DR Noel a Kerin v. Minister of National Revenue, [1985] 1 CTC 2077, 85 DTC 67

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on September 18, 1984 against an income tax assessment for the year 1979 in which the Minister of National Revenue allowed only the “restricted farm loss” to the appellant, whereas the appellant claimed the “full farm loss”. The background of the appeal was established in the notice of appeal, and the reply to the notice of appeal as follows:

For the appellant:

— The doctor commenced the practice of medicine in Ajax, Ontario, in 1971, where he established his residence. This practice continued until 1978.

— In 1977 the taxpayer acquired the property known as Aishling Farm in Baltimore, Ontario, on which his principal residence was situated from the time of its acquisition up to and including the present.

— During 1977 and into 1978, the taxpayer invested in both cattle and horses in order to raise them for resale, and spent a considerable sum of money in refurbishing the existing buildings situated on the farm.

— During 1978 the taxpayer arranged to trade medical practices with a local doctor in Port Hope. This meant that he took over the Port Hope practice in exchange for his practice situated in Ajax. Accordingly, a total move to the Port Hope environment was accomplished.

— At the same time that the taxpayer began to raise both cattle and horses, he invested considerable funds to correct the drainage of his property so that planting could begin, to start into intensified cereal crop management. This was accomplished by the taxpayer’s own physical labour and financed through special loans obtained from bankers.

— Coincidental with the move of practices from Ajax to Port Hope, the taxpayer’s style of medical practice changed from that of a 100% of family practice to approximately 50% family practice and 50% industrial medicine. Thus the patient load and responsibility was considerably reduced while the income generated was maintained on a constant level or increased. Further, time spent in the office was reduced thus allowing additional time to be spent working on the farm. Also the taxpayer gave up his vacation time and began to devote this time only to farm development.

— In order to create a viable farms operation, a considerable time is necessary to elapse prior to income being generated and profits being realized. When the livestock operation proved to be less than profitable, the taxpayer converted from a livestock operation to a farming operation, crops, and began to exert his efforts in the development of seed products.

— During 1979, negotiations began with “PS’’ to create Northumberland Seeds Inc which was a seed mill operation which was devoted to seed processing and merchandising using products from Aishling Farms, Cherry Hill Farms, (which belong to PS) and products purchased from outside sources. The company was owned 50% by the taxpayer and 50% by PS.

— When it became obvious that the relationship with PS in Northumberland Seeds Inc was not producing the taxpayer’s desired result, he replaced the land at Cherry Hills Farm with additional land that he leased and also purchased, and built his own seed mill on his property. The construction of this seed mill was done substantially by the taxpayer without outside help at a considerable expense and with a tremendous time investment. Further, the taxpayer acquired a considerable amount of additional equipment in order to complete the seed mill. This investment of money, amounting to approximately $200,000 plus the time invested, which is not measurable in dollars, almost put the taxpayer into bankruptcy. This is because the resulting increase in debt load and carrying costs, combined with the lost medical practice income, was immense.

— It is estimated, that the net medical practice income available to the taxpayer would amount to approximately $100,000 per year, if he were not involved in the farm operation. Further the additional debt service he must carry amounts to approximately $100,000 annually because of the farm debt. Thus his reduction on an annual basis, of net disposable pretax income is approximately $200,000 as a result of his involvement in the farm operation.

— During the 1982, 1983 period, farms sales should amount to somewhere between $150,000 and $200,000 based on favourable market conditions, and orderly sales of seed products.

— During 1981 and 1982, the taxpayer developed his own brand of seed products known as “Aishling Farm seeds”. This is now the largest pedigreed seed house in Eastern Ontario. Sales of these seeds are now marketed throughout the Maritimes, Quebec, and Ontario, and markets are presently being explored in the north-eastern United States.

— During this period, the seed products and the methodology employed in their management appealed to two of the largest companies in the “agri” business in North America, namely CIBA-GEIGY and Union Carbide.

— The taxpayer represented these companies for their Canadian trials in the development of a “plant growth regulator” for “Massey Barley”. They found his background as a Physiologist (BSc 1971) to be eminently suitable in their field research projects.

— Aishling Farms produced the highest recorded yield (bushels per acre) of Massy (sic) Barley in Canada in 1982.

— In computing his income for 1979 the taxpayer claimed a farm loss of $30,470 and deducted this amount from income.

— It is the contention of the taxpayer that he is both a farmer and a physician at present, and it is his intention to become a full time farmer and perhaps a part time physician.

For the respondent:

In reassessing, the respondent made, inter alia, the following assumptions of fact:

— The Appellant was at all relevant times engaged in the practice of medicine.

— The Appellant’s gross and net income from medicine and the farm operation was:

	1977	1978 1978	1979	1980 1980	1981 1981
Medical Practice
Gross Income	$72,032.00	$89,574.00	96,457.00	$133,686.00	$145,083.00
Net Income	25,999.00	42,749.00	37,484.00	57,520.00	41,004.00
Farming
Gross Income	Nil	4,064.00	1,172.00	25,771.00	54,687.00
Net Loss	10,740.00	23,269.00	30,470.00	8,117.58
Farm Loss
Claimed on
Filing	5,000.00	5,000.00	30,470.00	5,000.00	5,000.00

— Up until 1979 the farm operation was basically a small scale livestock operation.

— After 1979 the Appellant drastically changed the nature of his farming operation by converting it to the development of seed products.

— The Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income.

— At least up until the end of 1979 and prior to the drastic change in the nature of the farm operation, the Appellant had no reasonable expectation of profit.

— The Minister did not issue any Notice of Determination of a loss with respect to the 1979 taxation year on 27 April 1982.

Dr Kerin testified regarding the information contained in his notice of appeal, and presented considerable documentation in support thereof. In general, he had tired of the busy medical practice and life in Ajax and sought out a more acceptable alternative. Rather than some 90 patients per day and 12-hour workdays in Ajax, he had managed to develop a practice seeing some 25 to 35 patients per day and perhaps 30 hours per week. The balance of the time he had devoted to his farming operation. The original farm (1977) consisted of some 100 acres, but by further acquisition he now owned (1984) some 300 acres and leased about an additional 40 acres. His total capital investment in 1984 stood at about $400,000 for the farm, as opposed to perhaps $5,000 for his medical practice. The documentation and testimony left some uncertainty as to the degree to which he had embarked on the “seed” program by 1979. However, it could be said that he had by that year commenced to explore its prospects and had experimented with it. He took the view that in 1979 he was totally committed to the “seed” program. He provided no satisfactory explanation for having voluntarily reverted to the $5,000 restricted loss class in 1980 and 1981 (supra). The Minister took no major objection to the fact that a large portion of the evidence and testimony introduced related to the periods subsequent to 1979, but the Minister also noted that no final position had been taken by Revenue Canada on the situation for those subsequent years — only the year 1979 was under appeal at the hearing. The general thrust of the appellant’s testimony was that for the more crucial years (1984 and projected 1985) he should be coming into a profit picture.

In argument counsel for the appellant relied almost exclusively on the point that in 1979 Dr Kerin had made a change in direction and committed himself to farming. He cited as support for this assertion, that the farm was certainly not a “country retreat”, it was a working farm; the appellant’s major commitment of time to the operation; the appellant’s major commitment of dollars to the operation; and the prospects for profits in the current years. Simply, (according to counsel) in 1979, the appellant had embarked on the “seed” program, and that fitted directly into the wording which covered such changed occupational direction found in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213. Counsel also cited as support for this perspective the following case law: Graham v The Queen, [1983] CTC 370; 83 DTC 5399; Doyle v MNR, [1984] CTC 2205; 84 DTC 1174; Nikolaisen v MNR, [1984] CTC 2057; 84 DTC 1696; Knaak v MNR, [1984] CTC 2460; 84 DTC 1397; Roney v MNR, [1984] CTC 2701; 84 DTC 1431.

For the Minister, a main point to be made was that the evidence to suggest a “reasonable expectation of profit” was slight, indeed it was admitted by the appellant that it would have been virtually impossible on a mixed farming (grain and livestock) operation. Nevertheless, the Minister had assessed the earlier years by allowing the “restricted farm loss” claim and of course had done so for the 1979 year. Therefore, unless the appellant could show that the new operation (seed) had substantially changed his operation and commenced in 1979, and that it had a "reasonable expectation of profit", there was no basis for this appeal for a greater deduction. In support of his position, counsel for the Minister presented the following jurisprudence: Ernest S Wilson v MNR, [1984] CTC 2158; 84 DTC 1165; Leslie v MNR, [1982] CTC 2538; 82 DTC 1216; Kerr and Forbes v MNR, [1984] CTC 2071; 84 DTC 1094.

First a word with regard to the appellant’s list of authorities. As I understand it Graham (supra) Doyle (supra) Nikolaisen (supra) are all under appeal. Knaak (supra) is of more recent vintage, but apparently stands for a view that the “chief source of income” might be equated to the priority of demand on that taxpayer’s energy, interest and money. That indeed may be the appropriate interpretation for the specific facts in Knaak (supra) but Knaak (supra) does not assert that it is a proposition which must occupy such a central place in all jurisprudence based on Moldow an (supra). With regard to Roney (supra) as I read that jurisprudence, the position of the respondent, which is the same as in the instant case, was upheld. Accordingly, I find little in the submitted jurisprudence which gives comfort to this appellant.

With regard to the case law referred to by the respondent, I would note Wilson (supra) and Leslie (supra) but particularly I would quote from Kerr and Forbes (supra) from pages 2078, 2079 and 1100 and 1101 respectively:

. . . While it is not impossible for a person to fall within the first class even if he has other employment which is usually regarded as “full-time” it would, in my view, require a truly unusual set of facts of the kind described in Graham v The Queen, 83 DTC 5399, to arrive at that result.

With respect to the appellants’ investing all of their available resources in the farming operation, it is I believe clear from the evidence that this was necessary to keep the enterprise from going under financially. While I am not suggesting that funding a farming operation with revenue derived from outside employment is something that per se excludes a taxpayer from the first class — especially when start-up costs are involved

— it is something that can point away from the first class when that funding is relatively substantial and of long duration. I have already quoted from the evidence of Forbes concerning the recent necessity of remortgaging the farm to keep the farming operation afloat financially.

The evidence to support the proposition of this appellant that the “seed” business will be profitable is slim indeed, and it strikes me that it is probably in itself a very high risk business. In addition, the evidence that the “seed” business was more than just embryonic in 1979 is not very great, and certainly I do not find that the venture had reached proportions in that year which could possibly be regarded as the appellant changing his occupational direction. His ongoing medical practice activity, and his stated continuing plans for that medical practice leave me convinced that farming should not be regarded as the primary source of income in providing for his livelihood during the year 1979.

Where the Minister provides for the “restricted farm loss” in assessing a situation as in the instant appeal, and notes its accumulation for purposes of the carry forward provisions of the Income Tax Act (section 111), it would appear to me that the Minister has opened the door and shown the way to a taxpayer, in order that he demonstrate the kind of profit from the operation that it is alleged resides therein. In mathematical terms for the taxpayer, the prospect of using up the accumulated losses from the early years, against the real profits of the operation in later years, (thereby reducing or eliminating the tax impact), does provide a very real incentive to make the operation profitable — an incentive and a yardstick similar to that provided all other businessmen. The proposition of this taxpayer — immediate write off of a loss with little or no indication that profits will result in a reasonable period of time, is one which the Minister and other taxpayers are entitled to look at with a degree of reservation. Some comments along this line are to be found in the case of Glass v MNR, [1984] CTC 2905; 84 DTC 1748.

It is difficult to perceive, in the information supplied to the Court at the hearing the basis upon which the Minister accorded the so-called “restricted farm loss’’ to this taxpayer, but the Minister is to be commended on such a flexible approach rather than castigated for being unable to see the even greater positive aspects in the issue sought by the taxpayer. While this taxpayer might put up some argument that this farming operation was the “center of work routine” (and I suggest that would be a debatable proposition), he could not argue that it provided the “bulk of income” and the evi- dence is diametrically opposed to the proposition that he looked “to farming for his livelihood” — all quotations from Moldowan (supra). I can add nothing which has not already been said in Wilson (supra). The appeal is dismissed.

The appeal is dismissed.

Appeal dismissed.