Willis S. McLeese v. Minister of National Revenue, [1989] 1 CTC 2201, 89 DTC 157

Brulé, T.C.J.:— This appeal involves the 1977, 1978, 1979 and 1980 taxation years of the appellant. In all four years the Minister disallowed rental losses claimed and subsequently this portion of the appeal was abandoned leaving the determination of a claim for full farm losses for the 1979 and 1980 taxation years.

Facts

The appellant purchased Heathcote Hill Farm in 1967. No serious farming operation was undertaken for some period of time. In 1977 consideration was given to the breeding and raising of horses. The area of land not needed was rented to a local farmer. The initial endeavour was directed to the breeding of Quarter horses. In later 1978 a decision was made to change to Thoroughbred horses because, as the appellant said in evidence, Quarter horses were not profitable. The operation produced the following results:

During this period the appellant had engaged a full time farm manager. He continued to live in Toronto where he was fully engaged in business. The appellant spent approximately one-third of his time at the farm but apart from the farming operation was involved with "Heathcote Centre" a property with various endeavours. This property closed after 10 years of operation and during the period of this appeal lost over $80,000 in each of the two years.

The farming business, in spite of a plan for long range profit failed to have such materialize, at least to 1988.

Appellant's position

Counsel for Mr. McLeese stressed that the farm operation was a carefully planned business with large contributions of capital. The Court was referred to the case of Helen Kasper v. The Queen, [1982] C.T.C. 178; 82 D.T.C. 6148, in support of the appellant's claim citing that the two cases were similar.

Minister's position

The Minister argued that during the years under appeal the appellant's chief source of income was not farming nor a combination of farming and some other source of income. The Court was asked to consider the appellant's income from other business during the years under review, the pattern of losses at the farm, the problems with the "Heathcote Centre", the time spent at the farm, the money contributed to the operation as opposed to other interests, and the type of operation which changed during the period.

It appeared as if more funds were contributed, as a result of losses, to the Heathcote Centre as opposed to farm expenses. To be successful the major preoccupation of the appellant must be farming and the evidence indicated that this was not so. The farm, it was maintained, was a sideline business with no change by the appellant in an occupational direction.

Analysis

In this case the Minister was prepared to allow restricted farm losses for the years in question thus conceding that the appellant had a “reasonable expectation of profit”.

If it is found that a taxpayer has a reasonable expectation of profit, it must then be determined whether he falls within class (1) or class (2) as set out by Dickson, J. [as he then was] in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213:

(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 limitations of subsection 13(1) [s. 31] 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 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. (Moldowan at p. 5315)

In considering whether or not farming is a taxpayer's “chief source" of income, Moldowan tells us that the test is both relative and objective, the distinguishing features being the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. The criteria for such a test were said to include, inter alia, in relation to a source of income:

(a) the time spent;

(b) the capital committed;

(c) the profitability both actual and potential.

Moldowan attempted to clarify what is meant by the word "combination" as found in section 31. It was the Court's view that it was not necessary that there be a "connection" by way of physical relationship, integration or interconnection between the sources of income. Dickson, J. went on to state, however, that it did not mean the mere addition of two sources as that would permit all taxpayers to deduct full farming losses. Rather, he felt it contemplates a man whose major preoccupation is farming but who may have other pecuniary interests as well. While a quantum measurement of farming income is relevant to the matter, it is not alone decisive.

This case while similar in many respects to the Kasper case, supra, cited by the appellant's counsel differs in one major aspect. Mrs. Kasper disassociated herself from business interests and managed her horse operation personally. She devoted her time to this endeavour thus showing a change in occupational direction and a major preoccupation in farming which concluded by making a large profit in the last year indicated in the figures presented to the Court.

In the recent decisions involving horse farming of: Bertrand v. M.N.R., [1989] 1 C.T.C. 2030; 88 D.T.C. 1695; Rose v. M.N.R., [1988] 2 C.T.C. 2246; 88 D.T.C. 1559; Richardson v. Canada, [1989] 1 C.T.C. 10; 89 D.T.C. 5001, the Court in each case disallowed farm losses.

In the Bertrand appeal there were losses over ten years and the Court concluded that it was highly doubtful that the taxpayer had changed his chief source of income.

The Court in the Rose case held that in determining whether the taxpayer's chief source of income was farming or a combination of farming and some other source of income, the concept of profitability was important. The farm had never shown a profit whereas the taxpayer had earned substantial other income and devoted more of his time to other interests compared to his farm.

In the Richardson appeal it was held that the taxpayer made no efforts to liquidate his other sideline interests and did not convince the Court that in the year in question his major preoccupation was farming.

The Court is cognizant of the fact that it is possible that for the years under appeal the appellant's chief source of income was neither farming nor a combination of farming and some other source of income but that such could change during a continued operation of the farm. (See Juravinski v. M.N.R., [1986] 1 C.T.C. 2429; 86 D.T.C. 1274).

In the meantime the result in the present case is that the appeal is dismissed. To do otherwise and allow such an appeal on the facts before the Court would be tantamount to an indirect subsidy for the appellant by the other Canadian taxpayers.

Appeal dismissed.