R. Larry Shipowick v. Minister of National Revenue, [1990] 1 CTC 2528, 90 DTC 1356

Christie A.C.J.T.C.:—This appeal relates to the appellant's returns of income for 1982, 1983 and 1984. The issue is whether for the purposes of the Income Tax Act ("the Act") he is, for the years mentioned, entitled to deduct the full amount of the farming losses incurred by him or is he confined to deducting the maximum of the limited losses provided for under subsection 31(1) of the Act in accordance with the respondent's reassessments.

The appellant is a dentist. He was raised on a farm consisting of seven quarter sections near Fenwood, Saskatchewan. It was a mixed grain and cattle operation. He was one of seven children, all boys. He learned a good deal about farming in this environment. When he reached grade 10 he went to a boarding school in Alberta, returning home for the holidays. He studied for grade 12 at the North Battleford Collegiate Institute and lived in North Battleford with a brother. This was followed by two years at the Canadian Union College in Lacombe, Alberta. He then went on to Walla Walla College in the State of Washington where he received his Bachelor of Arts. For a relatively short time he taught school at Langenburg, Saskatchewan, and in 1958 he was accepted for enrolment in the Dental School at Loma Linda University, which is some 50 miles east of Los Angeles, California. He graduated in 1962.

While he was a high school and a university student he would do as much as he could to help out on the farm in the spring and the fall. Shortly after he graduated from Loma Linda his father commenced disposing of the seven quarter sections near Fenwood to his children. The appellant received a quarter section. Between this time and when he sold his quarter section in 1968, it was farmed for grain by the appellant's brothers with their equipment and with assistance from the appellant in the spring and the fall. Expenses and proceeds were shared. The appellant described it as a kind of break-even situation.

After graduating in 1962 he went to Red Deer and established a dental practice there in a shopping centre where he carried on business for 17 years. He shared some space and equipment with another dentist. They also had a satellite office in Eckville, near Red Deer, for a few years but this was shut down when their primary practice got too busy. After this for three or four years they did part-time work at an institute for the mentally handicapped in Red Deer.

When the appellant sold his quarter section in 1968 he purchased an 80 acre parcel of land (the “Blackfalds Farm") some 11 miles from Red Deer. The price was $17,000. He said that in 1981 or thereabout he refused an offer of $450,000 for this property. When he bought it, it was in poor condition. The buildings were dilapidated, the well was not functioning and broken machinery and barbed wire was strewn about. After dental hours and on weekends the appellant went to work to put the place in shape. He demolished all the buildings except the old house, a garage and a granary. It was also necessary to make extensive repairs to the fences. The major portion of all this work occupied two years. In 1970 the appellant and his family moved to Blackfalds Farm and occupied the renovated home. In 1971 another home was built on the farm and they moved there. The old home was then rented. The appellant still lives there.

When the Blackfalds Farm was purchased it was the appellant's plan to establish a herd of Charolais cattle. He had been studying market trends and had concluded that the best return on investment was to acquire fewer, but more expensive cattle like the Charolais which were being imported from France. In 1969 he purchased four females in Montana as the base for the Charolais herd. The following year he purchased ten or twelve in Saskatoon and two in Calgary. In 1971 he showed two of his animals at the Red Deer annual Charolais Association sale and one, a heifer, was chosen Reserve Grand Champion. He bought some animals that were cross-bred Charolais with the intention of upgrading or up-breeding them. During the period 1968 to 1973 the appellant was spending nearly all his time when he was away from his dentistry on work relating to the herd and was cutting back on the very long hours he had previously spent in dentistry.

By 1973 the market for Charolais was oversupplied and he decided to sell his herd. He had sustained losses in every year since 1969. In October 1973 the bulk of the herd was sold. The appellant could not recall the precise number sold and retained. The retained animals were gradually disposed of. The appellant, together with an individual from Stettler then invested in full- blooded blonde aquataine cattle, another exotic breed. They acquired a bull and two heifers at a cost of about $30,000. The bull went down with a spinal abscess when it was two years old and one of the heifers was also lost. The appellant's farming business from 1974 to 1978 related to a few blonde aqua- taines. His evidence about this is very skimpy. There is nothing to suggest that there were any farming profits during that period.

In 1976 or 1977 the appellant developed problems with his health. In particular, he had trouble breathing and suffered from drowsiness and a runny nose. Specialists traced this to allergies associated with vapours in his office which did not have a proper ventilation system and to stress. He was advised to decrease his professional work and spend more time in the fresh air. A reduction of his office hours followed. The days were shorter and on most Fridays the office was closed. He estimated that during the course of a year he would be absent from dentistry for two or three months.

In 1978 the appellant became interested in purchasing land for grain farming in the Peace River district. In consultation with Mr. Robert Gaede, whom he met as a patient, this prospect was given considerable attention. There was communication with the District Agriculturist. Projected calculations indicated that it would be a profitable undertaking. This planning was not reduced to writing or if it was the documentation was not placed in evidence. One of the important, and as it turned out overrated, lures was the appellant's understanding that there had not been a crop failure in the Peace River district for about 20 years. He stated that he anticipated a profit that ranged from $20,000 to $50,000 which is a considerable spread. This was followed by some obscureness. Thereupon this exchange took place:

His Honour: What were you looking for in round numbers as your profit factor? What were you anticipating?

A. Basically I always like to think that any venture should at least yield you bank interest, and in terms of investment I felt like that, you know, farm venture should—you know, your ten per cent or 12 which is what you get at the banks is minimum. I mean, we were looking I thought at, you know, 25 per cent profit up there because of the potential. I guess if one's going to risk their money you would want to be sure that you're going to have a return or else you wouldn't risk it, and I guess for 10 per cent I would have stayed with the bank.

But the big thing there was, you know, Your Honour, it wasn't so much —it was getting to be a necessity. I needed to derive another source of income, and the reason I went farming, it was the thing I knew and I anticipated making money. I mean, when you have 21 years without a crop failure, I talked to some of the farmers up there. I've got some acquaintances that live in Grande Prairie and they just never had a crop failure. So it looked like it was a good country to go into.

The testimony then moved on to something else.

In 1979 the appellant bought a quarter section in the Peace River district under an agreement for sale. The price was $40,000. A crop of rapeseed was planted and harvested on that land in 1979. In 1980 the quarter section was sold and then by agreement for sale dated August 22, 1980, made between Robert Gaede and Marlene Gaede as vendors and the appellant as purchaser, the latter bought a section of land for $180,000, again in the Peace River district. He also entered into an arrangement with Gaede whereby the latter, who was farming something in the order of 3,000 acres, would use his equipment to cultivate and seed the appellant's land and in return the appellant's combines were utilized to harvest Gaede's crops. Initially the appellant purchased a 9700 Whyte combine for $110,000. In 1980 it was traded for two combines.

Financial difficulties compelled Gaede to abandon his farming operations in 1983 and this terminated his farming business relationship with the appellant. Because of this and, as will be seen more particularly in a moment, the fact that the appellant’s Peace River farming operations had been, in large measure, an economic failure he decided in the spring of 1984 to shut it down and sell the section of land. The land was in summer fallow in 1984. The appellant's combines were disposed of in the fall of that year and the section of land was disposed of in the spring of 1985 for $220,000.

While the appellant was farming in the Peace River district he would spend about two weeks there in the spring and possibly two or three weeks in the fall. The period in the fall was interspersed with return trips to Red Deer that took five to five and one-half hours by automobile.

After the Peace River operation was terminated in 1984 the appellant continued farming at Blackfalds and still does. He has been involved with the breeding, raising, buying and selling of cattle.

I have already referred to some sparse evidence about blonde aquataines. There was also evidence of a somewhat sketchy nature of the appellant having acquired two more quarter sections in the Peace River district in 1984. This apparently arose out of the fact that the section which he bought from Mr. and Mrs. Gaede and these two quarter sections were encumbered by the same mortgage and in order to have clear title to the section the appellant had to acquire the two quarter sections. Two years of litigation were said to have been involved. One of the quarter sections was purchased by the appellant for $55,000 and the other for $45,000. One quarter section was sold in 1984 and the other in 1987. The latter produced a crop of rapeseed in 1986. There was also mention of grain crops having been planted in 50 acres of Blackfalds from 1979 to 1984. The evidence indicates that during these years the income and expenses regarding farming at Blackfalds were included in the statements of farming income and expenses in respect of the Peace River undertaking.

In the course of being examined-in-chief the appellant was referred to returns of income that he had filed with Revenue Canada. The 1979 return shows employment income of $25,000 and taxable dividends of $18,000 (i.e. grossed up—cash is $12,000) [1] from R. Larry Shipowick Professional Corporation (“his corporation"). The statement of farming income and expenses shows a farming loss of $17,126. The 1980 return shows employment income of $17,925 and taxable dividends of $49,511 (i.e. grossed up—cash is $33,000) from his corporation. The statement of farming income and expenses shows net income from farming of $20,688. The 1981 return shows employment income of $56,000 from his corporation. The statement of farming income and expenses shows a farming loss of $32,386. The 1982 return shows employment income from his corporation of $61,589. The statement of farming income and expenses shows a farming loss of $36,112. The 1983 return shows employment income of $50,993 from his corporation. The statement of farming income and expenses shows a farming loss of $23,345. The 1984 return shows employment income of $51,159 from his corporation. The statement of farming income and expenses shows a farming loss of $8,175.

The appellant's returns of income for 1985 to 1988 are not in evidence, but there is other evidence taken from those returns that shows that during those years he sustained these farming losses from his farming business at Black- falds: 1985—$30,205; 1986-$3,922; 1987-$153 and 1988—$1,008. Evidence also based on returns of income show that the appellant received this non-farm net income from 1985 to 1988: 1985—$54,405; 1986—$106,138 (this includes a gross- up of $21,000 in respect of taxable dividends); 1987—$43,646 and 1988—$61,972.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, a decision of the Supreme Court of Canada that is almost invariably cited in the frequent litigation involving subsection 31(1) of the Act, Mr. Justice Dickson (now Chief Justice) who delivered the judgment of the Court said at page 315 (D.T.C. 5216):

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 cf 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 non-business farming are not deductible in any amount.

The reference in subsection 13(1) [now subsection 31(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" [2] 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.

By allowing Dr. Shipowick the limited losses provided for under subsection 31(1) the Minister has, in effect, concluded that in the years under review he came within the second class of farmers referred to. The onus is on the appellant to establish on a balance of probability that the Minister’s reassessment is incorrect.

Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, is a recent decision of the Federal Court of Appeal. There, as in the case at hand, the Minister of National Revenue had reassessed Morrissey by disallowing his claimed deductions of full farming losses in respect of the three years under appeal and had allowed only the limited deductions provided for under subsection 31(1) of the Act. Again the taxpayer was in effect dealt with as coming within the second class of farmers described in Moldowan. [3] When the case was before the Federal Court-Trial Division, Mr. Justice Strayer allowed the appeal notwithstanding that the evidence established that profitability arising out of the appellant’s farming operations was unlikely. He arrived at this result on the basis that his analysis of Moldowan leads to the result that these criteria indicative of “chief source" referred to by Dickson, J.—time spent, capital committed and profitability both actual and potential—are to be considered disjunctively. In so doing he concluded “that the reasonable prospect of profitability is not a very important factor in determining whether farm income is a chief source of income”: [1986] 2 C.T.C. 389; 86 D.T.C. 6509 at 392 (D.T.C. 6512). He went on at page 393 (D.T.C. 6513):

. . . I believe that I should not be guided solely by the improbability of profit from the taxpayer's farming during the years in question or the foreseeable future. This is only one factor to be taken into account. Looking at all the circumstances, I am satisfied that the plaintiff here was a dedicated farmer trying to make a profit from his farm like so many full-time farmers do, unsuccessfully, year after year. The test of “chief source of income" is not one of economic wisdom. Nor do I think it particularly critical in the present case that the prospects for the taxpayer leaving his employment and devoting all of his time to farming were not very good. It must be kept in mind that subsection 31(1) contemplates the possibility of a taxpayer's chief source of income being "a combination of farming and some other source of income”. Whatever this may mean, and there remains room for clarification even after Moldowan, it does not require the taxpayer to abandon his employment in favour of farming. Moldowan merely requires that farming be the "major preoccupation" and I am satisfied from all the circumstances here that such is the case with this taxpayer.

In delivering judgment for the majority of the Court of Appeal reversing the trial judge, Mr. Justice Mahoney said at pages 241-42 (D.T.C. 5084):

With respect, I do not agree that Moldowan suggests disjunctive consideration of pertinent factors in quite the way the learned trial judge has dealt with them. The discussion in Moldowan begins 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. Moldowan also says, dealing with the difference between classes 1 and 2, "while a quantum measurement of farming income is relevant, it is not alone decisive”. While the determination that farming is a chief source of income is not a pure quantum measurement, it is equally not a determination in which quantum can be ignored.

The appellant has admitted that the respondent was farming with a reasonable expectation of profit. That means he was farming as a business and is conclusive that he was not a class 3 farmer. It also 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. In considering subsection 31(1), it seems to me that potentiality, rather than actuality, is the question in all cases since the provision applies only where there is a loss in a taxation year. This is not, of course, to say that actual profitability in other years may not be evidence of the potential for profit in years of losses.

On a proper application of the test propounded in Moldowan [to determine whether a taxpayer is in the first class of farmers], 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.

Mohl v. M.N.R., [1989] 1 C.T.C. 425; 89 D.T.C. 5236 (F.C.T.D.) is again a case where in reassessing a taxpayer's liability to tax the Minister of National Revenue disallowed deductions of full farming losses in the five years under appeal and confined the allowable deduction to the limited losses provided for in subsection 31(1) of the Income Tax Act.

The taxpayer appealed to this Court and the appeal was dismissed (unreported). A further appeal to the Federal Court-Trial Division was also dismissed by Mr. Justice Strayer. He said at page 428 (D.T.C. 5238-9):

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 history that the appellant placed before the Court regarding his farming activities on his own account commenced in 1962 when he received the quarter section of land near Fenwood from his father and ended in 1988 at Blackfalds. This covers a period of 26 years. During that time he realized a farming profit only in 1980.

Break-even is how the financial result of farming at Fenwood from 1962 to 1968 is described. The experience with the Charolais cattle at Blackfalds from 1969 to 1973 was a financial failure. There is no evidence of success with the blonde aquataines at that place between 1974 to 1978. The appellant acquired a section of land in the Peace River district in 1979 and disposed of it in 1985. [4] This period includes the years under appeal, 1982, 1983 and 1984. The evidence is that in each of the years 1979 to 1984 there were farming losses except in 1980. In 1980 the appellant’s net income from farming was $20,688. This is 41 per cent of his cash professional income of $50,925 in that year. In 1979 and from 1981 to 1984 his farming losses in each of those years were, respectively, the equivalent of these percentages of his cash professional income: 46, 58, 59, 46 and 16. During the years 1985 to 1988 farming losses, on average, were 15 per cent of his other income. These numbers condense the evidence referred to earlier that show profitability or lack of it from farming and the practice of dentistry and the relativity of these sources of income. I regard them as significant, particularly those pertaining to 1979-1984.

I emphasize 1979 to 1984 because the evidence before the Court ranged over a long period of time and related to Fenwood, Blackfalds and the Peace River district. I believe that on the facts of this case the principal focus must be on what transpired in those years. To my mind the amounts derived by the appellant from his sources of income during that time establish prima facie that he was not in the first class of farmers described in Moldowan. In the absence of other overriding evidence, of which there is none, establishing a reasonable expectation that his profit from farming would be substantial in relation to his professional income, those amounts preclude a finding of entitlement to deduct full farming losses. To paraphrase and apply the language of Strayer, J. in Mohl, the appellant has not demonstrated that in the years under appeal there was a reasonable expectation of his farming being significantly profitable, i.e. substantial in relation to his professional income. At best his farming is to be regarded as a “sideline business”.

The appeal is dismissed.

Appeal dismissed.