Ed Wurtz v. Her Majesty the Queen, [1992] 2 CTC 2602, 92 DTC 2292

Rowe, D.T.C.C.J.:—The appellant appealed from reassessments of income tax with regard to his 1986, 1987 and 1988 taxation years. In reassessing the appellant the Minister of National Revenue restricted the appellants farming losses in accordance with 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 appellants 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 is 63 years of age and is a married man living at Vanderhoof, B.C., about 100 kilometres west of Prince George. He was born near Saskatoon, Saskatchewan, and raised on a farm — a quarter section — used as a mixed farm operation producing hay, grain and raising cattle. He left home at age 16 and went to Ontario for employment cutting pulpwood but spent the summers in Alberta working on grain farms until age 20. In his early 20s he worked on the construction of a dam near Vanderhoof and then decided to return to farming. He bought a five acre farm near Aldergrove, B.C. and rented an additional ten acres. He began raising cattle and built up a herd of 80 head. During the preceding years he had worked as a logger, on road construction, fabricating hot water tanks and painting. He sold the Aldergrove farm in 1974 and intended to leave the painting business. As a result, he purchased a 960 acre farm in Vanderhoof for $105,000, borrowing money from a bank and obtaining additional bridge financing until the Aldergrove property was sold. The new farm had about 100 arable acres, with some Buildings and fences but with no livestock or machinery. The non-arable portion was mainly sticks, stumps and areas of second-growth bush. In 1977, in order to raise some capital for improvements, he sold one quarter section and the remaining 800 acres was maintained thereafter, including the years under appeal. The appellant rebuilt a barn, added fencing and cleared the land using borrowed money to hire equipment and labour. He also constructed granaries and sheds. The land, not having any irrigation, required the installation of dugouts. The appellant began growing hay and ran a beef cattle operation with some purebred Hereford and Charolais as well as a breed from Italy, Chianina. He progressed to having a herd of 300, of which 100 were purebred.

For the first few years after moving to Vanderhoof he was able to avoid the painting business but at the end of the 1970s he found he had to return to earning income from that source in the face of dropping beef prices. In late 1981 rising interest rates led to his decision to sell off nearly all the cattle and from the proceeds to pay off debts on farm equipment. Once the cattle were sold, the appellant decided to turn to a hay and grain operation and reviewed his plans with the local District Agriculturist. He also obtained advice from other farmers in the area and, together with his wife, did research by reading articles in farm magazines. The appellant was aware that with 700 arable acres his farm was larger than average and his soil was of average quality for that area. For the years 1982 until 1988, his farming operation was fundamentally the same, involving production of 100 acres of grain and 400 to 500 acres of hay. He retained 10 to 12 head of cattle and also provided pasture on a contract basis for 100 head of cattle owned by others. The pasturing contract brought in revenue for about six months per year based on a price of $10 per head per month. The grain crops were mainly barley and the hay was alfalfa. Unfortunately, the price of barley dropped from $150 per tonne to less than $75 and the hay had a price range between $20 and $120 per ton. Part of the reason for the price fluctuation was that the hay was sold locally and during a good year there was an adequate supply resulting in a decrease in price. In undertaking his revenue projections he used hay prices of $75 per ton and a yield of one to two tons per acre. Barley revenue was projected at $100 per tonne based on a yield of between one and two tonnes per acre and the appellant was satisfied these numbers were reasonable for the area and in accordance with the advice he had received and from his own investigations. The appellant used the Imperial ton and metric tonne as interchangeable measurements. By adding in the revenue from contract pasturing the appellant anticipated gross farm income in the range from $52,500 to $95,000 per year. At one ton per acre the hay would produce $37,500 and at two tons, $75,000. Barley at an average yield would bring in between $10,000 and $15,000. The costs of production should have been between $20,000 and $25,000 leaving a substantial profit. However, the appellant did not make a profit and consistently lost money.

During the period under appeal there was not enough rain early in the growing season and when the precipitation finally did arrive it was during the harvesting period which affected the quality. He did not want to borrow money although it was readily available and he had good equipment of the type necessary for the running of the farm operation. In order to produce income the appellant returned to the painting business which he estimated occupied about 800 hours per year of his time compared to three times that amount spent on the farming business. The painting business was a mixture of commercial and residential with some contracts sufficiently large to occupy large blocks of time. Throughout he wanted to be able to quit painting as his lungs were becoming "leaded up" and he was receiving advice from his physician to get out of that trade. His wife was running an upholstery business which was the subject of income tax filing showing him to be a 50-50 partner without any net income flowing therefrom. At one point he also became involved in a logging business with a partner and bought a skidder and loader. Although that enterprise grossed $180,000 a year it produced no profit and after two years he ceased that operation. He also had acquired two rental properties from a bank on a re-possession, one of which was done to accommodate a friend who had been living in a house but was unable to obtain a loan for the purchase or to make ongoing mortgage payments. Despite the painting business and the other ventures the appellants intention was always to earn a living from the farm. The reason for continuing in the painting business was expressed by him as follows: "You have to generate dollars to keep yourself alive.”

A comparison of revenue from the painting and farming operation for the years 1980 to 1988 is as follows:

As a further aid to comparison, filed as Exhibit A-5, was a summary of capitalization of Wurtz Farm and Wurtz Painting. The net capital contribution of the farm was $300,507 while the net capital contribution of the painting business was $52,748.

Counsel for the appellant submitted that the farming operation was of an adequate size, well equipped, properly capitalized, and worked on a fulltime basis by the appellant using appropriate farming procedures. The other sources of revenue were not disproportionate to farm income.

Counsel for the respondent took the position that the farm was never profitable during a 15-year period and that based on the track record it could not be regarded as capable of providing a chief source of income.

The jurisprudence in the area of farm losses is a well cultivated field, with the ground having been prepared by 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, reworked the soil. 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, was able to apply the resulting methodology and the extensive analysis done by him at trial in Morrissey, supra, to inspect the issue and arrive at the conclusion the taxpayer had produced nothing more than a sideline business.

In Moldowan, supra, at page 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 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 nonbusiness 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, supra, 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, supra, at page 428 (D.T.C. 4238-39), Strayer, J. stated:

It now appears clear from the Supreme Court decision in Moldowan as recently interpreted by the Federal Court of Appeal in The Queen 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 farming operation never produced a profit from 1980 through the period under appeal and onward to 1990, at which time the farm loss claimed by the appellant was $1,820.65 based on the method of filing in which the appellants wife is shown as a 50-50 partner. The other ventures of the appellant in the logging business and as a partner in his wife's upholstery business and even the rental properties are not particularly relevant except to indicate that he had a few other irons in the fire apart from the only real revenue producer, the contract painting business. It is clear on the evidence the appellant devoted the majority of his time to the farm. The capital contribution to the farm was approximately six times that of the painting business. However, an analysis of farm income and expenses for the period under appeal, found within Exhibit R-1, reveals that in 1986, barley produced revenue of $459 and hay $2,742. The most profitable source was contract pasturing which brought in $3,937. At the same time, on the expense side, the interest charges were only $1,616.18. In 1987, barley revenue was $35 and hay only $370. In 1988, barley revenue was $4,916 and hay brought in $11,453.50 while contract pasturing produced $3,640. The overall farm loss that year was $3,029. This actual revenue must be examined in the face of the appellant's expectations which were that barley would yield revenue of $10,000 to $15,000 per year while hay would produce income between $37,500 and $75,000. A significant amount was claimed as capital cost allowance but that is an integral part of the equation in determining profitability, actual or potential.

Subsequent to 1981, at which point the cattle operation was wound up, the appellant chose to conduct a farming business based on production of hay, grain, and renting out some pasture. The total farm income thereafter was such that the maximum gained from all sources was $43,786 in 1984, about the amount a decent hay crop alone should have yielded if the appellant's projections were reasonably accurate. The appellant estimated that at the end of 1991 he had on hand nearly $50,000 in hay and $9,000 in grain. It may be that the sale of this produce in a subsequent year, together with other revenue, might well produce a profit, all other things being equal. That is not to say such profit, if produced, will constitute anything more than a sideline business depending on the quality and quantity of other revenue. However, that is grist for another mill and is mentioned only in passing to rebut the suggestion that the appellant might have been able to show a profit earlier had he chosen to sell off all the hay and grain and to limit capital cost allowance claims. That is not the point. The actual returns of income, including the required statements of income and expenses during the years under appeal must form the basis for the decision. The appellants profit from the painting business, while not a large amount, was still the fuel for the engine of economic survival during a period of an unbroken string of substantial farm losses. It is not unusual for an individual to dislike, or even despise a trade, occupation or profession, and to prefer the endeavour of farming pursued simultaneously, but the more pleasant money-losing enterprise, while being a chief source of satisfaction, often will not be a chief source of income as defined by the relevant jurisprudence. Such is the case here.

The appellant has been unable to demonstrate the reassessments of the Minister of National Revenue are incorrect and the appeal is dismissed.

Appeal dismissed.