David Albers v. Minister of National Revenue, [1984] CTC 2310, 84 DTC 1260

Tremblay, TCJ:—This case was heard on March 10, 1983, at the City of Sherbrooke Quebec.

1. The Point at Issue

The point at issue is whether the appellant, a full-time teacher, is correct in deducting in the computation of his income for the 1977, 1978 and 1979 taxation years the amounts of $5,000, $5,000 and $4,483.48 respectively. These amounts were farming losses for his 75 acre chicken farm located in St-Joachim de Shef- ford.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based the assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

6. In reassessing the Appellant for his 1977, 1978 and 1979 taxation years, the Minister of National Revenue assumed, inter alia, the following facts:

(a) During 1977, 1978 and up to the autumn of 1979, Appellant was a full-time employed teacher and at odd times, acted as a contractor;

(b) Appellant acquired in 1973 an abandoned piece of land of 75 acres in St- Joachim de Shefford;

(c) Appellant expanded in 1976 by acquiring an additional 2 acres of land on which was built a house;

(d) During the taxation years at issue, out of the 75 acres of land, Appellant did not cultivate more than 4 acres of land which in fact is the only portion of good arable land;

(e) The crop obtained on the 4 acres of land was wheat and hay which Appellant used to feed his 80 to 90 chickens;

(f) During the taxation years at issue, Appellant’s ‘farming revenue’ was $1,280.00 in 1977, $1,214.00 in 1978 and $1,540.00 in 1979 obtained from the sale of various poultry products and wood products;

(g) Appellant’s farming revenue, which did not really vary in three years, indicates

that in the circumstances he could not have a reasonable expectation of profit;

(h) With only 4 acres of land cultivated, 80 to 90 chickens, and the wooded portion of land, Appellant’s activities were far too few to produce a profit-making enterprise;

(i) Furthermore, during the taxation years at issue, Appellant spent a considerable amount of money, namely $30,000.00, and considerable leisure time to renovate his house which clearly indicates his intention to obtain a capital gain and have the necessary money to buy a better piece of land;

(j) In fact, Appellant sold the house and land in St-Joachim in 1980 to buy a farm in Ste-Anne de Larochelle which confirms that the St-Joachim site could not generate any sort of profit.

3. The Facts

3.01 The appellant was brought up on a farm. He spent his youth on a beef farm where chickens and pigs were also raised. He went to McDonald College and followed a teaching program (3 years), then went to McGill University (2 years) and obtained a teaching post in physical education, mathematics, reading, music, etc.

3.02 In 1973, he bought a 75 acre farm and an old house. He paid $8,000 for it. It was located in St-Joachim, Quebec. There were four miles of woods, pasture land, maple bush, and a field of about 15 acres on the farm.

3.03 During the years 1973 to 1976, he spent time and effort to develop the farm. He built a chicken house. He drained the field.

3.04 During the years 1977, 1978 and 1979, he bought ‘‘a four-wheel drive tractor, a grain seeder, a grain grinder, harrows, a hay baler, a hay wagon, a threshing-mill, a turnip grinder, a spring-tooth tiller, a plough” (SN p 18). He spent over $10,000.

3.05 In 1976, he bought, in co-ownership with his mother-in-law, a property near Bromont which was about 12 miles from his farm. He painted the house and did renovations. In 1977, he sold it and declared a construction income of $5,388. Therefore he said he never expanded in 1976 by acquiring an additional 2 acres of land on which was built a house, as contended by the respondent in paragraph 6(c) of the reply to notice of appeal.

3.06 He utilized the whole 75 acres. From the wood lot, he sold wood products such as: construction wood, furnace wood, fence posts and Christmas trees. From the pasture land, he sold small nursery trees, cedar trees for hedges and maple trees. From the field, he cut hay in the first years, later he seeded the harvested wheat from this field to feed the chickens.

3.07 During the years involved he was a full-time employee working under contract for a school board. He had to work 200 days per year, and 51/2 hours per day, being free at 2:10 pm in the afternoon. He said he was teaching 54 per cent of his working days and spent 46 per cent on the farm. He was an every day farmer, not a weekend farmer. During the summer he had time to make hay, etc. Sometimes, he hired employees to help him.

3.08 In an eight-year project, he spent $30,000 and his leisure time to renovate his house. It was a necessity. He started in 1973 by installing hot water, insulation, new windows, plumbing etc. It was for the purpose of staying there and continuing as a farmer.

3.09 In the said years, the appellant also worked as a contractor.

3.10 Concerning the chickens, he started with 30 in 1977 and in 1982 he sold 500. He bought them for 0.50¢ when they were 2 days old and he raised them until they weighed 8 to 9 pounds. This took about 16 to 18 weeks. They were fed with wheat. In 1981, he seeded 4 acres of wheat and harvested more than 20 tons, which was fed to his chickens. They needed about 40 pounds of wheat per bird for 16 weeks. He said it cost around $4.50 to $6 to produce a bird. Each was sold for $16. The business was named “Deedee’s chickens”.

3.11 In June 1979, he left his teaching job to become a full-time farmer. Therefore in June 1980, he sold the farm and bought a new one (160 acres) for $52,000. This is located in Ste-Anne de la Rochelle whcih is 10 miles from St Joachim: “I have always believed that a profit could come from that farm, but as a full-time farmer, I can handle a larger project. As a part-time farmer, that farm, to me, is just enough to keep working hard . . .” (SN p 33).

3.12 All the machinery of the former farm was brought to the new farm.

3.13 The appellant said that “Le Crédit Agricole due Québec” offered him two choices to become a beef farmer:

(a) First to stay on the farm in St-Joachim and the government would finance “un parc d’engraissement”;

(b) Second to buy the farm in Ste-Anne de la Rochelle, and they would finance up to $25,000 with an eight per cent interest for the purchase of the new farm, plus grants and subsidies “to help us be successful full-time beef farmers”. However, he had to sell his farm in St-Joachim.

3.14 In the spring of 1983, he had 17 head of beef in the barn and 3 in the refrigerator to be cut up. In 1982, he sold 44,151 pounds of beef for $28,000. In 1981, his gross income was $20,046. In 1982, he also had 500 chickens on the new farm. Sickness, however, killed many of them. Finally, he had a gross income of $3,000 from the sale of the chickens.

3.15 In cross-examination, the appellant admitted that the gross farming income for the 1977 taxation year was $1,280 of which $250 was from the sale of hay and the balance from the sale of wood products and the sale of 30 chickens. The best year on the farm in St-Joachim was from the sale of 90 chickens in 1979.

The appellant became a member of “l’Union des Agriculteurs du Québec” in 1980.

He was involved with the chickens about one hour per day. Tree planting took about 5 to 6 weeks per year. In 1977, 1978 and 1979 he did not have the need to cut pulpwood because the mills, during those years, were overflowing with pulpwood. They had a surplus.

3.16 The appellant explained that he did not want to leave teaching before 1979 because he saw so many people coming from the city to live on a farm, and being obliged to face personal bankruptcy. He wanted, first to reduce expenses as much as possible so that “even if you are only receiving a small income to support your livelihood, your overhead is not high and you’ll have a chance of realizing success” (SN p 71).

Moreover, he said he did not invest big amounts at the same time because: “spending and investing very, very quickly, sometimes, works against you because you don’t have the chance, maybe, of investing wisely. So my theory was to invest slowly but wisely, which is what I think I’ve done”.

3.17 Concerning the expenses, the preponderance of the evidence is to the effect that he claimed 100% of the interest expense on the mortgage, and 75% of his car expenses for the business. In the years involved he was teaching in Granby, which is 15 miles from St-Joachim.

4. Law — Case at Law — Analysis

4.01 Law

The provisions of the Income Tax Act involved in this case are subsection 31(1) and paragraph 248(l)(a) under the definition of “personal or living expenses”. They read as follows:

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

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deductions in respect of expenditures described in section 37“ were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(1);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

248. (1) In this Act,

“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

4.02 Case at Law

The only case and the most important to which it is necessary to refer is:

William H Moldowan v MNR, [1977] CTC 310; 77 DTC 5213.

4.03 Analysis

4.03.1 The Supreme Court of Canada in the Moldowan case interpreted subsection 13(1) of the former Act which is the same as subsection 31(1) of the present Act as follows:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(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 carried 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.

4.03.2 The problem is whether the appellant is a gentleman farmer and his farming activities are a hobby.

The respondent contends it was a hobby because there was no reasonable expectation of profit.

In the Moldowan case, the Supreme Court of Canada said:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

4.03.3 First it is true that the appellant did not make a profit. However, as pointed out many times by the Courts, the word “reasonable” qualifies the word “expectation” and not “profit”.

The taxpayer’s training and knowledge was admitted by counsel for the respondent at the beginning of his submissions.

Concerning the capability of the venture as capitalized to show a profit, the evidence shows that the appellant was prudent. He bought the farm in 1973, repaired the-house, bought machinery and built a chicken house and in fact started, in 1977, to raise chickens. In 1979 he received an offer from “Le Crédit Agricole du Québec”. It was possible to stay on the farm at St-Joachim, however, he decided to buy a larger farm at Ste-Anne de la Rochelle.

The Court finds that the appellant’s course of action is logical. His prudence and his know-ho\v explain his conduct in his investment. In the years 1980, 1981 and 1982 he made a profit, as a result of his course of action during the former years. In a problem of this nature it is necessary to consider at least five years on which to base a decision. The Court finds that it can be said that there was reasonable expectation of profit in the 1977, 1978 and 1979 taxation years, therefore the appellant must be considered as a gentleman farmer. The expenses must be deducted pursuant to subsection 31(1) as quoted above. However, pursuant to the evidence, only 25 per cent of the car expenses claimed must be allowed for business purposes. Also only 60 per cent of the mortgage interest paid must be considered as business expenses.

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.