Cecil McLeod v. Minister of National Revenue, [1984] CTC 2327, 84 DTC 1297

Goetz, TCJ:—This is an appeal by the appellant with respect to his 1977 and 1978 taxation years.

Issue

Whether, in the relevant taxation years, the appellant was engaged in a farming business and, in particular, whether cattle raising constituted part of that business and whether income therefrom could be calculated on the cash method.

Facts

The appellant has been working on a farm of his father since he was 14 years of age. The total acreage was 1920 acres.As of 974 the land was owned equally between father and son. It was a mixed farming operation. The father died in 1974, leaving his 50 per cent share of the land to his oldest son Scott.

In 1979 McLeod Estates Co Ltd was incorporated and the land transferred to the company. The appellant held 60 per cent of the issued shares and his brother Scott 40 per cent.

In the 1940s the father bought cattle which were pastured in public pastures. The appellant trucked the cattle to Winnipeg for sale. In 1948, the appellant married, and sold all his cattle. In 1949 he had 50 to 100 head of feeder cattle on prairie pasture. He would buy in the spring and sell in the fall and carried on this way until he quit in 1966. P C McLeod and Son Farm Supply Ltd leased the farm land from the appellant and his sons. The appellant eventually became president and 95 per cent owner of the company. He was and still is a member of the Saskatchewan Stock Association. He also belongs to the Canadian Stock Brokers Association.

In 1971 PC McLeod and Son Farm Supply Ltd was incorporated. This was a John Deere dealership and the appellant owned 47 per cent of the issued stock. The company farmed the land and sold farm machinery.

The farm land is now farmed by the appellant and his son with extra hired help in the seeding and harvesting operation. The appellant attends the machinery business offices about an hour a day which, he says, is sufficient in that he has a very efficient staff. He was an organizer and is a shareholder of the Wey- burn Inland Terminal Ltd.

In 1977 he wanted to get back into the cattle business and in December purchased 174 steers from a Gary Jones, a cattle rancher. He felt the cattle business was on the upswing as it moves in cycles. He was invoiced by Jones as follows:

The appellant purchased the cattle in his own name and opened up a “cattle account” at his bank. The company has nothing to do with the cattle operations. On the advice of Jones he sold his feeders on June 5, 1978. He has been in the cattle business ever since, which constitutes his personal farm income. His other income was derived from the farm and machinery company as salary and dividends. He purchased feeders, paid Jones to feed and care for them, and sold them 6 months later. In actual fact though his sales were good, he derived no net income but rather losses from the cattle operation from 1977 to 1982.

Gary Jones, who owns 9,000 acres and 1,500 head of cattle, gave evidence and qualified himself as an eminent expert in animal husbandry. The organizations to which he belongs and his activities in this field are legion. He stated that he was involved in all phases of cattle operations and explained that in Western Canada the operation of the cattle business was split as follows:

70% — cow-calf operators

20% — backgrounders (raising a weaned calf)

10% — feeders

He was very firm that the cattle industry was a cyclical business, (ie a 10-year cycle) and was related to the grain industry, hence, as he says, cattlemen must hedge. He saw nothing unusual about the appellant’s losses because the appellant got caught up in one of the down cycles. He operates a feed lot which he likens to a hotel where the cattle are fed, branded and cared for. The appellant is now in the same business and feed lot operations have been treated by Revenue Canada as farming operations. The appellant is now making dollars from his cattle operations.

Findings

The appellant is, and has been a farmer since he was a boy involved in grain production, herding of cattle and feeding cattle to finish. Farming through the years in Saskatchewan has become a sophisticated operation. Farms have grown in size either by owning or leasing land. A farmer now operates large and expensive equipment and the cabs of the motor powered units are enclosed with air conditioning, two-way radios and even stereophonic equipment.

In the early days a rancher would raise his cattle on his land or rented pasture to the point where the cattle would be sold to another farmer or for slaughter. The appellant and his father, for years, grazed their cattle on public pasture. Although in 1948 the appellant disposed of his feeder cattle, he carried on farming through P C McLeod and Son Farm Supply Ltd — a machinery and farming business. This company leased the farm land from the appellant and his son after P C McLeod died in 1974. In 1979 McLeod Estates Company Limited was incorporated and it now owns and farms all the land previously owned by the appellant and his father. Although the appellant has never forsaken farming as his mental and physical pursuit, it must be remembered that the two companies are separate legal entities or persons.

When, in 1977, the appellant decided to reestablish himself in the “feed to finish” segment industry by the purchase of cattle, he decided to depart from a pasture operation to the computerized feed lot operation. He knew that cattle raising was a cyclical operation and was ready (as are all cattle raisers) to take the risk inherent thereto. He purchased 174 steers from Jones and had Jones feed them in Jones’ feed lot for six months. Then on the advice of Jones, he sold them. In 1978 and thereafter he went through the same procedure until he ultimately set up his own feed lot. As for income, the following figures filed as an exhibit show as follows.

Exhibit A-9

Counsel for the appellant says he is now in a “‘net earning” picture. His other source of income was from revenues derived from the operations of the compa- nies, his alter egos. Counsel for the respondent contended that the appellant was not sufficiently and personally involved in the “feed to finish” operation, whereas the appellant’s counsel relied heavily on the case of The Queen v Kuhl, [1973] CTC 846; 74 DTC 6024.

Although the Kuhl case related to income averaging, it has application to this appeal. In that case, two brothers engaged in farming potatoes for sale to a potato chip manufacturer. They incorporated a company with another farmer and sold their potatoes to it. Thereafter the brothers carried on the “potato” operations and continued as before with their farming activities. Though they did the actual farming for the company, it was held that they had an implied contract “for services”, rather than “of service”. The Minister refused the appellants’ claims to average their income because their “chief source of income” was not from farming but was derived from the company. Walsh, J held that their “chief source of income” was not from farming. He further found that the company was engaged in farming and, therefore, the source of money the defendants received was also from farming. I quote from Kuhl, (supra), at 852 and 6027 respectively:

It is also indisputable that the company had a corporate personality separate and distinct from the taxpayers’ who owned all its shares and fully controlled its operations. See for example the leading case of Salomon v Salomon ((1897), AC 22) where Lord Macnaghten stated the basic principle at page 51:

The company is at law a different person altogether from the subscribers to the memorandum; and, though, it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.

Further, at 859 and 6033:

In the final analysis, each case must depend on its own facts and I believe it does no injustice to the intent of subsection 42(1) of the Act, and is in accordance with the facts in this case to give a broad meaning to the words “‘source of income” in the said subsection 42( 1) by concluding that it originated from farming, even though some of this income may have been channeled to defendants through a corporation which has an independent existence. I therefore dismiss plaintiffs appeal with costs. As a result of this dismissal, the assessments are referred back to the Minister for reassessment accordingly, (italics added)

In the case before me, the appellant became enmeshed in a downturn in the cattle business which, as stated before, runs in cycles and is dependant on many factors over which he had no control. He made no net income until after 1982, although his gross income in 1982 exceeded his other income by a wide margin.

It is unreasonable to expect that his cattle business would be successful overnight. He had brought his cattle business to a high point of sophistication in having his cattle fed at Jones’ feed lot and he ultimately set up his own feed lot. From a practical point of view, he was farming. He performed farming services for the companies and, in his own personal name, carried on a cattle business. Since 1977 he had what I consider a reasonable expectation of profit. (See The Queen v D C Matthews, [1974] CTC 230; 74 DTC 6193.)

It is necessary to consider then the implications flowing from the decision in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, where subsection 13(1) (now section 31) was given full consideration. I quote Dickson, J from pages 315 and 5216 respectively:

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 farm- ing 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.

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 of 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.

The facts of this appeal, on the authority of the Kuhl and Moldowan cases, (supra), bring the appellant within the first class of farmers. The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.