Kenneth J Byron v. Minister of National Revenue, [1985] 2 CTC 2139, 85 DTC 459

Sarchuk, TCJ:—Kenneth J Byron ("Byron”) appeals from income tax assessments for his 1977, 1978 and 1979 taxation years. In those years he sought to deduct certain losses incurred from farming in the amounts of $27,711,02, $18,478.37 and $16,960.14 respectively. The respondent disallowed the deduction of these expenses on the basis that the appellant’s chief source of income in respect of each of the taxation years was neither farming nor a combination of farming and some other source of income and that as a result thereof the maximum loss permitted to be deducted in any taxation year was $5,000 pursuant to the provisions of subsection 31(1) of the Income Tax Act.

The respondent conceded that the appellant’s undertaking was a business during the relevant taxation years. The Court takes this as an admission of fact by the respondent that the appellant had a reasonable expectation of profit from his farming operations in those years. Although on the evidence adduced it is difficult to understand the basis upon which the respondent made this concession the admission stands and the only issue which remains to be dealt with is whether or not the appellant falls into the first class of farmer described by Chief Justice Dickson in William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, that is, whether the appellant is a taxpayer for whom farming may reasonably be expected to provide the bulk of his income or the centre of his work routine. While it is trite to say that each case depends upon its own peculiar facts that seems to be particularly the case in what are referred to as “farm loss cases". In the vast majority of these appeals the appellant’s sources of income are a farming business and some other usually quite unrelated employment or business. In such circumstances, to come within the first class the appellant must demonstrate that his major preoccupation was farming, that he looked to farming for his livelihood and that the unrelated employment was “‘subsidiary or auxiliary to farming", failing which the appellant falls into the second class and would then be entitled only to restricted farm losses.

The appellant is a chartered accountant. Prior to 1973 he lived with his family in North Burlington, a suburban residential area, where he dabbled in the breeding and training of quarter horses. This activity expanded and in 1973 the appellant sold the North Burlington residence and purchased a farm in Waterdown, Ontario. The property, 50-acres in size, comprised a 400-tree orchard (which according to the vendor was revenue-producing), a house, a barn and a drive-shed.

From 1973 the appellant occupied this property as his principal residence. Although he did not have an agricultural background he maintained that he had always had an interest in farming. It was his intention to continue with the quarter-horse breeding operation and to expand the farm operation by utilizing as a market garden that portion of the property which was not dedicated to the orchard.

In the 1974 to 1977 taxation years inclusive the appellant incurred losses from the orchard/market garden and the horse-breeding operations. He quickly realized that he was not able to operate the orchard as a viable business. Byron testified that one year there was too much snow as a result of which the rabbits and deer stripped the bark off the trees and caused irreparable damage; the next year there was too much rain which led to scabbing of the fruit; then frost destroyed a crop; and in another year the trees were damaged by a plague of mice.

The market garden visualized by the appellant as an alternative method of producing income also failed to get off the ground. Apparently the appellant discovered, too late it seems, that the property had a peculiar water table which made the land intended for the garden too wet to use without the installation of an extensive drainage system. The appellant did not have the funds to pay for such a project.

The foregoing failures forced the appellant to conclude that none of the three activities could ever be a profitable farming venture. As a result the appellant, in 1976, cast about to see what he could turn his farming hand to. He told the Court that he was familiar with Black Angus cattle (because he had purchased them for family use) and after consulting with the Black Angus association he decided "to try it".

Having made this decision the appellant commenced a cattle operation in 1977. It was necessary for him to consolidate his financial position and to do so he sold twenty-five acres of land, applying the proceeds to reduce the farm's debt load. In 1977 and 1978 he cleared the land, built fences and carried out other improvements to effect the proposed transition from a produce and horse-raising operation to cattle breeding.

It should be noted that notwithstanding the fact that Byron had determined well prior to 1977 that it would not be possible to make a profit from the horse operation, he continued to maintain an inventory of horses for a number of years thereafter. Losses incurred in his attempts to dispose of this inventory are included in the amounts claimed in the relevant taxation years.

Byron stated that he intended to develop a small basic herd of high quality animals totalling no more than 20. This was not to be a commercial "cow-calf" operation but an attempt to breed the best purebred stock available. It was his view that with proper breeding techniques, he could anticipate that the operation would produce a profit. Lacking capital the appellant chose to proceed to build his basic herd by way of selective purchases and natural increase. In 1977, in accordance with this plan he purchased two cows with their calves at a total cost of $700. He immersed himself in a study and examination of bloodlines, with a view to selecting and purchasing high quality semen for artificial insemination. In 1978, his herd consisted of four cows and calves and in 1979 it numbered nine head.

It is common ground that none of the farming operations from 1973 to the present time were self-sustaining. In addition, to convert the farm to a cattle operation it was necessary for the appellant to clear the orchard, to put in adequate fencing and to plant grass for forage. All of the costs associated with the changeover and subsequent development of the herd were paid for by the appellant’s earnings from his accounting practice. It is not disputed that the appellant committed all of his available capital to the farm operation. In fact, in 1981 and 1982 when the farm needed money the appellant in addition to his accounting practice acted as office manager for two business firms.

The appellant testified that to achieve his objective of farming full-time he gradually began reducing his involvement in his practice. In 1978, he terminated his teaching position with a community college. During the relevant years he maintained an office for his practice at the farm which enabled him to spend significant amounts of time working at his farm operation. It is, however, difficult to assess the import of the time spent on one business or the other in view of the fact that both were carried on at the same location.

From the evidence it is clear that farming was an important concern in the appellant’s mode of life and was a source of income (albeit not profit). It is equally clear that farming did not provide a means of livelihood for the appellant in the years under appeal (nor in fact in succeeding years). The appellant’s gross and net fees from his accounting practice (1976 to 1981) and from teaching accounting (1976 to 1978) are as follows:

The expenses in 1980 and 1981 include a salary of approximately $4,000 paid in each of those years to his wife.

The appellant’s losses from farming from 1976 to 1981 are as follows:

It was the appellant’s contention that he committed himself to a change in lifestyle as early as 1973. He appropriated all of his capital to the farm and its requirements, and took all reasonable steps to reduce, with the intention of ultimately eliminating, his involvement in the practice of accounting. This practice was unique in that the bulk of his clientele were professional people such as dentists, for whom he acted as a consultant in relation to their businesses and investments. He did, however, with some input from his wife, look after their records, financial statements and income tax returns as well. In 1984, he opened an office in Waterdown, intending to carry on an accounting practice there with the assistance of his daughter who was completing her training as a certified general accountant. While this event post-dates the taxation years in question the appellant suggests that it is relevant as being confirmative of his stated intention of farming full-time at some future point of time.

Throughout the hearing the appellant adamantly maintained that he expected his cattle operation to be profitable within a few years. This expectation had not been achieved as quickly as anticipated for a variety of reasons including market conditions and a motor vehicle accident which incapacitated the appellant for a time in 1981. Byron said that while he did not expect a profit through 1982, 1983 or even 1984 he did expect to earn a profit “perhaps in 1985 and, if not, certainly by 1986”.

According to the appellant the maximum number of cattle the farm could support was 20 head of breeding cows and their offspring. This would provide him with 20 animals for sale in any given year. The ratio of male to female calves is generally 50/50. Therefore of the animals available for sale in a given year 50 per cent are bulls, which according to Byron are sold as beef cattle and whose sale contributes but marginally to the gross income of the farm. With respect to the remaining ten heifers he hoped to achieve an average of $2,500 per sale.

These projections do not appear to take into account the fact that unavoidable cattle losses due to injury or illness occur; that a certain percentage of the ten heifers will be culls and not marketable as prime breeding stock. The projections also ignore the uncertainty of market conditions, for example in the most recent year, 1984, the average sale price of the appellant's stock was $1,500, well below the projected average of $2,500 per sale.

The appellant maintained that he has been relatively successful in developing a high quality Black Angus breeding herd; that this herd was, at the time of the hearing of these appeals, close to or at maximum size and that the sales have been at prices above market average. These submissions however, are not supported either by the documentary evidence or by any independent corrobative evidence. The appellant’s projection of profitability (accepting his optimum prediction of an average of $2,500 per sale) is not, in the Court's view, supportable. The appellant filed a document (Ex A-11) which listed, by animal, his current herd together with an estimate of the market value of each animal. This document shows ownership by the appellant of a total of 36 and one-half animals valued at $64,850. Of this number ten are bulls with a value of $5,000, which, according to the appellant, would be disposed of at the earliest opportunity. If one deducts the value of these bulls from the total amount it becomes apparent that the estimated value of the remaining 26 and one-half units is slightly in excess of $2,000 per unit. Accepting the projected optimum sale of ten head of cattle per year (and this assumes that market conditions are good) the gross income (including the disposition of the bulls) would be less than $30,000. In the taxation years in question farm expenses ranged from a low of approximately $20,000 to slightly in excess of $36,000. There has not been any reduction in expenses since then and in fact the evidence disclosed expenses of $32,760 and $33,658 in 1982 and 1983 respectively. In view of these facts it is difficult to comprehend the basis upon which the appellant so confidently projects profits in the future. Furthermore, caution must be exercised before one accepts the appellant’s reconciliation of his farm income from 1977 to 1983 (Ex A-8) as supporting his projections of profit since the figures therein relating to the sale of livestock include the proceeds of the sale of a horse or horses, the tag end of an inventory of a business which had been discontinued in 1976. Indeed, in cross-examination the appellant conceded that he could not accurately state an average per unit price for his cattle in 1983. In the same vein Byron conceded that in 1984 his sales amounted to $10,000 but that these were sales of all the beef bulls and culled heifers. If I understood Byron correctly this was a reflection of market conditions in 1984.

The appellant had no prior experience in farming. He failed to make a success of the orchard (which according to the vendor had been profitable in prior years); his earlier quarter horse operation was, by his own admission, not a commercial success and his venture into market gardening met the same fate. The Court accepts Byron’s sincerity and perseverance. He spoke at length of his efforts to establish a quality herd and of the fact that he had progressed to the point where he was able to show some cattle at agricultural shows. Nonetheless, it is a fact that Byron was completely self- taught, that he took no agricultural courses of any kind but simply read articles and books on breeding and occasionally consulted an agricultural representative. Although he has great confidence in himself, telling the Court that several times he tried to obtain advice from other farmers “but I found I generally knew more than they did", the results to date fail to support his unbridled enthusiasm and optimism.

The appellant relied inter alia on the decision of Mr Justice Cattanach in the case of Paul E Graham v The Queen, [1983] CTC 370; 83 DTC 5399. There is, in the Court's view, a key distinction to be drawn between this case and the case at bar. Graham had been raised on a farm and had a solid farming background. Independent evidence was adduced establishing Graham's ability to produce a high quality product. One witness, a hog producer himself, described Graham's stock as the result of a very good breeding line. He stated that Graham was one of the first swine men in that area to take an artificial insemination course and to utilize what was then a very new technique. As a result of advice given by Graham the witness himself was able to substantially raise his average productivity. He stated that Graham, in ratings produced by the Ontario Pork Producers Marketing Board, was in the top ten producers in the area.

It strikes the Court that the only similarity between the Graham case and the Byron case is the fact both incurred losses in their respective operations for a number of years.

There was no evidence before this Court as to the commercial viability of a Black Angus breeding operation of the size and nature carried on by the appellant. There was no expert evidence adduced to satisfy the Court that the appellant’s approach and breeding techniques followed accepted practices. All of the evidence adduced leads the Court to question whether or not the appellant, who by his own admission was self-taught (and whose other farming ventures had failed) was proceeding in a manner likely to develop a viable commercial operation.

The respondent's position is the fact that the appellant’s farm business, although it had a reasonable expectation of profit, was nonetheless, a sideline business or was subordinate or auxiliary to the appellant’s full-time employment and could not be considered “‘a chief source of income".

The onus is on the appellant to demonstrate that he was carrying on a farming business that was not a sideline business. The evidence adduced does not satisfy the Court that the appellant is within the first class of farmers described in Moldowan. Most certainly it can not be said that in the relevant years farming could have been reasonably expected to provide the bulk of his income nor does the evidence support the appellant’s contention that these were start-up years and that he could reasonably expect his farming operations “to provide the bulk of income” at some point of time in the future.

The appeals are accordingly dismissed.

Appeals dismissed.