C a Burns Limited v. Minister of National Revenue, [1981] CTC 2001, 81 DTC 14

John B Goetz:—This is an appeal by the taxpayer with respect to its 1976 taxation year. The owner of C A Burns Limited is Cecil Burns, a geologist and a farmer. His main source of income is as a geological consultant and partly as farming. It is acknowledged by the respondent that Mr Burns had proper expertise in the field of horse breeding which is included in the term “farming”. He purchased one and a half horses in 1973-1974 and had no sales in that year nor in 1975. He had no profit from horse raising in the year 1973-1974. He has an employee who lives on the farm, free of rent, who takes care of the horses, and in 1976 Mr Burns spent 25% of his time on the farm. The total fees for C A Burns Limited in 1976 were $31,000. The horse acquired for $3,800 in 1973-1974 was sold in 1978. In 1978 a horse known as Scotts Wonder was sold for $6,000. At the hearing pictures were filed of scotts Wonder stealing the spotlight at the Sudbury OSS action, as well as evidence of an award to Scotts Wonder as being an excellent horse. A performance record of Scotts Wonder for the year 1979 was also filed.

The leading case in this matter is William Moldowan v Her Majesty The Queen, [1977] CTC 310; 77 DTC 5213.1 quote from Mr Justice Dickson’s decision at 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 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 nonbusiness farming are not deductible in any amount.

It is quite obvious that Mr Burns comes under paragraph (2) of the above quotation and this is not in dispute. Unfortunately, he is faced with having to meet the requirements of subsection 31(1) and paragraph 111 (1 )(c) of the Act which read as follows:

(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 businesses 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)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

111.(1) For the purpose of computing the taxable income of a taxpayer fora taxation year, there may be deducted from the income for the year such of the following amounts as are applicable:

(c) restricted farm losses of the taxpayer for the 5 taxation years immediately preceding and the taxation year immediately following the taxation year, but no amount is deductible in respect of a restricted farm loss from the income for any year except to the extent of the lesser of

(i) the taxpayer’s income for the year minus all deductions permitted by the

provisions of this Division other than this subsection or section 109, and

(ii) his incomes for the year from all farming businesses carried on by him.

Although it is common knowledge in any business and particularly in the horse breeding business, that losses are encountered in the early years of operations, if one is a good horse breeder, as was the appellant, profits eventually accrue, which in fact happened in this case.

Unfortunately, I am bound by my interpretation of subsections 31(1) and paragraph 111 (1 )(c) and as a result, I must find that any loss incurred by the appellant in 1966 from farming operations is restricted by virtue of these sections.

For the above reasons, the appeal is dismissed.

Appeal dismissed.