Ronald Timpson v. Minister of National Revenue, [1985] 2 CTC 2114, 85 DTC 446

Bonner, TCJ:—In assessing tax for the appellant’s 1977 and 1978 taxation years the respondent proceeded on the basis that section 31 of the Income Tax Act applied to limit the deduction of the appellant’s farming losses.

Subsection 31(1) 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 deductions in respect of expenditures described in section 37, 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 deductions in respect of expenditures described in section 37” 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.

The appellant appeals from the assessments and in his notice of appeal he took the position that in the years in issue his chief source of income was either farming or a combination of farming and some other unspecified source. At the hearing of the appeals the issue was narrowed somewhat in that it was asserted that his chief source of income was a combination of farming and the practice of medicine.

After graduating from medical school and interning the appellant moved to Wawa, Ontario, where he resided and practised medicine until 1967. He then moved to Collingwood. He has since resided and practised his profession in that community.

During the 1971 to 1975 period the appellant acquired seven cows and three calves which he kept at a farm operated by an acquaintance. In 1973 the appellant purchased a 150-acre farm situated 14 miles south of Collingwood. The farm had an area of 150 acres and a barn and house, both of which were dilapidated. It was not served by hydro. The water supply was pumped by a windmill.

In the spring of 1975 the appellant moved his cattle to his farm. Using borrowed money he bought a truck, tractor and some attachments. He built a barn, dug a well and installed electricity.

In 1976 the appellant borrowed more money. With it he bought cattle and additional equipment consisting of a binder and baler for hay, a manure spreader, a cultivator and a harrow. He made an addition to his barn and carried on farming operations not only on his own land, but also on a further 100-acre parcel which he leased.

Until 1977 the cattle raised by the appellant were “grade” animals, that is to say, crossbreds intended to have hybrid vigour. Early in the summer of 1977 the appellant decided to carry on a purebred Hereford operation. Using more borrowed money he proceeded to build a purebred herd. Initially the appellant envisaged raising both horned and polled Hereford animals. Subsequently he discovered that the trend in Ontario was away from the horned variety and he proceeded to dispose of those animals and concentrate on polled Herefords.

The appellant had no farming experience before making his first cattle purchase, save for a brief holiday period spent on a farm during his student days.

The operation of breeding, raising, exhibiting and selling purebred animals continues to this day. According to the appellant, success in that endeavour rests on acceptance of the breeder by the farming community. To earn that acceptance the breeder must continuously improve the quality of his herd. He must cull and dispose of unsuitable animals. The appellant stated that he is now accepted. That opinion was confirmed by the witness, Donald Currie.

Mr Currie is a man of great experience in breeding, evaluating and judging purebred beef cattle. He stated that the appellant has gained respect and credibility as a Hereford breeder. His first contact with the appellant was made in 1975 or 1976. Initially, according to Mr Currie, the appellant’s inexperience was demonstrated by the cattle purchases which he made. However, Mr Currie felt that the appellant has now "turned the corner”. He did not say exactly when that happened.

Evidence was given by John Runnalls, a retired farmer who lives adjacent to a farm which the appellant had rented. The rented farm is located about a mile south of the farm owned by the appellant. Mr Runnalls stated that at first the appellant did not appear to know much about farming, but that he was prepared to ask questions. Mr Runnalls had advised the appellant and had helped the appellant with ploughing. He stated that in 1979, when he worked for the appellant during the summer, the appellant was at the farm "seven days a week”.

There can be no doubt that the appellant approached farming with the same intense dedication and commitment which characterized his approach to the practice of medicine. In order to divide all his available time between the medical practice and the development and operation of the farming business the appellant gave up golf and sideline medical and community activities. He relinquished the opportunity to become chief of staff at the hospital.

The tables filed as Exhibits A-9 and R-4 show a limited measure of farming success. The quantities of hay, grain and straw produced have increased over the years. Gross revenues have also increased. However, it must be remembered that what is under consideration in this case is the relative importance of farming as a source of income. As Dickson, J (as he then was) pointed out in William Moldowan v The Queen:* [1]

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 . . . [Emphasis added. ]

Subsection 9(1) of the Income Tax Act provides that:

9(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

Farming, before, during and after the years in issue has generated losses, not profits. The results are as follows:

The causes of the farm losses were not identified. It was not shown that they were attributable to circumstances peculiar to start-up. They occurred despite increases in the output of hay, grain and straw. The increased acceptance of the appellant as a breeder has, I assume, improved financial results, but no prediction was attempted as to whether, when and how much financial improvement can be anticipated as a result.

The Minister, by assessing on the basis that the section 31 limitation applies and by refraining from disallowing the losses entirely, concedes that the farming operation was a business. The next question then is whether a combination of that business and the practice of medicine can be described as the appellant’s chief source of income during the two years in issue. In Moldowan, Dickson, J stated:

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.* [2]

Shortly thereafter in his reasons His Lordship described the three classes of farmers envisaged by the Act. His description of a class (2) farmer is: . the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business”. It seems plain from that description that if farming is to be regarded as part of a combined chief source it must be a source or operation capable of generating relatively significant amounts of income, either immediately or after what, having regard to the nature of the operation, is a reasonable start-up period.

The financial results of the appellant’s medical practice during the years 1975 to 1984 are as follows:

When the relative importance of the appellant's farming operation as a source of income is compared with that of the medical practice it will be seen that farming is and has from the outset been a source not of income, but of loss. It is interesting to note that the appellant conceded that moneys loaned to him by financial institutions were loaned on the strength of his medical income.

Although the figures previously quoted indicate that farming is now showing improved financial results, there is no evidence which would lead to a conclusion that the financial results from farming are likely to continue to improve to the extent that farming will ever approach the practice of medicine as a significant source of income to the appellant.

The section 31 test, as Dickson, J, pointed out in Moldowan, is not only relative. It is also objective. Thus, I must also consider whether the scale and other characteristics of the farming operation in the 1977 and 1978 taxation years were such that farming is to be viewed not as a sideline, but as one of two chief sources combined. The section 31 limitation does not, after all, apply to a person who, but for what in a normally energetic person would be regarded as a full-time non-farm occupation, “.. . would have been considered to have been working fulltime as an efficient, hardworking and knowledgeable farmer".* [3]

The time spent by the appellant on farming, at least during the years in question, appears to have been in the order of 35 to 40 hours a week. Subsequent to the years in question farm-related paper work added a further eight hours a week. There can be no doubt that the appellant put a prodigious effort into the farming operation when it is considered that he was also, at the same time, practising medicine. However, having regard to the evidence of Messrs Currie and Runnalls and to the fact that the appellant had no farming background or formal agricultural training, it is less than clear that the appellant, at least during the years in issue, could be regarded as a knowledgeable and efficient farmer.

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.! [4]

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.

Overall, the evidence suggests that at least during the years in question the appellant could most accurately be characterized as a doctor who, by reason of his substantial income from the practice of medicine, was able to farm as opposed to a person who was not only a doctor, but also a full-scale farmer suffering from temporary financial reverses. For the foregoing reasons the appeals will be dismissed.

Appeals dismissed.