Mario Monteiro v. Minister of National Revenue, [1984] CTC 3062, 85 DTC 30

Cardin, TCJ:—The issue is the deductibility of amounts of $15,317.51 and $26,828.29 claimed by Mario Monteiro as total farm losses incurred in the 1979 and 1980 taxation years respectively.

Counsel who was retained by the appellant after the notice of objection and the notice of appeal had been filed, submitted that the appellant’s farm operations were an integral part of a Health Food business which the appellant carried out in a Health Food store and whose office was located on College Street in the city of Toronto, Ontario. It is the appellant’s submission that the farm losses claimed are expenses incurred to earn income from his Health Food business and that they are deductible under paragraph 18(l)(a) of the Income Tax Act, RSC 1952, c 148.

At the outset of the hearing, counsel for the respondent moved to amend his reply to notice of appeal by adding paragraph 18( l)(a) and section 67 of the Act to subsection 31(1) — the basis on which the respondent had assessed the appellant — allowing restrictive farm losses of $5,000 for each of the taxation years under appeal. Counsel for the appellant did not object and the motion was allowed.

The basic facts of this appeal on which the respondent relied in his assessments are set out in paragraph 4, subparagraphs (a) to (k) inclusive, of his reply to notice of appeal which were not contested by the appellant:

(a) the appellant was a reflexologist in the material years, working 35.5 hours in five days per week, earning the following amounts thereby in the following taxation years:

1977 — $13,001.72 1978 — $18,011.83 1979 — $28,922.74 1980 — $41,371.95

(b) the appellant purchased a 10-acre parcel of property near Schomberg, Ontario (“the property’’) in 1976 and constructed thereon a residence which was completed in 1976;

(c) the appellant cultivated five acres of the property in 1978 and 1979 growing onions and green beans respectively, and did not cultivate any amount in 1980;

(d) in the 1979 taxation year, the appellant constructed a small barn and chicken coop, brought (sic) approximately $400.00 worth of piglets and chickens, built a small plastic greenhouse and had a well installed;

(e) in 1980, the appellant lost three-quarters of his piglets and chickens to flooding and sold the remainder, keeping a few for personal use, and ceased farming operations;

(f) the appellant made investments of capital in farm-related equipment of $2,777.65, $4,277.00 and $2,486.75 in 1978, 1979 and 1980 respectively;

(g) the appellant spent $3,801.00 on the construction of a (blank) in 1979;

(h) the appellant suffered losses of $3,105.63, $15,317.51 and $26,828.29 in relation to farming activities in the 1978, 1979 and 1980 taxation years respectively, calculated as follows:

	1978	1979	1980
	—■
	$	$	$
Farm Income	910.50	2,150.00	2,300.00
General Expense	2,937.93	7,292.91	18,643.29
Interest	Nil	8,072.54	6,497.52
Taxes	Nil	Nil	1,773.65
Capital Cost Allowance	1,078.20	2,098.06	2,213.83
	3,105.63	15,317.51	26,828.29

(i) the appellant did not have, prior to 1978, training or experience in farming;

(j) the maximum yield a farmer could expect on onions was 22,500 lbs. per acre at $0.087 per lb, and the maximum yield expected on green beans was 5,800 lbs per acre at $0.24 per pound, based upon 1979 prices;

(k) the farming operations carried out by the appellant in the 1979 and 1980 taxation years was a sideline business to him.

In argument, the appellant suggested that there are two lines of cases dealing with farm losses. The first line of cases stands for the proposition that farm losses are totally deductible when farming is an integral part of the taxpayer's principal business or chief source of income. Counsel referred to the decision of the Federal Court, Trial Division in Oscar Dorfman v MNR, [1972] CTC 151; 72 DTC 6131 and that of MNR v William R Kellough, [1976] CTC 82; 76 DTC 6060, also decided by the Federal Court, Trial Division, as representing first line of farm loss cases.

The second line of cases, according to the appellant, are those where farming is not an integral part of the taxpayer’s chief source of income. Counsel referred to the Supreme Court decision in William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, as being the leading case for this second line of cases.

I do not accept the distinction made nor the conclusion arrived at by the appellant in his analysis of the two kinds of farm losses he described, nor do I agree with the interpretation which he seeks to give to the ratio decidendi of each of the cases to which he referred.

Operational expenses incurred in respect of farming as a principal business are as in any other business totally deductible under paragraph 18(l)(a). Parliament, however, has given certain types of farming operations a special status with corresponding special provisions, as exemplified by section 31,. . . which are not applicable nor available to other businesses. The existence of section 31 and its exceptional provisions, for specified kinds of farming operations, cannot be ignored and the burden of establishing that such operations are, for tax purposes, an integral part of another business is, in my view, formidable.

In Kellough, (supra), Mr Justice Collier allowed the taxpayer to deduct full farming losses because he found, not only that the appellant’s farm operations had a reasonable expectation of profit, but that farming constituted a bona fide business which was operated independently of the appellant’s real estate business. Indeed, the farm operations were assessed, independently of the appellant’s real estate business and the farm losses considered by the Minister, on the basis of paragraph 12(l)(a) of the Act (now paragraph 18( l)(a) ). In the instant appeal, the Minister assessed the appellant on the basis of subsection 31(1) and not on the basis of paragraph 18(l)(a).

In Dorfman, (supra), the Court found that the appellant’s mink farm was also an independent source of income which, together with another source (furrier business), was the appellant’s chief source of income. The Court concluded that the restrictions on the deductibility of farm losses under subsection 13(1) (sub section 31(1)), did not apply. In the case at bar, the appellant was assessed on the basis that farming, or farming and some subordinate source of income is not the appellant’s chief source of income and the farm loss restrictions of subsection 31(1) do apply.

In Moldowan, (supra), the Supreme Court dealt specifically with the application of subsection 13(1) (section 31(1)). Mr Justice Dickson, as he then was, clearly established at 315 [5216] of Moldowan, the criteria applicable with respect to the deductibility or otherwise of farm losses by describing three classes of farmers:

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.

The respondent in his assessment, in allowing the deduction of restricted farm losses, admits that the appellant had a reasonable expectation of profit and was engaged in the business of farming, although on the basis of the evidence he was, in my opinion, only very marginally so engaged. Nevertheless, the third category of farmers as described by Mr Justice Dickson does not apply to the appellant.

There are two principal issues here. The first, arising from the appellant’s contention that the issue does not come within the provisions of section 31, is whether the appellant’s farming operations form an integral part of his health food business, and whether all the farm losses claimed are deductible from income under paragraph 18(l)(a), or whether the farming operations constitute for the appellant a business distinct from his health food store and, as such, subject to an independent tax treatment.

The respondent having admitted that the appellant was in the business of farming and having allowed restrictive farm losses, the second issue is simply whether the appellant could reasonably expect to derive the bulk of his income from farming, in which case, full farming losses would be deductible.

Facts:

The appellant, who was born in Portugal, came to Canada in 1958. Because of language difficulty, he worked at various menial jobs. He testified that, while in Portugal, he had worked in a mineral water plant and it is my understanding that he acquired there an interest in health food.

In Canada, the appellant began his practice in reflexology which, he explained, was a needleless form of acupuncture administered through massages with a view of tuning up the nervous system. His practice also consisted in advising his clients as to the proper health foods to eat which were available in the store he operated, adjoining his consulting office. The income and expense statements of the “Mario Monteiro Reflexologist Health Food Store’’, which were recorded separately from the appellant’s farm incomes and expenses, indicate that the appellant’s net income from the health food business for the 1977, 1978, 1979 and 1980 taxation years, was $13,001, $18,011, $28,922 and $41,371 respectively.

In 1976, the appellant purchased a 10-acre farm on which he constructed an $80,000 home, a barn and a greenhouse. The appellant explained that he was engaged in organic farming, that is, only manure was used as fertilizer, strictly excluding the use of any form of chemical fertilizers for his crops. In this way, the appellant concluded that the corn, oats and barley, he claims to have produced, were organic grains.

He also testified that, as a result of feeding only organic grains to chickens, cows, goats and rabbits, he produced organic meats which were advertised and sold as such, on the farm premises. Along with a variety of different kinds of health foods obtained from other suppliers, the appellant advertised and sold in his store the following: organic eggs, organic milk, organic goat cheese and organic herbs produced on the farm.

The appellant’s farm income for 1978, 1979 and 1980 was $910.52, $2,150 and $2,300 respectively. The general expenses for operating the farm, in those three years was $2,937.93, $7,292.91 and $18,643.29. In 1978, the general expenses for operating the farm, in those three years, was $2,937.93, $7,292.91 and $18,643.29. In 1978, the evidence is that only onions were planted and in 1979, only green beans were planted. Because of the excessive humidity of the soil, neither crop could be marketed and a loss was incurred. A considerable number of rabbits died in that period, which also contributed to the appellant’s farm losses. As a result, the net farm loss claimed by the appellant in 1978 was $15,317.51 and in 1979, he claimed $26,878.92.

Conclusion:

With respect to the first issue, there is no basis on which the appellant’s farm operations can reasonably be considered as forming an integral part of the appellant’s reflexology and health food business. The figures clearly establish that the sale of organic products from the appellant’s farm was but an insignificant amount of the income derived from the appellant’s consulting practice and health food store.

For accounting purposes, the income and expense statements for the appellant’s practice and the health food store were recorded together and separate from those of the farming operations. Indeed, the farm can barely qualify as one of the suppliers of the appellant’s health food business in 1978 and 1979.

I have no difficulty whatever in concluding, on the basis of the evidence, that the appellant’s farm operations were separate and distinct from his health food business and was correctly assessed by the respondent as an independent entity.

Since the appellant’s chief source of income for 1978 and 1979 is definitely not from farming nor a combination of farming and some other source within the meaning of subsection 31(1), the only remaining question is whether the appellant could reasonably expect that his farming operations would or could provide the bulk of his income and whether farming could be considered the centre of the appellant’s work routine.

The facts certainly do not support, nor did the appellant suggest, that he could reasonably expect his farming operations to provide the bulk of his income. He did not contend that he looked to farming for his livelihood and he did not allege that farming was the centre of his work routine. I am satisfied that the appellant does not fall within the first class of farmers described by the Honour- able Justice Dickson (as he then was) in Moldowan, (supra). Consequently, the appellant is not free of the farm loss restrictions of subsection 31(1).

The appellant was correctly assessed for the 1979 and 1980 taxation years and the appeal is dismissed.

Appeal dismissed.