Phillips v. Canada, [1997] 1 CTC 59, 96 DTC 6581

Campbell J.—: In 1992 Mr. Phillips argued that his income tax reassessment for the years 1982 to 1985 was wrong because it disallowed farm loss deductions, and I think it is fair to say, he lost his argument by a very slim margin. That case proceeded before Judge R.D. Bell of the Tax Court, and it is from Judge Bell’s decision that Mr. Phillips appeals before me.

In the appeal, Mr. Phillips was unrepresented by counsel, but did a very effective job. Both he and Mr. Wheeler, who appeared on behalf of the defendant, argued well within a cooperative approach to examining the issues of the case. It was agreed that the facts as found by Judge Bell would apply to the appeal with any elaborating evidence that Mr. Phillips wished to add. It was further agreed that, even though this is an appeal by way of trial de novo, the primary issue in the appeal is whether Judge Bell erred in ruling against Mr. Phillips as he did, in view of the number of important findings he made in Mr. Phillips’ favour.

A. The facts as found by Judge Bell

The facts as Judge Bell found them, quoted directly from his judgment, are as follows:

These appeals are in respect of the 1982, 1983, 1984 and 1985 taxation years from reassessments under subsection 31(1) of the Income Tax Act (“Act”). The reassessments were made on the basis that the Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income and his loss in respect of each of the taxation years in question was limited to $5,000.

Although the Respondent’s Reply to the Notice of Appeal pleaded that, in the alternative, there was no reasonable expectation of profit from the farming operation, at the hearing Respondent’s Counsel admitted that there was a reasonable expectation of profit.

The Appellant, who is now 52 years of age, was born one mile from the farm on which he conducted the farming operations that are the subject matter of these appeals. His parents bought the Appellant’s grandfather’s farm in 1943 and moved from a farm they had rented from 1938 to 1943 to the newly purchased property. Prior to 1938 the Appellant’s father had farmed with his grandfather during the depression.

The Appellant lived on a farm and took part in his father’s farming operations during the first 18 years of his life. He then went to Queen’s University for a while, worked for two years with the Ontario Department of Agriculture and then returned to University, graduating with a Bachelor of Commerce degree in 1966. He stated that he would come home on weekends and work on the farm and that he would, although working for the Department of Agriculture in the summertime, also go home on weekends to help on the farm.

After University the Appellant was employed as a teacher in Toronto. He completed his teaching certification and took accounting specialist and marketing specialist courses and then received his Master of Education in 1972. Prior to that he taught in Etobicoke, Port Credit and Arthur.

The Appellant testified that his father had a second heart attack in 1967 and had to sell his holstein herd, that he continued to live on the farm and that he and his father had always talked about him taking over the farm. His evidence was that when he was teaching in the Toronto region from 1966 to 1973 inclusive he would often go home on weekends and assist with haying and combining. He stated that prior to deciding to commence a sheep business he analysed the other types of farming and decided that the dairy industry was in upheaval, that the hog industry and beef industry were always into cycles and were affected by quotas. He dismissed the “feather trade” and started researching sheep and discovered that it was the only meat not produced sufficiently in Canada to meet domestic needs.

The Appellant stated further that in the late sixties he read about sheep and that he attended the first ram sale which was held At Maple, Ontario, Maple- Newmarket being where the Ontario sheep specialists are located and Maple being the experimental farm for the Ontario Government. He also would go to the Royal winter show and the Canadian National Exhibition in the summer and stated that when he was at Arthur he joined the Wellington County Sheep Club.

The Appellant married in 1973 and moved to Campbellford to take a teaching position there. He stated that he had a house in Toronto which he was unable to sell when he moved and also that he had a house in Orangeville. In 1977, he bought a portion of the farm which his father and grandfather had rented for five years as aforesaid. Such farm consisted of 106 acres, about 60 acres of which was “work land” with the balance being trees and bush. The Appellant stated that on the land was a barn, a hog barn with both an upper and lower deck, a drive shed and a house.

The Appellant then pursued his stated goal of getting his information together. He contacted the sheep specialist at Newmarket, spent a lot of time with him and decided that he would purchase a flock of sheep and build from there because he would have a more stable supply, hoping eventually to sell breeding stock. He stated at this time that the sheep industry was working on the breeding cycle idea referred to as out-of- season breeding. His plan was to breed for out-of-season breeding, for higher lambing rates and for good mothering which he stated to be the three characteristics one would seek in breeding stock. He stated that he “did quite well” with out-of-season breeding because he was able to produce lambs for Christmas and lambs for Easter celebrations, this seasonal supply producing a much higher price.

In 1979 the Appellant purchased another 40 acres of “work land” and he obtained 95 acres of his father’s land. Of the total of 241 acres owned by him, 165 acres were pasture. He then, in 1979, purchased 150 bred [sic] ewes which were shipped from Western Ontario. He stated that he financed the purchase of the farm acreage by selling his house in Orangeville and the house in Toronto and gave a mortgage for $30,000 to the vendors from whom he had purchased the initial 106 acres. He then sold his house in Campbellford and with those proceeds and his floating operating loan was able to pay for the additional land.

The Appellant’s stated plan for the beginning years was to receive income for what he culled because he wanted to develop the above three characteristics in his sheep flock. His plan was to cull his flock and have his sheep “breeding true” for those characteristics and ultimately to own 300 to 400 sheep. He stated that his buildings could handle 400 sheep.

The Appellant stated that although he would be penalized for taking early retirement from teaching he planned to retire early at the age of 55. He also testified that having commenced a farming operation he no longer pursued a higher position in his teaching career such as Vice-Principal, Director of Education or Superintendent of schools, et cetera. He stated that “I did get my Co-op - specialist”, a new Ontario program by taking same “in the evenings and at different times”. He then stated that he hoped to have his flock in the 400 range within five or six years.

The Appellant described the culling operation by stating that ewes that did not meet the standards of his three objectives would be sold, that he would keep the ewe lambs and mothers that met his standards and bring in other breeding stock. He explained that even lambs and ewes that are kept may not necessarily breed true.

The Appellant subscribed to the Wool Growers, the Ontario sheep publication, and also had access to The Shepherd, an American publication, through the local library. That library also brought books in for him about sheep and sheep management. He also belonged to the Northumberland Sheep Club and was a member of the Record of Performance Program sponsored by the Ministry of Agriculture and Food, that he knew the two agricultural representatives and that he would receive their publications.

With respect to time, he stated that he would rise about 4:30 a.m. and would be out working from 5:00 a.m. to 7:30 a.m. and that he would be on the road to school at 8:00 a.m. He also stated that when he returned home from school he would, on average, spend two of three hours every evening checking the flock, re-feeding, et cetera, and that at lambing time he would devote much more of his time to the operation and during planting and harvesting time he would often work very late.

Appellant’s Counsel introduced a copy of the school year calendar for 1984-1985 showing the total number of days in school as 195 days. The Appellant testified that this was typical of the time spent at school for the period during which he was farming, it being fixed by statute. He stated that quite often he would take his noon hour and go to the Co-op to buy supplies or would go to the veterinarian’s office. His Counsel also introduced as an exhibit a 1986 calendar showing that in that year he spent 1,998 and one half hours farming and 1,755 hours at school. The Appellant testified that trips to the store or to the veterinarian while he was at school were not included in his computation of time devoted to the farming operation, the effect being that some of the school time included some farm time.

He also testified that his bridge financing carried interest rates as high as 24 1/2 per cent, that he put cash from the farming operation and his teaching income into the venture and beyond that would have to increase his operating loan. He stated that initially his weaning rate was too low, that in the first year he culled 115 ewes and that his flock contracted a disease known as chlamydia which caused spontaneous abortions or weak lambs which did not survive. He said that this disaster appeared in the fall of 1983, that in December of that year he went out one morning and discovered 20 dead fetuses and that in the next year although the ewes were carrying their lambs to term, such lambs were weak and would not survive. As a result he stated that he did not buy any fresh breeders because if they do not have resistance to this disease they are very susceptible to infection. As a result of this, in the Appellant’s words, at that juncture, “Everything had to go on hold”. He stated that it was not until 1986 that he was able to commence expanding his flock again. He testified that at that time the Red Meat Program had changed its focus and that grants for buildings were available.

With respect to field work the Appellant stated that the land needed improvement, that over the years he used corn rotation and planting of oats, that he had very high custom operator costs and very little revenue because of the corn market. He himself did all the field work with respect to haying. He would have the land custom ploughed and disced.

The Appellant stated that in 1986 he had plans for erecting a building in 1988 which would have the capacity for 500 sheep. He stated that by the end of 1987, with respect to his breeding operation, he was pleased with the ewes he had kept and that the ones he had purchased were “coming along”.

On February 13, 1988 the Appellant had the misfortune of suffering an extensive heart attack resulting in a quadruple bypass on October 5, 1988. One week after his surgery his wife advised him that she wanted a divorce and he decided to sell his equipment and sheep. The sheep were sold at the first available sale in 1989 with a majority of his equipment. He retained the tractor and the bailer and some other minor assets but in 1990 sold everything.

Tax returns of the Appellant for the 1982, 1983, 1984 and 1985 taxation years were entered as exhibits. Also, Appellant’s Counsel entered as exhibits financial statement of farm operations for 1988 and also for 1989.

The Appellant gave evidence to the effect that he was too old for further educational upgrades but he stated that he was approached a couple of times to see if he was interested in applying for the Vice-Principalship and that he turned those opportunities down because he was farming.

He then described in more detail the assistance received from the RMP (Red Meat Program). The Ontario Government brought in a local field man who was available for counselling and also a weigh man who did the weighing and assisted in providing more accurate records and computer printouts of the flock. He stated that this helped him in record keeping and knowing how to cull. The objective of this assistance was to be able to produce the records of performance to potential buyers of breeding stock thereby facilitating the ability to sell same. Such records were also used for culling. He then stated that at the outset of his operation all of his sheep were “grades” as opposed to purebreds. He said that at the end about 30 per cent of his flock was purebred, the sale price of which was substantially higher than that of grade sheep. He said that his lambing rate had improved from the time of commencing operations and that his weaning had also improved.

The Appellant was pleased with the turn around in his operation and stated that things were “really ready to start taking off when ’88 happened”. He also qualified for the Ontario Government renovation program and the grant for the Red Meat Program. He had no animals other that sheep on the farm and had no poultry.

On cross-examination, Respondent’s Counsel substantially focused upon the fact that the number of ewes had not increased over the years in question and sought to establish that the Appellant had no plan for expansion to reach his goal. He entered as exhibits copies of the Appellant’s income tax return for taxation years 1986 to 1989. He also established through his examination that the Appellant did not claim capital cost allowance in the years in question. The Appellant reviewed the difficulties he had with respect to the disease, interest rates and general economic climate and that he was replacing common sheep with purebreds. He stated with respect to the 1987 year

...that the flock was starting to shape up again after those previous years and things were working out well...and I had the land which was finally coming around....

He stated that his need to make substantial payments for custom work had disappeared, that his hay was coming along very well and that his feed bills were down.

In response to a question from Respondent’s Counsel to the effect that the farm operation was to help finance the buildings and the land that he had purchased, being the family land or part thereof, the Appellant said that on the contrary he would have been far better off to have stayed in town and bought a brand new place or bought a different farm and waited for his father to die because he was going to inherit land in any event.

Respondent’s Counsel then produced Mr. Thomas John Chambers as a witness. He was a graduate in agriculture from the University of Toronto, was a sheep raiser, at one time had been employed with Ralston Purina in evaluating the credit of various people and had worked as an adviser for the Ministry of Agriculture and Food on their Red Meat Program. He stated that he had spent probably a third of his time working at the viability of farm operations. He had visited the Appellant’s operation in 1987 in respect of the Appellant’s application for a grant of $5,000 for capital facilities. He stated that the Appellant’s operation fit “quite well” and he had at that time in the vicinity of 100 sheep and the operation looked good. He testified that the Appellant’s operation qualified for the grants under the Red Meat Program.

The Appellant’s teaching income, gross farming expenses, farm losses and farm profit for the years 1982 through 1989 follows:

	TEACHING GROSS FARM FARM			FARM	FARM
	INÇOMg,,,.	INCOME	EXPENSES LOSSES		PROFIT
1982	43,584	10,100	19,735	9,635
1983	43,856	12,484	24,531	12,048
1984	44,596	10,200	22,000	11,800
1985	49,676	10,531	21,498	10,966
1986	53,332	10,239	19,155	8,916
1987	53,018	11,423	17,360	5,931
1988	54,904	12,691	14,779	2,087
1989	57,363				290

B. Judge Bell’s analysis

Based on the facts as he found them, Judge Bell provided the following analysis:

I turn to the decision of Mr. Justice Dickson (as he then was) in the Moldowan case with respect both to the three classes of farmers that in his view were envisaged by the Income Tax Act and the distinguishing features of “chief source” of income. Those three classes set forth at page 5216 are as follows:

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 learned Justice said further,

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 spent, 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.

Counsel for the Respondent has admitted that the Appellant had, during the years in question, a reasonable expectation of profit thereby excluding him from class (3). Accordingly, this Court must determine whether the Appellant falls within class (1) or class (2) set out above. With respect to class (1), having regard to the Appellant’s full-time teaching job and the amount of income produced therefrom, I find that his chief source of income for the taxation years in question was not farming. The question then becomes whether his chief source of income was a combination of farming and some other source of income.

Mr. Justice Dickson, at page 5216 of the Moldowan decision, stated that

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....

“Sideline” is defined in The Shorter Oxford English Dictionary to mean,

“An auxiliary line of goods, trade, or occupation. Something subsidiary to the main subject....”

and is defined in The Concise Oxford Dictionary Thumb Index Edition to mean,

work etc. done in addition to one’s main activity.

Having regard to the evidence of the taxpayer with respect to the fact that

(i) he desired to return to a farming life,

(ii) he purchased farm land in the area where he had grown up,

(iii) he devoted substantially more time to his farming operation than he did to teaching (albeit the evidence in this regard was with respect to 1986, subsequent to the years under appeal),

(iv) he decided not to pursue advancement in the teaching profession,

(v) he committed, having reference to his resources, substantial capital to the farming endeavour,

(vi) his decision and actions effected a change in his mode and habit of work,

(vii) he established sheep raising goals and pursued those goals in spite of the interruption from disease and high interest rates, and

(viii) the direction in which the economics of the farming operation pointed,

I am satisfied that for this Appellant farming not only may reasonably have been expected to provide the centre of work routine but may already have done SO.

However, having regard to the fact that he devoted the full time required to his teaching profession and to the fact that the amount of income received therefrom was four (4) to five (5) times his gross farm income in six (6) of the seven (7) years (including the years under appeal) shown in the table above, I cannot conclude that his teaching was a “sideline employment”. Further, I cannot conclude, on the basis of these income figures, that the Appellant looked to farming for his livelihood as required under the first test. In my opinion, the Appellant cannot fall within class (1) for the taxation years in question. Therefore, applying the principles of the Moldowan case, the Appellant’s chief source of income was not, for the taxation years under appeal, a combination of farming and some other source of income.

Accordingly, these appeals are dismissed.

[Emphasis added.]

C. My analysis

So, as can be seen in the end, even though Judge Bell found favourably for Mr. Phillips on the many important factors to be considered, he placed extraordinary weight on the comparison of the dollar value of the incomes between Mr. Phillips’ teaching and his farming efforts. Mr. Phillips has argued that in the face of all the findings in his favour, it was an error to do so.

There is no dispute in the case that Dickson J.’s decision in Moldowan is the authority on the topic of farm losses. Indeed it is the only authority referred to by Judge Bell even though, as I understand it, a number of case authorities were produced in arguments presented by Mr. Phillips. In this appeal, between Mr. Phillips and the defendant, I have been referred to some 19 decisions on farm losses which go both ways. As Mr. Phillips put it in his argument “Seven [1] for — Twelve [2] against” his position.

The cases show that the law on the subject of farm losses is very clear thanks to Moldowan. But each case that has applied Justice Dickson’s reasoning has added little to it and, therefore, the differences in outcome have been essentially fact-driven. That is, the analysis in each case is an exercise of comparing the factors set forth in Moldowan, assigning weight to them depending on the whole of the evidence, and rendering a decision accordingly. [3] It is pretty obvious that in this type of situation no precedent is binding because no two facts situations are the same.

The argument before me, however, centred on one precedent which Mr. Wheeler argued to be very persuasive as being “on all fours” with Mr. Phillips’ case. Wilson dealt with a teacher who: grew up on a farm and always intended to be a farmer; taught as a source of income to finance the farm; spent more hours farming than teaching; taught between 8:30 a.m. and 5:00 p.m. when school was in session; did all the farm work; and was an active community member. In deciding Wilson [4] , Mr. Justice Dubé made the following findings which Mr. Wheeler has cited are all similar to those applying to Mr. Phillips:

The jurisprudence in the matter has provided six criteria which I find to be of assistance in the instant case: 1- The actual income from farming and other sources. 2- The time spent on each occupation. 3- The capital committed. 4- The reasonable expectations of a farming profit. 5- The change in occupational direction. 6- The ordinary mode and habit of work.

1. As we are dealing with the chief source of income, the first criteria, but not the only one, has to be a comparison between the taxpayer’s farm income and his income from other sources. On that score, the chief source of the plaintiffs income is clearly his teaching profession. In fact. during the whole period canvassed, the taxpayer has always claimed farm losses, except for the year 1993, and even for that year the employment income was greater than the farm income.

2. As to the time spent on each occupation, obviously the plaintiff spent more time on the farm as he lives there. However, except for weekends and holidays, his prime time is spent at school as a full-time teacher.

3. As to capital committed, none was required for his employment as a teacher and that criteria does not provide much assistance. The situation would be different in the case of a businessman running another business along with a farm in which case a comparison could be made between the capital invested in the farm business and the other businesses.

4. In the area of reasonable expectations of farming profit, there were certainly high hopes present in the plaintiffs mind and profit may become a reality once he retires and becomes a full-time farmer. But mere intention is not sufficient. During the 18 years canvassed, such expectations remained illusory as farm losses remained consistent except for the year 1993.

5. Neither can it be said that in his case there was a change in occupational direction at any time during the period. He started as a full-time teacher and still is a full-time teacher. The situation would most certainly be different if at any stage he had become a full-time farmer and merely a part-time teacher.

6. Finally, as to the plaintiffs ordinary mode and habit of work, although he lives on the farm, his daily schedule, except for weekends and holidays, is centered around his teaching profession. He has to drive to school, arriving there at 8:30 am. and returning home at 5:00 p.m. That is a fixed schedule which takes up his daily quality time. His work on the farm has to be adjusted accordingly.

Consequently, I must find that during the relevant taxation years, the plaintiffs chief source of income was not farming in combination with something else but teaching and possibly something else.

As might be expected, Mr. Phillips has successfully shown enough differences between Wilson and his case that Wilson becomes only an interesting and not binding authority. In particular, Justice Dubé’s fourth finding that Mr. Wilson’s “expectations remained illusory” is very different from the situation which applies for Mr. Phillips. As found by Judge Bell, “the direction in which the economics of the farming operation pointed”, which was upwards, clearly distinguishes the two fact patterns. In addition, while the fifth factor, “the change in occupational direction”, was absent in Mr. Wilson’s case, it as present in Mr. Phillips’. Judge Bell concluded that “he decided not to pursue advancement in the teaching profession” which is a finding that Mr. Phillips’ work energies were shifted from teaching to farming.

There are some other features of Justice Dubé’s reasoning in Wilson which I think I should comment upon. In his first paragraph, Justice Dubé states that “...the first criteria, but not the only one, has to be a comparison between the taxpayer’s farm income and his income from other sources”. This effort at ranking I think is unsupported by Moldowan and Morrissey which suggest that all factors should be considered and weight placed upon them with no predetermination as to which factor should take priority.

As to Justice Dubé’s second criteria, being how “prime time is spent”, Mr. Phillips argued effectively that Justice Dubé’s impression in what constitutes “prime time” is based on a very subjective analysis. Obviously, for Justice Dubé, a person’s prime time is during the day. As Mr. Phillips pointed out, what would it be for a night worker? Indeed, as he stated, within his support of the farm most of his work was done at night, being early in the morning starting at 4:00 a.m. and after the close of school at 5:00 p.m. His essential point was that, for him, this was his prime time since farming was his primary activity. I agree.

A similar comment can be made about Justice Dubé’s sixth point in that he considered that the time spent during school hours was Mr. Wilson’s “daily quality time”. Mr. Phillips effectively argued that what constitutes “quality time” again requires a subjective analysis, and that for him, the evidence shows that the time he spent farming was more important than the time he spent in school. I agree.

Because of the differences I have noted, and the comments I have made, I place no weight on Wilson in deciding the merit of Mr. Phillips’ appeal.

As addressed above, after making detailed findings of fact, Judge Bell made some critical evaluations. I accept those numbered (i) to (viii) as emphasized in the quote above, and also accept the additional statement that Judge Bell was satisfied that farming “may reasonably have been expected to provide the centre of work routine but may already have done so”. Each of these factors show that Judge Bell had a great deal of sympathy for Mr. Phillips’ argument that he should be allowed farm loss deductions as a class (1) farmer. However, Judge Bell’s decision went against Mr. Phillips on an evaluation of two points found in the last paragraph of his judgment. First, he placed strong weight on the difference of income between Mr. Phillips’ teaching as compared to his farming to conclude that teaching was not a “sideline employment”. And second, he said that on the basis of these income figures he could not find that Mr. Phillips looked to farming for his livelihood which he felt was a requirement under Moldowan.

The key question to be answered in assessing whether Judge Bell made an error is whether Mr. Phillips was a farmer who had a sideline job as a teacher or whether Mr. Phillips was a teacher who had a sideline job as a farmer. The differences in income between the two positions and the fact that Mr. Phillip’s teaching income was far greater than his farming income, are only factors which need to be taken into consideration with all the others of the case. Clearly Judge Bell felt that his decision should be driven by these two factors, but I think in doing so he made an error in not considering the weight of the whole of the favourable findings which he made.

On Judge Bell’s findings of fact, with which I completely agree having read his decision and having heard Mr. Phillips give evidence on appeal, I find that during the tax years under consideration the centre of Mr. Phillips’ psychological, physical, and professional activity was farming not teaching. I find, therefore, that teaching was only an essential support for Mr. Phillips’ successful farming efforts, and that, for tax purposes, Mr. Phillips was a farmer not a teacher.

Accordingly, I grant this appeal.

Appeal granted.