Dale Cockx v. Her Majesty the Queen, [1994] 1 CTC 2515, 94 DTC 1469

Brulé, J.T.C.C.:— These appeals involve the 1985, 1986 and 1987 taxation years of the appellant. The Minister of National Revenue ("Minister") allowed arming losses to the restricted amounts set out in 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 appellant has claimed his full losses for the years in question believing he was not in the farming business.

Issues

There are two issues in these appeals. The first is whether or not the taxpayer's operation was a commercial business or falls within the meaning of “farming” as defined in subsection 248(1) of the Act (see infra). The second is whether the appellant had a reasonable expectation of profit from his operation.

Facts

Mr. Cockx, the appellant, is a commodities broker employed by Refco Futures (Canada) Ltd. He has been in the commodities business since 1984. He deals primarily in agricultural products including livestock. In a normal day Mr. Cockx is in his office from 6:30 a.m. until 3:00 p.m. During the taxation years in question he had commission earnings from this business of $124,629.25, 159,546.49 and $168,581.93 respectively.

Mr. Cockx has also been running a cattle operation since the early 19705. In 1970 he bought a quarter section of land (160 acres) and began to feed cattle. In a typical year calves are bought in the middle of May. They are then fed over the summer months in order to fatten them for market. The cattle are usually sold in the middle to the end of August.

On average the cattle were kept by the taxpayer for around 120 days. During this time period the cattle would gain an average of 200 to 300 pounds. The periods the cattle were kept varied depending on a number of factors, including price. Nevertheless there was evidence given that it would be rare if the cattle were kept on the farm for more than one year.

Over the course of the operation of the farm Mr. Cockx usually sustained losses. For example in the period from 1978 to 1991 he experienced losses, at times substantial for every year except 1981 and 1983 when he showed small profits. There was also evidence that in 1981, 1982, 1985 and 1986 there were no sales of cattle at all. It appears that many of these problems with the operation were due to a lack of sufficient capitalization. It appears that Mr. Cockx frequently ran into financing problems with the bank.

The taxation years under appeal are 1985, 1986 and 1987. During these years the taxpayer incurred losses on the operation of $35,055, $26,435.87 and $26,166 respectively. The Minister has disallowed these losses by restricting them to the $5,000 limit as prescribed by subsection 31(1) of the Act.

Appellant’s position

The appellant is contending that the venture is a business and is not farming. He argues that the acquisition and sale of cattle is in the nature of trading and is therefore a business. Given that he had a reasonable expectation of profit for this business, the appellant submits that the losses should be fully deductible.

The basis of the appellant’s argument is that the term “raising of livestock” as found in the definition of farming is a long-term proposition. The traditional view of farming would encompass the breeding stage, right through to the sale to the market. This could involve several years of maintenance and care. The appellant suggests that the more rapid turnover practices he carried on takes him outside of a farming activity and into the realm of trading.

The appellant also argues that he had a reasonable expectation of profit. He submits that the respondent's assessment of him under section 31 is an admission that he does in fact have a reasonable expectation of profit. If the Minister had seriously intended to forward this argument it would have assessed him as a hobby farmer and disallowed all of his losses.

Furthermore, he suggests that his large investments in the operation are indicative of someone who expected to make a profit. On the whole, he contends that there was a business venture which was the purchase, feeding and sale of cattle. He had a reasonable expectation of profit for the activity and should therefore be allowed to deduct all ot his losses.

In support of this position counsel for the appellant directed the Court to the case of McLeod v. M.N.R., [1984] C.T.C. 2327, 84 D.T.C. 1297 (T.C.C.); [1990] 1 C.T.C. 433, 90 D.T.C. 6281 (F.C.T.D.). In a similar situation the Court found that the appellant was engaged in the business of farming and had a reasonable expectation of profit. This case also illustrated that the cattle business is a cyclical one.

Reference was also made to the case of Scharf's Cattle Co. v. M.N.R., [1971] Tax A.B.C. 913, 71 D.T.C. 627, which indicated that buying cattle and finishing them for sale was a chief source of income and the operation fell within the definition of farming in the Act.

Minister's position

The Minister suggests that the taxpayer was a farmer. The definition of farmer in section 248 of the Act is inclusive and not exclusive. The definition merely lists examples of what constitutes farming. Farming includes the raising of livestock. The concept of raising livestock includes the idea of contributing to the growth and maturity of a plant or animal. The appellant’s feeding of the calves over three or more months which led to substantial weight gains should be considered a contribution to their growth and maturity and therefore constitutes farming.

Furthermore the Minister suggests that there was never a reasonable expectation of profit for the operation. The Minister alleges that the appellant rarely showed a profit over the years. He also notes that the farm was severely undercapitalized which again exhibits the absence of a reasonable expectation of profit. He also notes that for two of the tax years in question (1985 and 1986) there were no sales of cattle at all. In order for there to be a reasonable expectation of profit there must be a source of income in the years in question, which was not the case for the taxpayer. For this proposition the Court was referred to the cases of Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, and Morrissey v. The Queen, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.).

Finally the Minister also argues that its assessment of the taxpayer under section 31 of the Act does not act as a barrier to raising the argument that there was not a reasonable expectation of profit.

Analysis

Other cases were presented to the Court by the respondent and where these are of significance to this case reference is made to them.

The issues in this case are similar to these which were found in Leblanc v. M.N.R., [1993] 2 C.T.C. 3054, 93 D.T.C. 1564 (T.C.C.). In that case the appellant ran a vineyard. As in the case at bar, the appellant argued that it was a business. The respondent suggested that it was a farm which was restricted to the farm loss provisions of section 31. The respondent also argued that there was no reasonable expectation of profit. The issues which were involved in Leblanc were set out at page 3057 (D.T.C. 1566) as follows:

1. The first question is whether the appellant, during the taxation years in question, was engaged in a farming activity or a manufacturing activity. If this Court finds that he was involved in the production of wine and therefore a manufacturing activity, section 31 of the Act does not apply.

2. However, if this Court finds that the appellant was in fact engaged in the farming business, the second issue is to determine whether the Minister has properly assessed the appellant in limiting his losses under subsection 31(1) of the Act.

This issue contains two parts:

(a) the first part is to ascertain whether there is a source of income, that is whether the appellant was carrying his farming activity with a reasonable expectation of profit;

and

(b) the second part is whether the appellant’s chief source of income was farming or a combination of farming and some other source of income during the 1983, 1984 and 1985 taxation years.

Here the issues are virtually identical with the exception that the parties agreed at some point that the appellant's chief source of income was not farming. Therefore the narrow issues are whether the cattle feeding operation was a farming activity and secondly whether the appellant was carrying on the activity with a reasonable expectation of profit.

As to this being a farming activity one must consider the provision in the statute.

Farming is defined under subsection 248(1) of the Act as follows:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

Does the appellant's operation come within this definition? Following Interpretation Bulletin IT-156R which, although not law, gives some guidance to the situation in the present case. Farming generally seems to be concerned with the element of an appreciable contribution to growth. It seems possible to envision a continuum where on the one hand there is the case where the calf is born on the taxpayer's farm, raised to full maturity over the span of several years, and is then sold to the market.

At the other end of the spectrum is the case of a middle man who buys fully mature cows, keeps them, and feeds them for a day or two and then sells them down the line. Clearly the “contribution to growth" made by the two individuals is uite different with the result that the first will be a farmer and the second a trader in livestock.

The distinction between these types of individuals is determined by an almost mathematical formula in the Interpretation Bulletin. In essence it stipulates that if the cattle are kept for over 60 days, or they gain at least 200 pounds, this will be considered to be a contribution to the growth and maturity of the cattle and will be held to be farming.

There has also been some judicial interpretation of the issue of where to place a farmer in this situation. The strongest case for the appellant is Schleissner v. M.N.R. (1966), 41 Tax A.B.C. 78, 66 D.T.C. 336. In that case the taxpayer bought cattle from outside sources and sold them for export. The evidence was that he held the cattle only long enough to test, inspect and prepare them for shipping. Generally the cattle did not stay on the farm for more than one month. The Court held that such activity could not be considered to be farming.

In the present case however, the appellant’s activity is much closer to "livestock raising". This is primarily due to the fact that he held the animals for a longer period of time. He made a much more appreciable contribution to the growth of the cattle than merely holding them for testing.

Therefore, even if the livestock is only held for a relatively short period of time, whether it be three months or six months, this will be sufficient to have contributed to the growth and maturity of the cattle. Here the taxpayer is engaged in a farming activity.

The second issue involved in these appeals is to determine whether or not the appellant had a reasonable expectation of profit from his operation.

A recent line of cases including Hover v. M.N.R., [1993] 1 C.T.C. 2585, 93 D.T.C. 98 (T.C.C.), First Farm Inc. v. Canada, 93 D.T.C. 1237 (T.C.C.), and Leblanc, supra, all suggested that the Minister conceded there was a reasonable expecta- tion of profit when the taxpayer was assessed under section 31 of the Act using the restricted farm loss provisions.

It having been said that there was a reasonable expectation of profit does this mean then that these appeals should be allowed? No, but at least the assessment awarding the section 31 losses are to be upheld. Such was decided in Epstein v. M.N.R., [1988] 1 C.T.C. 2152, 88 D.T.C. 1088 (T.C.C.). There the Court allowed that the Minister could raise the argument that there was no reasonable expectation of profit even though an assessment was made under section 31 of the Act allowing restricted loss provisions. The Court said that while argument could be made as to expectation of profit the taxpayer was entitled to the restricted farm losses. It appears that the Court may have upheld the assessments in recognition of the principle that the taxpayer cannot be forced to pay more tax as a result of an appeal. Even though it was held there was no reasonable expectation of profit there was still a restricted farm loss allowed.

The question of whether a reasonable expectation of profit exists is a factual one. There are many factors to be taken into consideration and these have been reiterated in many cases following the Supreme Court of Canada decision in Moldowan, supra. I do not intend to canvas these nor can the matter be determined on the subjective intention of the taxpayer.

The matter of reasonable expectation of profit involves whether such a source of income is the taxpayer's "chief source”. This, as the Moldowan case indicates, is both a relative and objective test. Applying such to this case it does not appear that the appellant would qualify.

Conclusion

The operation of the taxpayer falls within the category of “raising livestock” as provided in the definition of farming. He held the cattle for three to four months during which time they gained 200 to 300 pounds. As a result he clearly contributed to the growth and maturity of the animals. The time frame and weight gains are similar to other cases and to the Interpretation Bulletin which suggest that this is sufficient to constitute farming activity. The turnover of cattle through the operation was simply not done rapidly enough to constitute a feed and trade business as suggested by the taxpayer. As a result he was farming.

Once it is established that he was farming the matter is essentially resolved. There does not seem to be any dispute that the activity was his chief source of income. As a result he is only entitled to the restricted loss provisions of section

31. The Minister’s assessment of the taxpayer under this provision constitutes a concession that there is a reasonable expectation of profit, but this issue need not be canvassed by the Court in detail.

These appeals are dismissed, with costs to the respondent.

Appeals dismissed.