Avtar Aujla and Nirmal Aujla v. Minister of National Revenue, [1989] 2 CTC 2104, 89 DTC 360

Goetz, T.C.J.:—The appeals of Nirmal Aujla #88-567(IT) and Avtar Aujla #88-568(IT) relate to reassessments for their 1984 and 1985 taxation years whereby the appellants sought to deduct full farm expenses for those taxation years.

The Minister allowed them only limited farm losses pursuant to section 31 of the Income Tax Act. The appellants operated a farm in partnership and the issue is whether in those taxation years their "chief source of income” was farming or a combination of farming and some other source of income, namely, their employment as steelworkers at Titan Steel. The appeals were heard on common evidence.

Facts

The appellants worked on a small family farm in India and came to Canada in 1972. Both appellants worked at Titan Steel and purchased a home where they and their families lived together until they sold the home for $59,000 and purchased a 35-acre farm in Aldergrove, B.C. in 1979 for $190,000 with cash and mortgage of $142,000. The farm had been used as pasture land and they moved into an old farm house on the property. They planned to have a berry farm and by 1980 had 12 acres planted to raspberries and 10 acres to strawberries.

In 1981 they built another house on the property for $80,000 and rented it. They cleared three acres and now have five acres planted to broccoli. Both families worked the farm and berry pickers were hired in June and July to do the berry picking. Due to inclement weather their berry yield was reduced considerably, as well there was a drop in berry prices due to competition from California.

In 1984 they started building a bunk house for the berry pickers and which they finished in 1986 with $35,000 borrowed from the bank. Both appellants work 40 hours a week at the steel mill. The rest of their time they spend at the farm. They have a full-time worker who does the pruning and other chores. He has free board and room and is paid $600 a month. In the summer they work three to five hours a day and their vacation time is spent at the farm. Their wives and children help them with farm chores. They used 30 per cent of their steel income to clear the three acres between 1981 and 1984. When they purchased the farm in 1979 the provincial agriculture representative told them that because of the quality of soil and the nature of the land that drainage was necessary and in 1987 they installed drainage at a cost of $32,000. Because of frost, drought and too much rain in 1987-1988, they cut down the berry crop and planted vegetables.

Nirmal Aujla admitted that at no time since they started the farm operation in 1979 have they shown a profit.

In 1982 they each acquired an interest in a ten acre farm ten miles away at a cost of $180,000 — it was never farmed and the only income was the annual rental of a house for $2,000 — with annual interest expenses of $21,000. They ultimately sold the farm at a substantial loss in 1987.

In 1982 they each acquired a 16 per cent interest in the purchase of a four acre plot (with a house on it) at Surrey, B.C. The purchase price was $135,000 which they sold at a handsome profit with a selling price of $250,000.

Findings

The judicial decision rendered by Dickson, J. in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310, is the foundation and springboard to the interpretation and application of section 31.

In Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, Mahoney, J. quotes a passage from Moldowan as follows:

The authoritative judicial decision is that of Dickson, J., as he then was, for the Court in Moldowan v. The Queen, [1978] 1 S.C.R. 480. Relevant passages, at pp. 486 ff. . . . follow:

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.

. . . 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 [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.

It has been argued that the three factors, namely:

— the time spent;

— the capital committed;

— the profitability both actual and potential:

could and should be read and considered disjunctively. This approach has been deemed incorrect wherein Mahoney, J. at page 242 (D.T.C. 5084) in Morrissey, supra, says:

On a proper application of the text 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.

Potentiality of profit, rather than actuality is to be considered in applying section 31 since it applies only where there is a /oss in a taxation year.

The evidence shows that the appellants spent much time on the farm — but that was where they lived. Hired help, it would appear, did substantial work for them. Further, it is evident that the appellants committed considerable capital to their operation. Although the breakdown of time spent in actual farming at the farm is not clear, nevertheless, I consider the appellants have met the first criterion, i.e. time spent. I feel also that they invested sufficient capital to meet the second criterion — capital committed.

Unless the appellants meet the third test, namely, profitability actual or potential, they will be restricted in their expense deductions. Since they acquired the farm in 1979 they have not had a profit.

Exhibit A-5, the Financial Summary of Farming Operation from 1979 to 1985 shows this continued loss picture — and no profit has been made since.

FINANCIAL SUMMARY OF FARMING OPERATION FROM 1979 TO 1985

PARTICULARS	GROSS REVENUE	LESS EXPENSES	PROFIT OR LOSS
1979	2,874.84	17,778.03	(14,903.19)
1980	2,363.95	29,565.02	(27,201.07)
1981	35,334.89	51,341.57	(16,006.68)
1982	54,155.67	67,882.21	(13,726.54)
1983	83,633.50	89,919.56	( 6,286.06)
1984	25,416.97	90,832.73	(65,415.76)
1985	37,016.25	87,502.01	(50,485.76)
ACCUMULATED LOSSES:			($194,000.00)

Their income from employment (Exhibit A-8), when compared to their farm loss shows that the farming operation could not have been continued without their income as steelworkers.

I find that they could not in the years in question have a reasonable expectation that their farm income would be their chief source of income either alone or in combination with another source of income.

The appeals are dismissed.

Appeals dismissed.