Frederick C. Lansdall v. Minister of National Revenue, [1991] 2 CTC 2203, 91 DTC 852

Beaubier, T.C.J. [Orally]: —This matter was heard in Regina, Saskatchewan, on March 14, 1991.

Doctor Frederick C. Lansdall was reassessed for the taxation years 1982, 1983, 1984 and 1985 by the Minister of National Revenue to restrict his farm losses for these years to the sum of $5,000 each 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").

During the years in question, Doctor Lansdall was a urologist, practising in Kamloops, British Columbia, on a full-time basis. He also owned, lived on, and operated a mixed farming operation on a 400-acre farm outside of Kamloops at Chase, British Columbia.

Simultaneously, Doctor Lansdall and his son Fred, owned a 1,700 acre farm near Lestock, Saskatchewan, which was managed by his son who lived on the Lestock farm.

Basically both farms centred around cattle operations. The Chase operation was cow/calf and the Lestock operation went through to finishing cattle.

Doctor Lansdall and his son Fred operated both farms as a joint enterprise which was combined in a single statement during the years in question.

The son received a salary of $35,000 in 1982; $8,400 in 1983; $27,000 in 1984; and $32,103 in 1985. Thereafter the son was entitled to 25 per cent of the gain or loss, and Doctor Lansdall to 75 per cent of the gain or loss.

The enterprise had the following for the years in question:

Various adjustments to these figures were made, resulting in the taxpayer receiving a share of income or loss from the enterprise as follows:

Doctor Lansdall’s professional income for the years in question was:

The 1983 net farm income originally reported by the taxpayer was different. Upon audit, the Minister of National Revenue added $36,741 resulting in a net farm income position for that year. The expenses tabulated included capital cost allowance taken in each year.

The tests to determine chief sources of income as described in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 at 314 (D.T.C. 5215-16), 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.

Doctor Lansdall was a full-time urologist earning a six-figure income during the years in question. The capital committed to the farming enterprise by him was substantial. Profitability did not exist in three of the four years in question, and based on the original reported income, was marginal in the remaining year in dispute.

Doctor Lansdall was born in 1920. He spent the summers of his youth in farm occupations in Saskatchewan and California and took one full year of agricultural studies in California before he joined the RCAF at the beginning of World War II.

While in England, he spent his leaves working on a farm. Upon mustering out, he completed his studies in medicine and became a general practitioner. After two years he proceeded to complete his professional qualifications in urology, whereupon he moved to the Vernon and then to the Chase District of British Columbia. Throughout these years of work in British Columbia, he virtually always lived on a farm acreage or farm unit and operated the farming enterprise at each farm.

In 1964, at Chase he purchased the 400-acre farm that he still lives on and carried on his urology practice in Kamloops. For a period of four years around 1979, he ceased practising medicine and was a full-time farmer, but thereafter he resumed his urology practice.

His first wife died of cancer in 1979.

He also acquired and sold two other ranch properties in British Columbia and in 1972 he and his two sons had three farm operations in the area of Calgary, Alberta, which they sold in 1976. The Alberta farm operation lost money which was made up on the sale of the Alberta farmland.

In 1976, he and his son Fred began buying farmland near Lestock, Saskatchewan. This farmland is part of the present farming enterprise.

Doctor Lansdall's estimates as to his current capital investment in the farm enterprise are as follows:

Approximately $100,000 worth of equipment was sold at Chase when Doctor Lansdall was badly injured by a cow on March 14, 1987, resulting in the net equipment investment of $400,000. All of the funds invested come from Doctor Lansdall's medical practice. After March 14, 1987, Doctor Lansdall ceased practising medicine.

The Minister of National Revenue assessed Doctor Lansdall on the basis that the farming enterprise was, in the words of Moldowan, supra, at page 315 (D.T.C. 5216) a “sideline business”, to which the taxpayer did not look for his livelihood. Such an assessment would entitle Doctor Lansdall to deduct a restricted farming loss within subsection 31(1) of the Income Tax Act. The question to be decided is whether the Minister of National Revenue's submission that Doctor Lansdall's chief source of income was neither farming nor a combination of farming and some other source of income is correct.

Doctor Lansdall asserted that in the years in question he devoted equal amounts of time to his medical practice and the farming operation (particularly the part at Chase, British Columbia). The capital he committed to the farming enterprise is quite substantial.

The next illustrative question referred to in the Moldowan case is the question of the “profitability both actual and potential". This was further described by Dickson, J. in that same judgment at page 315 (D.T.C. 5216) as to whether or not the appellant is a: "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.”

There is no question that farming is not the chief source of income of the taxpayer. In the years from 1974 to 1985 inclusive Exhibit R-1 establishes that the taxpayer only reported two profitable years from his farming operations and that 1983 was only marginally profitable. Moreover, the taxpayer's testimony indicated that the years since have not been positive either. Thus, the taxpayer is not in any way looking to farming for his livelihood.

The question then arises as to whether the taxpayer looks to farming and some subordinate source of income for his livelihood.

Mr. Justice Strayer in Godfrey Mohl v. Canada, [1989] 1 C.T.C. 425; 89 D.T.C. 5236, has interpreted this to mean that the taxpayer must demonstrate that there is a reasonable expectation that the business will be “significantly profitable" as a consequence of the decision of the Federal Court of Appeal in Raymond Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080.

As I read the decision in the majority of the Federal Court of Appeal in Morrissey, supra, particularly at page 242 (D.T.C. 5084), an assessment by the Minister of National Revenue such as the one before the Court: ”. . . implies that farming was a potential source of income and calls for an enquiry whether it was potentially a chief source of income either alone or in combination with another source.”

The majority goes on to say on the same page that:

. . . 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. 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 other words, is the farm actually or potentially profitable to constitute a source of income? It is not actually profitable, according to the enterprise's long history. Doctor Lansdall admitted, on cross-examination, that in consulting experts concerning his farming enterprise, he was told to "get rid of it”. This advice did not accord with Doctor Lansdall's wishes. His view in respect to the enterprise and his professional income he has poured into it over the years is, to quote him, that: "As far as I am concerned . . .” (it was) "a father-son partnership . . . I was there to keep the farm going."

Doctor Lansdall had practical experience in farming for many years prior to the years in question before this Court. He has taken courses in agriculture and reads extensively, especially in relation to cattle operations. He tried hog farming. The cattle operation has used many breeds of cattle over the years and yet the enterprise is essentially unprofitable. Doctor Lansdall now proposes a new course of action commencing in 1991 which he feels will make it profitable.

However, judging from the history of Doctor Lansdall's farm operations; the fact that the time and capital poured into the enterprise have not created a profitable operation; the appearance Doctor Lansdall gave in almost four hours of testimony that he is virtually obsessed with his concepts of farming as they may occur to him from time to time; and the totality of evidence before the Court, it is the Court's view that the farm operation during the years in question and even today was not and is not a source of income or profitability, or a potential source of income or profitability.

Viewed in this light, the farming enterprise falls within the concepts of the assessment.

The appeal is dismissed.

Appeal dismissed.