Ronald Timpson v. Her Majesty the Queen, [1987] 1 CTC 389, 87 DTC 5266

Cullen, J.:—The plaintiff appeals from a decision of the Tax Court of Canada dated June 12, 1985, wherein the Court ruled that any losses experienced by the plaintiff by reason of his farming operation in the course of taxation years 1977 and 1978 were pursuant to section 31 of the Income Tax Act and limited to $5,000 for each year.

As a former income tax professor used to state about many an income tax, succession duty and estate tax clause, "To read it is to weep". Section 31 is such a clause. Mr. Justice Dickson, as he then was, wrote in Moldowan v. The Queen, [1977] C.T.C. 310 at 310; 77 D.T.C. 5213 at 5214, “Central to the appeal is the construction of s. 13(1) of the Income Tax Act R.S.C. 1952, c. 148, as amended, an awkwardly worded and intractable section and the source of much debate. It reads, in English:

(1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of:

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for year exceeds $2,500, or

(ii) $2,500

(2) For the purpose of this section, the Minister may determine that a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

(3) For the purposes of this section, "farming loss" means a loss from farming computed by applying the provisions of this Act respecting the computation of income from a business mutatis mutandis.

But he continues, "We must endeavour to construe the language of Parliament. It is not an impossible task."

Mr. Justice Joyal sees it this way in Hadley v. The Queen, [1985] 1 C.T.C. 62 at 62; 85 D.T.C. 5058 at 5059: ”. . .Section 31 is drafted in the kind of arcane language characteristic of taxing statutes. . ."

The whole issue of this appeal revolves around the interpretation of section 31 of the Income Tax Act within the factual situation of the present case.

I can do no better at this juncture than to quote the splendid summary of the law as expressed by my colleague Joyal, J. in Hadley (supra). At pages 62-64 (D.T.C. 5059-60) he states:

Suffice it to say at this time that with respect to farming losses, a taxpayer may fall within any one of three classifications. In the first classification, a taxpayer is entitled to deduct all his farming losses and in that respect, such farming losses are treated no differently from losses experienced in any other endeavour. The second category is where the taxpayer is limited, in charging his farming losses, to a sum of $5,000 for any one taxation year. The third classification is where a taxpayer is not entitled to deduct any farming losses at all.

Although section 31 is drafted in the kind of arcane language characteristic of taxing statutes, there have been several judicial pronouncements to bring some clarity to its provisions and to assist any trier of facts in determining under which of the foregoing categories a taxpayer engaged in farming operations might find himself from time to time or from year to year. The leading pronouncement in this regard is found in the Moldowan case.[supra] This is a Supreme Court decision and it appears to be the only case where the Supreme Court of Canada was called upon to rule on a section 31 issue.

At 315 [5216] of the report, Mr. Justice Dickson, as he then was, found that section 31 contemplated:

(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. 13(1) [now section 31(1)] in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to the 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 s. 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.

Section 31 creates no problem for the full-time farmer whose money, time and efforts are exclusively devoted to his farming operations and who has no other source of income. Treatment of farming losses for such a taxpayer is substantially in accordance with general tax rules. Neither does the section create much of a problem when dealing with a taxpayer who makes no pretense of being a farmer but, nevertheless, owns a country place with sufficient acreage to keep a couple of horses, who spends weekends and holidays there and has a neighbouring handyman look after his stock during weekdays. The public is not in the mood to subsidize the losses which might be experienced by such a taxpayer. Such losses are not business losses. They are merely the costs of maintaining a life-style.

Where the application of section 31 creates problems is in respect of a farming operation which is run as a business but where the taxpayer has other sources of income. Such a taxpayer might fit into the first category articulated by Dickson, J., in which case, any farming losses sustained may be charged against the taxpayer's other income. In the alternative, the taxpayer might fit into the second category in which case, his farming losses are, for tax purposes, limited to $5,000 annually.

The issue of whether a taxpayer fits into the first or second category is essentially a factual one. In this regard, the judgment of the Supreme Court in the Moldowan case provides us with certain tests, guidelines and indicia to assist a trier of facts in making his determination.

For example, Mr. Justice Dickson finds that a taxpayer engaged in farming need not have a "source of income”. It is sufficient, he says, that a taxpayer have a “reasonable expectation of profit”. In effect, an operation which suffers a loss may be found to be a source of income.

His Lordship further states, at 314 [5215], that "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 of measurement. . .”

In applying the test of “reasonable expectation of profit” in relation to a chief source of income, Mr. Justice Dickson lists inter alia, at 314 [5216], ”. . . the time spent, the capital committed, the profitability both actual and potential . . ." And he says ”. . . 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."

In a similar vein, Mr. Justice Dickson lists, again at 314 [5215], a number of criteria which might be considered in the determination of a “reasonable expectation of profit”, such as ”. . . the profit and loss experience in past years, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.” However, "the list is not intended to be exhaustive”, warns His Lordship.

The Moldowan decision has purified the air. It has provided us with legal principles and guidelines which narrow considerably the field of inquiry in determining under which of the three heads enunciated by Mr. Justice Dickson farming losses might be treated. The decision, of course, is also of a nature where both devil and saint may quote it with equal impunity and immunity.

Actually, still quoting Joyal J., my task now is, to ”. . . review the finding of facts in the case before me. It is fair to say there is not much conflict on the evidence. The difference between the plaintiff and the defendant is substantially one of weight and one of inferences.” In this case, counsel for the defendant presented no evidence.

The plaintiff is a doctor of medicine. He is also a man of boundless energy. Witnesses, physicians and laymen alike, marvel at his ability to do so much. The very character of the man would rebel at any suggestion that he ought to be a hobby farmer — and certainly the defendant made no such claim.

In earlier years, before 1975, he had the largest medical practice in Collingwood, Ontario. Dr. Roy Clark, a surgeon who did referral work for the plaintiff, stated, "We used Dr. Timpson as an anaesthesiologist and he was available at all times. He was always willing to work." Dr. Clark used the vernacular to describe the significant change in career, “by 1975-76 Ron was going to the farming". Everyone knew. The immediate effect to Dr. Clark was, "a lack of time available, only certain nights on call, and he was better organized. He divided his time between medicine and farm".

Arnold Anderson, now a builder but a fourth generation farmer (until market conditions and high interest rates did him in), described him as early as 1969 when Anderson was farming, as being a constant visitor.

We talked mostly about feed lots, feeding commercial cattle, a bit about purebred cattle and about commercial beef. He was very much interested. I knew he was going to get in [i.e. farming], he wanted to be on his own.

When the plaintiff made his first purchase in 1972 of seven heifers, I looked after them. He gradually built up the number. In the second year he rented a farm near Stayner and sought my advice about buying. He was always talking farm income, and difficulties of overhead. He made himself very knowledgeable.

Mr. Anderson described the evolution of the plaintiff's operation to his eventul decision to get into purebred cattle — “which are sold as heifers or bulls for breeding, to improve the quality of many herds. But you need a good name which you get from good stock. It takes a lot of time 8-10 maybe 15 years." (Emphasis added.) Despite being a fourth generation farmer, Mr. Anderson tried the purebred farming and abandoned it and later "went broke”. As stated earlier, he and all farmers faced a poor market and 20-24 per cent interest rates on mortgages.

Mr. Anderson withstood a searching, excellent, cross-examination with no damning evidence about the plaintiff's role as farmer. He conceded that the plaintiff started from scratch, did not buy an ongoing operation, bought a farm that was much in need of repair and fencing but had the basic ingredients for a cattle operation — not ideal but adequate to the need. “The farm purchased had a house and barn that were a disaster but good for cow — calf — good for beef in general and good for giving hay and grain. There was lots of water there but needed a well.” Counsel for the defendant stressed the fact that the plaintiff did not live on the premises, to which Mr. Anderson replied: "He was there pretty frequently and kept an eye on things.” When asked why he switched away from purebred, he stated the main reason was cash flow at the bank and he could turn dollars faster with a commercial herd. His evidence was that a normal operation needed at least 100 acres but with 500 cattle, with a cow base of 50 the need would probably be 300 acres.

The plaintiff's desire to work on his own was also confirmed by Dr. D. Smith of Collingwood. Although Dr. Smith answered an ad for help from the plaintiff, there was no partnership, no sharing of overhead, no exchange of money. The help needed was a sharing of the workload, rotating calls, familiarizing himself with the plaintiff's "style of practice”. He mentioned that the plaintiff, prior to 1972, had established an intensive care unit in Collingwood and, “I found him a man of more than average energy." When asked if the plaintiff had "any change in focus, Dr. Smith said, "an increasing interest in farming.” As interest in farming increased, his participation in hospital, medical and other committees decreased. He said no to becoming chief of staff at the hospital.” The plaintiff was not available in the fall for extra hours. His lifestyle changed — less ostentatious car, fewer personal holidays, never again to the Bahamas — devoted to farming. Dr. Smith estimated the plaintiff spent 40 to 55 hours a week on his practice of medicine plus on-call system obligations. He said, "now his spare time is farming”. (Emphasis added.)

Mr. Donald Currie, a man of unquestioned knowledge of the beef industry, confirmed, "the need to establish one's self — to get credibility as a breeder — establish a track record — it takes time." Mr. Currie said it took him 14 years before he sold a purebred for more than $2,000.

The purebred industry is clearly a long-term business, because one must find and identify good cattle. It is more time-consuming than commercial herds. Mr. Currie stated, "You bang your head against the wall for a long time. You must become involved with fellow breeders, work with the Association, attend shows, and go everywhere to gain credibility.” Mr. Currie stated that the plaintiff, in his meetings with him, asked many questions drawing on Currie's 14 years' experience in the cattle industry. Mr. Currie visited the plaintiff's farm, had conversations about the problems of purebred operation “which Dr. Timpson approached realistically”. It was interesting when Mr. Currie commented, "He is so knowledgeable now, people ask for his opinion" (emphasis added). The plaintiff has established a solid reputation, is admired by all. Mr. Currie had seen his herd and stated the plaintiff had made "tremendous strides". The plaintiff’s herds "are competitive locally and could become very competitive in the show ring. Top dollar on sales is $6,000 average and are considered successful in the $1,200-$2,000 range. This is a profession where the success rate is not high; it’s too hard. It is more difficult for a doctor: but he has proven it can be done: but it takes longer."

Mr. Currie said that “in the initial stages, the plaintiff started sensibly, bought from fairly reputable breeders: not as good as Timpson is now. He had the foresight to learn on lower price cattle.”

Again, the cross-examination was masterfully done, and concessions were wrung out. For example, Mr. Currie had stated in evidence before the Tax Court that the plaintiff "had started like a lot of breeders, and started in an aggressive way. It was tougher for a doctor; his medical income was a plus — and he did not get money on basis of farming ability." But Mr. Currie emphasized that commitment was important and although not as knowledgeable in 1977 and 1978 (he is better informed now) "he came for advice. Dr. Timpson was a progressive breeder — actively involved in everything, saw other cattle — choice of Hereford a good one — more self-sufficient and fertility high. Other breeds need more supervision.” Mr. Currie came back to the salient point: "You need credibility — you have to prove it!”

Mr. Jack Slaght, the next witness called, is Secretary/Manager of the Ontario Hereford Association. He was experienced in raising purebreds, but his evidence was directed mainly at the plaintiff's active involvement with the Ontario Hereford Association. He advised that sales in Ontario take place in five zones, usually one a year and a "prestige sale". The plaintiff is from the West Central Zone where he has been a director (elected) for seven years, and president (elected by members of the Zone). There are 240 herds in this zone, and it is one of the most active. "Ron's always involved in shows and sales, and in other areas of Ontario.” Mr. Slaght has attended the plaintiff's farm where, "He has above average herd — genetic, and better bulls are used.” Although Mr. Slaght stated he had seen the herd in 1987, he was also there in 1979. "He bought two of mine when I was getting out".

An agrologist specializing in "farm economics", Mr. Gary Hutchison, when asked about the plaintiff's farming methods, replied, "He farms as well as anyone could be expected, has good conservation methods. He has an ideal situation with breeders, clean dry calves dancing around and no neglect. Cattle eating outside, lots of space, not fixed up but adequate for the purpose. With 50 brood animals and has an older man as hired labour. It is more than a one-man operation."

Thus we come to Joyal, J.'s conclusion once again, "The issue of whether a taxpayer fits into the first or second category is essentially a factual one”. (Supra).

I am satisfied on the evidence here that the plaintif had a "reasonable expectation of profit". Most assuredly this profit did not arise as soon as the plaintiff predicted but the market, the high interest rates and the time required to gain credibility all conspired to delay what he had every right to expect — a profit.

Both counsel asked me to consider expanding on the meaning of start-up costs. Here again I believe it depends almost exclusively on the factual situation in place. Here, for example, everyone, experts and laymen alike, concede that it takes much more time, effort, capital, and dedication to be successful in a purebred cattle operation. For that very reason start-up costs must be allowed over an extended period of time, even to 15 years mentioned by one of the witnesses. Another operation, not depending upon purebred cattle and establishing credibility should no doubt be limited in the amount allowed as start-up costs.

I do not believe that an exhaustive review of the plaintiff's own evidence is necessary. His evidence was forthright and credible. There can be no question of his commitment to a dream — to become a full-time farmer. It was not a commitment blind to other considerations as, for example, his acceptance of the fact that his wife and children did not wish to move to the farm, and also that he needed the cash flow provided by his medical practice. I believe him when he states that friends and creditors and the bank were making it difficult to achieve his dream but achieve it he was determined to do.

In my view the situation here is practically on all fours with the Hadley case (supra).

The appeal is therefore allowed and the Minister of National Revenue is requested to reassess the taxpayer's tax returns for the years 1977 and 1978 accordingly and to allow full deduction of the plaintiff's farming losses for those taxation years.

Costs to the plaintiff.

Appeal allowed.