Le Service D’administration Champlain Inc. v. Minister of National Revenue, [1986] 1 CTC 2544, 86 DTC 1453

Tremblay, T.C.J. [Translation]:—This case was heard at Montreal, Quebec on January 16 and 17, 1985.

1. Issue

According to the originating pleadings, the appellant is a corporation with numerous objects (ranging from nursing care to farming activities and including property rentals and meal services). It sells services to a related company, the Centre d’Accueil Richelieu Inc., which administers various homes.

The issue is whether the appellant is justified when computing its net income for 1977 to 1981 in deducting farming losses of $228,443 (1977), $200,349 (1978), $262,514 (1979), $112,452 (1980) and $41,772 (1981). The appellant maintained that its chief source of income was farming or a combination of farming and some other source of income and that it was entitled to deduct the total amount of the farming loss from its other income.

The respondent denied this last allegation of the appellant, maintaining that its chief source of income was neither farming nor a combination of farming and some other source of income. He allowed it only a maximum deduction of $5,000 pursuant to section 31 of the Income Tax Act.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 This judgment also held that the assumptions of fact on which the respondent relied in establishing the assessments or reassessments are also presumed to be true until proven otherwise. In the present case the facts presumed by the respondent in the amended reply to the notice of appeal read as follows:

12. In assessing the appellant for the 1977 to 1981 taxation years inclusive, the Minister of National Revenue relied on the following facts, inter alia:

(a) The appellant was incorporated on January 1, 1973 by Marcel Roy, who was its principal shareholder during the years in question.

(b) The appellant’s principal business during the years in question consisted in providing all administrative and accounting services to a group of 11 corporations involved in providing centres and homes for senior citizens as well as related services (ambulance, maintenance, food and other services).

(c) Marcel Roy, who did not have the appropriate experience in farming, sold

a farm he had purchased in 1971 and 1972 to the appellant in 1974.

(d) Since the farm was purchased it has been run by Jean-Paul Roy, Marcel Roy’s brother, who did not have any experience in farming either.

(e) The type of farming being done had to be changed three times and large amounts of money were lost owing primarily to the inexperience of those running the business.

(f) The wages paid to the employees (approximately 5 to 6 employees a year), including Marcel Roy’s father, brother and brother-in-law, greatly exceeded the gross income from the farm.

(g) Over the years the breakdown of gross income between the administrative services and the farming business was as follows:

[This breakdown of gross income is included in Exhibit 1-2 and is reproduced in paragraph 3.05.]

(h) The breakdown of net income between the administrative services and the farming business was as follows:

[This breakdown of net income is included in Exhibit 1-2 and is reproduced in paragraph 3.05.]

(i) The appellant’s investments were financed by the other corporations in the group, through the working capital generated by the homes for which the appellant provided administrative services, and were available to it at no interest.

(j) Investment in the main business, namely the administrative services, has been increasing since 1978 and is much greater than investment in the farming business.

(k) The appellant’s farming business has been accumulating losses from year to year since 1972, whereas the administrative services business shows a profit each year.

(l) Since the appellant’s chief source of income for each of the taxation years in question was neither farming nor a combination of farming and some other source of income, the respondent restricted the appellant’s losses from its farming business pursuant to the provisions of section 31 to $5,000 for each of the years in question.

3. Facts

3.01 Marcel Roy, age 55, general manager of the appellant and of the Centre d'Accueil Richelieu Inc, was the first witness called.

In his examination-in-chief, after giving his qualifications, he first described the appellant’s role within the homes, testifying that:

(a) After completing his accounting studies at the Hautes Etudes Commerciales in the early 1950s, he joined an accounting firm and later became an administrator for a regional school board;

(b) In 1966, following a personal experience, he became concerned about the handicapped and incapacitated elderly people and subsequently began working to provide them with "more humane homes";

(c) In 1966 he started with a private residence for incapacitated elderly people. In February 1967 he obtained a licence from the provincial government to administer a home, called "Résidence d'Anjou", with room for 310 residents. He started with 100 and 5 months later all 310 places were full;

(d) According to him, homes for senior citizens used to be "parking spots while waiting to die" where the residents' beds were lined up in rows. The residents had no activities other than waiting, despite the good intentions and devotion of the administrators. The premises and organization were simply not appropriate;

(e) As a result of his personal activities, his active participation in the various organizations and the experience he had acquired, he formed the company Gestion Marcel Roy Inc., which is a shareholder of the following three companies: Centre d'Accueil Richelieu, Service d'Alimentation Mercier and the appellant. The latter owns Appartements Métropolitain Inc. (see Exhibit A-1, reproduced at p. 2547).

Other companies were also formed by the witness's brothers: Services de loisirs Champlain Inc, Service d'Ambulance Champlain Inc, Service d'Entretien Mercier Inc, Service de Distribution Richelieu Inc, and so on. All these companies were and still are administered (bookeeping, issuing of cheques, paying of wages) by the appellant, which does not mean that they were run (important decisions) by it.

These companies administered by the appellant had a total of 700 employees in 1985. The appellant’s employees varied in number from 40 to 60 in the years in question. Five of these employees took care of the farm. They had even taken farming courses: stock farming, and so on; (f) In 1985 the appellant administered, through the Centre d’Accueil Richelieu Inc, six institutions, homes, and so on, serving 1,050 people (senior citizens and handicapped persons) whose average age was 80 (about sixty of them were under 60). In the years in question there were 900 residents. In 1981 there were 950 (Exhibit A-1). The services provided are: nursing care, physiotherapy and ergotherapy, recreation and worship, medical secretariat, administration, security, medical service, ambulance service, maintenance of premises, management service, pharmacy and meal services.

(g) The witness is employed and paid by the Centre d’Accueil Richelieu Inc. He says that he is in good health and needs only two to three hours sleep a night. For the last couple of years he has only been working 100 hours a week. From 1966 to 1982 he always worked about 120 hours a week;

(h) In addition to providing appropriate accommodation, food and medical care, the witness and subsequently the appellant always emphasized from the very outset the recreation the residents should have. The expenses occasioned by such recreation were not always accepted by the government as normal expenses, however.

That is why in 1971 it was decided to purchase a farm, which would help meet two of the clients’ basic needs: food and recreation. At present the government is providing 10¢ a day per resident for recreation;

(i) This farm was purchased by the witness personally in 1971, for $21,000, in St-Liboire 40 miles from the Hippolyte Lafontaine tunnel. It has an area of 104 arpents. At the time it had several buildings and some animals: 20 cows, 20 pigs, hens and so on. Later two additional pieces of land were added to form a total area of 351 arpents (300 acres). The total cost of the three pieces of land purchased was $101,471.

3.02 Mr. Roy's lengthy testimony concerning the farm is well summarized in a letter sent by the appellant to the respondent in April 1982 and filed as Exhibit 1-3:

HISTORY OF THE FARM

Before giving a history of the farm, we think that we should situate it in the context of the overall business carried on by the Service d’Administration Champlain Inc.

The Champlain Group, as it is called, was founded by Marcel Roy for the purpose of operating homes and providing the residents in these homes with the most services possible.

The Champlain Group operates six homes and/or residences and provides the services required by the senior citizens and invalids, and employs a staff of over 600. There are approximately 1,000 residents, for whom the Champlain Group provides accommodation, meals, care, transportation, maintenance, recreation and other services. A large amount of food is needed. The residents eat the equivalent of 350 cattle a year, which will all come from the farm in 1982, and approximately 250 dozen eggs a week, 120 dozen of which come from the farm.

The farm in Saint-Liboire fits into this scheme since it serves a dual purpose. Not only has the farm’s production always been oriented toward providing as much food as possible for the homes (meat, poultry, eggs, vegetables), but the purpose of the farm is also to provide the following services to the homes for senior citizens operated by the Champlain Group:

1. Repair service for the equipment and furniture using the workshop on the farm.

2. Storage service for the equipment and furniture temporarily not needed.

3. Recreation service for the residents through activities organized in the community hall located on the farm (picnics, sugaring-off parties, etc). The farm facilities are also occasionally used to compensate volunteers working with senior citizens in the homes.

The farm consists of three pieces of land purchased at different times and covers an area of some 300 acres. From the beginning to the present time the agricultural production has undergone certain changes usually necessitated by external circumstances and the constant desire to find the most profitable way of operating the farm in light of the homes’ needs.

In chronological order, the changes in the farm’s orientation have been as follows:

From 1971 to 1976: Dairy and vegetable farming

The farm’s primary function was to produce milk in hope of being able to enter into an agreement with a dairy to have the milk pasteurized so that it could be consumed by the residents in the home. For this purpose milk quotas were purchased and the milk produced was then sold to various dairies. We were also counting on being able to eat the veal produced by this herd of dairy cattle, as well as the meat from cows that were no longer producing milk. Over the years the dairies formed a co-op and it became clear that it would be impossible to enter into an agreement to have the milk pasteurized and the herd was sold.

We now realize with hindsight that abandoning this type of farming was an error since dairy farming is now generally profitable. Unfortunately no one could predict the future and the decision was made on the basis of the information and priorities at the time, in the best interests of the farm’s objectives.

Over the same period, that is, from approximately 1973/74 to 1977/78, the farm attempted to grow vegetables in hothouses, encouraged in this regard by the on-going efforts of the government at the time to encourage hothouse cultivation in Quebec. The Champlain Group therefore hired an employee to develop hothouse cultivation. After one year of experimenting on the site and after consulting government and private organizations, it was decided that such cultivation could be profitable and the hothouses were therefore built. It must be remembered that at the time heating oil cost only approximately $0.16 a gallon and wages were still fairly low. The increase in heating costs and wages and the results of research conducted by government authorities showing that there was little hope of the hothouses becoming profitable forced us to abandon this type of cultivation.

One has only to recall the newspaper headlines at the time about hothouse tomato producers in Manseau, Quebec to understand how, like these producers, we were encouraged by the government to become involved in a type of cultivation which proved not to be profitable.

From 1975 to 1978: Pig fattening

The farm installations were then converted for pig fattening.

Prior authorization was requested from the municipality of Saint-Liboire to carry out the alteration work. Around 1978 we learned from the environmental protection department that our farming was illegal and that we had to reduce the size of the swine herd to a maximum of 150 head.

Ignorance of the law is clearly no excuse, but it must be remembered that although the swine regulations have been in existence since 1972, they have only been enforced very recently, no doubt as a result of the farmers’ infatuation with pork production (farmers who often did not have authorization any more than we did). Abandoning this pig farming proved to be fortunate, however. If we had persisted, as many did, it is quite likely that we would now be among the hundreds of swine producers on the verge of bankruptcy.

From 1978/79 to date: Beef cattle

The farm then went into beef cattle production in order to satisfy the need for beef in the homes. The stable was therefore converted once again to accommodate beef cattle.

It seems that thanks to the beef cattle, the farm will finally be profitable. The projections show that it will be profitable by March 31, 1983. Had it not been for a drop of $0.40 a pound in the price for beef in 1981, the year ending March 31, 1982 would already almost have been profitable . . .

Establishing a herd of beef cattle requires a three-year cycle, and the cattle purchased in 1978 are now ready to be slaughtered and the cycle has been established.

There are now over 300 head of cattle and there will soon be between 500 and 550 head, with the result that the farm will be profitable and will make it possible to satisfy the meat requirements of the homes in the group (approximately 350 head per year).

Over this entire period drainage and land improvement work was being constantly carried out to attain optimum production and optimum yield from the numerous acres under cultivation. These efforts are now producing a viable harvest of products used to fatten beef cattle. The farm also supplies 120 dozen eggs a week as well as poultry (chickens, ducks, geese, and so on), but on a more restricted scale.

3.03 With regard to the clients’ recreation needs that could be met by the farm, it should be pointed out that the farm as a place of recreation served to replace a chalet in St-Calixte that was sold when the farm was purchased. Mr. Roy also pointed out that 50 per cent of the clients were from the country. There was nothing more pleasant for these people than a visit to the farm with its goats, sheep, geese, ducks, rabbits, and so on. There are also sleigh rides in winter and sugaring-off parties in the spring. Various games have also been set up: badminton, darts, rings, and so on. Olympic games are even organized. All the farm buildings have been built so as to be accessible by those in wheelchairs. There are no stairs in the buildings. All these forms of recreation require appropriate organization: bus transportation, instructors, and so on.

During the years in question some 500 residents were able to use the farm every year as a place for relaxation and recreation. Twelve rooms were even built to accommodate people for a week: residents or employees and their children. There was even a room called a “‘saloon” that could hold a larger number of residents at one time.

3.04 The capital expenditures are summarized as follows in Exhibit 1-3:

Summary

Land	$ 101,471
Buildings	740,619
Silo and generator	17,528
Exterior appointments	106,366
Machinery and equipment	95,282
Rolling stock	74,615
	$1,135,881

[Each of the above items is confirmed in a table giving details for each year. These figures are not disputed by the respondent in any event.]

N.B. The farm was the subject of a scientific appraisal in 1981. The total market value of the farm is approximately $1,500,000.

3.05 Nor does the respondent dispute the financial statements showing the income and expenses for each of the years in question. Exhibit 1-2 shows the gross and net income for 1975 to 1981. The appellant's fiscal year runs from April 1 to March 31 of the following year. Exhibit 1-2 reads as follows (reproduced at p. 2551):

3.06 The following is a breakdown of the expenses pertaining to 1977 to 1981 (Exhibit A-7) without taking the capital cost allowance claimed into account.

The capital cost allowance claimed with respect to the farm for the said years is as follows:

3.07 With respect to the services rendered by the appellant, Exhibit A-5 shows how the gross income can be broken down with respect to each service in 1981.

(A) Gross Income

*Corrections were made during the investigation.

3.08 According to Guy Vincent, CA, who prepared the appellant’s 1980 and 1981 financial statements, the income from the farm is calculated on a cash basis pursuant to section 28 of the Income Tax Act. This applies to 1975 to 1983.

With regard to 1982, the year-end inventory was adjusted by $170,037.50 pursuant to paragraph 28(1)(b) in order to reduce the tax loss from $176,374 to $6,337 (Exhibit 1-1, p. 176).

3.09 Mr. Vincent also explained that the gross rental income in question was offset by an equal or greater expense. This income resulted from a hire-purchase agreement, in other words, from the purchase of a building by means of a rental, the said building being re-leased for accounting purposes. It is entered as a fixed asset. Depreciation and interest corresponding to deemed interest inherent in the lease can be claimed. Under this type of contract the rental expense on account of capital and the interest are greater than the rental income in the first years. In the last years the opposite is true. In the years in question there was thus no rental income. There was a rental loss (transcript, p. 137). Under the heading "commitments" in note 8(b) of the financial statements for 1979, we read the following:

8. ...

(b) The company has committed itself under leases until July 2002 to pay a total of $8,595,416. The instalments over the next twelve months, not counting an annual increase equal to 25% of the cost of living index applicable to an amount of rent of $35,000, amount to $400,000 [Exhibit I-1, p. 99].

In the 1980 financial statements, in note 3 entitled "retroactive change in accounting principles" (Exhibit 1-1, p. 116), we read the following in the first paragraph:

3. . . .

The Company has adopted a new accounting method for rental contracts, which is being applied retroactively. Previously it presented rental contracts as being hire-use contracts, whereas now it is capitalizing the rental contracts, which are categorized as hire-purchase contracts.

4, Act, Case Law, Analysis

4,01 Act

The principal provision of the Income Tax Act involved in this case is section 31. It reads 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 the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500 and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.T’ were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

(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.

4.02 Case Law

The parties referred the Court to the following decisions:

1. Moldowan v. The Queen, [1976] 1 F.C. 355; [1975] C.T.C. 323; 75 D.T.C. 5216; affirmed [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213;

2. James v. M.N.R., [1973] F.C. 691; [1973] C.T.C. 457; 73 D.T.C. 5333;

3. Rudniski v. M.N.R., [1975] C.T.C. 2019; 75 D.T.C. 14 (T.R.B.);

4. Napran v. M.N.R., [1971] Tax A.B.C. 976; 71 D.T.C. 621;

5. The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193 (F.C.);

6. Taylor v. M.N.R., 27 Tax A.B.C. 278; 61 D.T.C. 513;

7. Dorfman v. M.N.R., [1972] C.T.C. 151; 72 D.T.C. 6131 (F.C.);

8. Bishop v. M.N.R., [1984] C.T.C. 2879; 84 D.T.C. 1785 (T.C.C.);

9. Astroff v. M.N.R., [1984] C.T.C. 2788; 84 D.T.C. 1689 (T.C.C.);

10. McCambridge v. M.N.R., [1981] C.T.C. 2314; 81 D.T.C. 251 (T.R.B.);

11. Cooke v. M.N.R., [1975] C.T.C. 2296; 75 D.T.C. 223 (T.R.B.);

12. Philrick Limited v. The Queen, [1977] 2 F.C. 529; [1977] C.T.C. 217; 77 D.T.C. 5158;

13. Roney v. M.N.R., [1984] C.T.C. 2701; 84 D.T.C. 1431 (T.C.C.);

14. Doyle v. M.N.R., [1984] C.T.C. 2205; 84 D.T.C. 1174 (T.R.B.);

15. Tomeck v. M.N.R., [1971] Tax A.B.C. 845; 71 D.T.C. 590;

16. Bio-Test Laboratory Inc. v. M.N.R., [1983] C.T.C. 2348; 83 D.T.C. 295 (T.R.B.);

17. Buchanan Forest Products Limited (formerly Buchanan Brothers (Ontario) Ltd. v. M.N.R., [1984] C.T.C. 2281; 84 D.T.C. 1253 (T.C.C.);

18. Les Immeubles Dramis Inc. v. M.N.R., [1981] C.T.C. 2568; 81 D.T.C. 512 (T.R.B.);

19. C. A. Burns Limited v. M.N.R., [1981] C.T.C. 2001; 81 D.T.C. 14 (T.R.B.);

20. Arthur Bell Holdings Ltd. v. M.N.R., [1983] C.T.C. 2533; 83 D.T.C. 486 (T.R.B.);

21. CBA Engineering Limited v. M.N.R., [1971] F.C. 3; [1971] C.T.C. 504;

22. Blair Supply Company Limited v. M.N.R., [1984] C.T.C. 2560; 84 D.T.C. 1457 (T.C.C.).

4.03 Analysis

4.03.1 The crucial element is the interpretation of subsection 31(1), which is analogous to subsection 13(1) of the old Act, which Dickson, J., currently Chief Justice of the Supreme Court of Canada, said in Moldowan was a difficult subsection, poorly drafted and much debated; that was in 1977 and the said subsection has not yet been redrafted. Dickson, J.’s judgment makes it easier to interpret, however. The issue in short is whether the appellant’s chief source of income is farming or a combination of farming and some other source of income, as it maintains, entitling it to deduct all its losses.

The respondent's position is that farming is a sideline business for the appellant and that consequently the appellant is entitled only to the restricted deduction provided for in section 31.

4.03.2 We shall first quote what Dickson, J. said regarding the meaning of “source of income” at pages 485 and 486 S.C.R. (C.T.C. 313-14):

The next thing to observe with respect to s. 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer's income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words “‘source of income."

Although originally disputed, it is now accepted that in order to have a “source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R.,

([1972] C.T.C. 151). See also s. 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In the present appeal the question of a reasonable expectation of profit is not an issue. By allowing the deduction of restricted losses, the respondent is implicitly admitting that the appellant’s farming activity has a reasonable expectation of profit otherwise all expenses would have been refused.

4.03.3 Dickson, J. also commented, at pages 486 and 487 S.C.R. (C.T.C. 314- 15), on the meaning of “chief source of income" and “combination” referred to in the old subsection 13(1), now section 31.

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.

There has been difference of opinion on whether the word “combination” in s. 13(1) requires some “connection” by way of physical relationship or integration or inter-connection between farming and the subordinate activity which provides another source of income. Section 3(f) of the Income War Tax Act of 1917, as amended, made reference to “connection” in defining the permissible deductions from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income. Section 3(f) read:

(f) deficits or losses sustained in transactions entered into for profit but not connected with the chief business, trade, profession or occupation of the taxpayer shall not be deducted from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income.

The word “connected” is not found in s. 13 of the present Act. As Thorson P said, obiter, in Simpson v. Minister of National Revenue ([1961] C.T.C. 174), there is no reason why there must be such a limitation. I share this view. See also Dorfman v. Minister of National Revenue, supra, at p. 154 and Bert James v. Minister of National Revenue ([1973] C.T.C. 457), at p. 464.

It is clear that “combination” in s. 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think s. 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

[Emphasis added.]

4.03.4 According to Dickson, J. in Moldowan, supra, at pages 487 and 488 S.C.R. (C.T.C. 315), the Act envisages three classes of farmers:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(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) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to 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-busi- ness farming are not deductible in any amount.

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. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of “chief source” to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

4.03.5 Chief Source

The criteria and factors set out in the Moldowan case and cited in paragraphs 4.03.3 and 4.03.4 apply to every taxpayer even if, as in the appellant's case, the taxpayer is a corporation. We shall repeat what was said concerning “chief source" at page 486 S.C.R. (C.T.C. 314):

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.

Based on the evidence adduced, the following are the details of the appellant's various revenue sources, the time spent, the capital committed and the profitability.

4.03.5.1 Various Revenue Sources

The appellant’s various revenue sources as they appear at first sight from the financial statements and as summarized in paragraph 3.05 are: administrative services, rental and farming. The evidence concerning this rental income was not very clear. It seems that a new accounting method was applied to rental contracts whereby hire-use became hire-purchase. It is possible to claim depreciation and interest "corresponding to deemed interest inherent in the lease” according to the accountant Mr. Vincent (para. 3.08), but the question arises of who is the lessor and who the lessee.

The Court gathers that before this new accounting method was applied, rental was merely an expense, whereas now it has become an asset as well.

During the years in question, however, the system resulted in a loss. Later there might have been income (para. 3.08).

Can one really regard the rent as a source of income? Even though the Court has the impression that it is a fictitious source, it should be regarded as a source of income since the losses during the years in question were accepted by the respondent. However, the Court does not attach substantial importance to it in trying to determine the appellant’s chief source of income.

4.03.5.2 Time Spent

Mr. Roy, the appellant’s president, testified that he worked 120 hours a week during the years in question. Most of his time, however, is not spent dealing with the farm. He is the managing director of the Centre d'Accueil Richelieu, which is his employer. In this capacity he also runs and administers the other homes or residences or lodges.

A good way for a company to measure the time spent is to consider the time spent by employees in a given sector. The evidence shows that there are five or six employees who take care of the farm; the others, approximately 45 to 50, spend their time on the work determined by the administration: nursing care, meal services, and so on (para 3.01(e), (f) ).

4.03.5.3 Capital Committed

The amount invested in the farm is $1,235,000 (para. 3.04) whereas the amount invested in the other sources is $360,000 (Exhibit I-1, p. 139).

4.03.5.4 Profitability

Profitability comes down to the average annual income as set out in the last column of Exhibit 1-2, in paragraph 3.05:

It should be noted that the administration income was reduced by the rental losses only for 1980 and 1981. The losses were $125,000 and $70,000 respectively (Exhibit 1-1, p. 132).

4.03.5.5 The appellant’s farming activities not only have a reasonable expectation of profit but should see a real profit shortly.

4.03.6 The above factors can be summarized as follows:

Although the investment factor favours the thesis that the appellant’s chief source of income is farming, the other two factors favour the opposite thesis, and in view of their importance the Court cannot conclude that the appellant’s chief source of income is farming.

4.03.7 The other issue is whether the appellant’s chief source of income is a combination of farming and some other source of income. What does that expression mean? Dickson, J. in Moldowan (see above extract in paragraph 4.03.3) explains that “combination" could not mean an “addition” or “connection" between farming and the other source of income. But what does it mean in the provision? We must first determine its ordinary dictionary meaning. The French version of the section says “combinaison." Le Petit Robert (1984 edition) defines this term as follows: “Assemblage d'éléments dans un arrangement déterminé.”

The Shorter Oxford Dictionary, 3rd edition, defines “combination" as follows:

1. The action of combining two or more separate things. 1613

2. Combined state or condition; conjunction 1597

3. Concr. A group of things combined into a whole 1532.

Here there are only two sources to be considered: farming and administration (since I am ignoring rental for the reasons given above).

Even though Dickson, J. in Moldowan, citing Thorson, P. on this point, said at 487 S.C.R. (C.T.C. 314) that “there is no reason why there must be . . . a limitation” to the effect that there must be a connection between farming and the other source of income, he does not say that if there is such a connection, the combination cannot exist. In my view, if such a connection exists, it can be a factor in favour of a combination. Two activities that are related, that form a whole, can very well explain how this whole combination constitutes the taxpayer's chief source of income. In the Income War Tax Act of 1917, paragraph 3(f) required that a connection exist and as soon as it existed the losses were allowed (see quotation in paragraph 4.03.3).

The present provision is much broader in scope, and a connection is no longer required, but if it exists, it seems to be that a fortiori the loss must be allowed.

Does such a connection exist in the case at bar?

The appellant administers homes with between 500 and 800 patients. The farm serves partly as a source of food (para. 3.02, Exhibit 1-3) and as a place to meet the recreational needs of residents and even employees (para. 3.03). There is no doubt that the farm fits in perfectly with the appellant’s needs and objects.

I am therefore of the view that in light of the facts adduced in evidence and a strict interpretation of section 31 of the Act, the farming losses incurred during the years in question must be allowed.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment with respect to the 1977, 1978, 1979, 1980 and 1981 taxation years.

Appeal allowed.