John W. Coates v. Minister of National Revenue, [1988] 2 CTC 2136, 88 DTC 1515

Rip, T.C.J.:—John W. Coates, the appellant, appeals from notices of reassessment issued by the respondent, the Minister of National Revenue, for 1980, 1981 and 1982 on the basis that pursuant to subsection 127(5) of the Income Tax Act ("Act"), he ought to be permitted to deduct from tax otherwise payable investment tax credits, defined by subsection 127(9), with respect to the capital cost of qualified property purportedly acquired by him in the years of appeal. The issue is whether the machinery and equipment was required "to be used by the appellant in Canada primarily for the purpose of . . . farming or fishing” and is thus “qualified property", as defined in paragraph 127(10)(b) and subparagraph 127(10)(c)(viii). For the years in appeal subsections 127(5) and 127(10) read as follows:

(5) There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount not exceeding the lesser of

(a) his investment tax credit at the end of the year, and

the aggregate of

(i) $15,000, and

(ii) /2 the amount, if any, by which the tax otherwise payable by him under this Part for the year exceeds $15,000.

(10) For the purposes of subsection (9), a "qualified property" of a taxpayer means a property (other than a certified property) that is

(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23,1975, or

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(viii) farming or fishing,

Prior to 1979 John Coates, who was born and raised in Canada, lived for a period of 16 years in Australia and New Zealand where he says he operated a 100-acre farm. In those countries, he testified, there are people who earn a living as agricultural contractors; they own agricultural machinery and equipment and with the machinery and equipment perform services for persons operating farms. In Western Canada the work performed is called “custom work”.

When Mr. Coates returned to Canada in mid 1979 he "wanted to perform custom work" in Nova Scotia where he had obtained a teaching position with the College of Cape Breton. His potential customers, in his view, were farmers growing crops.

In November 1979, Mr. Coates purchased a furrow plough, tractor and tiller. The machinery was acquired to cultivate one acre of land he owned to grow vegetables as well as to enter the agricultural contracting business.

None of the machinery was used in 1979. In May 1980, Mr. Coates placed an advertisement in the local newspaper offering his contracting services and says he received a good response. Devco Farms, a division of Cape Breton Development Corporation, engaged Mr. Coates to cultivate two plots of land. Mr. Coates had quoted a price on a "per acre” basis to Devco Farms. In 1980 Mr. Coates had approximately 30 other jobs cultivating land for seeding; he says he does not know if his clients were farmers or not since they did not volunteer the reason they hired him. His work for Devco Farms was greater than all his other jobs combined in 1980.

Mr. Coates accepted a teaching position at Mount Allison University in Sackville, New Brunswick and left Cape Breton in June 1980. He purchased about three acres of land near Sackville where he took up residence in July. In late 1980 and 1981 he grew vegetables on one-half acre and buckwheat on two acres of his property and he also farmed on some of 50 acres owned by his father. On his land he used the machinery and equipment he had purchased and on his father’s land he used his father's machinery and equipment.

Mr. Coates acquired a harrow in 1980 and in 1981 he purchased a mower, a York rake and Belarus tractor. Also in 1982, he purchased a front end loader for manure and a manure spreader. In 1982 he acquired a new tractor and tiller because, he says, the jobs were getting beyond the capability of his other equipment. He hired help in 1982 to drive the tractor.

He testified that in 1982 his jobs were getting bigger; thus he required larger machines. He also expanded his services to cleaning barns and spreading manure. He started landscape work, as well, but, he says, he did not require the equipment and machinery for that work. Mr. Coates estimated 95 per cent of his work was custom work.

A front end loader and manure spreader were acquired in 1982. The loader was also used for cleaning barns of manure and snow removal.

Mr. Coates acknowledges he used the equipment and machinery on his three acre property in 1981 and 1982.

Mr. Coates is a founding member of the local Soil and Crop Improvement Association and was involved in creating the Sackville Farmers' Market in 1982.

Under cross-examination Mr. Coates explained that he charged a minimum fee of $25 an hour for his small tractor to $35 per hour for his larger tractor. He always supplied a driver with the tractor in his custom work, that is, he did not rent the machine to be worked by a customer.

In 1980 Mr. Coates earned $1,673 from his work as a contractor. During 1980 he served approximately 50 customers, including Devco Farms. According to calculations made by counsel for the respondent, each job, other than that of Devco Farms, took less than one hour. Mr. Coates did not deny the calculation. In 1981 he earned $3,442.22 from 77 customers and in 1982 he earned $3,328 from 81 customers; each job averaged a little more than one hour, according to counsel's calculations. Prior to 1986 he incurred operating losses from contracting. In 1986 he gained his first profit, $284, after claiming capital cost allowance. He stated his “business doubled" in 1987 and will show a profit.

Mr. Coates testified he acquired the machinery for contracting as opposed to working his farm. He stated that as a contractor he shared the same risks as other farmers: weather, market conditions, quotas, marketing boards and machine breakdowns.

In cross-examination, Mr. Coates acknowledged that prior to 1983 he did not carry on the business of farming on his land and that of his father. The success of his appeals, therefore, depend on whether the machinery and equipment Mr. Coates acquired for custom work purposes was used by him primarily for farming.

For the equipment and machinery to have been purchased for farming one must have been farming at the time of their acquisition, or within a short, reasonable time thereafter.

Counsel for Mr. Coates submitted that even if the appellant was not farming himself, the custom work he performed for farmers was part and parcel of farming. The machinery and equipment therefore was purchased primarily for farming.

In the view of the respondent's counsel, the appellant does not satisfy the Act's "primary purpose of farming" requirement for two reasons. Firstly, a person supplying services as an independent contractor is expressly excluded from the statutory definition of "farming" in paragraph 248(1)(a) [Subsection 248(1)] which provides that "farming . .. does not include an office or employment under a person engaged in the business of farming”. Secondly, the appellant can not be treated as a farmer simply by association to his customer's activities, for the reason, amongst others, that the customers themselves were not farmers.

According to the evidence Mr. Coates was an independent contractor when he performed services with his machinery and equipment; there is no evidence of a master-servant relationship between Mr. Coates and his customers. Mr. Coates' activities do not come within the definition of “an office or employment under a person engaged in the business of farming" [1] nor is there evidence that in any of the years in appeal he carried on the business of farming.

The real battle between the parties is whether the work performed by Mr. Coates for the people he contracts with is farming. The appellant relies on the reasons of the Federal Court of Appeal in Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79; 85 D.T.C. 5310, where it was held that a corporation engaged in the business of building logging roads and performing related site service under contract with logging roads and performing related site service under contract with logging companies in British Columbia may claim an investment tax credit on equipment purchased and used in its business. The Court applied the "words-in-total-context" interpretation approach to determine the object and spirit of subparagraph 127(10)(c)(vii) of the Act. Speaking for the Court, Mr. Justice MacGuigan affirmed, at page 83 (D.T.C. 5313):

Applying this test to subparagraph 127(10)(c)(vii) of the Act, what do we find? The respondent maintains that the phrase “by him” implies that the taxpayer claiming the benefit has to use the equipment for the purpose of logging, but in fact the location of the phrase makes it clear that it is the use of the equipment that has to be by the taxpayer claiming the benefit, not that the purpose of logging has to be uniquely his. It suffices if the ultimate purpose, as defined by the overall contractor, is that of logging.

Taking a broader look at the provision, we have what appears from the text to be an inducement to taxpayers to undertake or augment specific activities, viz., those listed in paragraph (c). From that point of view, it would be a matter of indifference whether the increased activity was that of a logging company itself or of a subcontractor: in both cases the increase in investment and economic activity would be the same.

Parliament's intention, in passing section 127, was to encourage investment. An investment in a property is made by a taxpayer for the purposes of earning income either from the property or from a business in which the property is used. The activities set forth in paragraph 127(10)(c) are those carried on by a business. [2] The "farming" activity referred to in subparagraph 127(10)(c)(viii) means the business of farming.

The case of Lor-Wes Contracting Ltd. can only be relied on by the appellant if Mr. Coates' customers were farming. It would appear that Devco Farms was in the farming business in 1980, however there is no evidence that his other customers were in the business. Mr. Coates testified he did not ask his customers why he was being retained or if they were in the business of farming.

Devco Farms was the only customer of the appellant who was in the business of farming. But here, too, the only description of Devco Farm's activities was that it was the largest agricultural enterprise in Nova Scotia. No description was given of what it farmed specifically or of its farming activities in general. There is no evidence in which I can hold that Mr. Coates' work for Devco Farms in 1980 was in any significant degree integrated to the farm operations of Devco Farms in 1980 was in any significant degree integrated to the farm operations of Devco Farms in a manner similar to that of Lor-Wes Contracting Ltd. which was integrated into the logging industry.

For these reasons Mr. Coates' appeals must be dismissed.

Appeals dismissed.