30,000. Hence, the
Minister assumed that the income derived by the Appellant's
engineer position was, and in the future probably would remain,
his chief source of income. Therefore, Judge Dussault of this
Court found that farming could not be the Appellant's chief
source of income nor a combination of farming and some other
source of income. He cited a paragraph from The Queen v.
Donnelly, 97 DTC 5499 (F.C.A.) at
pages 5500-5501:
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.[6]
[23] In this case, the Appellant took her farming business
seriously, she cut back the number of days that she worked as a
nurse to be able to spend more time working on the farm. The farm
was not a hobby or sideline business. I conclude the direction of
the farm is leading up to substantial profitability and it is a
reasonable presumption that in the future the farm will replace
the Appellant's nursing income completely.
CONCLUSION
[24] The Respondent has concluded the farm had a reasonable
expectation of profit. The Appellant made a substantial
investment of capital into the farming activities. She performed
physical labour, made organizational and administrative
decisions. The amount of time spent was considerable and in
excess of that she exercised as a shift nurse, that is, upon
acquisition of the farm she reorganized her work schedule so that
she could devote the majority of her work time to farming. The
farm is fully operational beef farm with some hay sales. For the
Appellant, the farm was and is indeed her principal preoccupation
and occupation, that is, the focus of her daily activities and
where she sought to achieve a livelihood. In 1994 and 1995, being
a nurse, to the Appellant was a means to an end when she changed
and reduced her role as a head nurse, she changed her
occupational direction. For the taxation years 1994 and 1995, I
find the combination of nursing and farming had become the
taxpayer's chief source of income. Section 31 does not
apply to the determination of the Appellant's income for 1994
and 1995 taxation years.
DECISION
[25] The appeals are allowed for 1994 and 1995 and the
assessments are referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the
Appellant is entitled to deduct losses in the amount of
$26,239.13 for 1994 and $25,623.87 for 1995.
Signed at Ottawa, Canada, this 21st day of October 1999.
"D. Hamlyn"
J.T.C.C.
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