Michael G. Sidon v. Minister of National Revenue, [1987] 1 CTC 2302, 87 DTC 235

Taylor, T.C.J.:—This is an appeal heard in Toronto, Ontario, on February 2, 1987, against income tax assessments for the years 1978, 1979, 1980 and 1981, in which the Minister of National Revenue disallowed certain farming losses. For the year 1978, in filing his income tax return the appellant had claimed $5,000, presumably representing the maximum permissible under the restrictions of section 31 of the Income Tax Act. On assessment the Minister had reduced this to $4,149.94 to reflect the actual calculations of the permissible loss under section 31 of the Act. On appeal the taxpayer was Claiming an amount of $5,799.88, allegedly representing the “full farming loss” for that year, based on certain "carry-forward” provisions under the Act to which Mr. Sidon contended he was entitled. For the year 1979, the taxpayer claimed an amount of $7,500 in this case representing the “full farming loss”. On assessment the Minister reduced this to $4,800.52 by invoking the restrictions under section 31 of the Act. On appeal Mr. Sidon was Claiming an amount of $7,101.04 as "full farming loss”. For the years 1980 and 1981, Mr. Sidon claimed “full farming losses” of $9,160.25 and $13,602.23 respectively, but the Minister reduced these to the maximum permissible amounts of $5,000 for each year, again invoking the provisions of section 31 of the Act.

Certain basic information contained in the reply to notice of appeal sets out the salient circumstances:

. . . at all material times the Appellant was employed by the York County Hospital as the Manager of the Purchasing Department;

the Appellant acquired a 98 acre farm together with his wife and mother in 1973 and started a cattle farm thereafter in equal partnership with his wife. The Appellant’s mother subsequently conveyed her interest in the farm to the Appellant and his wife. At all material times the farm land was apportioned as follows:

86 acres	— cultivated land
5 acres	— pasture land
7 acres	— not used for farming.

the Appellant’s farm generated a profit of $24,772.26 in the 1982 taxation year and was reported 20% by the Appellant and 80% by his wife. The profit realized in 1982 was the result of the Appellant and his wife selling their entire inventory of cattle while converting the farm from a cattle farm to a hay farm;

The evidence provided by Mr. Sidon showed that he had always operated the farm in a form of “partnership” with his wife, and that during the years 1973 through 1981 there had been consistent losses, which had been divided for income tax purposes on a 50-50 basis between the two of them. Up until about the year 1980 Mrs. Sidon had also been employed outside of the farm. One child was born in 1978, another in 1980, and from 1980 on Mrs. Sidon devoted her efforts to her home, and to the farm work. From 1973 through 1978 the farm had been almost excusively used in the production of hay, and some grain. While Mr. Sidon’s outside employment income had gradually increased over the years, so too had his losses on the farm, until in 1978 his outside employment income was $19,970.54 and his reported share of the farm losses (50 per cent) was $4,633.69. I would add here that neither party at the hearing provided the Court with "reconciliations” of what might appear to be minor divergent amounts for certain years — and the Court has made no attempt to do this. In general the differences appear to relate to personal or non-business portion of expenses, but the amounts to which the Court is addressing itself are those shown in the opening portion of this judgment. In effect the relative claims of the two parties as well as the Court can understand them are:

In the year 1979, Mr. Sidon decided to enter into the beef business — buying cattle, keeping them on his farm, and selling them when ready. By this process he hoped to make better use of the hay he could grow on the farm, which was about 15,000 bales per year, of which the cattle consumed 2,000 bales, leaving some 13,000 bales for sale. Since a part of Mr. Sidon’s presentation was that he had "changed occupational direction” by this move into cattle farming rather than simply hay farming, certain amounts to be found in the financial statements of the farm attached to the tax returns are informative:

During the years 1980 and 1981 Mr. Sidon commenced small amounts of what he termed “custom work", apparently using some of his machinery and time, doing work for other farmers. In my view that does not materially affect the basis of this matter. I would note a point from the above schedule

— that at the end of 1981, the farm loss was the greatest ever ($26,734.20) in total, and Mr. Sidon did not include in calculated income (see notes below) any provision for estimated inventory to reduce it, as he had done for the immediately preceding two years. To some degree therefore it is more realistic for purposes of comparison of the four years at issue here to make reference to the results of the 1982 year (supra) and average the two years. (I am not of the view that the use of section 28 in the calculation of farming losses provides either a better or a worse argument than without it — see Stephen W. Herman v. M.N.R., [1986] 2 C.T.C. 2288; 86 D.T.C. 1708 — but it may serve a useful purpose for simple comparisons as in this situation). That procedure would result in a “loss" over the two years of $1,961.94 ($26,734.20 - 24,772.26), or one could argue a loss of $980.97 for each year — solely from using comparable amounts with regard to the “cattle" business for that period. Looking at the sale of hay — the average for these four years 1979, 1980, 1981 and 1982 (during which Mr. Sidon was in the cattle business) is $13,863. That compares very favourably to the sale of hay in 1978

— the year before he went into the cattle business — $11,202. Considering that about one-seventh of Mr. Sidon’s hay crop was consumed by his cattle, his production and sale of hay alone did not appear to suffer. So for the five years we are looking at, the total farm losses would be — after the “averaging" indicated above:! [3]

While not dramatic, it should be accepted that by entering into the cattle business, Mr. Sidon had improved his farm operation situation — and this during a period when beef selling prices were very low according to the appellant. The major indication he provided is that when he first bought cattle in 1979 he paid the highest prices recorded during the four-year period involved but was forced to sell all his remaining cattle in 1982 at a very low price. According to Mr. Sidon while cattle prices were high in 1979, when he embarked on the venture — all the predictions and forecasts with which he was able to get acquainted indicated even higher prices over the next four years. That did not happen obviously — but I do not think it can be said that Mr. Sidon entered into the beef cattle business without some reasonable business perspective. It is therefore understandably difficult for Mr. Sidon to accept that he now should be penalized (as he sees it) for a business decision which appeared to him, then, and arguably can be perceived even now, as a good business decision.

That brings us at least up to the situation, however, which has already been accorded by the Minister — that during the years in question Mr. Sidon had a “reasonable expectation of profits". The Minister has already accepted that as a fact by virtue of the allowance of the “restricted farm loss". The above analysis may also shed some light on the real question — the chief source of income of Mr. Sidon, but that remains to be seen. One could easily argue that had Mr. Sidon not entered into the beef cattle business in 1979 that there might have remained little basis for the years 1979, 1980 and 1981 upon which he could even lay claim to the “restricted farm loss”. During six years (1973 through 1978) he had shown only consistent and increasing losses. Very powerful arguments indeed would have been needed, in my view, for the Minister to have remained open to the "restricted farm loss” claim even, there was by that time neither "actual” profit, nor the appearance of "potential” profit.* [4] The more subjective criteria such as time spent; capital committed; dedication to farming; training and prior experiences, etc., might come into play then, and their more limited applicability has been thoroughly discussed in other case law.f [5] This same case law does provide considerable analysis of the value of these factors in resolving the ultimate question of the "chief source of income”, and I could make particular reference to some of the comments in William M. Kerr and Gail Ann Forbes v. M.N.R., [1984] C.T.C. 2071; 84 D.T.C. 1094 relevant to this determination.

It would seem to me quite reasonable therefore that by the end of the year 1978 this appellant might well have exhausted any claim he had to even the "restricted farm loss”. Equally I believe it can be said that by entering into the “beef cattle business” Mr. Sidon was making a reasonable business effort to build upon the assets he had accumulated during the six-year "losing” period, and foremost among these assets was that he now had a recognized hay producing farm — by his account one of the best around the area, with hay that was of excellent quality. He had certainly found out (or should have been aware) that the hay crops could not of themselves support the farm and fulfil any objective, or even hope, of providing his main cost of income in the near future. But perhaps — fed to cattle it could do so!

At this point I would refer to the cases of Roger M. Bender v. M.N.R., [1986] 1 C.T.C. 2437; 86 D.T.C. 1291, and Stephen W. Herman v. M.N.R., supra. Those do refect my appreciation of the signal Federal Court jurisprudence in The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.) and Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.). It was noted in this matter by counsel for the respondent that due consideration must be given to the terms “rather unusual circumstances” referenced by the learned justices in Graham (supra), and "the factual situation which has unique and distinguishing features” noted by the learned justice in Hadley (supra) in reaching their conclusions, before this Court should reach the same conclusion favourable to this taxpayer. I agree, but I am unable to find points of substance which would disqualify this appellant from similar treatment. It seems to me that giving due consideration to the Graham (supra) and Hadley (supra) judgments can result in a view that only those taxpayers so clearly and markedly disqualified should be denied such consideration.

I am further strengthened in that opinion with respect to the instant case, when I consider that it would not be unreasonable from the analysis made above to perceive the entry of the appellant into the beef cattle business as a "change in occupational direction” — that is from a part-time farmer (restricted farm loss) to a full-time farmer (full farm loss) — see William Moldowan v. The Queen, (supra).

In summary, I am not persuaded that this taxpayer should be denied the full farming loss he has claimed for the years in question. I am aware that the arguments in favour of this treatment for the year 1978, are somewhat less substantial, than those which can be seen for the subsequent three years, but I am not inclined to examine that prospect in further detail. Further it is obvious that the structure and the situation on the farm changed dramatically when all cattle were sold in 1982. What claim the appellant may have for consideration of any farm loss after the years in question in this appeal is not a matter for consideration by this Court. I would also add that no comment is made with regard to the change from a 50-50 split of farm losses in the years up to 1981, as contrasted with the 20-80 split of the profit for the year 1982. That issue is not before this Court.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in order that the appellant may claim farm losses of $5,799.88 for 1978, $7,101.04 for 1979, $9,160.25 for 1980 and $13,602.23 for 1981. The appellant is entitled to party and party costs.

Appeal allowed.