Milton J Macaulay v. Minister of National Revenue, [1985] 2 CTC 2161, 85 DTC 468

Bonner, TCJ:—In assessing tax for the appellant’s 1978 to 1981 taxation years the Minister acted on the basis that section 31 of the Income. Tax Act applied to limit the deduction of losses incurred by the appellant in farming. The sole issue in these appeals is whether he was correct in doing so. That turns on the question whether the Minister correctly found the appellant's chief source of income during the years was neither farming nor a combination of farming and some other source.

The appellant has, since 1955, been employed by British Columbia Hydro. During the years in question he also carried on the business of farming. That operation consisted mainly of raising cattle, breeding, raising and selling purebred Arabian horses and boarding animals belonging to other persons.

The operation has not been financially successful. The results during the 1978 to 1983 period as set forth in Exhibit R-1 were as follows:

*It is not clear why this figure is not 3,528.00.

Subsection 31(1) provides in part:

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 . . .

There follows a formula by which the amount of the deemed loss is to be calculated.

In William Moldowan v The Queen, [1978] 1 SCR 480; [1977] CTC 310, the Supreme Court of Canada reviewed the position of farmers under the Income Tax Act. Dickson, J (as he then was) stated that the Act envisages three classes of farmers as follows:

(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 carries 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-business farming are not deductible in any amount.

His Lordship went on to say:

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 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.

In my view during the years in question the appellant fell into the second class. His change in occupational direction was partial and provisional. The commitment of energy to the farming operation was very great, but it appears

to have been directed not to farming as a “main expectation of income” but, rather, to farming as a lifestyle.

Throughout the years in question the appellant continued to work at the B C Hydro job which he had held since 1955. His salary or wages rose steadily from about $23,700 in 1978 to $32,200 in 1983.

The appellant’s evidence was that he spent about 1,500 hours a year working for Hydro and 2,000 hours a year farming. The fact that the appellant arranged to serve Hydro at times designed to accommodate the imperatives of such farm operations as sowing and harvesting does not, by itself, lead to a conclusion that farming was the chief source or part of one.

There can be no doubt that farming may form part of a combined chief source even where, as here, a taxpayer devotes a substantial part of his time to non-farming activities, provided that the farming operation in question is a source which, despite losses during the years in question, can be viewed as possessing the potential to yield significant amounts of income in the future.* [1] However, a farming operation such as the appellant's which as will be seen, seems as likely to yield loss as profit can hardly be described as a chief source whether on a basis relative to the Hydro employment as a source or otherwise. The fact that the appellant devoted much more time to farming than he did to his employment does not support a conclusion that farming was a “major preoccupation” in the sense in which those words were used by Dickson J. His Lordship was referring to a major preoccupation from the standpoint of the generation of income or profit! [2] and not to major preoccupation in the sense of an activity undertaken primarily to fulfil some desire other than a desire to earn income.

As to commitment of capital, the evidence was not precise. Apparently none of the moneys required to purchase the farm came from the appellant's own resources. Payment of one half of the $80,000 purchase price was deferred on the security of a mortgage back to the vendor and the other half came from a mortgage to the Federal Business Development Bank. The total investment in machinery up to the end of 1977 was said to be $25,000. Up to that same time the total investment in clearing was $5,000.

The major sources of farm revenue are broken down on Exhibit R-2 as follows:

The appellant explained that 1979 cattle sales were unusually high because of troubles with a well which created problems in watering the stock with the result that he had to sell a number of animals. Crop sales are not a consistently significant source of revenue. This item consists of hay sold, but only in years when production exceeds consumption. The consistent major revenue generator has been the horse-boarding operation, the revenues of which have been recorded under three headings, “Board”, “Vet & Animal Care” and “Shoeing”. Despite the financial promise shown by boarding, the appellant stated that he has no plan to expand the activity. The 1983 revenue from the sale of wood appears to be of a non-recurrent nature. The wood was a by-product of clearing operations on a part of the farm.

Overall, the evidence suggests that during the last six years of operation the revenues have stabilized in the $20,000 to $25,000 area. The appellant indicated that he has no present intention to expand or change the farming operation. He suggested that he might build an indoor ring, but that does not appear to be a firm intention and the financial impact of such a venture was not explored. The evidence of the appellant on cross-examination indicated that, generally speaking, the recorded expenses during that six-year period were not unusual. Thus it is evident that the farming operation in the mature state is, at best, a break-even proposition.

Earlier in these reasons I indicated that the change in occupational direction was provisional. The appellant’s evidence was that he intended to retire from his Hydro job “. . . when the farm turns a profit sufficient to live on”. Barring some unplanned change that event appears unlikely to occur.

The evidence does not, for the foregoing reasons, support a conclusion that farming, whether alone or in combination with the Hydro employment, was, during the years in question, the appellant’s chief source of income within the meaning of section 31 of the Income Tax Act. The appeals will therefore be dismissed.

Appeals dismissed.