Ernest S Wilson v. Minister of National Revenue, [1984] CTC 2158, 84 DTC 1164

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on December 9, 1983, against income tax assessments for the years 1978 and 1979, in which the Minister of National Revenue disallowed the full farming losses claimed against other income by the appellant, but did allow the limited amount of $5,000 per year. The Minister, in assessing, relied, inter alia, upon section 3 and 5 and subsection 31(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The following comments taken from the Minister’s reply to notice of appeal reasonably set out the situation:

3. By reassessments, the Respondent permitted the Appellant to deduct the sum of $5,000 only in each of his 1978 and 1979 taxation years on account of farming losses incurred by him. Such reassessments were founded on the following facts:

(a) at all material times, the Appellant was President of and employed on a full- time basis by Wilson’s Industrial Auctioneers Ltd.

(b) in 1973, the Appellant purchased a farm property and commenced hobby farming;

(c) the Appellant incurred losses from his farming activities of at least $5,049.56 and $7,728.27 in the 1973 and 1974 taxation years, respectively;

(d) the Appellant earned income and incurred losses from 1975 to 1980 as follows:

	1975	1976	1977
Remuneration as Employee of
Wilson’s Ind Auction (Net)	$49,840.00	$52,065.47	$55,743.00
Interest	5,421.14	20,171.89	13,515.05
Income from Real Property	1,599.65	nil	2,285.66
Other Income F Allow	794.88	794.88	860.04
— Home Insul
— from Holdings Cos	20,000.00	nil	5,854.00
— Personal Expenses		1,405.60
Farming Loss	(8,190.05)	(16,611.61)	(21,117.61)
	1978	1979	1980
Remuneration as Employee of
Wilson’s Ind. Auction (Net)	$81,792.00	$37,255.00
Interest	16,554.23	23,628.28
Income from Real Property	2,762.26	802.99
Other Income F. Allow		720.00
— Home Insul		311.66
— from Holdings Cos	39,783.58
— Personal Expenses
Farming Loss	(93,228.18)	(52,481.11)	(62,950.94)

(e) no capital cost allowance was expensed by the Appellant in computing his farming losses for the 1977, 1979 and 1980 taxation years; if capital cost allowance had been expensed in those years in a manner consistent with other years, the losses incurred by the Appellant would have been increased by $17,266.52 in 1977, $15,621.43 in 1979, and $18,257.13 in 1980;

(f) at all material times, the Appellant financed his farming activities by borrowing from Wilson’s Industrial Auctioneers Ltd.;

(g) at all material times, the Appellant’s chief source of income was neither farming nor a combination of farming and some other source of income.

I do not assert that the appellant and his counsel were in complete agreement with all aspects of the comments noted above, but, in my view, for the purpose of a determination of this issue, any differences in perspective or emphasis were not critical. The appellant, in his testimony, noted a long standing interest in farming — he had been raised on a farm, and in addition to the particular farm property in question in this appeal, he held interests in other farming lands which were rented. This farm (Chinook) purchased in 1973, consisted of 100 acres, and when necessary, Mr Wilson rented additional acreage. His particular interest was Black Angus cattle and “cutting” horses bred for specific ranch land work. He developed very substantial and recognized herds of both cattle and horses over the years, but did sell off a great part of the stock, including some of his best breeding stock, allegedly to pay the amounts at issue from these income tax assessments. It was on the advice of his accountants that he decided in 1977 to leave the “hobby farming” and engage in a very major way in the business of farming — as he saw it, with the purpose and intention of making the operation profitable as soon as conditions would permit. By December 31, 1979, he owned fixed assets totalling some $369,000 at cost, and his own financial interest (even considering the losses suffered) was above $311,000. His other business as an auctioneer left him able to devote time and energy to the farm in the morning, in the evening and virtually every weekend. He did the farm work himself, as well as hiring help when required from the most menial of chores up to the selection and care of the most prized and valuable animals. He demonstrated in the witness box that he knew virtually every one of the prize cattle by name and pedigree and that he could recognize each one from a photograph. In the years under appeal, and subsequently, he had between 50 and 100 head of cattle. It was also clear that he had a direct interest and personal knowledge of each one of the “cutting” horses on the farm.

This appeal arises to a specific and identifiable level the current “state of the art” in dealing with the problems in section 31 of the Act. The hearing was conducted in a most professional and competent manner by counsel representing both sides, and Mr Wilson demonstrated a remarkable familiarity, association and devotion to farming. Both Mr A Scace, QC, and Miss M T Boris are fully cognizant of the elements, including the jurisprudence which impinge on the decision of this and other courts with regard to the issue of “full-time farming loss deductions”. They were both brief and specific in summing up their positions:

For the appellant:

I submit looking at all the facts and if somebody has a real commitment to farming, spends time at it and is knowledgeable in the area to my mind you can within Moldo- wan come down and say that person is not affected by Section 31 and should be treated like any other manufacturer. If Mr. Wilson was manufacturing coats or anything there would be no question, but he just happened to be manufacturing food, a very sophisticated operation, and you run into trouble. So in my view and certainly the way I handle the practice is don’t get too tied up in the language of Section 31 or the linguistics of some of the judgments. I think it is purely a judgment call based on the facts . . . I think the full background in the early years through high school being on a farm is important. He testified on several occasions it was his lifelong desire to be a farmer. He would have been originally if he had any money to buy a farm. Certainly I think the commitment to farming now in both capital and time is very intense and perhaps predominant and indeed he indicated that, if all went well, the farming might become his chief business venture. There was a clear change in direction as well in 1977. The farm was purchased in 1973 if you recall. Mr. Wilson admits to being a hobby farmer for the next three years but in 1977 there was a total change in direction and I submit in his life . . . In 1983, if you will recall the testimony, there is going to be a very substantial profit to some degree due to the sale which was necessitated by the fact that the tax was owing but in 1983 there would be a $75,000 profit after taking capital cost allowance of $30,000 or thereabouts. So the net profit from the farm predicted for 1983 could be prior to depreciation about $100,000. Again I don’t want to compare years, but since Miss Boris put the exhibit in, R-1, it is interesting to note Wilson’s Auctioneers, in 1979 there was a $356,000 loss. Well, no loss the farm incurred ever approached that. I realize I am not comparing strictly each year with each year, but just dealing with the evidence that is, suffice it to say, I think that from 1977 on it is very clear that the farm became Mr. Wilson’s prime interest, an enduring interest.

For the respondent:

— because of the provisions in Section 31 of the Act that Mr. Scace has suggested you should not pay very much attention to the language, unfortunately, the language is there. It is a provision of the Income Tax Act and it must be dealt with as the Act now stands . . . Section 31(1) is, of course, a difficult section to deal with because one tends to think that if (it were) any other business these losses would be fully deductible. Unfortunately 31(1) has expressed the legislative intent which has been expressed to limit an individual who is carrying on a farming business, but where that is not his chief source of income or a combination is his chief source of income to $5,000 per year which is what the Minister had done in this particular case, he has limited the deduction to $5,000 per year. In the circumstances of the case, despite the limited farm background that the appellant had . . . there was not a change in occupational direc tion in 1977 within the meaning of Moldowan. There could not be. What there was was a decision to increase the capital commitment to the farming operation, but Mr. Wilson continued as president and employee of Wilson’s Auctioneers Limited . .. The difficulty, obviously arises from the wording of the section itself and from the interpretation that it has been given from the cases . . . it is difficult to take a situation where there is a loss and have legislative language that talks about a source of income . . . I have struggled with the problem of when you have a whole history of losses such as this, — how can you say that somebody has a reasonable expectation of profit such that you can constitute it a business? . . . but what does one expect of a person when one talks about him carrying on a business and cases have used the expression “business-like approach, he has operated his farm in a business-like manner,” such as, for example, the appellant clearly has done here?”

Inevitably in an examination of this question, one must reach the Supreme Court jurisprudence in Moldoxvan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213, but I do not think the comments made in the judgments at earlier levels of the proceedings in Moldoxvan, (supra), can be totally ignored. One of the comments from Moldowan, (supra), to be found at 315 and 5216 respectively, has always interested me.

In the instant case, it is common ground that the appellant was farming and that his farming constituted a source of income. There are concurrent findings below that farming was not his chief source of income. I would not disturb those findings.

There are at least two comments in the judgment of the Federal Court of Appeal (Moldowan v The Queen, [1975] CTC 323; 75 DTC 5216), which shed some light on the reasons which were adequate to the judges at that level, (and not disturbed by the Supreme Court) for finding that farming in that case was not the “chief source of income”. These comments are found at 325 and 5217, respectively, and read as follows:

Section 13 presupposes that farming may be a taxpayer’s chief source of income for a taxation year in spite of the fact that the taxpayer may have incurred a farming loss for that year. A business does not cease to be a business in a year (and a source of income does not cease to be a source of income in a year) for the sole reason that it does not yield a profit in that year. Section 13(1) does not refer to the “chief source of the taxpayer’s income” but to the “taxpayer’s chief source of income”. In my view, as long as a taxpayer carries on the business of farming, farming remains one of the taxpayer’s sources of income regardless of the fact that the farming business may in certain years result in losses and regardless of the fact that the taxpayer may have no reasonable hope of operating his farming business at a profit in those particular years.

In order to qualify as a taxpayer’s chief source of income, it is not necessary, in my opinion, that farming be more important than all the taxpayer’s other sources of income grouped together; it is sufficient that farming, as a source of income, be more important than any of the other sources of income.

Mr Moldowan, in that case, had as sources of income — “office or employment”, investments”, “business”, “farming” and “rentals”.

Going even further back to the Federal Court, Triai Division, judgment (Moldoxvan v The Queen, [1974] CTC 638; 74 DTC 6496, at 642 and 6499, respectively, one finds:

He was optimistic of success, but although it was a potential source of income I do not think he could reasonably look to or depend upon it, either alone or in combination with some other source of income, as his chief source of income in any of the years ahead, including the years 1968 and 1969.

While the jurisprudence demonstrates clearly that there are circumstances under which a “loss” does not invalidate the claim to “source of income”, it would appear that it becomes increasingly more difficult to maintain that status where there is no record of profit, indeed a record of losses continued and com- pounded. Before proceeding further, I would quote from the Supreme Court judgment in Moldowan, (supra), at 314 and 5216, respectively:

It is clear that “combination” in section 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. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

I can only interpret that section to mean that where “farming” as a source of income, by itself, does not constitute the chief source of income, that merely combining the farming loss with the income from another source — the only source of income does not fulfill the conditions in section 31 of the Act. Therefore, in order for there to be a “chief source of income” which combines two elements, “farming” and “some other source” there must be at least three original sources of income to which the taxpayer can point. That condition is filled in this instant appeal, there are at least three sources of income. For the year 1978, the income “sources” were:

In Moldowan, (supra), (Supreme Court) at 313 and 5215, respectively, the Court noted:

. . . whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts.

When turning to the question of “chief source” the comment arose: “Whether a source of income is a taxpayer’s chief source of income is both a relative and objective test. It is decidedly not a pure quantum measurement” (pages 314 and 5215 respectively). As I read it, the Court dealt later in that paragraph with “farming” by itself as the chief source of income, and concluded as noted earlier, that “farming” was not the chief source of income. With regard to the “combination” aspect, it is my reading of the balance of the judgment that the learned Justices had great difficulty using the same criteria (in the sense I have indicated) to conceive of a situation which combined the acknowledged minor or subsidiary source of income (“farming”), with one of the other sources of income, to produce a “chief source”. It would appear to me that when farming alone had failed to fulfill the role of “chief source” — the appellant Moldowan’s “major preoccupation” was not farming — then some other source of income must have been his “major preoccupation”. The Court was not called upon to determine which of “employment”, “investments”, “business” or “rental”, that major preoccupation might have been, and as far as I am able to determine, the taxpayer did not specify the “combination” he regarded as fulfilling that section. I do not suggest that the phrase “some other source of income”, merely because it is in the singular, rules out the prospect of a taxpayer attempting to combine “farming” with one or more other sources of income to fulfill the “chief source” requirement by way of such combination, but it would appear to me that some such identification might not only be useful in determining these appeals, but could be regarded as incumbent on the taxpayer. Whether on its own, or in combination with some other source, farming must represent “the bulk of income or the centre of work routine” as well as the direction to which the taxpayer “looks . . . for his livelihood" in order to be regarded as the “chief source of income” as I read Moldowan, (supra). Circumstances may exist in which farming as a business does not provide the “bulk of income”, nor the direction to which the taxpayer “looks . . . for his livelihood—, and yet it might be described as “the centre of work routine”. I am not convinced that such a situation entitles that taxpayer to the full farming loss deduction from other income (see James R Leslie v MNR, [1982] CTC 2233; 82 DTC 1216. Equally, I am not persuaded that gross farm income, which is often relied upon very heavily by a taxpayer, can be regarded as a major factor in making the necessary “relative” comparisons with other sources of income, which almost invariably are “net” of expenses related to earning the income. Gross farm income and, for example, employment income have little, if any, possible comparability.

There are certain matters upon which I could make some comments before reaching a final conclusion on this case. First there is the case of Helen Kaper v The Queen, [1982] CTC 178; 82 DTC 6148. I recognize that the facts and factors in that case have some resemblance to those of the instant appeal, and it is my reading of that judgment that the learned judge placed great emphasis upon the indication of apparent profit for the farm in 1981. The judgment also notes that the “commitment of time and money” was indicative of the fact that the appellant by 1977 and 1978 “had changed her mode and habit of work to the management of her horse breeding farm from her previous active participation in the operation of Motor Express Terminals Limited”. There were references in the instant case to prospects of profit in the currrent year (1983), but it is my view that such a prospect was not supported to the degree sufficient to offset the impact of the substantial and consistent losses in earlier years; and I see nothing in the instant case which would give me the same confidence of changed “mode and habit of work” for Mr Wilson. Certainly, I do not hold the view that in all situations one should equate “commitment of time and money” with such a changed direction. There could easily be other explanations. Second, reference must be made to Casimir Van Straubenzee v MNR, [1981] CTC 2692; 81 DTC 552, a case with very striking similarities to that of Mr Wilson. I repeat a comment to be found at 2238 and 1220 respectively, of Leslie, (supra), regarding the Van Straubenzee matter:

However, as I read the rationale of that case, it turned on the view that during certain years prior to those under appeal, Mr. Van Straubenzee had not only been in the business of farming but that, during that prior period, farming had been his chief source of income. In the instant matter, it has not been contended by Mr. Leslie that his chief source of income before 1977 had been from farming rather than from his employment.

There is no such rationale for allowing this appeal that I can see, and it is difficult for me to find in Van Straubenzee, (supra), any other rationale for allowing that appeal. Finally, I would quote from an article of the December 1983 Chartered Accountants Magazine (to be found at pages 16 and 17, thereof), which dealt with possible and suggested changes in the Income Tax Act:

Restricted farm loss. Chapter II, “Farmers and Fishermen,” no longer contains any justification for the continued use of Section 31 to limit the deduction for farm losses. As a result, the brief recommends that this section be removed from the Income Tax Act. The apparent intention of that section was to restrict deductions for the so-called gentleman farmer who operated a farm as a hobby for personal pleasure. Recent court decisions have shown that such a person is not entitled to any deduction under the normal rules of the Income Tax Act. Unfortunately, Section 31 then goes on to penalize a person who is carrying on a farming business expecting to make a profit, but who has other income — which rules out farming as a chief source of income. Because the act does not restrict a person in deducting losses from any other business except farming, “we cannot see the justification for such a restriction in the case of farm losses”.

In the final analysis of “chief source”, whether “farming” by itself is the subject of the review, or a “combination of farming and some other sources of income”, the question remains if it is subordinate to, or more important than, another source of income. The subjective and operational tests may be of some value in making such a determination, but for me they would need to be overwhelming indeed to compensate for and reverse the impact of recurrent and substantial losses on the farming business. Whether it was intended or not, by the legislator, the end result of section 31 of the Act appears to more and more (except in certain rare cases) restrict the farmer to a loss of $5,000 during any period alleged to be a “start-up” period, and leave with the farmer the prospect of utilizing other sections of the Act for the deduction of excess losses when and if available and applicable. The limit for deduction imposed by section 31 is not the “restricted farm loss”, it is of course the excess of the total loss incurred over the limit provided under the provisions of section 31 of the Act. Nevertheless, certain comments from 2257 and 1204, respectively, contained in Fred S Goring and F Dennis Goring v MNR, [1976] CTC 2255; 76 DTC 1202, a decision of the Tax Review Board before the Supreme Court of Canada (Moldowan judgment, (supra)), may have certain validity:

There was considerable evidence of a laudable effort to rehabilitate the property and turn it into a base for the family estate, and the same evidence also indicated strongly the motivation for this effort to be both a love of rural life and farming as an occupation, as well as a deep and understandable attachment to this particular homestead property. It is evident to me that it is at least partially in recognition of these latter human feelings, that the Income Tax Act does contain the provisions in section 31, permitting the deductibility of a portion of the loss in the year in which it is incurred (up to a maximum of $5,000) as a “restricted farm loss’’. In section III(l)(c) some flexibility is also provided to the taxpayer in taking advantage of the loss amounts in excess of the “restricted farm loss” against profits earned during other periods of the farm operation even though there is not sufficient evidence of a planned program, or of current results to support the proposition at this time. It is in recognition of this inbetween situation that the Minister has provided, in the Act, the relevant provisions dealing with restricted farm losses. The alternative would be to regard the operation as merely the base for a personal retreat, recreation or hobby.

The appeal is dismissed.

Appeal dismissed.