Taylor, T.C.J.: —These are appeals heard on common evidence, in Sudbury, Ontario, on May 19, 1988, against income tax assessments for the year 1982, in which the Minister of National Revenue disallowed the deduction of "full farming losses" claimed against other income. The Minister had allowed the “restricted farm losses” of $5,000 to each of the appellants.
Certain information prepared by Mr. Elliott of Farm Business Consultants, indicated that the first farm of 156 acres had been acquired in 1968 for $12,500 on Manitoulin Island, Ontario, the second of 100 acres for $16,500 in 1971. Both farms were sold in 1977 and a different farm of 507 acres purchased in that year. According to the submissions and the testimony of the Chandlers, they were “building up the farming operation" during the years 1979 to 1981. It was contended by the appellants that the high interest rates in 1981 and 1982 caused a slow down in their programme, but that they were now back on their scheduled plan:
... . The outside incomes have enabled the Chandlers' to maintain the capital established since 1975 (real estate, machinery, etc.). The Chandlers have every intention of regaining and reaching their goal of establishing a cow/calf operation where the chief source of income for the taxpayers is farming.
For the Minister, the situation for Gary Chandler was:
— during the 1982 taxation year, the Appellant and his wife operated a cow/calf farm (the farm operation) which had been stated in 1977;
— during the 1977 to 1985 taxation years, the Appellant was engaged full-time as a teacher/principal and earned employment income in the following amounts:
1977: $32,494.00 1978: $34,100.52 1979: $36,766.96 1980: $40,343.70 1981: $48,079.00 1982: $52,829.68 1983: $57,055.33 1984: $59,486.00 1985: $62,420.36
— the gross revenue of the farm operation during the 1977 to 1985 taxation years (excluding stock inventory) reported by the Appellant was:
1977: $10,877.84
1978: $23,462.87 1979: $16,029.45 1980: $14,956.93 1981: $22,959.75 1982: $26,667.68 1983: $10,821.33 1984: $19,255.51 1985: $ 6,146.42
— the loss from the farm operation during the 1977 to 1985 taxation years reported by the Appellant using the stock inventory as permitted by section 28 of the Income Tax Act, was:
1977: $17,499.74 1978: $ 7,576.92 1979: $ 7,500.00 1980: $28,807.22 1981: $38,635.13 1982: $55,729.10 1983: $46,097.12 1984: $37,385.83 1985: $44,930.21
— for the 1977 to 1981 taxation years, the Appellant in filing his income tax returns deducted the allowable restricted farm loss;
— for the 1982 to 1985 taxation years the Appellant sought to deduct 50% of the losses reported for the farm operations as follows:
1982: $27,897.21
1983: $23,048.56 1984: $18,692.91 1985: $22,465.10
— the farming operation carried on by the Appellant and his wife during the 1982 taxation year did not and could not reasonably have been expected to provide the bulk of the Appellant's income and the centre of his work routine;
— the Appellant did not look to farming or to farming and some subordinate source of income for his livelihood but carried on the farm operation as a sideline;
— during the 1982 taxation year, the Appellant's chief source of income was neither farming nor a combination of farming and some other source of income.
— The Respondent relies, inter alia, on sections 3, 31 and 248 of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, s. 1 as it read in its application to the 1982 taxation year.
It will be referenced in more detail later, but it appeared that the issue before the Court arose because the appellants filed amended financial statements and tax returns for the year 1982 claiming the full farming losses — as partners, whereas the “restricted farm loss" had been allowed by the Minister for the years 1977 through 1981 and had continued based on the original tax return filed for Gary Chandler for the year 1982. In very rough terms therefore the losses for the years 1977 through 1981 alone had totalled over $100,000 (see schedule above) and the Minister had allowed a total of $25,000 ($5,000 each year) as a deduction from other income. For Penny Chandler the only difference of note was that for her, the outside income, also from teaching was:
1982: $25,244.56 1983: $39,406.40 1984: $41,113.60 1985: $43,076.48
Certain portions of the argument provided by both the agent for the appellants and counsel for the Minister are quoted:
For the appellants:
And out of that Moldowan case [William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213.], . . . we have to look at those three issues, the criteria; startup costs; and change in direction.
And we also have to look at losses as a result of a start-up period: that we are building up the inventory and we are acquiring capital assets to accommodate that and we're obviously going to have higher carrying costs that reflected why losses occur.
And so through those three issues of (the) start-up period, the adverse conditions of the input costs escalating and beef prices stabilizing in the period under appeal, and also with the situation of the — my mind went blank — with the situation that the start-up period, the interest rates escalating and the input costs escalating when the market conditions stabilized. (Emphasis mine)
I believe I summarized earlier on that keynote of capital investment, farming background involvement and adverse conditions that have affected this operation which, needless to say, in their evidence it was a game of survival. They had to turn their attention by 1982 and 1983 — their attention wasn't on profit-making; their attention was on saving a capital asset that was in jeopardy. And so where that transition occurs, I feel quite strongly that in 1977 through those years there was a build-up and they had no choice, they were on a roller-coaster in 1982 and 1983 to hold on to what they had, and that’s something that should be borne in mind today.
And out of the Morrissey case [Raymond Morrissey v. The Queen, [1986] 2 C.T.C. 389; 86 D.T.C. 6509], the Chief source of income is not one of economic wisdom. We have to look at the taxpayer's training which is impressive. This is not someone who's jumped off a truck and said, "We're going to go into farming”. He has extensive training and background and knowledge of farming is impressive, in his evidence, with his teaching. And once again his experience with Manitoulin Island in 1968 and the research he put into buying that farm in 1977, his knowledge of knowing where he's got to go with the farm operation. The fact that he improved his hay equipment. He improved the fencing, the crop rotation, not only in crops to provide more nutrition to the soil but also the rotation and pasture land with the cattle.
If you refer to the Gray case [Dennis C. Gray v. The Queen, [1986] 2 C.T.C. 382; 86 D.T.C. 6504 (F.C.T.D.)], on page 6508, “chief source" it tries to wrestle with the defining “chief source" on page 6508.
Also relevant to the determination of reasonable expectation of profit and consequently also relevant to chief source are the taxpayer's training, the taxpayer's intended course of action. The factors listed are expressly stated by the Chief Justice not to be exhaustive. The factors will differ with the nature and the extent of the undertaking . . .
And why did the farm losses occur? We're in a start-up period and these are adverse conditions that were affecting the situation with the interest costs and the input costs escalating, with market prices stabilized on the beef. [Emphasis mine.] Referring to the Moldowan (supra) case which discussed start-up costs and it refers to the Matthews case on raw land [The Queen v. Douglas C. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193], and you have to look at Mr. Chandler buying a property in 1977, making improvements to that property, which Mr. Chandler indicated in his evidence that he couldn't do that overnight. In fact, he had to set up some kind of land crop rotation which restricted the cash revenue from that operation. He had to facilitate the buildings in setting the buildings up properly. It’s all a period of investment that you make in that start-up period. And then, obviously, you're building up the inventory, the breeding stock. You have a start-up period that you start with buying 20 animals and trying to achieve up to 75 to 80 head. That is all a start-up period. You've got to start somewhere. We buy a farm. We make improvements to the farm, whether it's to the land and buildings. We make improvements and additions to the machinery to be able to accommodate the farm, and we also accommodate the inventory, of building up that inventory. All that is in a start-up period of developing that farm operation. It would be nice to have everything fall out of the sky and walk into it but we've got to start somewhere and that's what we look at in start-up periods. . . . The objective is to develop a capital base that's going to be able to facilitate your income-producing item, namely this inventory that's going to sell calves. It’s something that has to be initiated and we just cannot go out and buy 75 cows if we don't have the facilities to handle that; or improve facilities, such as kicking out the wall at the end of the barn so you've got more efficient manure-handling. And to be able to handle that kind of inventory. So we have to start from somewhere and, once again, that’s all tied in with capital investment and also the income-producing asset, the inventory of the animals. [Emphasis mine.]
And for the respondent:
. . . Mr. Chandler got a promotion in 1980, I submit, to a more responsible position. He agreed with me — and I believe that he has integrity with his job; I believe he's dedicated to it and does a good job as a principal, and he would do more than what is legally required under his contract, and he has a sense of responsibility about it. I submit it is not the same as simply what amounts to investment income, as was found in the Hadley case [Harold S. Hadley v. The Queen, [1988] 1 C.T.C. 62; 85 D.T.C. 5058].
Now looking, for example, at the ordinary mode and habit of work — and there was testimony about the average hours — well, on an ordinary winter's day he would get up, do some farm work, and go to his school and do his principal's . .. . do the responsibilities that arise from that job; and the same would be true of his wife. Ordinarily, on a winter's day, a holiday, a spring day, that would happen. The summertime is off. That's the nature of that type of job.
And I'd like to now refer you to Tab 3. That's a decision in Her Majesty the Queen against J. Peter Conne/l, [[1988] 1 C.T.C. 247; 88 D.T.C. 6166] a very recent decision of Mr. Justice Strayer. It’s at Tab 3. The tax years in issue were 1979 and 1980. The farm had been purchased in 1972. So I submit once again we have a situation similar to this one where we have a few years to look at. We don't just have the beginning period. It was noted by Mr. Justice Strayer, at page 6167 that the capital investment was adequate. It was noted by Mr. Justice Strayer that Mr. Connell was a serious man. He had done a lot of reading. He had educated himself. There was certainly doubt about his intelligence.[s/c] His research into the field or his sincerity.[s/c] Timewise, out of fairness, timewise Mr. Connell appeared to spend more time in his other employment than at his farming. You will conclude whether the testimony in this case also supports that proposition.
. . . Certainly, intentions and plans can be frustrated but markets fluctuate, interest rates fluctuate. These things happen. And I submit a businessman takes them into account. They aren't acts of God, in that sense. Mr. Justice Strayer looks at the ordinary mode and habit of work of the Defendant in Connell and I submit your Honour should do the same. Look at the nature of employment in issue. We have a teacher and we have a principal. I submit they are professional people. They've gone to university. In fairness to Mr. Chandler, he did not agree he went to university solely for a teaching degree, and I accept that. That was money, that was money that went into educating them. They are responsible positions. They have a responsibility, I submit, beyond strict contractual terms. That's what perhaps distinguishes a profession from a job.
In the Conne/l case, Mr. Connell was promoted during the years in issue. That obviously came from his satisfactory performance at his former job. I submit the same is true in this case.
Analysis
The question here to be decided is not whether there was a "reasonable expectation of profit” — that has already been accorded by the Minister by virtue of the $5,000 "restricted farm loss" allowed to the taxpayers. Counsel for the Minister did suggest that it was still open to the Court at this hearing to decide that on the facts brought out there was no reasonable expectation of profit, although the assessment allowing the restricted farm loss would remain the same. Such a concession by the Minister — allowing a restricted farm loss under circumstances which are doubtful at best — appears to have caused the Courts considerable difficulty in the recent case law, when the final question became "chief source of income”. Some of the more recent cases which have dealt with the subject of “chief source”, at the Tax Court level are:
Joseph Said v. M.N.R., [1986] 1 C.T.C. 2115; 86 D.T.C. 1009 - Dismissed
James Leakos v. M.N.R., [1986] 1 C.T.C. 2245; 86 D.T.C. 1190 - Dismissed
Roger M. Bender v. M.N.R., [1986] 1 C.T.C. 2437; 86 D.T.C. 1291 - Allowed Stephen W. Herman v. M.N.R., [1986] 2 C.T.C. 2288; 86 D.T.C. 1708 - Allowed
Rodney David Leslie v. M.N.R., [1987] 2 C.T.C. 2134; 87 D.T.C. 435 - Allowed
I have reviewed these, and I recognize it is very difficult to chart a completely standard path through them — due to the differences in facts and the weight given to them — nevertheless they do indicate a certain pattern. In Said, supra, at page 2123 (D.T.C. 1014):
It may be possible to conceive of a set of circumstances wherein a taxpayer would fail to establish the primacy of his farming venture (in a comparison with another source of income) from the first viewpoint — “expectation of income from his various income sources", and yet manage to overcome that built-in handicap and support his assertion on the second viewpoint —- "mode and habit of work" — but I do not see in this appeal the prospect for such a turn of events. Indeed, I would suggest, it would be the extraordinary set of circumstances which could fit into that equation, as the Judges saw in Graham (supra). [Graham v. The Queen, [1985] 1 C.T.C. 380; 85 D.T.C. 5256.]
Leakos, supra, is presently under appeal, but on page 2251 (D.T.C. 1195) the following comments were made:
. . . The prospect of "profit" rivalling that of the medical practice is almost inconceivable. It certainly could not be said that the four years since 1980 have supported Dr. Leakos' alleged optimism at December 31, 1980, that the losses would reduce dramatically and consistently — they have not done so.
... l have never been of the view that "gross income" as such should play a great role in determining the question of chief source of income except in the most unusual circumstances (support for this view may be found in The Deputy Minister of Revenue of Québec v. Julius Lipson, [1979] C.T.C. 247 (Supreme Court of Canada).
In Bender, supra, the deciding factor in favour of the appellant was that any further appeal of Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 had been withdrawn by the Minister, and that led the Court to comment on page 2438 (D.T.C. 1292):
... To take the headnote from the D.T.C. version of Hadley (supra) alone, one may conclude that there were at least four salient factors in favour of Mr. Hadley:
(1) He made a substantial investment.
(2) He brought his organizational and analytical skills to the business.
(3) His expectations were that the farm would some day provide the bulk of his income.
(4) The losses were the result of depressed market conditions.
These points were relied on substantially by the agent for these appellants — but as will be noted later, consideration must also be given to subsequent jurisprudence. For Herman, supra, the Court relied considerably on the conclusion reached in Bender, supra, and at page 2292 (D.T.C. 1711) stated:
The main point still is whether Mr. Herman fulfils the conditions under section 31 of the Act — referenced in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.), Paul E. Graham v. The Queen, [1983] C.T.C. 370; 83 D.T.C. 5399 (F.C.T.D.), Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5059 (F.C.T.D.), and Bender (supra), which provide for the tax relief he seeks. No evidence or argument was advanced in the appeal in support of the Minister's assessment, which persuaded me that there was a difference of substance between the facts in the above-noted jurisprudence and the facts in this matter. The circumstances of this case are such that they appear to me to fit the criteria outlined in the relevant current case law.
Finally, the case of Leslie, supra, continuing the sage of Hadley, supra — on page 2136 (D.T.C. 436):
. . . Taken along with the appellant's own evidence, it is quite clear that Mr. Leslie looked at the operation as a base for setting up a retirement income rather than providing a net return during the years under review. However, in my view, even if all the Minister's assumptions noted above were correct, they do not support the conclusion reached that "the appellant's chief source of income was not . . . farming . . .", as I I understand the current relevant jurisprudence . . .
Without some more recent case law, from which to review Hadley, supra, that case could remain the base point for an examination of this appeal. For such enlightenment I turn to the relevant case law at the Federal Court level. Justice Strayer examined the question of “chief source” in Raymond Morrissey v. The Queen, [1986] 2 C.T.C. 389; 86 D.T.C. 6509, wherein at page 392 (D.T.C. 6512) he stated as one basis for allowing the appeal:
I have with some difficulty concluded, on the basis of higher authority, that the reasonable prospect of profitability is not a very important factor in determining whether farm income is a chief source of income.
It will be noted that the learned judge says that 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". It appears to me that these are to be read disjunctively; that they are each factors to be taken into account but neither is an absolute requirement.
As I have noted in other judgments, I find it somewhat difficult to relegate the end result of profitability to a minor position in the hierarchy of factors to be considered, in a determination of “chief source”. Morrissey, supra, has been appealed to the Federal Court of Appeal and in due time some further assistance will be available to this Court on the matter.
But now we must consider the case of The Queen v. J. Peter Conne/l, [1988] 1 C.T.C. 247; 88 D.T.C. 6166 in which Justice Strayer does provide some current aid in pursuing the issue before the Court in this matter and I quote rather extensively from page 250 (D.T.C. 6168):
Looking at the criterion of the "taxpayer's reasonable expectation of income from his various revenue sources" I find it difficult to see in the present case that the taxpayer has established a reasonable expectation of his farm income becoming his chief source, or one of his chief sources, of income. He testified that when he commenced building his herd in 1973 he expected it would take about ten years to make the operation profitable. The basis for that belief was demonstrated. In any event, it has proven to be overly optimistic as the farm is not yet profitable some 15 years later. The taxpayer blames this in part on depressed meat prices and, for part of the period after the tax years in question, on extraordinarily high interest rates. To a certain degree these and similar problems seem to arise frequently in agriculture and any realistic forecast of profitability must take them into account. While the taxpayer says he is optimistic for the future and expects his herd to become profitable, as mentioned earlier no data and no corroborating evidence was presented on this point. While the Minister has, by applying subsection 31(1), conceded that the taxpayer's farming is “a source of income” and this implies some expectation of ultimate profitability, this is not determinative of whether the taxpayer could have a reasonable expectation that his farm income would be his chief source of income either alone or in combination with another source of income. It is hard to see how such an expectation could be entertained in the circumstances of 1979 and 1980 when he was earning a salary of respectively $61,199 and $69,510 Mr. Connell himself confirmed in his testimony that he could not conceive of his farm income exceeding his employment income. On the facts it is difficult to see how he could have had a reasonable expectation of his farm income even being significant in relation to his employment income so as to constitute one of his chief sources of income.
Looking at the other criterion identified by the Supreme Court, namely the taxpayer's “ordinary mode and habit of work" one is obliged to try to compare the taxpayer's commitment to farming to his commitment to employment. Two relevant tests suggested by the Supreme Court are the time spent and the capital committed in relation to farming. It is obvious the Supreme Court did not intend these to be the only tests and one must try from the evidence available to determine whether he is, as the Court said in Moldowan “a man whose major preoccupation is farming”. After carefully reviewing all the evidence, I am not satisfied that the taxpayer here has demonstrated — and the onus is on him to do so — that his major preoccupation during the years in question was farming. As for time spent, even accepting the rough estimates provided by the taxpayer it is clear that he spent more working hours in his employment than in farming. Further, it is hard to characterize the role of Deputy Minister in the Government of Canada as an "employment side-line". Mr. Connell agreed that he would have felt obliged to give priority to his job had there been a conflict with his farming. This is not a situation, as found in some of the cases under this section, where a person continued with his employment but declined promotions or greater responsibilities at his place of employment in order to concentrate on farming. In the present case Mr. Connell, when he purchased his farm, was a Deputy Secretary of the Treasury Board. Three years later he was promoted to the position of Deputy Minister of National Revenue, a post he occupied during the taxation years in question. It is fair to assume that he performed that role ably and with diligence as he was subsequently appointed, in 1982, to the very responsible position of Deputy Minister of Agriculture. While it is clear that throughout this period he was serious about his farming and apparently did whatever was necessary, including the outlay of capital, for an operation of its size, the evidence does not satisfy me that this should be viewed as anything other than a side-line occupation which, because of its nature, could be conveniently combined with his main preoccupation of being a Deputy Minister. The capital committed also provided the taxpayer and his family with a home and life style that they clearly found appealing quite apart from any income-earning potential that might be involved.
Whatever else may be said on behalf of these taxpayers (The Chandlers) in claiming full farming losses, their situation parallels very closely that set of circumstances described in Connell, supra. One can admire their dil- ligence, perseverance, and dedication but that does not serve to overcome the obstacles in the way of these appellants in claiming that the farming business constituted their chief source of income. As at this point in time I regard Connell, supra, as setting the parameters for the “chief source" question, and I do not find therein judicial support for the assertion in these appeals.
A minor effort was made by their agent to bring these taxpayers under the phrase from Moldowan, supra, "a man who changes occupational direction", by virtue of the taxpayers' acquisition of the 507-acre farm in 1977, and disposing of the other two smaller farms. That effort was not persuasive in my view. First I would have difficulty relating the transaction in year 1977 to the year under appeal; and second it was quite clear from the evidence that the appellants realized by 1977 that their then existing operation could never be profitable, and they simply attempted to re-establish in a larger farm which they hoped would provide a better prospect — but they still continued to farm. I do not see how they had changed their occupational direction in any way. They had certainly not discontinued teaching, nor had they embarked on any new venture.
Finally a word on "start-up costs" — another proposition put forward by the agent for the appellants. A review of "start-up costs" — has been made in a recent judgment, McClure v. M.N.R., [1988] 2 C.T.C. 2140 in which it was proposed that the term “start-up costs" was little if any different than the normal anticipated operating costs of a business. In McClure, supra, the Minister had not accorded the taxpayers the restricted farm loss — so their initial task was to convince the Court that a "source of income" existed. They were not successful in so doing. For the Chandlers in these appeals, there was little in the original financial statements filed, and nothing in the amended statements to support a conclusion that the operation of the farm in 1982 was a stable productive economic unit with any immediate prospect of an excess of income over expenditure. There was nothing provided in testimony to improve that perspective, and the record of operations before, during and after that year made available to the Court, cannot provide the taxpayers much comfort. The Minister perhaps had access to information not made part of the trial record, which led him to conclude that there was a "reasonable expectation of profit”. But on the basis of that made available to the Court it would be difficult, if not impossible, to reach that conclusion for 1982. In order that the agent's proposition that the amounts at issue be considered as "start-up costs", some demonstration of the positive results of such an alleged "start-up" would be required in my view. No such information was provided as was done in Speck v. M.N.R. [1988] 2 C.T.C. 2133. In Conne/l, supra, the learned Justice was not required to deal directly with “start-up costs", as this Court in McClure, supra. However, the question did arise in my mind — Once the Minister has conceded “a reasonable expectation of profit” — (a requirement not substantiated in McClure, supra) — are any excess costs over the "restricted farm loss" limited to be considered as “start-up costs"? Justice Strayer indirectly touched on the point and may have answered this question as follows at page 250 (D.T.C. 6168):
. . . While the Minister has, by applying subsection 31(1), conceded that the taxpayer's farming is "a source of income" and this implies some expectation of ultimate profitability, this is not determinative of whether the taxpayer could have a reasonable expectation that his farm income would be his chief source of income either alone or in combination with another source of income.
I would conclude from that comment, that the appellation "start-up costs" does not have any more positive and favorable effect for the taxpayer, when the issue is "chief source”, than it does when the issue is the primary one of “reasonable expectation of profit". Simply alluding to the costs incurred as "start-up costs" does not fulfil the responsibility on the taxpayer to demonstrate the basis for a claim of "chief source of income". I do consider it of some interest that counsel for the respondent in this matter indicated that this Court, as a result of the hearing, could reach the conclusion that a proper basis for the Minister allowing even the “restricted farm loss" had not been demonstrated, and accordingly the Court could decide that no "reasonable expectation of profit” (no source of income) existed. That would totally negate the claim of these appellants that the operation represented the "chief source of income”. I did not find it necessary to so decide in this matter, but the prospect of the Court requiring support at a formal appeal stage, for the "source" of income, before considering the question of "chief source" remains open in my mind. This Court could not reverse the allowance of “restricted farm loss", already accorded an appellant, in such a circumstance, but if no "source" could be demonstrated (irrespective of the Minister's assessment concession) no basis for claiming "chief source" would exist. The point may well arise as difficult for an appellant to surmount at some time however.
Summary
There has been no evidence or argument provided in these appeals which would warrant allowing the amounts claimed as representing the costs of a business categorized as the “chief source of income” of the appellants, when the facts are cast against the decisions arising out of consideration of the issues dealt with in Conne/I, supra, McClure, supra, and Speck, supra.
The appeals are dismissed.
Appeals dismissed.
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