Raymond Morrissey v. Her Majesty the Queen, [1986] 2 CTC 389, 86 DTC 6509

Strayer, J.:—The plaintiff appeals with respect to reassessments made of his income by the Minister of National Revenue in respect of taxation years 1977, 1978, and 1979. In respect of each of these years the Minister in the reassessments restricted deductible losses from the plaintiff’s farming operations to $5,000, thus disallowing, as I understand it, additional losses as follows: 1977 — $16,971.40; 1978 — $22,133.42; and 1979 — $27,108.27. The material is somewhat confusing on the exact amounts at issue but they are of this magnitude and it is unnecessary for me to make a precise finding in this respect.

Instead, the issue here, with respect to each of these taxation years, is as to whether the plaintiff’s income from his farming operation was a "chief source of income” within the meaning of subsection 31(1) of the Income Tax Act. That subsection commences as follows:

31. (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, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be . . .

which is thereafter followed by a virtually incomprehensible formula. The general effect of this subsection is that if one's income from a farming business, alone or combined with another source, is not a “chief source of income” then the losses incurred in that business may not be deducted from other income beyond a certain maximum depending on the circumstances, the highest deductible loss being $5,000. It is this amount which the Minister has allowed the plaintiff to deduct in the present case in respect of each of the taxation years 1977, 1978, and 1979 on the basis that the plaintiff does not come within the exception referred to at the beginning of subsection 31(1). In other words, it is the position of the Minister that in respect of each of these years the plaintiff’s farming income was not a “chief source of income", either by itself or in combination with some other source of income.

The plaintiff was raised on a family farm in Ontario but sought employment elsewhere as he approached adulthood. He commenced work on Great Lakes boats in 1948 and has been so employed during the shipping season ever since that time. In 1958 he bought a home in St. Catharines, Ontario. His wife had also been raised on or around farms and they both wanted if possible to return to farm life. In 1967 they traded their house as a down payment on a farm at Wainfleet, Ontario. The farm consists of 178 acres, eight of which are bush. The plaintiff and his family have lived there continuously since 1967. For the first year or so they rented the land to another farmer but since 1969 have farmed it themselves. Essentially they have carried on a cow-calf operation, breeding cows, selling calves, using their land for grazing and for growing feed for the cattle. For a time Mrs. Morrissey raised chinchillas but this proved not to be profitable. Indeed from the commencement of their farming in 1969 up to and including 1985 the farm has not shown a profit.

In the meantime the plaintiff has continued his employment on the Great Lakes freighters. By 1965 he had risen to chief engineer, a position which he still occupies today. According to his evidence, which I accept, he normally works six to seven months a year on the boats and spends the rest of his time working on his farm. Employment on the boats commences at or around the opening of shipping season sometime in early April and continues up until December, a period of perhaps eight to nine months. However he takes off time at certain points in the summer to work on his farm. He said that one of the reasons he chose a cow-calf operation was that it would fit well with his employment on the boats: for example, calving time when he is definitely needed on the farm would normally occur before the shipping season opened in the spring. His wife, who also testified, obviously works very hard especially during his absences in the operation and management of the farm. There are three children who have helped, although at the time in question here the children would have been quite young: the oldest was only 13 in 1977. The plaintiff has made a substantial income from his employment all the time he has been suffering losses from his farming. For the years in question the relevant figures are set out below:

As indicative of his dedication to farming the plaintiff testified that he had taken courses, since acquiring the farm, at the University of Guelph in soil sciences and in animal nutrition. He is currently a director of the Canadian Cattlemen's Association and has been for the last four or five years.

In the early years of his farm operation, up to and including 1974, the plaintiff deducted from his income only the restricted losses permitted under subsection 31(1). In respect to taxation years 1975 and 1976 he deducted full losses and these were accepted by the Minister of National Revenue. It is the following three years which are in question here.

According to the evidence, the plaintiff and his wife anticipated when they commenced farming in 1969 that within ten years they would have built up the profitability of the farm to the point where the plaintiff could leave his job on the boats and devote most of his time to farming, perhaps supplementing his income with some farm-related work such as custom work for other farmers using his farm equipment. It was his general goal to have a breeding herd of around 75 to 100 cows, his barns and his land being adequate in his estimation to accommodate the size of cow-calf herd which this would imply. The breeding herd has never reached this size, however. From 1976 to 1979, covering the years in question, the breeding herd grew from 19 to 32.

It is hard to construe the plaintiff’s farm losses during the years in question as transitory, accidental, or wholly unforeseeable. It is true that he suffered misfortunes in having rabies in his herd in 1976 and scour in 1978. Yet his losses in those years do not appear to be significantly worse then several other years. He also says that meat prices were depressed toward the end of this period, but as counsel for the defendant pointed out, even if meat prices had quadrupled they would not have made his farm profitable.

In deciding this appeal I must conclude whether the plaintiff’s “chief source of income" was either from “farming" or “a combination of farming and some other source of income" during the years in question.

It should first be noted that the Minister, in the reassessment which he has made and in the position taken before me, has accepted that the plaintiff's farming activity is a business and not a hobby. This necessarily follows from the fact that expenses up to $5,000 have been allowed as deductions. This means that the farm is a source of income and the plaintiff is therefore not within the third class of farmers as set out by Dickson, J. in Moldowan v. The Queen, [1977] C.T.C. 310 at 315; 77 D.T.C. 5213 at 5216.

The dispute remains as to whether the plantiff comes within the first of those three classes, where farming is a chief source of income, or within the second class where it is only a sideline. The taxpayer here contends that he is within the former so that all his losses are deductible; and the Minister contends that he is within the latter so that his deductible losses are restricted by subsection 31(1).

If the matter were to be determined predominantly on the basis of normal usage of language, and in particular on the likelihood of profitability, I could not find in favour of the plaintiff. For whatever reasons, the plaintiff has demonstrated that this farm has not been and is not likely to become profitable, at least if he operates it at the level of which he seems to be capable in terms of time and available capital. The Minister's representative on examination for discovery, however, did not take the position that the operation could be profitable with more time or more capital and I need not go into that issue. The fact is that it was far from being profitable in the years in question and nothing that happened either before or since that time suggests that those years were an aberration. Further, it is hard to characterize many of the expenses incurred as “start-up costs”, given the fact that they were incurred some eight to ten years after farming commenced.

Counsel for the defendant placed a good deal of stress on the recent decision of Gordon v. The Queen, [1986] 2 C.T.C. 280; 86 D.T.C. 6426 (F.C.T.D.) where Madame Justice Reed dismissed the taxpayer's appeal involving the same subsection. In doing so she emphasized the fact that the taxpayer in her view did not have a clear intention to give up employment and concentrate on farming, nor was there a reasonable probability of his farming business becoming profitable.

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. In the Mol- dowan case, at 314 (D.T.C. 5215), Dickson, J. stated:

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 measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. 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. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. 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.

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. This seems to be the tone of the judgment as a whole, and moreover on page 315 (D.T.C. 5216) where Dickson, J. describes his first class of farmers, namely the kind within the exception in what is now subsection 31(1), he says that they must be persons “for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine”. [Emphasis added.] Later on that page he describes such a farmer as one “whose major preoccupation is farming”. Again, profitability is not set up as an essential requirement.

Focusing on the three factors mentioned by Dickson, J. in the quotation above, namely, time spent, capital committed, and profitability, it appears that the taxpayer here can show a substantial commitment to farming in relation to the first two factors. I am satisfied that the taxpayer spends virtually as much time farming as he does on the boats. The fact that he lives on the farm when not on the boats, that his family lives there and contributes substantially to the management of the farm in his absence, together with his obvious personal commitment to farming, satisfy me that his major preoccupation is farming. In this connection it would also be noted that he has not in any way altered his status or responsibilities on the boats since he commenced farming which suggests that he has made no effort to develop further his employment career. As for capital it appears likely that he has committed as much as he had available. His counsel estimated that he had invested in the order of $200,000 and I do not disagree with that estimate. In terms of commitment this is as important as the investment of millions by a millionaire.

This third criterion referred to by Dickson, J. in the passage quoted above is, of course, “profitability both actual and potential”. As I have said, if this were the sole criterion or the most important one and if it were a sine qua non then I think the plaintiff could not succeed. But I understand it to be only one factor of several which may be relevant. This seems to me to be implied in the Moldowan case and underlined in the case of The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.). In that case also the taxpayer had been engaged in farming for a number of years before the taxation years in question, while continuing his employment. There also in the years in question he had large losses, albeit that his gross farm receipts (unlike in the present case) did exceed his employment income. The trial judge found that during the years in question whereas 40 sows would be required to provide a reasonable standard of living, the facilities he owned then could accommodate no more than 34 and in fact he did not have more than 28. It thus seems apparent that he had no reasonable expectation of profit during the taxation years in dispute. Nevertheless the trial judge emphasized the test in Moldowan as being “‘an objective determination to be made from all the facts” as to whether there is a reasonable expectation of profit. He proceeded to lay great stress on the commitment of the taxpayer, the extraordinary number of hours he worked, and his dedication of all available resources to his farm. This decision was upheld by the Court of Appeal even though there was no finding as to the probability of profits during the years in question nor in the future. The Court of Appeal approved of the principles upon which the learned trial judge proceeded, in drawing a conclusion from all the evidence that the taxpayer's main preoccupation was farming even though “he has income from a sideline employment” (the “sideline” employment paying him between $29,000 and $33,000 in the years in question and the farm yielding him losses equal to about one third of his employment income).

Having regard to what was said in Moldowan and the result in the Graham case I believe that I should not be guided solely by the improbability of profit from the taxpayer’s farming during the years in question or the foreseeable future. This is only one factor to be taken into account. Looking at all the circumstances, I am satisfied that the plaintiff here was a dedicated farmer trying to make a profit from his farm like so many full-time farmers do, unsuccessfully, year after year. The test of “chief source of income” is not one of economic wisdom. Nor do I think it particularly critical in the present case that the prospects for the taxpayer leaving his employment and devoting all of his time to farming were not very good. It must be kept in mind that subsection 31(1) contemplates the possibility of a taxpayer's chief source of income being “a combination of farming and some other source of income”. Whatever this may mean, and there remains room for clarification even after Moldowan, it does not require the taxpayer to abandon his employment in favour of farming. Moldowan merely requires that farming be the “major preoccupation” and I am satisfied from all the circumstances here that such is the case with this taxpayer.

The appeal is therefore allowed and the Minister will be directed to reassess the plaintiff's income tax for 1977, 1978, and 1979 on the basis that his chief source of income for those years was farming or a combination of farming and some other source of income.

Appeal allowed.