David Ray Piche v. Minister of National Revenue, [1984] CTC 3032, 85 DTC 23

Tremblay, TCJ:—This appeal was heard on May 16, 1984, in the city of Sudbury, Ontario.

1. The Point at Issue

The point at issue is whether the appellant, a truck driver for Star Transfer Ltd, is correct in the computation of his income for the taxation years 1977, 1978, 1979 and 1980 to deduct the following farming losses, roughly $9,800, $8,600, $8,000 and $11,800, respectively.

The respondent disallowed the said losses on the basis that the appellant is not a full-time farmer but only a gentleman farmer. Therefore the deductible losses are restricted losses limited to $5,000 as provided in provision 31(1) of the Income Tax Act.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is 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 his assessment or reassessment are also deemed to be cor- rect. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In assessing the appellant, the Minister of National Revenue made, inter alia, the following assumptions of fact:

(a) The appellant purchased the farm property in question in 1970. The farm property

consisted of about 98 acres located in the North Bay, Ontario area, (admitted)

(b) During the 1977, 1978, 1979 and 1980 years, the appellant was employed as a truck driver for Star Transfer Ltd. (admitted).

(c) During the period in question, the appellant reported the time spent at this employment to be as follows:

	Number of Days
Year	of Employment	Hours per Day
1977	237	10
1978	166	10
1979	218	11
1980	207	12
(admitted)

(d) During the 1977 to 1980 taxation years, the appellant in his income tax returns reported the following amounts as income from employment wages, business income, gross farm income, farm expenses, and net farm income:

		Gross	Gross
	Wages from	Business	Farm	Farm	Net Farm
Year	Employment	Income	Income	Exenses	Income
1977	$23,219.80	Nil	$1,322.81	$11,146.24 ($ 9,823.43)
1978	$17,212.65	Nil	$2,352.03 $12,917.86 ($ 8,635.81)
1979	$26,173.83	$5,460.97 $ 880.00 $11,505.52 ($ 8,025.73)
1980	$25,566.20 $8,775.16 $1,734.44 $15,402.51 ($11,868.07)
(admitted)

(e) The appellant’s farm operation has never experienced a profit. (admitted)

(f) The appellant’s principal occupation was his employment as a truck driver for Star Transfer Ltd. (denied)

(g) The appellant’s chief source of income was neither farming nor farming and some other source of income, (denied)

(h) The appellant’s spouse is a full-time school teacher. (denied, she quit teaching in June 1977 to work on the farm.)

6. He states that the appellant had no reasonable expectation of profit, (denied)

3. The Facts

3.01 The appellant was not at the trial because of sickness. His wife was the main witness.

A. Chief Examination

3.02 Concerning the time spent on the farm by her husband, she said:

So what I mean is whatever he does is for the farm. His money goes into the farm. His time goes into the farm. The only reason he is working is unemployment is so high now he has to hang on desperately for what he has got before he goes in the hole.

We started from nothing. We started from absolutely nothing. The land was just scrub. I mean we picked up stones with our bare hands and made makeshift trailers to carry stones and pile them up. We cleaned up the land. We got about a quarter of it done where we can grow hay and, you know, it is beautiful. We think it is beautiful. We worked hard to make it that way, but then there is another swampy part we can’t

— we have asked the Township, we have asked the Minister of Agriculture to come and help us, but all our work, all our time is for the farm and we have built up our machinery to do a larger scale of — when it is time to pick up the crops and because we don’t have the land we usually buy the neighbouring, you know, from other neighbouring farms. (TS p 19)

3.03 According to Mrs Piche, her husband, during the year 1983, spent 3,168 hours working on the farm and 2,640 hours working for his employer. (TS p 27) In computing the working hours on the farm, she takes into account, the mornings and evenings of the days he was working for his employer, the weekends and the two months off in the summer.

3.04 In 1970, they acquired the farm (98 acres) for $6,000. One-fifth of it was swamp, about 30 acres. They then started farming. However they claimed losses only in 1975.

We were called farmers before we ourselves realized we were farmers.

They are not yet members of the Federation of Agriculture.

3.05 In 1984, they have 27 head of cattle, 6 horses and 6 chickens. They had to sell 31 to pay the income tax.

3.06 In 1970 they had a few horses to pull the plough. A few years later, they increased the number of horses because they “had to go out and check for rustlers and check the farm area each night or at intervals”. They had “to go horseback riding in the evenings to check the fence.”

They needed them

very badly with the very swampy area, we used to have to go in to rescue baby calves in there. There was no other way you could get in there except with the horse. We put them in fairs and children usually come, before they used to come to the farm to learn, as a learning situation, you know from different schools. (TS p 18)

Now they don’t need them anymore. They have a jeep in summertime and a skidoo in the wintertime. The horses are for sale.

3.07 Concerning the head of cattle, they started in 1970 with two. In 1978 they had about 18. From 1975 to 1980, they had as many as 50. In 1982, they sold 31 to pay the income tax.

3.08 In 1979, they built a snack bar on the farm. The appellant’s wife and daughter worked there. The gross net income of this business for the years 1979 and 1980 is as follows pursuant to Exhibit R-5 and R-6:

3.09 The plan is to eventually have 50 acres of cultivated land as follows: 10 acres — grain, 20 acres — hay and 20 acres — corn for ensilage.

They need a new barn, further drainage and better machinery. They are also going to complete the house. However, they have some problems.

I also have a list of handicaps here. One worth mentioning is poor accounting, inadequate farm income and a number of past injuries and ill health, lack of dependable help, loss of cattle and material, building material per theft.

And property taxes are too high. “Expenses far surpass the potential farm income because we would require $1,500 monthly to meet Hydro bills and so on.” (TS p 31)

He said $1,500 includes the farming expenses and the living expenses. (TS p 35)

3.10 In 1976, they missed out on a governmental assistance program to settle their swamp problem.

We weren’t aware of it at the time and anyway we probably wouldn’t have qualified because in order to qualify you have to have a gross income of a certain amount (TS p 45)

Every year, they lost an average of two head of cattle.

Our veterinary fees were high but although our cattle sales exceeded those of the previous year, our expenses also surpassed those sales because of rising cost of feed, repairs and utilities. (TS p 42)

3.11 Concerning the years 1981, 1982 and 1983, the figures are as follows:

3.12 Mr Bram Brissette de Courchesne, the appellant’s neighbour, testified how much the appellant’s whole family work on their farm. About the appellant he said:

He is a workaholic. I have seen him. I drive by the house quite often and at 03:00 o’clock in the morning or different times I can see Ray up at very odd times working. I don’t known how he does it. (TS p 54)

That is a good farm, but, as I said, he calls his farm Rocky Hill Farm and it is nothing but a big rock. People don’t know how Ray can stand it and can do it but he has improved the land a lot. I can see it. (TS pp 57, 58)

3.13 The court also took knowledge of the facts alleged in the story of Piche’s farm written by Mrs Piche and which is part of the notice of appeal.

3.14 Michelle Piche, the appellant’s daughter, testified her father

works all the time and it makes me sad. I keep telling him he is going to drop dead of a heart attack someday . . . He does not want to admit how old he is getting I don’t think. (TS pp 60, 61)

The appellant is 50 years old.

3.15 It was also evidenced by Mrs Piche that her husband was brought up on a farm in Botfield, Ontario. He did not attend some courses in agriculture but

he has gone to meetings, I mean he does not have a certificate. Sometimes farmers get together and they have what they call a jam session. They discuss each other’s problems. (TS p 33)

4. Law — Cases at law — Analysis

Law

4.01 The main provision of the Income Tax Act involved in this case is 31(1). It reads as follows:

Sec 31. Loss from farming where chief source of income not farming:

(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 business 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)(i);

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

4.02 Cases at Law

The counsel for the respondent referred to the following cases:

1. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213;

2. Donald J Gillis v The Queen, [1978] CTC 44; 78 DTC 6103;

3. Joseph Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340;

4. Wesley H Warden v MNR, [1981] CTC 2379; 81 DTC 322.

4.03 Analysis

4.03.1 The problem is whether the appellant’s chief source of income for a taxation year is farming or a combination of farming and some other source of income. If it is so the appeal must be allowed, if not the provision 31(1) of the Act must apply and the reassessments must be maintained.

4.03.2 The Supreme Court of Canada in the Moldowan case referred to above at page 314 CTC and 5215 DTC makes the following comment concerning the chief source of income:

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. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of “chief source” are the taxpayer’s reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances. [Emphasis added]

Continuing the Moldowan case at page 315 CTC and 5215 DTC, the court 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.

The provision 13(1) of the Former Income Tax Act to which the court refers to in the Moldowan case is substantially the same as 31(1) of the Present Act quoted above. The appellant contends he is in Class 1 due to the number of hours spent on the farm. The respondent’s contention is that the appellant is in Class 2.

4.03.3 The Supreme Court in the same decision makes the following comments concerning those classes of farmers:

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 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. [Emphasis added]

4.03.4 At first glance, if the Court in the present case would have to consider the only criterion of time spent by the taxpayer and his wife in the farming operation, to prove the chief source of income, the appeal would be allowed. (see paragraphs 3.02 and 3.03) However, this is not the only standard. The profitability both actual and potential is also important. The figures available from 1977 to 1983 (see paragraph 2.02; alinea (d) of paragraph 5 of the reply; paragraph 3.11) does not show any actual profit. No evidence was given that, from 1970 to 1975, some profits were made from the said farming operation.

It is true as says the Supreme Court quoted above (paragraph 4.03.3) that

while a quantum measurement of farming income is relevant, it is not alone decisive. The test is both relative and objective, and 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.

4.03.5 As many times, the courts pointed out the necessity for the farmer to have a plan on a short, medium and long-term basis in order to arrive at a certain success. In the present case, the plan is to eventually have 50 acres of cultivated land. (paragraph 3.09)

The evidence however does not show how many cultivated acres they have in 1984. The evidence was vague concerning the source of income from the cultivated land.

As underlined in the Warden case, by Mr Justice Taylor,

. . . Start-up costs . . . that designates, as I see it, the existence and demonstration of a systematic and organized program for the earning of profit from a business and proof that the initial outlays were an integral part of the process, taken into account in the planning and capable of absorption by the appellant in anticipation of the eventual production of profits. In such a program, an appellant would clearly show that he has consciously decided to write off these start-up costs against a year or years of little or no income, rather than capitalizing them (if some form of asset accumulation is involved), or deferring their deduction until sufficient income is earned in order to absorb them. The absence of such a discernable and comprehensive program upon which to base a claim for deductibility of such losses as “start-up costs” will always put such a claim at considerable risk in my view. The Moldowan (supra) quotations above were made in connection with a “farming business”, and as it may be seen from James R Zavitz v Minister of National Revenue (78 DTC 1730, (1978) CTC 3021) and from Her Majesty The Queen v James R Zavitz (81 DTC 5007, (1981) CTC 17), there is a feature about the “business of farming” in which encouragement and flexibility is permitted to a taxpayer in getting established, or in surmounting economic fluctation — by virtue of the “restricted farm loss provisions” of the Act, which is not permitted to that degree in other business ventures. However, the principle of substantiating the “losses” as “start-up costs” remains the same for any business. The onus remains for a taxpayer to prove the reality and viability of profit, even in the long term. When a taxpayer claims expenses which are in excess of income, then he must assume the difficult task of showing that these “excess” expenses were rational and reasonable — those which a normally wise and prudent man intending to improve, not reduce his financial position, would incur under the circumstances.

4.03.6 With the evidence adduced, the court cannot see how during the 1977, 1978, 1979 and 1980 taxation years, the appellant had actually changed the chief source of income from employment income to farming income. Once again, the time spent in the farming operation is not the only criterion.

The Court however thinks that, in the not too distant future, with appropriate investments to put their plan in concrete form, the farming operation will no longer be auxiliary and will become the main source of income.

The Court must maintain the reassessments for the years 1977, 1978, 1979 and 1980.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.