John Ralph Watts v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2271

Brulé J.T.C.C.:-This appeal is in respect of the deduction of farm losses incurred by the appellant during his 1990 taxation year in the amount of $26,548. The Minister of National Revenue (the ’’Minister”) disallowed the appellant’s claim by restricting his loss in accordance with the provisions of subsection 31(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.),

c. 1 (the "Act"). The appellant elected to have the informal procedure of the Tax Court of Canada Act apply to his appeal.

Facts

In so reassessing the appellant for the 1990 taxation year, the Minister made the following assumptions of fact:

- at all material times the appellant was a self-employed dental surgeon;

- in 1973 the appellant purchased a farm property located at R.R. #1 Drumbo, Ontario (the ’’property”), on which the appellant’s principal residence is located;

— the property consists of 17 acres of land, of which six acres are workable;

— the appellant buys and sells cattle and has reached 30 head, which is the maximum number that his barns will hold;

— prior to 1984, the appellant deducted restricted farm losses in computing his income;

— since 1984, the appellant has deducted the farm losses in full in computing his income;

— since the commencement of the appellant’s farming activity, the appellant has never reported a profit.

The appellant is 50 years of age and physically capable of working the farm. He spent approximately 35 hours per week farming and about 30-32 hours per week in his dental practice. This latter practice has been sold and the appellant is now a full-time farmer.

In addition to his working the farm, the appellant’s wife assisted to the extent of approximately 30 hours per week.

Evidence revealed that the appellant was born and raised on a farm, took extensive courses at the University of Guelph and consulted with agricultural representatives and neighbours respecting the farming operation. The appellant stated that the farm operation took precedence over the dental practice and when his presence was needed on the farm, patients were rescheduled or referred to an "on-call" emergency dentist. He vigorously marketed his product as other witnesses testified.

Issue

The sole issue is wheterh the appellant’s chief source of income was farming or a combination of farming and some other source of income in the 1990 taxation year. The Minister’s counsel conceded that there was a reasonable expectation of profit.

Analysis

While it appears that during the year in question, the appellant relied on his dental practice for his income this was not necessarily true. The appellant’s centre of work routine was the farm.

Counsel for the appellant referred to several cases but I do not consider necessary to refer to all of them.

As to the appellant’s chief source of income, a guideline was set out in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, wherein Dickson J. (as he then was), said at page 486 (C.T.C. 314, D.T.C. 5215):

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. 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 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.

The criteria set out by the Supreme Court of Canada in this decision can be said to include in relation to a source of income:

(i) time spent;

(ii) capital committed;

(iii) the profitability both actual and potential.

In accordance with the Federal Court of Appeal decision in The Queen v. Morrissey, [1989] 1 C.T.C. 235, 89 D.T.C. 5080, these factors should be assessed collectively and not disjunctively. This would indicate that the Court felt that all factors should be considered as a group and no one factor should determine the existence of a source of income.

In order to qualify as a chief source of income the taxpayer’s reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work are essential as was stated in Moldowan, supra.

As to a summary of the legal position this has been well expressed by Strayer J., in Mohl v. The Queen, [1989] 1 C.T.C. 425, 89 D.T.C. 5236 (F.C.T.D.). He said at page 428 (D.T.C. 5238-39):

It now appears clear from the Supreme Court decision in Moldowan as recently interpreted by the Federal Court of Appeal in Morrissey v. The Queen, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term “significantly profitable" because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a “sideline business"....

There are the general principles and it is necessary to apply these to the present case. Here the appellant had substantial income from the farm, some $64,000 in 1990, but expenses were higher. His dental practice income was over $100,000. More than $150,000 was spent on the farm in addition to the hours of work given by both the appellant’s wife and himself.

The importance of the appellant’s contribution is a strong indication of his commitment to farming. As mentioned by Joyal J. in the Hadley v. The Queen, [1985] 1 C.T.C. 62, 85 D.T.C. 5058 (F.C.T.D.), at page 68 (D.T.C. 5063):

One such factor which might predominate over the others is the amount of capital the plaintiff committed to his farming venture. If the plaintiff argues new direction, new orientation, or new commitments to bring himself within the first category defined in the Moldowan case, the quantum element alone of his capital investment provides the plaintiff with pretty good credibility. It gives force to the several arguments advanced by the plaintiffs counsel and overcomes the incredulity which an ex post facto analysis of actual performance attracts to the case.

To my mind, the application of the three above tests points towards the conclusion that farming does not constitute a sideline business to the appellant. Adopting the terminology used by Bowman J.T.C.C., in Hover v. M.N.R., [1993] 1 C.T.C. 2585, 93 D.T.C. 98 (T.C.C.), at page 2599 (D.T.C. 107), Dr. Watts was not ...merely testing the water. He had plunged fully and without reservation into the water’’.

The appeal is allowed, with costs to the appellant and the matter is returned to the Minister for reconsideration and reassessment.

Appeal allowed.