Peter Knaak v. Minister of National Revenue, [1984] CTC 2460, 84 DTC 1397

Bonner, TCJ:—The appellant appeals from assessments of income tax for the 1977 and 1978 taxation years. The Minister, on assessment, proceeded on the basis that subsection 31(1) of the Income Tax Act applied to restrict the deduction of losses from a pig-farming operation carried on by the appellant. The sole issue is whether the appellant’s chief source of income for those years was either farming or a combination of farming and some other source within the meaning of the subsection. That meaning became much clearer in 1977 when the Supreme Court of Canada handed down its decision in William Moldowan v The Queen, [1977] CTC 310, 77 DTC 5213.

The appellant did not have any substantial farming background before entering into the farming business. As a young boy in Germany he lived in a rural area, but his family did not engage in farming. After his family emigrated to Canada the appellant lived with his parents on a farm for a two-month period only. The appellant had no other connection with the farming business until the Spring of 1976 when he purchased the farm in question as a going concern.

The appellant was educated in economics and in law. He was called to the Bar of Alberta in 1972. He did not start to practise law until 1975. Between 1972 and 1975 he worked for the government of Alberta first as a civil servant and subsequently as an executive assistant to a minister of the Crown.

After buying the farm the appellant proceeded to develop a very large “farrow to finish’’ hog operation. Although he sought to utilize his knowledge of economics for purposes of the farming enterprise he, wisely, did not rely on economic theory alone. In the beginning the appellant retained the services of the former owner of the farm as farm manager. The appellant studied with very considerable care all aspects of the pork-raising business including particulars of breeding, raising and feeding of pigs, the relevant diseases, the handling and marketing of the animals, the overall layout of the required structures and the advantages and disadvantages of the various kinds of farm equipment. The appellant planned to raise on the farm, the area of which at the outset was 640 acres, much of the feed required by the pigs. Thus, his studies extended to the details of raising grain as well. Some indication of the appellant’s thoroughness may be found in the fact that the appellant even made provision for the continuing education of his farm manager. Both took an extension course on pig raising. In summary the appellant took all steps necessary to overcome his deficiencies in farming experience.

In order to finance the purchase of the farm the appellant increased the mortgage on his family home in Edmonton. He also sold one of his three rental properties. Two remaining rental properties were sold two years later to satisfy the bank which had loaned the appellant the balance of the money required to buy the farm and to carry on operations during the start-up period while the number of pigs was being increased to planned levels.

The appellant embarked on an extensive programme designed to upgrade the productive facilities of the farm. In addition to the equipment acquired on the purchase of the farm as a going concern the appellant bought equipment which included a combine, a rake, a grain truck, a chemical sprayer and a tractor with a front end loader. A new well was drilled and underground water distribution lines were installed. The electric transformer was upgraded to provide sufficient capacity. In 1978 the appellant commenced construction of a farrowing barn and outside pens. The entire assemblage of barns, stalls, silos and feed mixing and distributing devices represented the appellant’s choice of the most modern and efficient available. It is abundantly clear on the evidence that the appellant’s capital, the money which he borrowed and his labour were all invested to acquire assets designed to make a direct contribution to the production of pigs. The appellant did not pour money into the creation of any sort of gilded rural retreat.

By the end of 1980 the appellant’s farm possessed assets of a value of approximately $750,000 including five quarter sections of land, barns having a reproduction cost of approximately $200,000 and inventory having a value of approximately $100,000.

Figures published by the Alberta Department of Agriculture indicated that farms of the size of the appellant’s and carrying on grain and pig operations on a similar scale to the appellant’s yielded, on average, $115,000 per annum before provision for the operator’s labour, management and return on investment.

The appellant was no mere dilettante. He worked prodigiously himself both in the construction of capital improvements and in the performance of tasks more directly connected with day-to-day production operations. It may be noted that with the exception of the framing of one pig barn all of the barns were constructed by the appellant and his father.

The appellant carried on the farming operation and the practice of law concurrently during 1976, 1977 and the first half of 1978. Much was made by the Minister’s counsel of the location in Edmonton of the Appellant’s law practice and home. Such was the fact, but one must not be hypnotized by it. The appellant’s departure from his law firm followed a period during which his partners became increasingly discontented with the extent to which the appellant spent his time, both in the office and out, on farming endeavours. On any balanced view one can only conclude that by far the greatest proportion of the appellant’s energies were committed to creation, launching and operation of the 100 farrow endeavour.

Early in 1979 the appellant successfully stood for election to the Alberta Legislature. Counsel for the Minister relied on this too as a basis for suggesting that farming was then and had been during the two previous years a subordinate activity. Again I do no agree. Counsel for the Minister stressed the fact that the appellant did not go out of his way, when running for office, to advise his constituents that it was then his plan to move from Edmonton where his home and riding were both located to the farm located some seventy-five miles to the east. The bearing which the appellant’s moving plans might have had on the attitudes of the constituents toward the appellant, had the constituents been aware of the plans, will never be known. I do not doubt however that the appellant was entirely capable of both properly representing his constituents and, at the same time, of running the farm at optimum levels of production.

A finding as to the relative importance of farming as a source of income does not necessarily turn on the location of the taxpayer’s residence in relation to the farm. It is quite conceivable that a large and profitable farming business, one that is successful by any measure, can be carried on by a farmer whose residence is nowhere near the farm. A farm in the context relevant to section 31 is a business, not a home.

The Minister submitted that the farm was a mere sideline. Counsel argued that because of the appellant’s reliance on income from other sources, namely the law practice and the office of MLA, the appellant could not demonstrate a change in occupational direction, viz, he could not show that farming had supplanted the practice of law as his chief source of income. Farming, according to the submission of the Minister’s counsel, was but one of many businesses or occupations which the appellant intended to engage in. The position, as the Minister saw it, was confirmed by the appellant’s subsequent action in seeking elective office.

This line of argument was wholly unsupported by the evidence. That evidence plainly established that farming had, from the time of the purchase in 1976 through to the end of 1978 and well beyond that, the first call on all of the appellant’s resources of energy, of interest and of money. I find without hesitation that the appellant’s chief source of income during the relevant years was farming. The fact that the farm lost money does not, of course, mean that it could not be the chief source.* [1]

The appeals will therefore be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that section 31 of the Income Tax Act does not apply to restrict the deduction of the appellant’s farming losses.

Appeals allowed.