Richard Struble v. Minister of National Revenue, [1991] 2 CTC 2207

Tremblay, T.C.J.:— This appeal was heard on October 17, 1989 in the City of Regina, Saskatchewan.

1. Point at Issue

The point at issue is whether the appellant has the right to deduct for tax purposes for the 1986 taxation year the entire amount of farming losses of $26,988.36 incurred by him, on the basis that he is as a full-time farmer.

The respondent allowed only the restricted loss of $5,000 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") on the basis that the appellant is a gentleman farmer and not a full-time farmer.

2. Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the present case, the assumed facts are described in paragraphs 5(a) to

(I) of the reply to notice of appeal as follows:

5. In reassessing the Appellant as he did for his taxation year 1986 the Respondent made and relied upon, inter alia, the following assumptions of fact:

(a) the Appellant has since acquiring his farm in 1979 always treated the losses arising from such business as being subject to the regime of Section 31 of the Act except for 1983 when a small profit of $6,495 was reported and for the taxation year the subject of this appeal; [admitted]

(b) the Appellant carried out his farming operation on three quarter sections of land in the Crane Valley area of Saskatchewan; [admitted]

(c) the farming operation of the Appellant except for the year 1983 when he produced pork, consisted in grain (wheat) growing; [denied]

(d) the average yield of land in the area farmed by the Appellant is 20 to 24 bushels of wheat per acre over a fifteen year period; [denied]

(e) the Appellant had 473 acres of land, half of which each year was in cultivation and half of which was in summer fallow; [admitted]

(f) the reasonable expectation of yield for each year does not exceed 5,676 bushels of wheat annually; [denied]

(g) except for regular school holidays the Appellant was employed full-time as a teacher with the Assinaboya School District; [admitted]

(h) for his taxation year 1983 the Appellant claimed no capital cost allowance deduction. He included in income a cash advance of $- 9,266 from the Canadian Wheat Board as well as $1,000 received for custom work; [admitted]

(i) the Appellant for the years 1979 to 1987 reported the following losses (profit) from the farming operation:

1979	$2,430.56	1984	$16,085.00
1980	2,054.67	1985	3,414.36
1981	2,585.14	1986	26,998.36
1982	9,356.11	1987	21,958
			[admitted]

(j) for the years 1983 to 1987 the Appellant reported the following wage income and gross farm income:

Wages	Gross Farm Income
1983	$40,666.00	$50,817.00
1984	42,075.00	24,574.00
1985	43,203.00	26,823.00
1986	43,785.00	23,715.00
1987	43,859.00	22,462.00
		[admitted]

(k) the Appellant invested considerable time and effort to become a qualified teacher; [admitted]

(I) the Appellant’s chief source of income for the taxation year 1986 as well as for preceding and subsequent taxation years was not farming nor farming combined with some other source but rather this employment as a teacher. [denied]

3. Facts

3.01 The appellant was a full-time teacher with the Assinaboya School District of the province of Saskatchewan from 1983 to 1987. His wages income were cited in the above paragraph 2.02-(5(j)).

3.02 The appellant was born on November 11, 1944 and was brought up on a farm. In 1979, after consulting his father, he decided to buy a farm in Crane Valley, Saskatchewan. The purchase price was $143,100. This included a barn, three granaries, an old house valued at $7,000 and 473 acres of land. Half of the land was in cultivation and the other half in summer fallow.

Crane Valley is an agricultural region where over the past five or six years, it has become more of a straight grain-growing area.

3.03 In 1980, the appellant purchased a tractor and a combine valued at $7,000 each. In 1981, he decided to move to the farm a house which he already owned. It became his permanent residence. His intention was to support himself and his family by farming in the near future.

3.04 According to the appellant, basically he had been growing wheat and would reinvest the revenue generated from this into the farming operation to pay for the price of the land and for machinery he had been purchasing.

3.05 He continued teaching and farming by working on the land three to four hours a day, mostly in the evening. Moreover, he spent weekends as well as summer vacation to working on his farm.

3.06 In 1984 and 1985 respectively, the appellant made some major purchases. Indeed at the time his plan was to be farming full-time and teaching part-time within the next eight or ten years. According to him, he purchased machinery to manage the farm work so that he would not have to depend on anybody. The list of the farming assets purchased by the appellant and produced as exhibit A-3 indicates year of acquisition and cost of acquisition is as follows:

3.07 The main farming operation consisted of grain production. However, in 1981, he had some calves and in 1983 and 1984 he had up to 25 hogs.

3.08 The farming operation from 1979 to 1989 was described in substance by the appellant on his testimony as follows:

The starting point is April 1st and farm work includes picking rocks and preworking the soil before seeding.

The month of May includes the seeding process which consisted of seeding 240 acres: two full days and probably about five evenings and one more day to harrow.

Then follows the processing of summer fallow, also called tilling, which takes two days.

The month of June consists of spraying the crop. This would take the appellant three half days.

The month of July is dedicated to working the summer fallow (for the second time).

August is usually used to paint the buildings, to get the machinery ready for combining and harvesting.

And just before school, the appellant would summer fallow again depending on the moisture conditions. This would take him three days.

The final process consists of putting the crops into the granaries and getting them to the market.

3.09 The list produced as exhibit A-4 indicates acreage sown under summer fallow and the bushels produced by the appellant each year from 1979 through 1989 (A-4).

3.10 During the years of 1984 and 1985, the agriculture produce has been plagued with grasshoppers and drought. This explains according to the appellant, the variance in the productivity as read in the exhibit A-4, supra.

3.11 For the years 1979 to 1987, the appellant reported the following losses from the farming operations.

Although, in the taxation year of 1983 there was a profit, the appellant claimed no capital cost allowance deduction. Moreover, he included in his income a cash advance of $9,266 from the Canadian Wheat Board as well as $1,000 received for custom work.

3.12 Pursuant to the appellant, during the taxation year of 1986, prices dropped considerably and that type of price fluctuation was not foreseeable when he commenced farming. He also stated that input prices from 1979 to 1989 went and are still going up considerably. This is due to the fact that the Canadian Wheat Board is trying to stabilize and normalize the flow of wheat. Consequently, farmers must sell in accordance with the prices established by the Wheat Board.

3.13 The appellant’s combined farm, land, building and machinery was evaluated at $780,000 in 1989. It was worth $140,000 in the 1986 taxation year. Moreover, the ten years of farming activities resulted in an equity of $30,000.

3.14 Until 1986, the appellant filed his income tax return as a gentleman farmer. However in 1986, the year in dispute, he claimed on his income tax return that farming was now his main source of income.

At that time, the appellant stated that between 1985 and 1986, he had purchased a full line of farm equipment.

Having a granary, space for wheat and a full line of equipment he felt he needed to farm on his own according to him he had become a full-time farmer.

4. Law, Case at Law, Analysis

4.01 The provision of the Income Tax Act involved in the instant case is mostly subsection 31(1) of the Act. It reads as follows:

31. (1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of (A) ‘2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1" were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

4.02 Cases at Law

Counsel for both parties referred the Court to the following cases at law:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.);

2. Marius Carrière v. M.N.R., [1983] C.T.C. 2717; 83 D.T.C. 665;

3. Raymond Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080;

4. Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200; 87 D.T.C. 5025.

4.03 Analysis

4.03.1 In the present case, the crux of the matter is whether the farming business carried on by the appellant in 1986 was his chief source of income.

4.03.2 The respondent issued the reassessment for the 1986 taxation year by submitting the farming loss of the appellant to the regime of subsection 31(1) of the Income Tax Act and allowing the deduction of the amount of only $5,000 from income from other sources.

Pursuant to the Supreme Court case Moldowan in 1977 (paragraph 4.02(1)), the effect of subsection 31(1) is to limit to $5,000 the farming losses which the taxpayer may claim as a deduction in a taxation year. The appellant's farming losses exceeded this amount in the 1986 taxation year.

The appellant contends that his chief source of income for the taxation year 1986 was farming and therefore the constraint of the section does not apply to him.

4.03.3 As established in the Moldowan case, on page 315 (D.T.C. 5216), the Income Tax Act 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 [s. 31(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 [s. 31(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 appellant said that in 1986, having a full line of equipment, he felt he was of the first category.

First of all, the Court may say that to determine whether one is a first, second or third class farmer is not a question of feeling. It must be evaluated with regard to the criteria given in the Moldowan case. On page 314 (D.T.C. 5215), the relevant passage reads as follows:

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.

It is stated fact that in order to have a source of income, the taxpayer must have a profit or a reasonable expectation of profit. However, this is not in question in this case, the respondent has admitted by allowing the appellant $5,000 deduction that his farming operation had reasonable expectation of profit.

The point is whether or not the appellant met the criteria given in Moldowan, supra, in order to interpret his farming activity as the chief source of income.

4.03.04 Focusing on those factors namely time spent, capital committed and profitability, those in regard to the appellant's ordinary mode and habit of work, it appears to the Court that the taxpayer did meet the requirement of full-time farmer as defined in Moldowan class one farmer. In regard to the time spent, I believe that even though a class one farmer should make farming his major preoccupation, he may also have subsidiary interests or other pecuniary interests as recognized in Moldowan. A major preoccupation, however, may be regulated many different ways according to the circumstances.

For instance, let us take the case of a person who works intensively in his farming business only a few months a year and earns his annual income by growing and selling corn. His farming operation may not appear to be his major preoccupation because of the amount of time spent on it. However, it is in fact a major occupation if one looks at his qualitative involvement in terms of time work and profitability. Each case must be considered on the merits of its own facts and circumstances.

4.03.05 The facts in the present case do not indicate that the taxpayer experienced a change of mode or habit of work or a significant change in his farming operation since he started in 1979. Regarding those facts, the Court does not believe that the appellant has satisfied the criteria of time spent in a qualitative order. The appellants employment income allowed him in fact to earn the capital required for his farming operation. Moreover, while the determination that farming is a chief source of income is not a pure quantum of measurement, it is equally not a determination in which quantum can be ignored as said on page 242 (D.T.C. 5084) in the Morrissey case (4.02(3)).

4.03.06 In the case at bar in 1986, the appellant was first a school principal. He had a farming operation but he remained first and foremost a school principal. He would do the farm work on nights, weekends and holidays (3.08). Since he started in 1979, he has not had any employees besides his 13-year-old son and his wife, who occasionally helped him. He has not substantially changed occupational direction nor has the time spent on the farm significantly increased in all the years in question. On the contrary, it seems as showed by exhibit A-6, that the appellant and his wife increased their off-farm income between 1985 and 1988. Historical analysis reads as follows:

Income I Expenses July 6, 1989 Expense summary

			Total farm income		27,227
	1985	1986	1987	1988	Average
Variable expenses
Salaries/wages	0	0	0	0	0
Crop insurance	1,664	977	1,460	1,438	1,385
Fuel/oil/grease	2,105	1,913	2,651	2,008	2,169
Machinery repairs	1,664	3,479	1,637	2,870	2,413
Feeder L/S	0	0	0	0	0
Replacement L/S	0	0	0	0	0
Vet/b reeding Fees	10	20	11	71	28
Feed/concentrate	53	0	56	0	27
Pasture/straw	0	0	0	0	0
Seed/plants	0	0	0	0	0
Chemicals	0	0	0	0	0
Fertilizer	1,882	1,390	104	0	844
Containers & twine	0	0	6	0	2
Custom work	205	175	729	125	309
Trucking/hauling	0	0	0	0	0
Interest (op. loan)	1,509	1,217	0	822	887
Small tools/misc.	224	1,180	312	532	562
	9,316	10,351	6,966	7,866	8,625
G.M.R.	0.65	0.56	0.69	0.78	0.68

Fixed expenses
Rental payments	0	0	0	0	0
Property taxes	1,532	1,508	1,332	0	1,093
Insurance	0	0	0	0	0
Bldg/fence rep.	445	1,083	1,393	9	733
Auto expense	4,282	3,357	3,780	5,924	4,336
Telephone/hydro	2,855	3,116	2,267	1,022	2,315
Business expense	325	368	1,618	2,888	1,300
Interest (& It)	14,419	20,192	17,990	17,887	17,622
	23,858	29,624	28,380	27,730	27,398
Total cash expense	33,174	39,975	35,346	35,596	36,023
Net cash income	(6,351)	(16,261)	(12,886)	316	(8,796)
Cheryl off farm	1,519	1,337	962	3,799	1,904
Richard off farm	44,579	45,403	45,292	47 ,100	45,594
Disposable income	39,747	30,479	33,368	51,215	38,702
Curr/inter princ.	8,000	8,000	8,000	8,300	8,075
Long term princ.	4,600	4,800	5,000	5,448	4,962
Family living cost	24,000	24,000	24,000	24,000	24,000
Total demand	36,600	36,800	37,000	37,748	37,037
Residual	3 ,147	(6,321)	(3,632)	13,467	1,665
Bldg replacement	0	0	0	0	0
Mach. replacement	12,491	13,298	11,016	8,558	11,341
Net farm income	(18,842)	(29,559)	(23,902)	(8,242)	(20,136)
T.C. E./T.C.I.(%)	64%	78%	77%	47%	64%
(No. rent or interest
payments)
Var.exp.per k-acre	20	22	15	16	18
Var.exp.per COW	ERR	ERR	ERR	ERR	ERR

4.03.07 Despite the investment in new machinery (3.06), the appellant has not increased his farming production.

The purchase of farm equipment does not automatically make him a first class farmer.

4.03.08 Except for 1983, when he made a small profit, the appellant suffered constant and increasing losses. The appellant maintains (3.12) that input costs and commodity prices were such as that they did not allow for a profit (4.03.08). With all respect in regards to commodity prices, this has not been satisfactorily proved if we refer to exhibit A-5.

It is hard to construe the appellant's farm losses during those years, and 1986 in particular as being problem of general nature or wholly unforeseeable as stated by the appellant.

I agree he suffered misfortune from the grasshoppers and drought. Yet the Court does not believe that this, along with the addition of input costs and high interests can explain ten years of constant and increasing losses in the appellant's farming activity. Moreover, one must expect to suffer this type of misfortune in farming.

4.03.09 If one looks at the actual and potential results of the appellant's farming operation (3.11) regarding the years prior to and following 1986, this may give the true nature of the farming activity. The Court does not think it can actually be said that the appellant's farming activity was his chief source of income in the definition of a first class farmer (Moldowan) during the taxation, or any other year. The Court also believes that the quantum, even if not being a decisive criteria in itself, is surely relevant to distinguish whether or not the farming operation is the appellant's chief source of income. Quantum of profit derived from exhibit A-6 (3.11) shows that salary from the school (3.01) is astronomical as compared to the losses from farming operation. Moreover, as confirmed by the appellant, a maximum earning expectation in his specific case is about $37,500 compared to his capital cost allowance which stands around $38,000. This, added to a $30,000 equity for the ten-year farming operation does not prove much regarding an actual or potential profit.

4.03.10 All the facts, in light of the actual and potential profitability of the farming operation, lead the Court to the conclusion that for the taxation year in question, the appellant is not a first class farmer as described in the authoritative case, supra. He is therefore, subject to the limitation of section 31 of the Act.

The Court cannot retain the arguments of the learned counsel for the appellant and must maintain the reassessment issued by the respondent.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.