Frederick Day v. Her Majesty the Queen, [1993] 2 CTC 2837, 93 DTC 1231

Rowe, D.T.C.C.J.:—The appellant appealed from reassessments of income tax with regard to his 1985, 1986 and 1987 taxation years. The respondent reassessed on the basis that the appellant was entitled only to restricted farming losses pursuant to 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's position is that he is entitled to deduct the full extent of his losses incurred in his farming operation on the basis that farming was a "chief source of income".

The appellant testified he was born in Edmonton in 1916 and during his high school years once spent an entire year on his grandfather's farm near Athabasca, north of Edmonton. He developed an interest in livestock and while attending the University of Alberta studied genetics while pursuing his B. Sc. which he obtained in 1937. He went on to study medicine, graduating in 1941 and then served with the Canadian Army for the next three and one half years. Returning to Canada, he set up a medical practice in Nordegg, Alberta and after two years went to England where he studied for two years to obtain his orthopaedic specialty. Back in Edmonton, he began to practise his specialty and served for twenty-two years as chief of staff at two major Edmonton hospitals. In 1954, while out hunting near Lloydminster on the Alberta- Saskatchewan border, he won some money at a poker game and the next day attended an auction where his friend was the auctioneer. Each time there was a lull in the bidding, the auctioneer would bang the gavel and announce: "Sold to Dr. Day”. The appellant stated that at the end of the auction he realized he had purchased 100 head of cattle. The morning after — an apt phrase — he drove around with a local realtor to find some land upon which to put the cattle. He bought a section of land at Hughenden, about 100 miles south of Lloydminster. He was fortunate in having as a patient a man who was able to move onto the ranch and look after the livestock. The appellant stated the enterprise was profitable for several years and he sold the ranch to his foreman. He moved his cattle to some land north of Edmonton and ran a 150-200 head feeder operation for three years. He purchased a section of land at Carvel Corner, 20 miles west of Edmonton, and hired staff to manage the 150-head cattle operation while he and his family continued to live in Edmonton where he was carrying on a busy medical practice. In 1962, he purchased a 320 acre farm at Winterburn, close to Edmonton, and, with an additional leased section, he and his family lived on it and the entire family began to participate in the farming venture as a way of life. The appellant stated he took a short holiday once a year, played some golf, and spent the rest of his time practising medicine and raising commercial beef cattle. In 1965, he decided to switch to purebred Hereford cattle and later to purebred Charolais. Atone point, he left medicine for two years and served as the president of an exploration and gold mining company. He had also invested in real estate and owned seven apartments which provided a good return on his investment and he built a large house in Edmonton. However, his time and energy turned to the purebred cattle operation. In his opinion, it was necessary to develop outstanding bulls as only the very top bulls commanded high prices on the semen market. At the Winterburn ranch, he eventually had 44 bulls — the largest individually owned production unit in Canada — and sold their semen all over the world. One Charolais bull — Canadian Meridian — produced $300,000 in sales of semen. In 1972, he left his medical practice to devote full time to the exotic cattle business. He formed and owned 51 per cent of Canadian Stock Breeders Service Ltd., which in one year had gross sales of $1,600,000, employed up to twenty persons in the laboratory and several salesmen stationed in various parts of the world. He also became chairman and principal owner of Canadian Livestock Imports and Exports Ltd. Sponsored by a program of the government of the Province of Alberta, the appellant sold planeloads of cattle to Korea and developed a large export trade with Mexico, largely on the basis of a personal relationship established by the appellant with President Ecchevaria. Canadian Livestock Imports and Exports Ltd. had offices in Brazil, Peru, Venezuela, Costa Rica, Guatemala, Mexico, most states in the United States, Australia, New Zealand, France, Ireland and England. For two years, the appellant devoted all of his talents to this enterprise and he travelled between six and eight months a year pursuing the business interests of the company. The appellant was responsible for the first importation of Canadian beef cattle into Brazil and one of his bulls won the supreme championship along with a prize equivalent to $46,000 Canadian. The government of Canada gave the appellant a grant in the sum of $135,000 to research certain aspects of artificial insemination. He formed Canadian Bovine Transplants Ltd. and served as president. The research project involved collecting as many as fifteen eggs in a Petrie dish and then bathing them in sperm. Once fertilized, an egg would then be transplanted into the uterus of a surrogate cow. At the Winterburn ranch, where the research was carried out, there was a complete veterinary facility staffed by four veterinarians and three scientists. At the height of the exotic cattle market, two Maine Anjou cows were sold for $85,000. Unfortunately, in 1975, the bubble burst in the exotic cattle business and he owed a substantial amount of money to the bank and returned to the practice of medicine. Prior to 1975, the well- known entertainer, Danny Thomas, had offered the appellant more than one million dollars for the Stock Breeders Service corporation but the appellant had declined to accept on the basis the company was worth more. Over the years, the appellant stated that he made a lot of money in areas other than medicine. A venture in the oil business produced a profit of $250,000 which was followed later by seventeen consecutive dry holes but a gold mine property and real estate around Edmonton yielded substantial profits upon which income tax was paid. However, tax returns were retained by the appellant for a period of ten years and were then discarded.

Filed as Exhibits A-3 and A-4 were a book of photographs and index depicting many of the achievements of the appellant over the years in the cattle industry. One bull, Superol, won multiple championships but he was small in stature and when a dwarfism scare crept into the Canadian market, his offspring were suddenly suspect and almost the entire herd had to be sold as beef. As a result, the appellant had to begin again with new cows and a larger bull, an example of the vagaries of the cattle business. At times the appellant wrote articles on various topics which were published in trade journals. He invented a device for storing semen known as the Rannoch Cassette or Universal Straw Gun and it sold worldwide and today still produces royalties to the appellant. The bull, Canadian Meridian, set records for the entire industry which still stand and the breeding problems were reduced to nil as 39 out of 39 births from his semen were unassisted live births. At times, the Winterburn farm was used to conduct seminars and over the course of four or five years, 350 technicians were trained at that facility by the appellant and his professional staff. The appellant’s travels took him to many locations around the world and he dealt face to face with government leaders in Mexico and Nigeria to promote the Canadian cattle industry. While he owned the Winterburn property, the limited companies in which he was involved located facilities there and also rented an entire floor of an office building in Edmonton. In 1975, the appellant moved to Vancouver Island. His son, who had been in third year medicine at University, had been in a motor vehicle accident which left a permanent disability and his own health was poor. He began to practise orthopaedic surgery in Victoria and brought in another specialist to assist. Later, he moved to Sidney and practised until 1990, when he retired from medicine.

About 1978 he purchased 9.5 acres with a small house and barn at Deep Cove and installed 36,000 square feet of concrete to avoid problems with the cattle having to stand and walk around in mud. He built four large barns for cattle and to store hay together with a feed lot featuring a poured concrete floor. He had an agreement to use 22 adjoining acres with an option to purchase so that the entire operation was comprised of 31.5 acres. In order to pay off some debts in Edmonton and to finance his new venture at Sidney, he borrowed $214,000 from the Royal Bank, secured by a section 88 loan, backed by the federal government. In 1980, Canadian Meridian, a champion bull was killed by his own offspring and the appellant collected $50,000 in insurance proceeds. Later, the valuable semen from this bull was being transported by vehicle when it overturned and the semen was destroyed. Again, the appellant was paid the sum of $50,000 from insurance proceeds. In moving to Vancouver Island, the appellant brought with him ten mediocre cows, some of which were polled, i.e., genetically designed so that they are born without horns to reduce probability harm to other animals and to farm operators. Buyers in Australia and New Zealand wanted to purchase only polled animals. While Canadian Meridian was alive, the breeding results were excellent and a world record was obtained by one of his progeny for the most weight gain. The appellant was able to sell a one-quarter interest in this animal for $18,000 and another one-quarter interest for $20,000 to a New Zealand farmer. Some heifers were also sold at good prices. The appellant's plan had been to build a herd from Canadian Meridian, holding on to the best of the cattle, and he built up a herd of 90 while shipping out the lesser quality animals. His cattle were at the top of the growth list within British Columbia and he won prizes at cattle shows in 1980 through 1982. However, he was paying interest at rates which climbed to 22 per cent per annum. He decided to turn to “in depth polling”, (having nothing whatsoever to do with the fine work done by the Gallup or Decima Research organizations) a process of perfecting the transmission of the polled or non-horned gene and in order to do so had to'sacrifice the expansion of the herd. In 1990, he decided to produce the best bulls in the world and, following up after considerable research, obtained 40 doses of semen from a star-quality bull, appropriately named Juice. The appellant bred his entire herd of cows to Juice. However, the semen was of poor quality in that the cows did not all conceive. In those cases where conception occurred the offspring were of prize-winning calibre. The appellant currently owns a 365-day old heifer who weighed in at 1400 pounds and she was bred to a new clean- polled bull of prestigious ancestry, purchased in 1992. The appellant stated that the progeny of this union will be the issue of national champions and sales at high prices should follow. The costs of advertising in trade publications can exceed $7,000 per year per publication. He is monitoring his calf growth for another six months and then the semen will be sold as will four of the bulls. The four heifers will be bred and the herd will be increased. The Royal Bank loan, initially $214,000 has been reduced to $53,000.

The appellant stated he quit practising medicine in 1992 owing to cataracts and other health problems. He has hardly been off the farm for the past ten years. But, he stated he has always spent more time farming than practising medicine. The revenue projections for 1992 were not achieved and a loss of about $48,000 was sustained. The calves that were sold were from a good bull, but not a great one, two barns blew down and the loss was only partly covered by insurance. He is counting on a new bull to attract buyers from across Canada and also is looking into producing revenue from some pear trees on the property. He does his own welding, repairs, much of the veterinary medicine required and relies as much as possible on his own skills. Since retiring as a physician, the appellant receives CPP and OAS and his wife is employed. He expects the farm will show a profit in 1994. Over the years, medicine did not fully occupy his time or thoughts as it was pretty routine compared with farming which was a continual challenge.

In cross-examination, the appellant stated that his son's injuries and resulting disability, together with his own deteriorating health, were major factors motivating the move from Edmonton to Sidney. The current farm is 9.5 acres and an additional 22 acres is leased from the University of Victoria and while he no longer has an option to buy that property he understands that he has a right of first refusal. In 1984 his herd was 90 in number but he began selling off cattle and reduced the herd to 15 in an effort to reduce operating expenses. The appellant agreed the schedule of Farm Income and Expenses, filed as Exhibit R-1 was accurate. As for the volatility inherent in the exotic cattle market, the appellant explained it is now more stable but the price per animal has been reduced. He does not use artificial insemination procedures in breeding and the current thinking is to have 15 to 20 cows bred to one new bull, Mr. President, that was acquired in May, 1991. The appellant agreed that his income from the medical practice for the 1985 taxation year should be increased by $21,000 as the accountant had deducted from that source of revenue the sum of $21,000 paid in alimony. Also, the sum of $22,000 paid in interest on farm loans was charged against the medical practice. The appellant indicated that he had to spend some time over the past two years attempting to obtain subdivision approval on some land he holds together with his ex-wife and family in Edmonton.

In response to questions from the Court, the appellant stated that he projects revenue based on 12-15 calves per year, of which 7 bulls would sell at $4,000 apiece and 5 heifers at $2,000 for total revenue of $38,000. In addition, he expects to have some bulls that would sell for $10,000 as no one else has bred championship bulls in the polled variety. In addition, if the weaning weights of the offspring of Mr. President are as high as anticipated then the semen will be marketed.

Leroy Rollins was qualified as an expert on the cattle industry as it pertained to exotic breeds and was permitted to give opinion evidence. Filed as Exhibits A-6 and A-7 were his affidavits setting forth his experience in the industry. Mr. Rollins testified that he had owned several supermarkets but became interested in raising cattle. He attended various seminars and read the relevant literature and brought in some Charolais cattle and bred one to a Hereford. The calves were heavier by a large margin and in 1970 became involved in a project using ova and fertilization by sperm which produced two live births. In 1971 he moved some Simmental bull to the appellant's farm at Winterburn and began to work along with the appellant in various projects. He stated that the exotic cattle industry requires expensive advertising in appropriate publications and that accurate data must be kept concerning progeny. It took him three years to show a profit on his investment of the two bulls. However, that profit was produced in 1971 and the cattle business was much better at that time. However, he has known the appellant since 1971 and expressed the opinion that Dr. Day proceeded along lines of industry practice in pursuit of breeding outstanding animals.

In cross-examination, Mr. Rollins stated he scaled down his own cattle business in 1974 and sold out in 1983. He did not offer any opinion on the profitability of the appellant's farm prior to 1993 or on the present state of the appellant’s operations.

Counsel for the appellant, after rounding up the usual herd of authorities, submitted that Dr. Day was clearly an individual of outstanding ability and proven track record in the exotic cattle industry. He had made money in the past and would do so again and throughout the years under appeal he was first and foremost a farmer with the medical practice as a secondary pursuit.

Counsel for the respondent countered by pointing to a string of unbroken losses from 1985 through to 1993 and that the recent jurisprudence required a finding that the appellant's farm income was not and could not be considered to be a chief source of income.

The seminal case in the area of farm losses is the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. Then, the Federal Court of Appeal in Morrissey v. Canada, [1989] 1 C.T.C. 235, 89 D.T.C. 5080, reconsidered the issue. As a consequence, Strayer, J. of the Federal Court-Trial Division, in Mohl v. Canada, [1989] 1 C.T.C. 425, 89 D.T.C. 5236 applied the resulting methodology and the extensive analysis done by him at trial in Morrissey to deal with the issue and arrive at the conclusion the taxpayer had produced nothing more than a sideline business. The Federal Court of Appeal then considered full farming losses in the case of Poirier Estate v. Canada, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 and most recent, the case of Timpson v. M.N.R., [1993] 2 C.T.C. 55, 93 D.T.C. 5281.

In Moldowan, at pages 487-88 (C.T.C. 315, D.T.C. 5216) of the judgment of Dickson, J. (as he then was) His Lordship stated:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(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 carries 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 carries 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 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 or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of chief source" to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

In Morrissey, the taxpayer like the appellant in this appeal, had been granted the concession by the respondent that he was farming with a reasonable expectation of profit. As to the suitability of the taxpayer falling into the category of a class 1 farmer, Mahoney, J. at page 242 (D.T.C. 5084) stated:

On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the 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 Mohl, at page 428 (D.T.C. 5238-39), Strayer, J. stated:

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

The decision of the Federal Court of Appeal in Timpson was delivered by MacGuigan, J.A. and the entire judgment is as follows:

The leading case with respect to the deduction of farming losses from income from another source is Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, per Dickson, J. as he then was.

At the time the trial judge decided this case in 1987, the implications of the Moldowan test had not been so fully spelled out by this Court as they have been since in The Queen v. Morrissey, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.), Gordon v. The Queen, [1989] 2 C.T.C. 277, 89 D.T.C. 5481 (F.C.A.), The Queen v. Roney, [1991] 1 C.T.C. 280, 91 D.T.C. 5148 (F.C.A.), Connell v. The Queen, [1992] 1 C.T.C. 182, 92 D.T.C. 6134, The Queen v. Poirier, [1992] 2 C.T.C. 9, 92 D.T.C. 6335 (F.C.A.).

The trial judge limited his examination solely to the question of the taxpayer's reasonable expectation of profit (Appeal Book at page 147):

I am satisfied on the evidence here that the plaintiff had a “reasonable expectation of profit". Most assuredly this profit did not arise as soon as the plaintiff predicted but the market, the high interest rates and the time required to gain credibility all conspired to delay what he had every right to expect—a profit.

But this consideration gets, at best, only to a finding that farming is a "source of income,” not that it is "a chief source of income,” as required by subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

We find this case to be on all fours with Poirier, supra, where we said at page 10 (D.T.C. 6336):

It is . . . 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 sources 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.

In our view, the trial judge would have come to the same conclusion in the case at bar if he had applied the correct legal test.

The appeal should therefore be allowed with costs both here and in the Trial Division, the decision of the trial judge of May 12, 1987, set aside, and the reassessments for the 1977 and 1978 taxation years restored.

The schedule of the appellant's farming income and expenses and gross and net income from his medical practice for the years 1985 to 1990, inclusive, is as follows:

[Chart not reproduced.]

As noted earlier, the appellant's net professional income for the 1985 taxation year was actually in excess of $100,000 had proper accounting methods been used. It is apparent that for the years under appeal the disparity between his farm income and professional income is extremely large. The farm was still losing money in 1992 and the expected revenue for future years based on the testimony of the appellant would yield little, if any, profit. There is no doubt that the appellant is a man of outstanding accomplishments and he has achieved great success in his medical career and in various business ventures. However, despite the time, energy, money and effort put into those other fields the appellant, in his heart, remained a farmer specializing in exotic cattle breeding. There is no doubt that he always was able to devote a large amount of his time to farming and even left the practice of medicine to concentrate on exporting cattle. However, during the years under appeal, in order to generate income, it was necessary for him to establish a medical practice, relocate that practice to Sidney from Victoria, and to continue to devote sufficient time to that endeavour in order to earn gross revenues in excess of $155,000 in each of the years under appeal and for the two years following. The amount of capital committed to the farming operation would have been greater than that of the medical practice, and the two vocations were more or less equal in time spent. However, in terms of profitability, actual and potential, farming was clearly in a subordinate position to the professional occupation. The potential profitability was not there in the years under appeal and may still not be there as at 1994. As MacGuigan, J.A. stated in Poirier at page 10 (D.T.C. 6336):

It must be remembered that it is the cumulative impact of the various factors for determination that governs, not any one factor taken disjunctively.

The appellant is searching for the perfect bull to match up to some perfect cows and hopes the world will beat a path to his door. He may well be right, but in the years in issue, the potential for that kind of profitability to boost him into the category of a Class 1 farmer did not exist.

The litigation in this area could be reduced practically to zero if Parliament would only adjust the allowable amount of restricted farming losses to keep pace with inflation. A great deal has changed since that measure was introduced in 1951 and $5,000 in 1987 had only a fraction of the purchasing power of its 1951 counterpart. The appellant is an individual who has made substantial, permanent contributions to the cattle industry in Canada and has provided research and innovations to assist cattle ranchers throughout the world. Appellants keep looking for a solution to be provided by the judiciary and that is not possible. The Federal Court of Appeal has made it clear in Timpson by reiterating the points spelled out in earlier cases.

The appellant has been unable to demonstrate the respondent's reassessments are incorrect and the appeals are dismissed.

Appeals dismissed.