A. W. Peter Van Nostrand v. Minister of National Revenue, [1986] 1 CTC 2132, 86 DTC 1104

Brulé, T.CJ.:—

Issue

These are appeals for the taxation years 1978, 1979 and 1980 wherein the appellant claimed “full farm losses"' whereas the Minister of National Revenue allowed only “restricted farm losses" to the appellant. The facts of these appeals are best put forth by quoting from the appellant’s notice of appeal and the Minister's reply to the notice of appeal as follows:

For the appellant:

The Appellant is a member of a farming family which has continuously farmed the same property for the past 127 years. The Appellant was born and raised on this farm and has formed a life-long commitment to it. He spent all of his teenage summers working on the farm in addition to several summers while he was in attendance at medical school. The Appellant retained some involvement with the farm during his post-graduate training.

The previous owner of the farm was the Appellant's father, who died in 1975. During the thirteen-year period prior to the Appellant's father's death the Appellant maintained an active involvement with the farm by both assisting physically with the farm work and by providing investment capital for the farm enterprise.

In 1962, the Appellant started a general practice in medicine in the Town of Maple, which is located approximately 15 miles from the farm. In 1964, the Appellant subsequently moved to King City, which was located 10 miles from the farm. The Appellant and his family remained in King City until 1976, at which point they moved to the farm itself.

The Appellant is a medical practitioner in the branch of pathology. The Appellant left a very successful general practice of medicine in Maple in 1964, returning to post graduate training in pathology. The Appellant did this with a view to making preparations to change his occupational direction from a general practice of medicine to the practice of pathology. The Appellant commenced this shift in emphasis in his professional career pursuant to a desire to spend considerably more time on Nordlands Farm. The hours of work in a practice of pathology are regular, requiring an average of 40 hours per week of the Appellant’s time. This has permitted the Appellant to devote a substantial amount of time per week to his farm.

The Appellant operates a livestock enterprise consisting mainly of a cow/calf operation. Such an enterprise requires considerable amounts of time and effort for the purposes of supervisory and labour duties. It is for this reason that the Appellant employs a single employee to help him with the farm duties.

The Appellant has contributed and continues to contribute his own time and capital into the farming enterprise. These contributions to capital were made prior to the acquisition of the farm by the Appellant in 1976, and were continued and increased by the Appellant after that acquisition. These capital contributions have been made with a view to modernizing and increasing the efficiency of the farming enterprise. The source of these capital contributions include, inter alia, a portion of the Appellant’s medical income.

From the date that the Appellant acquired the farm in 1976, he has operated the farming enterprise solely for the purpose of earning a profit. The Appellant has, however, sustained initial operating losses due to both adverse economic conditions and the difficulties normally encountered when converting a mixed farming operation into an efficient livestock farming operation.

The Appellant has acquired a substantial knowledge of farming through his own experience on the farm. This knowledge was augmented by the attendance of the Appellant at an evening course on "The Principles and Practice of Beef Management” provided by the University of Guelph in January, February, March and April, 1974, prior to assuming a fulltime farming role. The Appellant is keenly interested in the farming enterprise and conducts most of his own veterinary work on the premises. The Appellant expects that the enterprise will produce a profit in the 1982 taxation year.

For the respondent:

In reassessing, the respondent made inter alia, the following assumptions of fact:

the Appellant is a pathologist and holds the position of Deputy Head of the Pathology Department at the Toronto General Hospital;

the Appellant also holds an appointment at the University of Toronto as an Associate Professor;

the Appellant is also engaged in an active research program in the pathology field, presenting papers at national and international meetings and contributing to medical journals;

Nordlands Farm is a farm continuously owned and operated by the Van Nostrand family since 1855;

upon his father’s death in 1975 the Appellant, his wife and four children moved to the farm;

the farming operation is conducted as a partnership with the Appellant’s mother (now 82) on the basis that profits and losses are shared on a 70-30 basis (70% to the Appellant and 30% to his mother);

from 1976 through 1980 the Appellant’s sources of income were as follows:

Sources

	1976	7977	1978	1979	1980
Employment Income	$57,887.00	$61,306.00	$61,443.97	$64,351,38	$69,894.00
Investment Income	20.00	30.00	74.00	311.00	208.00
Family Allowance	1,060.00	1,147.00	1,233.00	920.00	784.00
Professional Income	(1,798.00)	(2,335.00)	(96.00)	(710.00)	(1,071.00)
Farming Loss	(13,089.22)	(30,143.00)	(44,232,00)	(8,891.00)	(14,933.00)

the Nordlands Farm has continuously incurred losses for the past 14 years;

from 1976 to 1980 inclusive, the Appellant suffered losses from his farming operation and a summary of such farming losses is as follows:

	1976	1977	1978	1979	1980
Gross Revenues	$27,088.89	$15,865.00	$25,164.00	$54,620.00	$45,701.00
Expenses	44,885.80	49,608.00	72,996 ,00	67,111.00	64,234.00
Loss	(17,796.91)	(33,743.00)	(47,832.00)	(12,491.00)	(18,533.00)
Appellant’s share	(13,089.22)	(30,143.00)	(44,232.00)	(8,891.00)	(14,933.00)

the Appellant’s chief source of income was neither farming nor farming and some other source of income.

In evidence Dr. Van Nostrand elaborated on the information contained in the notice of appeal (supra), and introduced through counsel several exhibits in support of his argument. He was undoubtedly spending a great deal of time in his farming operation and was contemplating a change in his professional duties which might allow him even more time for those farming duties.

Counsel for the appellant advanced two basic arguments. The first is best exemplified by a quotation from the Supreme Court of Canada case of The Canadian Northern Railway Co. and the Canadian National Railways Co. v. The King and the Provincial Treasurer of Alberta, 64 S.C.R. 264. In that case at 275 Brodeur, J. quoted from the English case of Tennant v. Smith, [1892] A.C. 150 as follows:

A law imposing taxation should always be construed strictly against the taxing authorities, since it restricts the public in the enjoyment of its property. These taxing laws are not to be extended beyond the clear import of the language used and the powers granted to the officers charged with their execution must be strictly pursued.

I do not find any trouble with this premise, but one must consider the application of a particular set of facts to the language in the statute, and in such an application judicial interpretation becomes important.

The second argument revolves around the judgment of Dickson, J. in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 wherein at 314 (D.T.C. 5215) he said: “Whether a source of income is a taxpayer's “chief source” of income is both a relative and objective test.”

Counsel for the appellant maintained that the relative and objective test was met in this case.

In order to have a source of income Dickson, J. said that the taxpayer must have a profit or a reasonable expectation of profit. He then goes on to point out that whether or not a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts.

That determination included the profit and loss experience, the taxpayer's training, the taxpayer's intended course of action, and the capability of the venture as capitalized to show a profit after charging capital cost allowance.

Counsel then reviewed these matters as they are found in the present case, allowing that profits were forthcoming, and he stated that taking all these factors and applying them in a relative and objective manner the appellant is a full-time farmer and not a sideline farmer.

He then went on to review various decisions in support of his argument and concluded that if the Income Tax Act is properly construed in favour of the taxpayer section 31 is not designed to penalize a full-time farmer even though he might be a top pathologist.

The Minister's counsel acknowledged that the facts in each case are different, but that Moldowan (supra) dealt with the treatment for the interpretation of the facts and is the basis for the law.

She stated that besides farming as a “chief source of income" one must consider other income as being an important element. Where does the appellant look for his chief source of income?

In this case, following Moldowan, (supra) the actual and potential profit are easily distinguished. The former came from the appellant’s medical practice while the latter has not been satisfactorily demonstrated. Counsel said that the subjective expressions of optimism were not a good substitute for the facts, i.e. profitability.

As in all these farm loss cases there is always an expectation of profit on behalf of the taxpayer. If otherwise, there would likely be no ground for appeal.

Here we have a pathologist who, by his own admission, is a busy individual. In 1980 he prepared a lengthy memo which was entered as Exhibit R-1. At page 12 of that memo he sets out:

As the sole wage earner in the family I commute 30 miles daily to a responsible position as a pathologist in downtown Toronto. A heavy work schedule (55 - 60 hours per week) allows me virtually no time during the week to either perform or supervise activities on the farm.

While the appellant may now be taking steps to change his occupational direction the above admission does not seem to indicate he had done so up to the period of these appeals. This differs from many of the cases cited.

In the notice of appeal (supra) there is the statement that the enterprise will produce a profit in the 1982 taxation year. In the case of Paul E. Graham v. The Queen, [1983] C.T.C. 370; 83 D.T.C. 5399 Mr. Justice Cattanach in considering post-1979 evidence (the last year of the appeal) said at 375 (D.T.C. 5403):

I fully appreciate that some of this evidence is subsequent to the taxation years in question but that evidence is properly admissible as illustrative and confirmatory of the plaintiffs course and intention in those antecedent years.

Taking from Exhibit A-4 the analysis of farm expenses and income shows by comparison the following:

Appellant’s loss

after allowance

	Expenses	Income	Loss	Loss	to Mother
1976	$44,886	$27,089		$17,797	$13,089
1977	49,608	15,865		33,743	30,143
1978	72,996	25,164		49,832	44,232
1979	67,111	54,620		12,491	8,891
1980	64,234	45,701		18,533	14,933
1981	91,748	50,042		41,706	38,106
1982	90,084	72,387		17,697	14,097
1983	94,715	45,953		48,762	45,162

(In 1982 the income was higher as a result of gravel sales of almost $21,000.)

This chart not only illustrates that there was no profit as expected in 1982, but losses continued at least to the end of 1983, the last figures available.

From the evidence it was suggested that the farm is near capacity and that the taxpayer is operating in an efficient manner. This raises the question that profit in the near future is at best limited and with the large outstanding capital loans, such may never be realized.

It is helpful to the Court to look at the judgment in the case of Ronald Timpson v. M.N.R., [1985] 2 C.T.C. 2114; 85 D.T.C. 446, a case involving a medical practitioner who entered the farming business. At 2118 (D.T.C. 449) Bonner, T.C.J. said:

In argument much stress was placed on evidence which showed that the appellant was fully dedicated and committed to the farming operation. Counsel, of course, was seeking to rely on the following passage from the reasons for judgment in Moldowan:

The reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business.

I do not believe the Court there referred to subjective preoccupation. Such preoccupation, even in a case where it amounts to an obsession, will not convert sideline farming into a chief source. “Major preoccupation” refers to major preoccupation from an income-earning standpoint.

Conclusion

On the basis of the evidence it appears to me that the appellant bought the family farm perhaps out of a sense of loyalty without considering the profit potential, or lack thereof. The property had belonged to the appellant's father and was in the family for over 100 years. None of the brothers or sisters wanted the property and so the appellant acquired it.

The appellant had been raised on the farm and from his professional income and credit rating was able to provide capital that would change the type of farming conducted and repairs necessary to the property. Although the appellant was in the business of farming, as was recognized by the Minister in allowing him restricted farm losses, there is no evidence that farming, in the years under appeal or at any time prior to or after those years, could reasonably be expected to provide the bulk of the appellant’s income.

Farming was not the centre of the appellant's work routine during the years under appeal. An intention or plan on the part of the appellant to change his occupational direction in the future in order to make farming the centre of his work routine was not convincingly demonstrated.

If profits result in the future, as the appellant is convinced will happen, then he may avail himself of the provisions of section 111 of the Income Tax Act. In the meantime, the Minister has properly assessed him by allowing restricted farm losses.

The result is that this appeal is dismissed.

Appeal dismissed.