G Brian Hunter v. Minister of National Revenue, [1985] 1 CTC 2440

Taylor, TCJ [ORALLY]:—This is an appeal by the appellant with respect to his notices of reassessment for his taxation years 1978 to 1981 inclusive.

The issue before me is whether the appellant is entitled to deduct his total farm losses in the operation of a farm, or whether he is restricted to a limited farm loss of $5,000.

The facts of this case are, of course, indeed important, and I am going to deal with them to some extent to enable me to clearly set out the basis upon which I render my decision.

The appellant is 43 years of age. He was born on a farm in Manitoba. This was a mixed farming operation where he became conversant in dealing with cattle. He left home at the age of 18 and became an apprentice with Manitoba Hydro, where he worked for four years and then subsequently took two years in engineering technology. In 1967 he went to British Columbia, where he became employed as a lineman with B.C. Hydro. This required him living in construction camps.

He went to Vanderhoof, British Columbia, in 1975, where he met the woman whom he married, and I might point out that she as well came from a ranching family in the United States. He purchased 210 acres for $75,000, putting $25,000 down in cash from his savings and assuming an existing mortgage.

The appellant and his wife discussed at considerable length the feasibility of getting into a farming operation. Having done that, they made the decision and started the operation. The land was fallow and not in a good state. It was necessary, of course, to bring it up to a proper level. He had to make improvements; he spent $14,000 for a well. He got the eletricity in, set up the buildings, feedlot, fences, “loafing shed” as he referred to it.

He and his wife were committed to living near or on the farm, and they started out living in a trailer and then rented a house two miles from the property. Ultimately, they purchased a house immediately adjacent to the feedlot that the appellant had set up.

Exhibit A-l illustrates the progression of acquisition of land to be farmed by ownership or by leasing and, as of 1985, the projected acreage would be 1,357, that is coming from 210 acres. The appellant, on top of all the improvements and expenditures, acquired 100 head of cattle.

He now has 85 cows, 84 calves and 50 yearlings, which is a fairly substantial herd. He knew that in deciding to establish a farm, he would be faced with start-up costs and he was fortunate in having available to him employment with BC Hydro where he did earn a substantial amount of money.

Exhibit A-4 shows the periods of time over the years that he worked for Hydro and the amount of time he spent on the farm. We all have to stop and take thought as to whether we are doing the right thing in whatever we are doing and that particularly applies to farming operations, especially one that is just starting up.

The appellant had this farming background dealing with cattle and he knew all the vicissitudes of raising cattle. He had projected profits. He says he made a profit in 1984 and projects a higher profit in 1985. The graph on Exhibit A-2 clearly illustrates that expectation. As mentioned by counsel, Justice Cattanach in the case of Graham v The Queen, [1983] CTC 370; 83 DTC 5399, says that hindsight is relevant in determining the basis of a reasonable expectation of profit.

In acquiring the farm he wanted to avoid being involved in a high-risk business but he knew that it was very necessary to carry on with that because all of the money that he earned from the Hydro employment was plowed back into the farming operation.

Further, he wanted to raise a family on a farm and his wife was completely in accord with that approach. He did not like being away from home as much as he was but, as I say, he had to do that during the period of establishing the farm as a viable business operation.

He was able to take this outside employment and acquire funds to assist him in the farming operation because of the nature of his farming operation namely, that the seeding would be done before his work with Hydro would start; the cattle would be out grazing during the summer and his wife would check on them once a week. The work period for Hydro was, as I understand, from June until October., basically, more or less.

The appellant was faced with what was common to all farmers in Canada: rapidly increasing costs of equipment, fuel and supplies, rapidly increasing interest rates; as opposed to the steady of level of income from the sale of cattle. He mentioned that over that whole period of time the net revenue from the sale of the cattle was very, very narrow because of the flat level of prices per pound on the sale of cattle. He engaged in cross-breeding, which gave him a higher poundage yield in his calves. He indicated that (as shown in Exhibit A-4) and I quote: “I must fit Hydro work into my farming operation”, which he seems to have been successful in doing. With Hydro, he would work two weeks and have four days off.

The appellant had hoped that he would show a profit in five years. He did not, and in 1981 he realized that that was not going to happen, and he extended his viability expectation to seven years. The situation here is, and was, common to many farmers across Canada who have filed and are still filing petitions in bankruptcy because of the pressure of rising costs of farm equipment, interest, fuel, etc.; everything on the expenditure side has gone up, whereas the revenue side has either stayed flat or has dropped.

From the above facts I can relate to the dicta in the case of Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, a bench-mark decision of the now Chief Justice of the Supreme Court of Canada. All of the other cases flow from the statements of law in the Moldowan case. They vary to certain degrees, as this case varies in different degrees, as far as the facts are concerned.

It is very seldom you get two cases with exactly the same facts, but the basic consideration on which I must decide is whether the appellant is entitled to the deduction of full farm losses or limited farm loss as set out in the Moldowan case. Section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended, is indeed a difficult section to interpret and the criteria set out in that case are not exclusive.

The appellant started out with an investment of $75,000. He has a revolving loan account of up to $100,000 at the bank. The value of the farm is now, he said, $350,000, which gives him an equity of $250,000. This is certainly a progression from his situation when he embarked on the farming operation in 1978.

It is quite clear to me that after studying the feasibility of the operation, he made a decision to change his mode of life, to change his direction and his interest to the building up of a viable farm operation. He gradually reduced his time spent with B.C. Hydro to the point where it is virtually nil in 1985. I can see no reason why he cannot carry on supplementing his income by an outside activity such as Hydro, but all the facts clearly indicate to me that he has moved, with everything that he has, to the building up of a farm operation that will net him profit and, apparently it now has. That is why I say hindsight fits into this picture. Justice Cattanach in the case of Graham v The Queen (supra), says that it is quite relevant and I find it very much so in this case.

We see a loss picture growing into a profit picture. It all comes down to the question of timing. The appellant was committed to building up the farm; he committed capital; he committed time; he committed labour in growing degrees to build up the farm. As I mentioned, he certainly changed his direction; he was not treating the farming operation as a sideline. That was his life, that was his home, that’s where he wanted to live, and he is moving, fortunately, in that direction.

We then come to the question: Did the appellant really have a reasonable expectation of profit? The facts indicate that he did. The potential for profit was there. And we get down, ultimately, a profit picture three years beyond the taxation years under appeal.

Obviously, with this type of farming operation the start-up costs are extremely difficult to handle but he, through really hard work, working with Hydro and working on the farm, was able to handle the start-up costs. The fact that he is doing outside work is no different than if he had to go to the bank to borrow the money.

The appellant was fortunate in that he had this ability to obtain outside income, that is outside of the farming operation. From 1976 on, his total preoccupation was building up a farm and he has done that, albeit it took him a bit longer than what he had expected. From everything that he has said I have no doubt in my mind that the goal of reaching a profit was there from the start and that it was reasonable for him to expect a profit within five years.

The start-up costs were heavy and the appellant made considerable sacrifices in handling them. He fits into just about every possible classic category referred to in the Moldoxvan case (supra). 1 do not need to get into a discussion of the subjective intent that he had. Objectively, it is quite manifest. I have to decide into which category the appellant falls with respect to the deduction of farm losses. Was he able to deduct the total amount of farm loss? Was he limited to $5,000? Or was it a hobby? Well, it was certainly not a hobby and I would refer to pages 315 and 5216 respectively of the Moldoxvan decision (supra), with respect to the three categories analyzed by Justice Dickson (as he then was). The criteria in the Moldowan case (supra), and in the other cases are met by the appellant. He was dedicated to building up this farm; he has proven that. There was a clear change in his occupational direction. That has all been established.

I feel that there was a combination of farming and outside activity but the prime activity was farming, and that was the appellant’s life. The centre of his routine was in Vanderhoof, British Columbia, where he was going to be able to bring up his children in a quiet environment and eliminate being away from the family all the time, working for Hydro.

I do not think I need say anything further. I am fully satisfied that the appellant had a reasonable expectation of profit, which came into reality in 1984. He is therefore entitled to deduct the total amount of his farm losses for the period from 1978 to 1981, and I so order.

I incorporate into my judgment the minutes of settlement as filed relating to what I would consider collateral matters to the main issues before me. I award costs to the appellant.

Appeal allowed.