Victor Kozinski v. Minister of National Revenue, [1984] CTC 2743, 84 DTC 1600

Goetz, TCJ [ORALLY]:—These are appeals with respect to the appellant’s 1977 to 1980 taxation years inclusive wherein he sought to make certain deductions from his income tax which he had to pay as a result of working in the oil fields as a well driller. The appellant withdrew his appeal for the 1979 taxation year, there being a nil assessment. In the relevant years, the appellant earned $7,984.95, $18,945.70 and $20,816.26 respectively in the 1977, 1978 and 1980 taxation years, from the oil-field work.

The difficulty in this case is not one of these what we call “caper cases”, where a professional will get involved in horse raising or a nominal type of farm where they have done improvements and so on, and they are able to enjoy a hobby or, let us say, a half-successful farming operation in conjunction with their main source of income.

Exhibit A-3 is, to me, the most important document and it shows from 1976 to 1980 a very substantial growth in loss, particularly in 1980, from the farming operation. Fortunately, 1981 looks much better; the gross farm income doubled and the farming loss came down from $22,000 more or less, in 1980, to $13,000 more or less, still a farming loss.

The appellant acquired property from his mother and then leased a considerable amount of land from his mother. He leased a quarter section of some of the land and he either got title to or leased. He leased this to his wife who also has an appeal before the Court.

The decision of Moldowan v The Queen ([1977] CTC 310; 77 DTC 5213) remains the leading case that we rely upon. This is a decision of Mr Justice Dickson of the Supreme Court of Canada and I refer particularly to pages 315 and 5216 respectively, where he sets out three categories of areas where certain effects come about as a result of section 13(1) of the Income Tax Act, RSC 1952, c 148, as amended, as it was known then (now section 31):

(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 subsection 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 subsection 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 third category quoted above is what troubles me because it was quoted directly by Mr Stolniuk. Mr Justice Dickson goes on to say:

The reference in subsection 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 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.

There is no doubt in my mind that the appellant has lived on the farm pretty well all his life. He worked as early as he could with his father on the farm. He also worked as early as he was able to in the oil fields and he continues to work in the oil fields, which from Exhibit A-3, the statement of income and summary, seems to be his major source of income.

The appellant spent his whole life on the farm; when he was not on the farm, he would be in the oil fields. Now, I have to decide how far can we go with what we call “start-up costs”, which in this case involve very high repair bills and interest charges, because of the conduct of the appellant in what I say expanding too fast — and I have seen many a taxpayer go under by failing to heed the advice of his accountants and lawyers in being told to go easy and slowly.

The appellant lived and worked hard on the farm and he has put in all his spare and substantial hours upgrading the farm, when he was not on duty with the oil company as a driller. Having regard to the large amount of land he required [sic] by transfer and by lease, he had to have a substantial amount of farm equipment and he said he bought mostly second-hand equipment, which is proven by the size of the annual repair bills.

By resolution and hard work on his part and his being able to retain what I consider to be his main and only source of income — I realize he can kill a cow or a calf and have meat for weeks; he can grow vegetables in his garden and maintain himself on the farm — but, with this heavy load that he has voluntarily put on his back, he has slowed up what I call the “start-up procedures” which he is entitled to, and any taxpayer is entitled to point out to the tax authorities: “Well, this is start-up and I am entitled to my full deduction because, look, I have improved from year one, year two”. Very few businesses make a profit before the second year of operation, but here we have it running for several years, up to 1980, with a substantial loss and always being dragged down by these inordinate interest charges and repair bills and the frost hitting the appellant’s crops. The appellant admits that he lives in a frost-prone area. I believe he said he was “frosted out” three times and yet, 20 miles away, farther south, of course, and in a better area, they do not suffer in the same way.

The land that the appellant acquired, he admits, is marginal; it still needs to be cleared of trees and he deserves 100 marks for the work that he has done in the attempt to improve his land, but to make his appeals successful, I would have to find that he had a reasonable expectation of profit and all I can find is a fond hope of profit and that things will be better next year. His financial position, obviously, is gradually improving.

Looking at the two financial statements filed, it looks like 1981 could be the turning point in his struggle to make the farming operation a viable operation and it is an operation that he would not be able to make viable if he had not the basic source of income, that is, working in the oil fields.

I cannot see from Exhibit A-3 (the income summary) a bona fide reasonable expectation of profit with over a number of — one, two, three, four, five years. Now, we are only dealing with the years 1977 to 1980 (excluding the 1979 taxation year, there being a nil assessment) and the farming loss for instance in 1979, dropped down from $11,403.68 to $9,839.09 and then unfortunately went up to $22,609.63 in 1980, and then this is again from acts of nature beyond the control of the appellant.

The appellant certainly has not in any way sought to use the farming operation as a device to reduce his income tax arising from another source of income. I think he falls within the second category of Moldowan, (supra), where there is a combination. The farming operation was a sideline business.

Counsel agreed that the appellant was in the farming business with an expectation of profit. The issue is whether the chief source of income is from farming or a combination. Well, certainly, there was no source of income from the farm. In my view, there could not be a reasonable expectation of profit, at least in the relevant taxation years under appeal.

I find this a very difficult case to decide in that I see the eagerness and desire of the appellant to eventually reside completely on the farm and get his full income therefrom. He indicates that he intends to get out of the oil business. I frankly, doubt that he will be in a position to do that, having regard to all of the evidence that I have heard today about the land, the propensity of the farming operation, the suffering from frost, drought and low cattle prices. I certainly see, from the figures before me, a potential that could be described, I would think, from 1979 on, as an expectation of profit sitting in the appellant’s mind and being a real expectation of profit, particularly in light of what has happened in 1981. Just one good year does something for him.

Counsel agreed that there was a reasonable expectation of profit and that is the high hope that always sits around here in Saskatchewan. Aside from the reasonable expectation of profit, the question is whether the chief source of income is from farming or a combination and read separately as section 31 reads, well, I cannot find on the evidence that the chief source of income of the taxpayer is either farming or a combination of farming and some other source of income. I would find him having to fall in paragraph two of the three categories of Mr Justice Dickson’s decision in the Moldowan case, namely:

(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 subsection 13(1) in respect of farming losses.

It would appear, then, that though the appellant lived on the land in a trailer home at St Walburg, I still find that his major occupation, his major source of income, was from the oil-field work and, as I mentioned earlier, that appears to be changing in 1981.

The same statements that I made earlier with respect to 1977 and 1978 (1979 being a nil assessment, the appeal was therefore abandoned) 1980 would fit in with what I have said, and I simply suggest to Revenue that from 1981 on, they take a different approach. For the years under appeal, I would feel that the appellant would be entitled to at least the reduction as allowed by subsection 31(1) and I so order and ask that you deal with it in that way.

I have no jurisdiction, I realize, to suggest even to you what to do, but I would say that if, after this length of time working very, very hard on the part of the appellant and not being able to deduct the full cost of start-up as a result of my order, then I think Revenue should use a certain amount of introspection — may I use that word — and I am sure from the demeanour of the appellant and the straightforward way, that he is some day going to be a successful farmer in a sub-marginal area and for the reasons that I have given, I order that he be at least entitled to the $5,000 deduction under subsection 31(1).

Appeal allowed in part.