John A. McCulloch v. Minister of National Revenue, [1988] 1 CTC 2284, 88 DTC 1183

Christie, A.CJ.T.C.:—This appeal relates to the appellant’s 1978 to 1982 taxation years. In respect of these five years he seeks to deduct full farming losses against other income. In reassessing, the respondent confined deductions for farming losses to the limited amounts allowable under subsection 31(1) of the Income Tax Act. By allowing these limited losses, the respondent has admitted or conceded for the purposes of this litigation that during the years under review the appellant's farming activities were a business; that is to say, in the years 1978 to 1982 he had a reasonable expectation of profit: Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071 at 2073-74; 84 D.T.C. 1094 at 1096. Further, by allowing limited losses the respondent has, in effect, placed the appellant in the second class of farmers described by Dickson, J. (as he then was) in delivering the judgment of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. He said at page 314-15 (5216 D.T.C.):

It is clear that “combination” in section 13 (now section 31) cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think subsection 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

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 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.

(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 question is whether the respondent erred in reassessing in the manner he did. The onus rests on the appellant to establish such error. This onus can be discharged on an evidentiary balance of probability.

The returns of income as filed by the appellant show that during the last two months of 1978 and at the time of the other years under review he was in a farming partnership with Weatherall's Farm Consulting Limited. Eighty per cent of the partnership was with the appellant and twenty per cent with the corporation. The farming business operated under the name Honeywood Farms near Badjeros, Ontario. The returns also show this:

The appellant is 49 years of age. He was not raised on a farm although as a child he visited his grandfather's farm near Orillia, Ontario, during the summer months. He graduated in medicine from the University of Toronto in 1963 and did his junior internship at the Toronto General Hospital in 1963-64. He started his surgical training in orthopaedics in 1964 and completed this specialized training in 1969. He received a specialist certificate from the Royal College of Surgeons (Canada). In 1970 he commenced a spine surgical and orthopaedic practice in Toronto. He was associated in particular with St. Michael’s Hospital. In addition to practising he did other things in the medical field as will be seen shortly.

The appellant's medical career has been very successful from the outset. By the time he left Toronto for the United States in early 1983 he had developed techniques in spine surgery which were favourably acknowledged world wide. He had, in his words, become "the world expert in one particular procedure." The bulk of his practice became spine surgery with referrals from all over North America. When he moved to Akron, Ohio, he established himself in practice and teaching there, where he continued to thrive.

Counsel for the respondent introduced in evidence the curriculum vitae of the appellant. It is 23 pages in length and, as a biographical resumé of his medical career, it is very impressive. Currently he holds a number of appointments, including Associate Professor, Department of Orthopaedics, Northeastern Ohio University’s College of Medicine, Rootstown, Ohio, and Adjunct Assistant Professor, Institute for Biomedical Engineering Research, The University of Akron, Akron, Ohio. Prior to leaving Canada, in addition to his practice he was, during the years 1977 to 1983, Assistant Professor, Department of Surgery, and Assistant Professor, Department of Anatomy, University of Toronto. During the years 1979 to 1982 he was Medical Inspector, College of Physicians & Surgeons of Ontario. These activities relate to the years under review on this appeal:

Visiting Professorships

Sciatica and Chemonucleolysis; Rhizolysis; University of Bordeaux, Bordeaux, France, May 29, 1981

Chemonucleolysis, Robert Jones and Agnes Hunt Orthopaedic Hospital, Oswestry, England, November 3, 1981

Disorders of the Low Back in Adolescents and Children, Children’s Hospital Medical Center of Akron, Dept. of Pediatric Orthopaedic Surgery, Akron, Ohio, October 22-23, 1982

Papers Published

Lateral Lumbar Discography, McCulloch, J.A.; Waddell, G. British Journal of Radiology, 51:498-502, 1978

Factors Affecting Prognosis After Rear-End Motor-Vehicle Collisions, McCulloch, J.A. Advocates’ Quarterly, Editor, P. Theodore Matlow (Lawyer), Vol. 1:441-446, 1978 Anomalous Root-Sleeve Emergence, Suzuki, N.; McCulloch, J.A.; Macnab, I. Journal of Japanese Orthopaedic Association, 51-252, 1978

Failed Lumbar Disc Surgery and Repeat Surgery Following Industrial Injuries, Waddell, G.; Kunnel, E.G.; Lotto W.N.; Graham, J.; Hall, H.; McCulloch, J.A. The Journal of Bone and Joint Surgery (Am.), Vol. 61-A, 201-207, 1979

Chemonucleolysis: Experience with 2000 Cases, McCulloch, J.A. Clinical Orthopaedics and Related Research, 146:128-137, 1980

Nonorganic Physical Signs in Low-Back Pain, Waddell, G.; McCulloch, J.A.; Kum- mel, E.G. Spine, 5:117-125, 1980

Variations of the Lumbosacral Myotomes with Bony Segmental Anomalies, McCulloch, J.A.; Waddell, G. The Journal of Bone and Joint Surgery (Br.), Vol. 62-B, 475-480, 1980

Chemonucleolysis for Relief of Sciatica Due to a Herniated Intervertebral Disc, McCulloch, J.A. The Canadian Medical Association Journal, 124:880-882, 1981

Die Chemonukleolyse: Erfahrunge bei 2000 Fallen, McCulloch, J.A. Extracta Or- thopaedica, Bad 4, No. 4:273-291, 1981

Outpatient Chemonucleolysis, McCulloch, J.A. and Ferguson, J.M. Spine, 6:606-609, 1981

Ultrastructural Study of the “In Vivo” Effects of Chymopapain on Herniated Discs, Postacchini, F.; Bellocci, M.; Ippolito, E. (Rome, Italy); McCulloch, J.A. Italian Journal of Orthopaedics and Traumatology, Vol. 8, pp. 445-455, December, 1982

Papers Presented

Non-surgical Treatment of Herniated Intervertebral Discs by Use of Chymopapain Injection, Internists of New York State, September, 1978

Chemonucleolysis, Orthopaedic Guild, Toronto, September, 1978

Chymopapain Injection of Lumbar Discs, Annual Orthopaedic Symposium, Winnipeg, October, 1978

Chemonucleolysis, Spine Symposium, Miami, Florida, April, 1979

Adult Spondylolisthesis, Spine Symposium, Miami, Florida, April 1979

Outpatient Chemonucleolysis, International Society for the Study of the Lumbar Spine, Goteborg, Sweden, June, 1979

Chemonucleolysis — 200 Cases, International Society for the Study of the Lumbar Spine, New Orleans, Louisiana, May 23-28, 1980

Outpatient Chemonucleolysis, Canadian Orthopaedic Association, Calgary, Alberta, June 11, 1980

Surgery Following Chemonucleolysis, International Society for the Study of the Lumbar Spine, Paris, France, May 20, 1981

Chemonucleolysis and Rhizolysis-University of Bordeaux, France, 1981

Chemonucleolysis with Chymopapain, Lamplighters Orthopaedic Association, 26th Annual Meeting, Toronto, May 30, 1981

Disorders of the Spine, Dept, of Orthopaedic Surgery, Continuing Medical Education, University of Minnesota, Minneapolis, Minnesota, July 29-August 1, 1981

(1) Physical findings — Nonorganic Low Back Pain

(2) Facet Syndrome — Diagnosis and Management

(3) Chemonucleolysis

(4) Spondylolysis/Spondylosis

North American Orthopaedic Society, 25th Annual Meeting, Toronto, October 14-17, 1981

(1) Chemonucleolysis with Chymopapain

Symposium: Psychological and Disability Assessment in Backache, Glasgow, Scotland, October 31, 1981

(1) Workmen's Compensation Board: Ontario

(2) Legal Reports — Medical Assessment

Thermography as a Diagnostic Aid in Sciatica, International Society for the Study of the Lumbar Spine, Toronto, June 9, 1982

Chymopapain for Chemonucleolysis: An Overview, 32nd Annual Meeting of the Congress of Neurologic Surgeons, Toronto, October 3-8, 1982

Instructional Courses Given

Anatomy of the Spine — American Academy of Orthopaedic Surgeons, Atlanta, Georgia, February, 1980

The Spine, The Division of Orthopaedic Surgery, Faculty of Medicine, University of Toronto, April 17-19, 1980

The Spine — Surgery and Rehabilitation, American Academy of Orthopaedic Surgeons, Kissimmee, Florida, December 1-5, 1980

Back Pain and the Role of Chymopapain:

(1) Dynasty of the Disc

(2) What is Sciatica?

(3) What isn't Sciatica?

(4) Chemonucleolysis

The Columbus Orthopaedic Society, Columbus, Ohio, April 24, 1981

Chymopapain and Low-Back Pain: Painful Disorders of the Back, Moderator, Florida Society of Neurology, Naples Community Hospital, Naples, Florida, June 26-27, 1981

Diseases of the Lumbar Spine: Chemonucleolysis, American Academy of Orthopaedic Surgeons, Seattle, Washington, May 6-8, 1982

"Discolysis," Chymopapain and Collagenase, St. Joseph's Hospital, Patterson, New Jersey, September 24, 1982

Chymopapain Treatment of Herniated Disc Disease, The Fourth Annual Jersey Shore Symposium on "What's New in Neurology — 1982,” Tinton Falls, New Jersey, October 9, 1982

Surgery Performed in other Centers

1981 — Bordeaux, France — Chemonucleolysis and Rhizolysis

The biographical data since the appellant has been in the United States exceeds that of prior years.

The appellant decided he wanted a challenge outside of medicine, so in 1971 he bought a 400 acre farm that produced Christmas trees for the market. The purchase price was $100,000 which the appellant says was beyond anything he could afford. He sold everything he could to raise cash and the vendor was mortgagee in respect of a large mortgage. A dramatic increase in the appellant's medical income allowed him to pay this debt within two or three years. By the time the appellant met Morley Weatherall in 1974, he had concluded that he was bored with the Christmas tree operation. Weatherall was the manager of Peace Valley Ranch Limited which conducted a substantial feed-lot operation near the appellant’s Christmas tree enterprise. It is also to be noted that Weatherall owns the shares of Weatherall's Farm Consulting Limited. The feed-lot operation gripped the appellant's interest. He was most favourably impressed by Weatherall and regarded him as his expert adviser.

The upshot was that the appellant took about 12 extension courses on various aspects of farming that were being offered as evening courses in Toronto by the Guelph Agricultural College. In addition he took three correspondence courses made available by the College on the business aspects of farming, feed-lot operations and cow-calf operations.

The appellant began to acquire good farm land in 1973 and at that time began disposing of the Christmas tree land. It was sold in four parcels. The first farm of 300 acres, Dundalk, was purchased from a person named Clayton. Soon after, he bought a second farm of 160 acres almost across the road. This gave him a total of 460 acres of excellent farmland. These properties were rented for two years. The third acquisition was a farm of 300 acres purchased in 1974 near Dunedin. As this was being done, two farms known as the Maple Valley Farms near Badjeros came on the market and were purchased by the appellant. All of these properties were in close or reasonably close proximity to each other. The Maple Valley Farms were side by side and consisted of 550 and 600 acres for a total of 1,150, of which 980 were tillable. They included six houses and barns, all in bad shape and the land had not been properly fertilized during the two or three years of tenant farming. The appellant undertook extensive repairs and renovations and restored the fertility of the land. This became the cornerstone of his finishing feed-lot operation, i.e. calves would be purchased in western Canada, transported east and fed until they were of marketable weight. The first cattle arrived around 1976 and in the latter part of that year or early 1977 Weatherall left Peace Valley Ranch Limited and went to work for the appellant as his manager in respect of day-to-day farming operations. Hiring of supervisory help was done by the appellant and any major step had to be approved by him. Weatherall had the control over the hiring and firing of other help. When the operation was at its peak in 1980-81, 20 men were employed, three of whom were in the supervisory category. At one time all of the previously mentioned farm land consisting of 1,910 acres was known as Maple Valley Farms. The 300 acres near Dunedin was sold, but under terms giving the appellant rental rights to farm the land.

On November 1, 1978 the appellant and Weatherall's Farm Consulting Limited purchased 400 acres of the Peace Valley Ranch on an 80-20 basis. It is located three or four miles southeast of the Maple Valley Farms properties. This is also when the Honeywood Farms partnership was formed. At this time the second 160 acre farm purchased by the appellant was sold to Weatherall and he took up residence there.

There were two related business ventures that also deserve mention. In April 1980 the appellant decided to cut his costs for grain by incorporating Riding Mountain Grains Limited and having it acquire 2,600 acres of land near the Riding Mountain Park in Manitoba. Eighty per cent of the shares were owned by the appellant and twenty per cent by Weatherall. In 1982 the appellant and Weatherall concluded that this was turning into a financial disaster so it was disposed of. The appellant described this undertaking as the dumbest decision he ever made. The second venture was the purchase of an abattoir. The reason for this decision and how it was arrived at is described in this passage from the appellant's evidence:

Q. You've mentioned an abattoir. Would you mind telling the Court what that's about?

A. Well, you know, we were getting worn out, going out and paying . . . at one time we were paying a dollar-five for our calves, and selling them for eighty-five cents; and we sold them on the hoof. We sold them live to the stockyards in Toronto. And we said that, you know, it makes no sense that we give this fat animal to all those middle men to chop pieces out and the end cost of the beef, we're going to buy our own abattoir. And within five minutes of us, in Markdale, Ontario, an abattoir was in a bankruptcy. And Wayne pointed it out to me that it was in the bankruptcy. And he said, you know, I think this is an opportunity for us to get rid of all these middle men, and sell the finished product. So we bought this bankrupt abattoir, which was literally bankrupt. It was physically broken down as well. We renovated. We were good at renovating. We had lots of practice. And we renovated the abattoir, and hired the manager, Wayne pointed him out to me, I hired him.

Markdale Meats Limited was incorporated for the purpose of making this acquisition and conducting the business. Share distribution was the appellant 40 per cent, his accountant, Mr. Wayne Ferris, C.A., 40 per cent and Weatherall 20 per cent. The abattoir was a financial failure. It was closed and later sold.

The appellant describes himself as a workaholic and his evidence undoubtedly placed him at the intense end of what that word connotates. Further he says in substance that this trait is combined with extraordinary efficiency. Understandably he emphasized his commitment to farming. He said that from 1976 until November 1982 when he decided to give up farming altogether he spent more time on the farm than he did with his family. He described his work routine in this way. He was involved with medicine on Monday and Tuesday, but the evening of these days was devoted to matters pertaining to the business side of farming. Either Tuesday night or upon rising around 5 a.m. on Wednesday he would drive to the farm. This took about 1 /2 hours. He would meet with Weatherall about 7:30 a.m. Later he would also meet with his accountant and the whole of the day was devoted to farming matters. Wednesday evening he would return to Toronto arriving at 8 or 9 o’clock. Thursday and until noon on Friday were devoted to medicine, but Thursday evening was occupied with farming matters. He returned to the farm Friday and remained there until Sunday evening when he returned to the city. This went on for 50 weeks a year. He would take two weeks off to vacation with his family. Later he added: "I calculated that I worked approximately 38 hours a week in medicine and I worked 53 hours a week in farming and that worked out to an 80 [sic] hour work week. The work of two men." It was obvious that the appellant was under considerable emotional stress while testifying. It was necessary to adjourn for a period because of it. This may perhaps account for what I can only regard as some exaggeration in his evidence.

The appellant attributed his failure in farming and related enterprises to such things as soaring interest rates, rising fuel and fertilizer costs and a downward trend in commodity prices. Weather and some bad management by persons other than Weatherall was also mentioned.

While I am satisfied that the appellant was thoroughly devoted to his farming enterprise and that he generously committed his physical, intellectual and financial resources to it this, of itself, cannot resolve the dispute in his favour. This commitment must be considered in relation to his dedication to medicine which obviously was very substantial. His income from this source, the volume of surgery he performed, his teaching activities and his authorship and presentation of learned papers all speak, and speak emphatically, for themselves. A comparison between the appellant's medical income and the financial results of his farming activities is cogent. The whole of the evidence leads me to conclude that the appellant falls considerably short of discharging the onus that rests upon him to establish that the respondent erred in his reassessments. I go even further and say that, when regard is had to what realistically must have been his commitment to farming as opposed to his commitment to medicine and the economic results of each, I am affirmatively satisfied that the appellant falls within the second class of farmers described in Moldowan. During the times relevant to the appeal he did not look to farming, or to farming and a subordinate source of income, for his living. The business of farming was in a sideline position with respect to his medical business. It follows that this appeal cannot succeed.

I add this. There is an aspect of this appeal that I find perplexing. Maple Valley Farms Limited was a corporation and all of its shares were owned by the appellant. He was a director of Maple Valley Farms Limited. He said that the corporation's lands at one time were made up of the 300 acres purchased from Clayton, the 160 acres acquired across the road, the 300 acres purchased near Dunedin and the 550 and 600 acres that were previously described as Maple Valley Farms, the total being 1,910 acres. As previously indicated the 300 acre parcel near Dunedin was sold as was the 160 acres, leaving 1,450 acres. Then Honeywood Farms consisting of 400 acres was acquired and it is the farming operations of this partnership that is reported in the appellant's income tax returns for the years under review. The relationship between the partnership and Maple Valley Farms Limited is at best murky. These questions were asked of and replies given by the appellant:

Q. You've indicated that during those years there was some contribution of your medical income in the farming operation, can you comment any further on that?

A. I . . . you know ... I don't ... I think Wayne can give . . .

Q. Can you give a general —

A. . . . the exact figure. But every cent I earned I put in the farm.

Q. And in making those decisions, how would you break it down as to where those contributions went with respect to Maple Valley Farms, Honeywood Farms, Riding Mountain Grains?

A. Well, there were two factors that I was always considering. And one is, that I would put the money where it was needed. That was number one factor. And the second factor that was the most difficult factor of all for me to control, was that Morley Weatherall was my partner. And I couldn't contribute . . . I couldn't continue to contribute unlimited capital to Honeywood Farms, because I would bury his 20 per cent interest. So instead of contributing capital, I contributed some capital to Honeywood Farms, but instead of contributing capital to Honeywood Farms, I would put my capital into Maple Valley Farms, and then Maple Valley Farms would provide the service to Honeywood Farms. And we would bill Honeywood Farms for the service. So that the . . . my investment, my capital investment, in Maple Valley Farms would show up as an operating cost in Honeywood Farms, and would not reflect adversely on Morley's 20 per cent ownership of Honeywood Farms.

Later he added:

Q. And as the farms functioned on a day-to-day basis, how separate and distinct were they?

A. They ... it was a blur. You know, we had these . . . Maple Valley Farms Limited, Markdale Meats Limited, Honeywood Farms, the trucking business, Riding Mountain Grains, but everybody knew us, whatever you wanted to call us, it was Morley, Wayne and John, running a farming enterprise. Nobody knew that one was a corporation and one was a partnership, but . . . we didn't make that known amongst the people out there.

Weatherall in his evidence spoke of an "amalgamation" having taken place in 1981 involving his farm and the Maple Valley Farm. The accountant, Ferris, said that the amalgamation referred to consisted of Weatherall leasing his farm to the Honeywood Farms partnership and Maple Valley Farms Limited doing the same thing. This occurred between Christmas and the end of December 1981.

The appellant placed in evidence financial statements pertaining to Maple Valley Farms Limited that show that in 1978 the corporation's revenue from cattle sales was $553,030 and in 1979 it was $650,634, with a deficit at the end of each fiscal year of $31,035 and $24,309 respectively.

A great deal of the time and other resources devoted to farming by the appellant during periods pertinent to this appeal related directly to Maple Valley Farms Limited. This raises, in my mind, the question whether the appellant held an office under a person engaged in the business of farming thereby precluding a very considerable portion of the contributions just mentioned from being regarded as farming.* [1] Subsection 248(1) of the Income Tax Act defines “farming”, “office” and "person" as follows:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

"office" . . . includes the position of a corporation director . . .

"person" . . . includes any body corporate .. . .

In coming to my determination I have, however, chosen to disregard this point because of the pleadings and the condition of the evidence. It is possible that there is an explanation for it so I have treated the evidence adduced at the hearing as pertaining to the partnership alone.

The appeal is dismissed.

Appeal dismissed.