Roger M. Bender v. Minister of National Revenue, [1986] 1 CTC 2437, 86 DTC 1291

Taylor, T.C.J.: —This is an appeal heard in London, Ontario, on January 20, 1986, against income tax assessments for the years 1979, 1980 and 1981 in which the Minister of National Revenue allowed only the restricted farming loss maxima of $3,750, $5,000 and $5,000 as reduction of other income, rather than the full farming losses of $5,000, $16,744 and $24,421 claimed by the taxpayer. During all times material the appellant was employed by Bell Canada and earned from that source $19,089, $24,999, and $26,760 respectively. The taxpayer claimed deductions for the full farming losses, whereas the Minister contended that Mr. Bender's chief source of income was neither farming, nor a combination of farming and some other source of income, as provided under section 31 of the Income Tax Act, S.C. 1970-71- 72, c. 63, as amended.

During the three years in question, the operation of the farm resulting in the above losses, showed the following:

Mr. Bender had a farming background, as did Mrs. Bender, and the farm on which they reside was purchased in December 1977. He devoted all his available spare time to the farm and his arrangements with Bell Canada provided for flexibility and consideration during certain critical periods of the year — seeding, harvesting, etc. In general Mr. Bender restricted his operation to livestock and during the period in question he built up a fairly good herd of beef cattle. A record of inventory estimates (as provided for under paragraph 28(1 )(b) of the Act) used on his financial statements indicated the following as of December 31, each year:

The agent for the appellant provided the Court with a detailed comparison of the factors found in The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.) and the instant situation, which led the agent to conclude Mr. Bender's case was virtually identical to that of Graham (supra), and should be accorded the same favourable treatment.

Counsel for the Minister distinguished the Graham (supra) case based on his view that the favourable decision for Mr. Graham resulted from the perspective of the learned judges that Mr. Graham had “changed direction" and was therefore entitled to the full allowance. That is not my view of the reasons given by the Court in Graham (supra) for allowing the full farming loss. The change in “occupational direction" which occurred in 1968 — some seven to ten years before the period under appeal, demonstrated Mr. Graham's interest in farming, and probably assisted in qualifying him as in the “business of farming," but I do not read that phrase to certify that his chief source of income from that moment on became farming. But in any event there does not appear to be any such possible reason in the instant case. There was no clearly defined "change in direction" from employment to farming for Mr. Bender, as I would understand that term. I do not see that Mr. Bender, on the basis of the evidence presented, is entitled to the full farming loss solely because that was the judgment in Graham (supra). The comments on that subject to be found in Kerin v. M.N.R., [1985] 1 C.T.C. 2077; 85 D.T.C. 67, Said, v. M.N.R., [1986] 1 C.T.C. 2115; 86 D.T.C. 1009, and Leakos v. M.N.R., [1986] 1 C.T.C. 2245; 86 D.T.C. 1190, are equally applicable here.

However counsel for the Minister also informed this Court regarding the present status of a decision of the Federal Court, subsequent [sic] to Graham (supra) — H. S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058. That decision in favour of Mr. Hadley was originally appealed by the Minister, but the Minister has withdrawn the appeal. To take the headnote from the D.T.C. version of Hadley (supra) alone, one may conclude that there were at least four salient factors in favour of Mr. Hadley:

(1) He made a substantial investment.

(2) He brought his organizational and analytical skills to the business.

(3) His expectations were that the farm would some day provide the bulk of his income.

(4) The losses were the result of depressed market conditions.

I would also note from page 67 (D.T.C. 5062) of the judgment ". .. the plaintiff’s earlier operations had become much more a source of investment than employment income/' However I do not regard that as crucial, since there does not appear to be in section 31 any differentiation with regard to “source/' between such categories as “investment" or “employment."

Therefore looking back at the four criteria from Hadley (supra) noted above I must come to the conclusion that Mr. Bender meets all of these adequately, taking into account the size of his operation, his farming background and that his expectations were adversely affected (according to his testimony) by the depressed beef market conditions. Counsel for the Minister made substantial efforts to distinguish Hadley (supra) from the instant case, but in my mind he was unsuccessful in so doing. The size of the investment in Hadley (supra) is obviously related to the financial resources available to Mr. Hadley and to the plans and ambitions he had for the farm. That should not be seen as an indication that a large investment — by itself

— signifies “chief source of income,” as opposed to a smaller investment. Further while there was no specific third party witness for Mr. Bender testifying to the depressed beef market during the years in question, there was no challenge at the hearing from the Minister to Mr. Bender's assertions in that regard. I doubt that any independent witness could have added much to Mr. Bender's testimony. I do note that Mr. Hadley, however, when faced with a period of substantial losses did desist from the farming operation, and stop the drain on his resources. While it does not appear that Mr. Bender has done so, (and I do not recommend that he should curtail his operations), this is at least one distinction between the two situations. Counsel for the Minister however did not pursue that point with the Court.

Suffice it to say that I am prepared to rest on the favourable decision given and now not appealed in Hadley (supra) and that the substantive differences between that case and the instant appeal were not made evident to me at this hearing.

The appeal is allowed and the matter referred to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.