Dixon v. R., [1998] 1 CTC 2167

Bowman T . C.J.:

This appeal is from an assessment for the 1994 taxation year. By that assessment the Minister of National Revenue restricted the appellant’s deduction in respect of a farming loss to $8,750 under section 31 of the Income Tax Act.

The sole issue before me is whether the appellant’s chief source of income in 1994 was farming or a combination of farming and some other source of income within the meaning of section 31.

Paragraph 6 of the reply to the notice of appeal reads:

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6. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) at all times, the Appellant was employed by the Victorian Order of Nurses in Niagara Falls, Ontario;

(b) during the 1994 taxation year, the Appellant earned employment income in the amount of $46,864.73 from her employment with the Victorian Order of Nurses;

(c) during the 1994 taxation year, the Appellant also conducted a farming operation which consisted of breeding, training and racing standarbred horses;

(d) during the 1994 taxation year, the Appellant reported gross farming income in the amount of $216.00 and a net farming loss in the amount of $45,213.70;

(e) the Appellant reported gross farming income and net farming losses in other years as follows:

YEAR	GROSS INCOME	NET FARMING LOSS
1991	$ Nil	$ 7,298.00
1992	$ Nil	$17,463.00
1993	$ 1,963.00	$44,428.00
1995	$12,409.00	$24,800.00 ;

(f) the Appellant’s chief source of income during the 1994 taxation year was neither farming nor a combination of farming and some other source of income;

(g) expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining or producing income from farming, but were personal or living expenses of the Appellant; and

(h) the Appellant did not have a reasonable expectation of profit from the farming activity in the 1994 taxation year.

Assumptions (g) and (h) are wholly inappropriate and are inconsistent with assumption (c) and with the Minister’s allowance of a restricted farm loss. Counsel for the respondent quite properly conceded that assumptions

(g) and (h) should not have been in the reply. The court and litigants rely on the accuracy of pleaded assumptions. They should be pleaded honestly. The pleading of fatuous and self-contradictory assumptions that could not possibly have been made is to be deprecated as is the routine incantation of meaningless and inappropriate formulas. I should emphasize that Ms. Quinn, who represented the respondent, did not draft the reply.

The appellant is a registered nurse employed by the Victorian Order of Nurses in Niagara Falls. Commencing in about 1989 or 1990 she decided that in light of uncertainties in the health care system in Ontario, she should consider an alternative source of income for her future and for her retirement. Evidently with the advice and encouragement of John Cheeseman she embarked upon the business of breeding, raising, training and racing stan- dardbred horses. To this end, using her life savings, she bought a 36 acre farm near Fort Erie for $89,000. With the proceeds of two further loans of $57,000 and $16,000 from the Bank of Montreal, she constructed a 12 stall barn and a track and bought two horses. The training was done by Mr. Cheeseman who was an experienced trainer. Mr. Cheeseman appears to have been quite influential in the decisions made by the appellant.

The business developed over the years but as is apparent from the figures set out in assumption (e) it did not yield a profit in any year. The gross income for 1994 was not, as reported by the appellant, $216 but rather was $7,430. For reasons that are not altogether clear $7,214 of the winnings were attributed to Mr. Cheeseman. On assessing, this amount was removed from his income and attributed back to the appellant, thereby reducing her loss for 1994 from $45,213.70 to $37,999.70.

The business was beset by a variety of problems: horses would fall ill, equipment was stolen from the farm, and one of their prize horses was poisoned, to mention only a few.

Notwithstanding this Ms. Dixon and Mr. Cheeseman persevered. At present they have five horses and they hope to make a profit next year. There is no question that the appellant put her heart and soul, as well as her life savings, into the operation. I have no hesitation in finding that this was a business carried on with a reasonable expectation that ultimately a profit would be realized. The commitment of time and capital and the perseverance in the face of difficulties all attest to the serious nature of the endeavour. It was no hobby. The raising, training and racing of horses as a hobby is a game that millionaires can play, but not the appellant.

Nonetheless, was the farming operation, or a combination of farming and some other source of income (presumably nursing) the appellant’s chief source of income? Notwithstanding the losses sustained, it is clear beyond any doubt farming for the appellant was a source of income in that it was a business involving a serious commitment of time and capital, carried out knowledgeably and intelligently, with a careful selection of breeding stock and a rational expectation that it would yield a profit. Some meaning must however be given to section 31 of the Income Tax Act. One need only read the words in the section “chief source of income” to see that not every case in which farming is an alternative form of economic activity can escape the restrictions of section 31. The French version of subsection 31(1) is of some interest. It reads:

Lorsque le revenu d’un contribuable, pour une année d’imposition, ne provient principalement ni de l’agriculture ni d’une combinaison de l’agriculture et de quelque autre source...

It is obvious that “revenu” in section 31 must be gross revenue, not net income, because section 31 is premised on the existence of losses from farming. As L’Heureux-Dubé J., speaking for the majority of the Supreme Court of Canada, said in Hickman Motors Ltd. v. R. (June 26, 1997), Doc. 24994 (S.C.C.) [Now reported (1997), 148 D.L.R. (4th) 1 (S.C.C.)] at paragraph 64:

The word “income” is susceptible of two meanings: “gross income” (revenue) or “net income” (profit): see Mark Resources v. The Queen, [1993] D.T.C. 1004; see also Bellingham v. Canada [1996], 1 F.C. 613 (CA) at pp. 627-28...

While I do not regard this fact as necessarily determinative, the gross farming income in any of the years, including 1994, is only a fraction of the appellant’s income from nursing. As, however, the Federal Court of Appeal observed in Poirier (Trustee of) v. Canada (1992), 92 D.T.C. 6335 (Fed. C.A.) at p. 6336:

...it is the cumulative impact of the various factors for determination that governs, not any one factor taken disjunctively...

I do not think that by 1994 it can be said that farming, or a combination of farming and some other source, had attained the status of a principal source of income for the appellant. It may in time become such a source but on reading the words alone of section 31 (I hesitate, in discussing that section, to use the expression “plain words”) one can only conclude that the appellant’s chief source of income in 1994 was nursing. It was her principal occupation, the focus of her activities and her livelihood. However much time and money she spent on farming in 1994 and earlier years, it had not reached the point at which it can be said that she had changed occupational direction and committed her energies and capital to farming as a main expectation of income, to use the words of Dickson J. in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.).

Mr. Cheeseman, in a very able argument, referred at some length to Interpretation Bulletin IT-322R, which appears to incorporate some of the observations made in Moldowan. In particular he emphasized that the Department of National Revenue had not given the appellant a sufficient period of start-up time. In fact it did allow her farming losses for 1991, 1992 and 1993. I dealt with the matter of start-up costs in Hover v. Minister of National Revenue (1992), 93 D.T.C. 98 (T.C.C.), at pp. 109-110:

There is one other aspect of this case with which I have not dealt at length but which, out of deference to the submissions of counsel, merits comment. This is the question of start-up costs. The Department of National Revenue applied section 31 in Dr. Hover’s first year of operations. Although the Income Tax Act makes no reference to start-up costs and the administrative practice seems inconsistent in this regard, Dickson, J. in Moldowan evidently regarded the fact that losses occur in the early years of a farming operation as a significant consideration. In two of the passages that I have quoted above, he stated:

...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.

and

One would not expect a farmer who purchased a productive going concern to suffer the same start-up losses as a man who begins a tree farm on raw land.

Given the magnitude of the operation envisaged by Dr. Hover, the large expenditures required and lengthy period of time required before the business becomes fully operational, it would seem unreasonable to suggest that the farm should become profitable in the first several years or to deny him the full impact of the Start-up costs.

Nonetheless, I am precluded by the judgment of the Federal Court of Appeal in Roney from placing too great a degree of importance on the references to start- up costs in the judgment of the Supreme Court of Canada. The Federal Court of Appeal stated at page 5155:

Start-up costs, contrary to what the trial judge said, cannot be considered as the basis for an alternative ground of decision. The permissible amount to be deducted depends on the class the taxpayer finds himself in. Indeed, Dickson J., as quoted by the trial judge, said the following in Moldowair.

...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)

Read in context, however, it is clear that Dickson, J. is referring to the class (1) taxpayer. This, in turn, brings us back to the issue I first dealt with. For the reasons given there, I have concluded that the respondent is not a class (1) taxpayer.

Since I have concluded independently that Dr. Hover is a class I farmer I do not base my decision on the fact that his start-up costs were significant nor do they form a separate basis for my judgment. Their magnitude does, however, illustrate the serious nature of his commitment to farming and confirms my conclusion that farming was not a sideline but rather his major preoccupation.

The heavy start-up costs here illustrate the serious nature of the appellant’s intent but they do not establish that in 1994 the farming operation, or a combination of farming and some other source, was the appellant’s chief source of income. When, as the appellant hopes and expects, the farming operation becomes profitable the restricted farm loss from 1994 will be available for carry-forward against such profits.

In Hover! found that the vast commitment of time, energy and capital made to farming by a successful dentist indicated a change of occupational direction with the result that a combination of farming and dentistry had become the taxpayer’s chief source of income. I do not think that on the facts of this case the same can be said.

The appeal is therefore dismissed.

Appeal dismissed.