Harder v. R., [1998] 1 CTC 2201

Brulé T.C.J.:

The Appellant is a practising lawyer who also operates a farm. During the years 1992, 1993 and 1994 the Appellant sought to deduct all his farm losses from other income. The Minister of National Revenue (the “Minister”) assessed the Appellant for his farm losses while restricting the farming losses in accordance with subsection 31(1) of the Income Tax Act (the “Art”). The Appellant appeals from this restriction.

Facts

In computing income for the 1992, 1993 and 1994 taxation years, the Appellant deducted the amounts of $11,819.00, $8,377.00 and $12,352.00, respectively, as farming losses.

The Minister assessed the Appellant for the 1992, 1993 and 1994 taxation years, Notices of Assessment thereof mailed on September 7, 1993, June 20, 1994 and June 1, 1995, respectively.

In so reassessing the Appellant for the 1992, 1993 and 1994 taxation years, the Minister made the following assumptions of fact:

¢ at all material times the Appellant was a self-employed lawyer;

° the Appellant earned the following net professional income from his legal practice during the 1987 to 1994 taxation years, respectively. The relevant years are:

TAXATION YEAR INCOME

1992 $45,507.00 1993 $43,273.00 1994 $61,667.00

° in 1986 the Appellant purchased a farm property located at R.R. #1 New Hamburg, Ontario (the “Property”), at a cost of $90,000.00;

• the Property consists of 100 acres of land, of which 80 acres are workable;

• the Property was vacant land at the time of purchase, and subsequently the Appellant constructed a barn and a house which is the Appellant’s principal residence;

• the Appellant’s spouse is the legal and beneficial owner of the Property, and the Appelant pays rent to his spouse for use of the land for his farming operation;

° the Appellant’s farm operation consists of the cultivation and sale of cash crops such as wheat, soy beans, corn and hay;

e the Appellant’s spouse is his principal customer, using the crops as feed in her cow/calf operation, which is also conducted on the Property;

• since the commencement of the Appellant’s farming activity, the Appellant has never reported a profit;

• during the 1992,1993 and 1994 taxation years, the Appellant spent approximately 14 hours a week working on the farm and 35 hours per week working in his legal practice.

Issue

The issue is whether the Appellant’s chief source of income was farming or a combination of farming and some other source of income during the 1992, 1993 and 1994 taxation years.

Analysis

The Appellant is a lawyer who has made a profit from his practice during the years under consideration. The Minister felt that the Appellant had no reasonable expectation of profit during the 1992, 1993 and 1994 taxation years and so limited him to the benefit provided by subsection 31(1) of the Act.

The main point here is the Appellant’s chief source of income. Was it neither farming nor a combination of farming and some other source? According to the principal cases presented to the Court the Appellant was not qualified.

In the leading case of Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), the Supreme Court said at page 5216:

It is clear that “combination” in section 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think s. 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

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 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...

Here the Appellant worked approximately 14 hours per week on the farm and 35 hours per week working in his legal practice.

Such is more relevant to the case when one considers there is little or no work to be done on the farm in the winter months. As well, the Appellant’s wife uses at least part of the farm in her cow/calf operation. Counsel for the Minister in a well-prepared argument stressed that the farming activity was not the Appellant’s centre of his work routine and that his chief source of income was not farming but rather his legal practice.

The Appellant may find some comfort in section 111 of the Act but in the meantime this appeal is dismissed.

Appeal dismissed.