Raymond Binks v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2105

Christie, A.C.J.T.C. (orally):—The years under appeal are 1988, 1989, 1990, 1991. The issue is whether in computing his income for those years the appellant is entitled to deduct his full farming losses. In reassessing the appellant's liability to income tax for those years the Minister of National Revenue confined the deductions to the limited losses provided for under subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The notice of appeal reads:

I have filed a notice of objection with regard to the above reassessments. Our objection was based on the fact that I have been farming for only a few years, trying to build up a cattle herd which would enable me to become a full time farmer within a short period of time, Revenue Canada has reassessed me and restricted my farming losses for tne above years per section 31 of the Income Tax Act. I do not feel that they should have restricted any of the farming losses that I have had to date as they have not allowed me enough time to build up my herd to enable me to farm only. By September of this year I will be farming on a full time basis. If 1 have to pay to Revenue Canada what they have assessed me, I will not be able to farm full time as I will have to have off-farm income to come up with the taxes owing. Please accept this letter as my intent to pursue these restrictions in Court under the informal procedure as none of the assessments exceed $7,000.

Paragraphs 1 to 10 of the reply to the notice of appeal read:

1. He admits that the appellant was reassessed in order to restrict his farming losses as stated in the notice of appeal.

2. He denies the remainder of the facts as stated in the notice of appeal.

3. In computing income for the 1988, 1989, 1990 and 1991 taxation years, the appellant claimed net farm losses of $16,864.58, $14,490.10, $19,043.75 and $22,461.32 for the 1988, 1989, 1990 and 1991 taxation years respectively.

4. In reassessing the appellant for the 1988, 1989, 1990 and 1991 taxation years, the Minister of National Revenue (the "Minister") restricted the farm losses to $5,000, $6,470, $8,750 and $8,750 for the 1988, 1989, 1990 and 1991 taxation years respectively, in accordance with subsection 31(1) of the Income Tax Act (the "Act").

5. In reassessing the appellant for the 1988, 1989, 1990 and 1991 taxation years, the Minister reduced the farm expenses claimed by the appellant by $2,452, $3,249, $2,641 and $2,066 respectively prior to restricting the farm losses as described in the previous paragraph of this reply.

6. In reassessing the appellant for the 1989 taxation year, the Minister increased farm income claimed by the appellant by $800 for personal consumption of a steer.

7. In reassessing the appellant for the 1991 taxation year, the Minister reallocated interest income of $110 from farm revenue to interest income.

8. In so reassessing the appellant, the Minister made the following assumptions of fact:

(a) the facts as herein previously admitted;

(b) at all times the appellant was a full time employee of Alberta Government Telephones;

(c) the appellant earned the following amounts from Alberta Government Telephones during the 1988, 1989, 1990 and 1991 taxation years respectively:

TAXATION YEAR	INCOME
1988	$30,975.29
1989	$31,997.72
1990	$32,132.58
1991	$37,264.75

(d) the appellant reported farming income during the 1988, 1989, 1990 and 1991 taxation years as follows:

TAXATION	GROSS		NET
YEAR	INCOME	EXPENSES	LOSS
1988	$3,028.46	$19,893.04	$16,864.58
1989	$3,598.23	$18,088.33	$14,490.10
1990	$2,402.74	$21,446.49	$19,043.75
1991	$2,585.99	$25,047.31	$22,461.32

(e) subsequent to the audit completed by the Minister the farm income for the 1988, 1989, 1990 and 1991 taxation years was restated as follows:

TAXATION	GROSS		NET
YEAR	INCOME	EXPENSES	LOSS
1988	$3,028.46	$17,441.58	$14,412.58
1989	$4,398.23	$14,839.33	$10,441.10
1990	$2,402.74	$18,805.49	$16,402.75
1991	$2,475.99	$22,981.31	$20,505.32

(f) the appellant’s chief source of income during the 1988, 1989, 1990 and 1991 taxation years was neither farming nor a combination of farming and some other source of income.

9. The appellant did not have a reasonable expectation of profit from the farming activity in any of the 1988, 1989, 1990 and 1991 taxation years.

B. ISSUES TO BE DECIDED

10. The issues are

(a) whether the appellant's chief source of income was farming or a combination of farming and some other source of income during the 1988, 1989, 1990 and 1991 taxation years; and

(b) whether the appellant had a reasonable expectation of profit from the farming activity in the 1988, 1989, 1990 and 1991 taxation years.

The figures in paragraph 5 relate to alleged capital expenditures. As I understand it, there is no real dispute between the parties about this.

The appellant is 31 years of age. He was raised on a farm near Grande Prairie, Alberta, and he did all those things pertaining to farming that children raised on a farm usually do. I think the evidence makes it clear that farming is in his blood. Indeed, his great-grandfather operated the farm on which he grew up. The farm that he purchased, that will be referred to later, is six miles from where he was raised. He was a 4-H member for eight years. His wife Sandra also has a farming background.

After high school he worked at home for about a year. He then secured employment as a storeman with Alberta Government Telephones in Grande Prairie. His hours of work were 8:00 a.m. to 5:00 p.m., five days a week. His employment income was about $25,000 per year at the commencement, and in the order of $37,000 a year when he terminated the employment in October 1993 rather than accept a posting to Calgary. The appellant initiated a grievance about this and it is to be dealt with by an arbitration board.

In November 1987 the appellant bought a quarter section and moved there. Of the 160 acres, 130 were in a condition to be cultivated. There was a house, small barn and some sheds on the property. They were rundown and in need of repair. The yard was described as a mess. He set about to rectify these deficiencies.

In 1986 the appellant reported farming income of $743, farming expenses of $2,322, for a net loss of $1,579. In 1987 ne reported farming income of $2,124, farming expenses of $4,659, for a net loss of $2,535. This relates to farming conducted by the appellant at his parents' farm. I do not attach any special import to these figures. It strikes me that 1988 is the significant starting point for the purpose of I these appeals.

Commencing in 1988 the appellant planted crops, but the yields were mostly used as cattle feed. He estimated that the time devoted to farming in percentages during the years under review was, 1988, 40; 1989, 50; 1990, 60; 1991, 65. The estimated time in percentages devoted to Alberta Government Telephones Ltd. during those years was, 60, 50, 40, 35 respectively.

The appellant placed in evidence a number of documents. First is an income analysis for the appellant from 1986 to 1992. The figures there are in line with the figures for 1988 to 1991 in paragraphs 8(c) and (a) of the reply to the notice of appeal, except that in the analysis the figure $3,198 should, I believe, be $3,598.

Second is a Schedule of Capital Invested. It reads:

RAYMOND BINKS

SCHEDULE OF CAPITAL INVESTED

CAPITAL ASSETS 1986 1987 1988 1989 1990 1991 Total

Land and buildings
NE 26-72-4-W6	— $43,000 — — — — $43,000
Other depreciable
	$7,720	—	$8,152 $2,178 $8,145 $2,066 $16,731
property
	$7,720 $43,000 $8,152 $2,178 $8,145 $2,066 $59,731

It will be seen that the total is $59,731, which includes $43,000 for land and buildings in 1987.

Third is an inventory of animals during the period 1988 to 1994. The figure for 1994 is a projected figure. The document reads:

RAYMOND BINKS

INVENTORY

1988 1989 1990 1991 1992 1993 1994

Cows	12	15	16	18	18	20	29
Calves	—	5	5	16	22	25	35
Bulls	2	2	3	2	2	3	1
Horses	4	_4	4		_‘l	4
				.9.			_.5.
	8	26	28	30	46	52	70
					—
				,
*Projected inventory

The actual increase in cows from 1988 to 1993 is 12 to 20. The figure for 1994 is 29. Calves increased from five in 1989 to 25 in 1993. The figure for 1994 is 35. Bulls increased from two in 1988 to 3 in 1993. The figure for 1994 is one. Horses were four from 1988 to 1993. The figure for 1994 is five.

Fourth is a farm summary. It reads:

It includes total farming income and expenses. The exhibit shows net losses before CCA, interest and mandatory inventory adjustments to be: 1988, $11,739; 1989, $10,256; 1990, $15,559; 1991, $17,702. The document goes on to include CCA, interest and MIA, and the resulting loss figures for the years under review are the same as indicated in paragraph 8(d) of the reply to notice of appeal. The net losses before CCA, interest and MIA might be usefully compared to the net loss figures in paragraph 8(e) of the reply to the notice of appeal. These figures were the result of a Revenue Canada audit regarding the years under appeal. They are, in 1988, $14,413; 1989, $10,441; 1990, $16,403; 1991, $20,505.

Fifth is a document showing the losses for 1993 that are known but not yet reported. The figure is $6,436. The projected loss for 1994 is $2,960. A profit of $6,580 is projected for 1995.

Finally, to conclude the review of the evidence adduced, I refer to the appellant having succeeded, after previous unsuccessful attempts, in obtaining a permit for 1994 from Alberta Agriculture Food and Rural Development relating to the Kleskun Lake Grazing Reserve. The permit covers 25 cows and one bull.

I will now refer to some applicable law. The onus is on the appellant to show that the reassessments are in error. This can be established on a preponderance of probabilities. Where the onus lies has been settled by numerous authorities binding on this Court. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Logging Co. v. The King, [1925] S.C.R. 45, [1917-25] C.T.C. 198, 52 D.T.C. 1209, and Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182. The four latest pronouncements by the Federal Court of Appeal regarding the deductibility of farming losses are: Morrisseys Canada, [1989] 1 C.T.C. 235, 89 D.T.C. 5080; Connell v. M.N.R., [1992] 1 C.T.C. 182, 92 D.T.C. 6134; Poirier Estate v. Canada, [1992] 2 C.T.C. 9, 92 D.T.C. 6335; Timpson v. M.N.R., [1993] 2 C.T.C. 55, 93 D.T.C. 5281.

In Morrissey, supra, as in the appeals at hand, the taxpayer sought to deduct full farming losses in computing his income for the years under appeal. In reassessing the Minister confined the deductions to the limited amounts provided for under subsection 31(1) of the Act. That kind of reassessment is tantamount to an admission that the taxpayer was farming with a reasonable expectation of profit. The same applies to the case at hand. Mahoney, J.A., speaking for the majority, said at page 242 (D.T.C. 5084):

On a proper application of the test propounded in Mo I do wan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, when, as here, it is found that profitability is improbable notwithstanding all the time and capital a taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer’s income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

In Connell, supra, Marceau, J.A., speaking for the Court, said at page 242 (D.T.C. 6134):

As we understand the analysis of subsection 31(1) of the Income Tax Act. . .made by Mr. Justice Dickson. . .in the now famous Moldowan case, supra, once it is established that farming is for the taxpayer a business and not merely a hobby, that he is engaged in farming as an activity from which he can derive income and eventually profit, the question of whether farming is, in his case, not only a source of income or a “sideline” source of income, but a chief source of income either alone or in “combination” with “some other source”, is a question of fact that must be resolved having regard to all the surrounding circumstances.

In Poirier, supra, MacGuigan, J.A., also speaking for the Court, cited a passage from the reasons for judgment of the trial judge. He then went on at page 10 (D.T.C. 6336):

The learned judge here seems to suggest that farming income can be combined with, in the sense of supplemented by, another source of income in order to constitute a chief source of income. It is clear from Moldowan, supra. . .that the word “combination” in subsection 31(1) is not to be read in that sense. It is also now clear that what is required for a determination that farming is a chief source of income is a favourable comparison of farming with the other source of income as to such matters as time spent, capital committed, and the profitability, both actual and potential: The Queen v. Connell, [1988] 1 C.T.C. 247, 88 D.T.C. 6166 (F.C.T.D.). . .approved on that point by this Court . . . January 16, 1992.

Later he added this:

It must be remembered that it is the cumulative impact of the various factors for determination that governs, not any one factor taken disjunctively: Morrissey, supra. Timpson, supra, simply applies and follows Poirier. I also refer to what Mr. Justice Strayer of the Federal Court-Trial Division, said in Mohl v. Canada, [1989] 1 C.T.C. 425, 89 D.T.C. 5236, at page 428 (D.T.C. 5238-39):

It now appears clear from the Supreme Court decision in Moldowan, supra, as recently interpreted by the Federal Court of Appeal in Canada v. Morrissey, 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" to which the restriction on losses will apply in accordance with subsection 31(1).

On the matter of probability of profitability, the appellant, as already stated, purchased his quarter section in November, 1987. During the years 1988 to 1992 the losses incurred in those years, as a percentage of gross farming income, were: 1988, 387; 1989, 320; 1990, 647; 1991, 684; 1992, 21. In 1992 of the total farm income of $14,074, $12,440 related to the sale of cattle. The farming losses figures used in these calculations are those of the appellant, that is before CCA, interest and MIA.

A comparison of gross farming income to employment income during the same period shows that in 1988 gross farming income was ten per cent of employment income. The percentages for the other years are: 1989, 10; 1990, 7.4; 1991, 7; 1992, 38.

While there is a projected profit of $6,580 in 1995, this strikes me in the light of what has gone before as being more in the category of subjective hope rather than objective determination, and it is the latter that governs.

In Poirier, supra, the time spent factor was "rough equality". The appellant's figures over the period 1988 to 1991 might be said to fall within this description but, if not, it should be borne in mind that the percentages stated by the appellant were given without any indication of how they were arrived at. Generally speaking, when a taxpayer is engaged in what is commonly known as full-time employment, there must, in the absence of other very persuasive evidence, be some reasonable limitation to what are acceptable allegations regarding time spent in unrelated commercial activity.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, a decision of the Supreme Court of Canada, the taxpayer who is entitled to deduct full farming losses was described in these terms at page 487 (C.T.C. 315, D.T.C. 5216):

. . .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 from the limitation of subsection 13(1) [which is now 31(1)] in those years in which he sustains a farming loss.

Having regard to the whole of the evidence and applying the “cumulative impact" approach prescribed by the Federal Court of Appeal in Poirier, supra, I can only conclude that profitability was improbable at any time relevant to these appeals. I make special mention of the relationship between farming income and expenses, farming income and employment income, and the solid wall of losses or anticipated losses running from 1988 to 1994 inclusive.

My conclusion is that the appellant is not entitled to full farming losses in the years under appeal. judgment shall issue accordingly.

Appeal dismissed.