Robert D. Blake v. Her Majesty the Queen, [1991] 2 CTC 236

Muldoon, Jj. [Orally]: —In the case of Robert D. Blake v. Canada, T-1424-84. This is a rather old case, as may be noted from its suit number in 1984, and it is old especially so, when one recalls that the case has already passed before the Tax Court of Canada on January 26, 1984, with judgment having been rendered by Chief Judge Christie on February 9, 1984.

The case turns on the plaintiff's reasonable expectations of profit from his farming operations and whether they were indeed reasonable or not.

The income tax assessments in issue were issued for the plaintiff's 1977, 1978, 1979 and 1980 taxation years. The taxpayer-plaintiff served as his own counsel in the Tax Court proceedings, which he turned into a somewhat futile exercise of jejeune irrelevancies, because of his own compulsive subjectiveness. There, in Blake v. M.N.R. [1984] C.T.C. 2152, Chief Judge Christie wrote at the conclusion of his reasons for judgment:

A considerable part of the appellant's presentation at the hearing consisted of an acerbic attack on National Revenue as an institution and against some of its employees. This did not contribute in any way to the resolution of the legal issue. I presume it was this kind of thing that led the Honourable Keith Flanigan to conclude his 1974 “Summation and Decision" with these words:

I add gratuitously, from one who has heard many cases in the past few odd years, two years and a bit, from coast to coast, that to take a position that the government through its representatives with the Minister of National Revenue, District office, are bent on destroying the willpower, good name or initiative of individual taxpayers throughout the country is one that should not be pursued, from my experience, and although one should be forceful and one should be prepared to stand up for one's right, one should not assume that because an assessment is not accepted by the department, that there is a conspiracy to brow-beat the taxpayer.

Chief Judge Christie continued:

There having been no evidence adduced from which it could be concluded that the appellant had a reasonable expectation of profit within the meaning attributed to that phrase by judicial authority binding on this Court, the appeal cannot succeed.

Fortunately for all concerned, the plaintiff is entitled to appeal by trial de novo, and sometime after he formulated his own statement of claim in these present proceedings, he engaged counsel in order to salvage something of the plaintiff's action.

The defendant, perhaps more mercifully and sportingly than he has allowed, that is to say, than the plaintiff has allowed, did not move to strike out Mr. Blake's statement of claim, and his counsel herein managed, more or less, to keep him "on the rails” in testimony and documentation. A jointly approved book of documents is before the Court as Exhibit 1, comprised of subexhibits 1(1) through 1(9).

The plaintiff appears, by his own testimony, to have been from an early age, at least, if he is not still, obsessive and compulsive about the farming life for himself and his children, and about shunning city living. That outlook started as early as Grade 11 and became crystallized in the years thereafter and throughout the taxation years here under review. Most of the plaintiff's testimony seemed credible enough, but some was not. However, because of the effluxion of time, and the relevant factual testimony which, it seems, the plaintiff never thought to express before the Tax Court, this Court will avail itself of such factual testimony only where it serves to confirm the relevant documentary evidence found in Exhibit 1, and, of course, in some other instances when the plaintiff describes himself, because he has the only personal knowledge of that.

While the plaintiff might in fact be endowed with a very good memory, known to his friends and intimates, he is not so known to this Court, and humans' memories do tend to fade, and oral histories do tend to reconstruct and to telescope or to compress and to confuse events. Reliance on documentary evidence would seem not to be misplaced in such circumstances.

Had the plaintiff been familiar with the unanimous judgment 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, he would never have alleged in his 1984 statement of claim: "The plaintiff has been a ‘hobby farmer' for the past 20 years . . .” an allegation of fact which the defendant, not surprisingly, admits. The defendant, of course, does not admit that the plaintiff conducted farming operations in the years 1977 through 1980, with any reasonable expectation of profit.

From the plaintiff's statement of claim the defendant further admits this passage, and I quote from the statement of claim Introduction:

The Minister of National Revenue, by Notification of Confirmation by the Minister, for the taxation years 1977, 1978, 1979 and 1980, confirms the assessments on the ground that the farming losses claimed as deductions from income, in the above mentioned taxation years, were not losses from a business or property within the meaning of subsections 9(2) and 31(1) of the Act but were personal or living expenses within the meaning of paragraph 18(1)(h) and subsection 248(1) of the said Act—dated at Hamilton, 23rd day of September, 1982. (Notification of Confirmation by the Minister is attached).

That's just a quote from the statement of claim setting the scene. It’s the Introduction.

The following recitation of salient facts set forth in the statement of defence is confirmed by the plaintiff's testimony and by Exhibit 1(2):

(a) the Plaintiff during the period under appeal was employed as a teacher and was also a municipal officer of the corporation of the Town of Dunnville;

(b) in 1964 the Plaintiff purchased 53 acres of land in Dunnville and in 1965 he purchased an adjoining 45 acres of land to give him a total of 98 acres of land (hereinafter referred to as the "farm");

(c) in 1969 the Plaintiff sold 30 acres of the farm land;

(d) the Plaintiff had never made a a profit from farming and reported the following gross revenue, expenses and losses resulting from the operation of the farm:

Here, resort may be had to Exhibit 1(2) without risk of misstatement because the plaintiff was examined on it, a summary of his employment and farm income, during the giving of his sworn testimony:

**farm gross share-cropping & market gardening acres indicated are those

seeded to market garden.

And that's the exhibit, you may recall, which has the years from 1977 to 1983, and counsel are very familiar with it.

The plaintiff became a municipal councillor in 1972, he testified, and he started in 1976, working and studying during winters, to attain the university degree of Master of Education, or M. Ed., an event which occurred in 1982. The plaintiff was active in partisan politics during the years under review, having been his party's local organizer for Dunnville. Sometime during, perhaps throughout the material time, the plaintiff was a director of the Dunnville Golf and Country Club, he is not exactly sure of the years of his term of office. He was a Kinsman but ceased to be such in 1974, and he was active in the Masonic Lodge, Grace United Church, and the Canadian Cancer Society. The plaintiff was generally community minded and he surely evinced civic spirit. He said he fitted into his life other “oddball activities”, but never, as the saying goes, "went through the chairs" meaning he was not a high-office holder in those organizations, a fact which he mentioned particularly in regard to the Masonic Lodge. The plaintiff testified in regard to all his civic and benevolent activities, that he regretted that he did not spend more time with his family. His energy, he testified, perhaps “boiled over in too many places to the sacrifice of the girls’, meaning his three daughters. He was busy with more than full-time teaching and part-time farming.

One further passage from the statement of defence was confirmed by the plaintiff's testimony:

(e) during the period under appeal the Plaintiff used approximately three acres of the farm land to grow vegetables for the personal consumption of the family, the remainder of the land was rented out to another farmer under a share-crop agreement; under the terms of the share-cropping agreement, the Plaintiff's share of the revenue was limited to a maximum of approximately $2,000.00, but has never exceeded $1,200.00;

Now, that should be understood to require some amendment. The vegetables were not only for the personal consumption of the family. They were, not to use a term that sounds too pejorative, but they were peddled throughout the neighbourhood to neighbours who would wish to buy fresh vegetables from the garden.

In cross-examination, the plaintiff stated that during the years in question, the bulk of the farm expenses for salaries and wages was paid to his daughters, but never to exceed that amount which, under the Income Tax Act, would just keep them qualified as dependent children. He asserted that he would never have voluntarily reduced that particular farm expense because that would be unfair to his daughters. Because they ought to have earned more in fact, he said that he and their mother agreed to pay one half of their school field-trip expenses and their university tuition fees. As for the daughters’ teenaged friends who also worked on the "farm", the plaintiff testified that they did not feel they were actually earning, if paid by cheque, so he more often than not, paid them cash out of his pocket, right in the field.

The plaintiff faced no extraordinary risks apart from those faced by all food growers. Weather and climate generate the salient risks, and sometimes municipal levies and prices of produce or farm machinery impose big risks on the profitability of food growing operations. Such agriculturists, like the plaintiff, must all be invincible optimists.

Jurisprudence, apart from the Moldowan case, cited for the plaintiff is: The Queen v. Connell, [1988] 1 C.T.C. 247; 88 D.T.C. 6166 (F.C.T.D.), The Queen v. Gorjup, [1987] 2 C.T.C. 129; 87 D.T.C. 5348 (F.C.T.D.), Canada v. Morrissey, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 (F.C.A.), Armstrong v. M.N.R., [1988] 1 C.T.C. 2198; 88 D.T.C. 1122 (T.C.C.); and cited for the defendant is: Bigelow v. Canada, 90 D.T.C. 6262 (F.C.T.D.), Croutch v. The Queen, [1986] 2 C.T.C. 246; 86 D.T.C. 6453 (F.C.T.D.), Gillis v. The Queen, [1978] C.T.C. 44; 78 D.T.C. 6103 (F.C.T.D.), Taillefer v. M.N.R., [1987] 2 C.T.C. 2137; 87 D.T.C. 418 (T.C.C.).

The above-cited jurisprudence evinces decisions in favour of the fisc and in favour of the taxpayers, and all purport to abide by the very same principles. Indeed, it is apparent that in this area of income tax law, circumstances determine conclusions and accordingly each case turns on it own facts, the principles being constant.

The modern locus classicus of the principles is that above cited 1977 judgment of the Supreme Court of Canada in Moldowan v. The Queen (hereinafter cited to the C.T.C.). Dickson, J., later Chief Justice of Canada, characterized subsection 13(1) of the Income Tax Act as it stood in 1968 and 1969 as "an awkwardly worded and intractable section and the source of much debate” (page 310). He is reported on page 311 as writing:

The effect of subsection 13(1) is to limit to $5,000 the farming losses which a taxpayer may claim as a deduction in a taxation year. The appellant's farming losses exceeded this amount in the years 1968 and 1969. He contends that his chief source of income for those taxation years was either farming or a combination of farming and some other source of income, and therefore the constraint of the section does not apply to him. In an alternative argument, he submits that subsection 13(1) is meaningless and incomprehensible; therefore, it should not be applied to his detriment. In effect, he would have us write the subsection out of the Act. I do not think we can accede to that submission. We must endeavour to construe the language of Parliament. It is not an impossible task.

As a pause to examination of the Moldowan case, one may note that Mr. Blake would have this Court eliminate the effect of jurisprudence in regard to the meaning of "profit", just as Mr. Moldowan sought to induce the Supreme Court of Canada to eliminate the effect of subsection 13(1) of the Act. The plaintiff takes, as he says, a "holistic" or all-inclusive approach to the meaning of profit. As an example, he mentions his middle daughter now holding down two jobs. She, he says, had instilled in her, from his upbringing and her work on the farm, a dedication to hard work, thrift and such virtues. This, the plaintiff asserts, operates not only to her and his "profit", but to the "profit" of the whole community—nay! the whole country. In raising his daughters on the "farm" as he did, he says, he certainly operated his farm with the expectation of "profit" not just in a restricted monetary sense, but in that holistic sense. That is an interesting assertion, but it is not the law. The creation and evincing of intellectually tough civic virtues would hardly induce decadence in Canadian society and, from that point of view, would be beneficial to Canada, but first Parliament has to be convinced of the validity of the plaintiff's viewpoint in order to make the law conform. In the meanwhile, this Court must get on with the adjudication of this case.

The Moldowan judgment continues on pages 313-314 as follows:

The next thing to observe with respect to subsection 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming would not make any contribution to the taxpayer's income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words "source of income”.

Although originally disputed, it is now accepted that in order to have a "source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R. [1972] C.T.C. 151; 72 D.T.C. 6131. See also paragraph 139(1)(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, ne is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors wi differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

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.

That's the end of the quotation, and a long one, from the Moldowan case.

Following these principles in these circumstances, it is clear that for much, if not all of the material time, the property was maintained by the plaintiff for his own, and his family’s use and benefit—as indeed a means of rearing his children and instilling moral and civic virtues. Insofar as the property, in that light generated “personal and living expenses", they are not deductible. And so it is the more so in the plaintiff's holistic view of "profit" which is not an objective, but rather the plaintiff's own subjective view, not shared by the jurisprudence. The criteria enunciated by the Supreme Court must be applied to this plaintiff’s circumstances. His profit and loss experience with the farm over the previous years was one of loss and no profit whatsoever. The taxpayer's training was to farm as a child and then as an adult on “hobby” farms in effect, hobby farms in Port Hope, Ontario, in Bermuda, and in Bronte, Ontario. They were used, indeed, for the family, for the raising of food for the family. He was impressed by what he saw in Wallaceburg and attempted to exploit the similar conditions in and around Dunnville. This criterion does not operate wholly in favour of the plaintiff's contentions. Nor does that of the capability of the plaintiff's alleged venture, as capitalized, to show a profit after charging capital cost allowance. It produced nothing but losses. To paraphrase the Moldowan judgment: a man who has been a teacher all of his life does not cease to have his chief source of income from teaching because he deliberately chooses to operate a little farm at an expensive annual loss. The plaintiff's chief source of income was from teaching, over and above the municipal stipend paid to him as a councillor. He surely expected, with objective justification, to be paid his salary and his stipend. After all his start-up years on the little farm, the plaintiff could have objectively had no reasonable expectation of profit because he just could not make it profitable no matter what he did, tested, tried, sowed or reaped before, throughout and after the years under consideration unto 1983, according to exhibit 1(2). This is not to say that someone else with a different agenda could not have had more realistic expectations of profit. Oh, the plaintiff had great subjective expectations of holistic profit from is obsession, that farm! Sad to say, they were just not reasonable, and are now clearly seen not to be reasonable, those expectations. Nor can any effective measures to reduce those losses be seen in the evidence before the Court, flexible and adaptable as the plaintiff sees himself.

This plaintiff's plight is much akin to the plaintiff's plight in the Bigelow case, earlier cited, as described by Mr. Justice MacKay. Both had a dream or vision of ideal farm-home circumstances which, year after weary year, just never materialized, but the plaintiff failed to stop to realize what were his prospects for the farm during those years, probably because, as he said, his energy just boiled over in too many places. It did not require only December 31 hindsight. January 1 is only the very next day. The land in question was, of course, the plaintiff's to do with as he pleased. Here we are inquiring only whether the government, or the rest of the taxpayers, should be required to subsidize the plaintiff's hobby.

What then could have raised the plaintiff's expectations that the forthcoming year, each year, would yield him a profit, or even any less a loss than the previous year? It was only his invincible optimism which was still radiating from nim as he recalled his past intentions in his testimony right here in Court. Had the plaintiff persisted, had he not lost heart, as he said, in December, 1987, he might well, from 1981 onwards, have raised his category to class 2, as was found and confirmed in Robinson v. The Queen, [1991] 1 C.T.C. 556; 91 D.T.C. 5302 a decision of Madam Justice Reed of this Court.

One can hardly differentiate the non-existent prospects for making a profit by the plaintiff, given how he ran his alleged business of farming, in any of those four years under review. During argument the Court briefly considered distinguishing the results of the fourth year, 1980, because the farm loss then was the least of the four, but it was only negligibly less than the 1977 loss of $6,825.74. When one points happily to those losses being less than the over $7,000 losses of 1978 and 1979, and when one pins hopes on total farm produce revenue increasing from $60.70 in 1977 (exhibit 1(3)), “all the way” progressively up to $132.75 in 1980 (exhibit 1(6)), one is evincing hopeless, naive, yes invincible optimism. The sums are so small as to be negligible, and they are companions of the six, and $7,000 losses. The plaintiff always hoped that someday there would be profits sufficient to support him, with his other pensions, in retirement. The plaintiff retired a year early from teaching in July 1991.

Based on all the evidence tendered in this trial de novo, the Court concludes that this plaintiff, this man of civic virtue and high ideals of the kind which are never obsolete, simply had no reasonable expectation of profit from his hobby farm during the years under review. That is not a crime, nor other offence. The expenses deducted by the plaintiff from farm revenue which caused the losses were not incurred for the purpose of gaining or producing income from a business or property but were the expenses of property maintained by the plaintiff for the use of his family and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. That does not say that it was not a business carried on in selling vegetables to the neighbours, but it was not carried on for profit or, the Court finds, with a reasonable expectation of profit. That being so, this action must be dismissed with costs to be taxed.

The defendant's counsel may prepare on long paper a draft judgment to give effect to these reasons and submit it to the plaintiff's counsel in an attempt to elicit his approval as to form and/or content, whereupon the Court will review the draft and amend it suitably, or not amend it at all, and it will be signed and entered.

Appeal dismissed.