Lutken v. R., [1998] 3 CTC 2264

Teskey T.C.J. .

The Appellant, in his Notice of Appeal wherein he appeals his reassessments of income tax for the years 1993 and 1994, elected the Informal Procedure.

Issue

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

Facts

The Minister of National Revenue (the “Minister”) made assumptions of fact when he restricted the Appellant’s farming losses for the 1993. and 1994 taxation years, in accordance with subsection 31(1) of the Income Tax Act (the “Act”). The following assumptions of fact which were reproduced in the Reply to the Notice of Appeal, in paragraph 6 thereof, were either confirmed by the testimony or were not disputed, these are as follows:

a) at all material times the Appellant was employed full time as a faller for MacMillan Bloedel;

b) the Appellant earned the following employment income with MacMillan Bloedel in the 1991 to 1994 taxation years:

Taxation Year	Income
1991	$71,986
1992	$74,065
1993	$67,375
1994	$65,402

c) in the 1985 taxation year, the Appellant and his spouse purchased a 43- acre farm property (the “Farm”);

d) the Appellant and his spouse began breeding horses in the 1989 taxation year and have three registered producing mares;

e) neither the Appellant nor his spouse had any expertise in horse breeding prior to starting their operation;

(f) the Farm generates revenue from hay and the sale of colts;

(g) the Appellant reported farming income (losses) during the 1991 to 1994 taxation years as follows:

Taxation Year	Gross	Expense	Net Income
	Income		(Losses)
1991	$6,986	$35,875	$(28,889)
1992	$5,502	$33,397	$(27,895)
1993	$7,765	$34,808	$(27,043)
1994	$9,973	$35,419	$(25,446)

(h) the farming income for the 1991 to 1994 taxation years amounted to approximately 8.59%, 6.70%, 9.73% and 12.43% of the Appellant’s total income for those years, respectively;

(i) the horse breeding losses absorb a significant portion of the Appellant’s cash flow and will continue to do so;

The Appellant graduated from Queen’s University in Ontario with a degree in geography and then attended McCarthy College at Queen’s and got a teaching certificate. He grew up in a rural area outside of Kingston, where about 90% of his fellow students at high school lived on farms. During the summer months, he worked for farmers in the neighbourhood picking up field stones and straightening fences.

The Appellant and his wife moved to the West Coast in 1973 where he found that the prospects of full-time teaching was close to nil. Through manpower, he ascertained that loggers in the north part of Vancouver Island were in short supply. He and his wife then moved to the north portion of the Island and he got a job logging near Zeballos. In 1985, he and his wife purchased 43 acres of property for $125,000. Twenty acres are wooded, five acres are for pasture, fifteen acres are for hay and the balance of the acreage is taken up with the barn outbuildings and the Appellant’s residence.

The Appellant’s employment income for the years 1995 and 1996 was $78,052 and $75,376 respectively. In the years 1995 and 1996, he reported farm losses in the amount of $17,724 and $8,765 respectively. Although the Appellant testified that the capital committed to the farm was approximately $300,000, this figure was never substantiated in any way and I do not accept it as accurate.

At the time of the purchase, all ditches had been grown in, the perimeters of the hay fields had started growing back in alders and willows, the fences had been barbwired and were scattered around and rotting. The barn was unusable and had to be resupported and braced and the house was described as being a mess. There was no driveway to the house and the first job that the Appellant had to complete was the installation of a driveway and a turnaround at the house.

Initially, the Appellant raised swine and had a small herd of Hereford cattle. He also raised chickens, collected eggs and turned one field over to organic tomatoes. It was the Appellant’s intention to raise international sport horses of Olympic calibre.

Germany is the leader in this endeavour and they had been breeding Hanoverians and Oldenbergs for many years. In 1989, the Appellant purchased his first thoroughbred mare that was in foal. This horse was bred several times over and has formed the basis of his foundation heard. The money to support the farming operation comes from the Appellant’s job in the bush falling timber.

The Appellant enjoys raising young horses and tending to the lands and that is what he would like to do.

The Appellant earns about $400 before tax per day as a tree faller and works between 150 and 180 days each year.

lam satisfied that the Appellant spends as much time, if not more time, working on the acreage as he does in the bush falling trees. The Appellant does all the field work associated with the ditching, sub-soiling, harrowing, fertilizing, spreading of all the manure. He repairs all the equipment that can be repaired, he also looks after all the finances of the farm, does all the planning and strategy for the direction the farm is heading financially. In essence, he does all the physical work. Although on occasion, he has hired help that could supply a post pounder.

The Appellant’s wife does “all that horrible stuff with the horses, the mucking” when he is away in the bush, and when he is at home, he helps his wife with these chores. The Appellant has not taken any courses or attended any seminars. His wife however has attended forage and feeding seminars.

Although the Appellant claims that the farm is capable of supporting self-sufficiently 40 head of horses, I am not convinced. He also claimed that boarding of horses is going to increase, and the financial and capital expenditures for the next several years to accommodate more horses, will give a return. Again, I am not convinced of this.

When asked if anything delayed his progress and his plan to develop the farm, the Appellant answered “Well as you can probably see, I mean I still have to raise a family and maintain what we have happening. And except for one mare, we’ve cut back on the breeding. I just, I don’t know which direction I am going here, I can’t risk any, I can’t jeopardize the farm and my situation by borrowing money in the event that I am not going to get a favourable result from this hearing. And this has been in the back of my mind, it has been praying on me for going on two years now, and it’s affected the farm development in terms of the development of our breeding herd, because I’ve cut back on the breeding period”.

When the Appellant was boarding horses, the owners were only paying for the actual feed consumed.

The Appellant feels that the road to profit will be the building of an eight-stall shed which does not exist at the present time, and he agreed that if the eight-stall shed is not built, that he will be in a continual loss situation. He also admitted that he does not have the resources to jump in and go ahead on his farm plan without encouragement from Revenue Canada, and that he cannot earn enough income off the farm to keep the farm going and to absorb the losses. He is also not overly confident that his job with MacMillan Bloedel in the bush is secure. Right now on the farm, there is a total of nine horses on the property, six are the Appellant’s and three are boarders.

In 1997, the Appellant did not breed his mares. The Appellant’s wife said that they are trying to create exceptional offspring for the sport horse world, or the sport horse market and that they could not afford to buy made horses. The Appellant’s wife gave evidence that in her opinion, they could develop good quality international second generation sport horses. It would provide a good living if they can establish a herd, and that they are just around the corner from second generation breeding stock (I am not convinced of this).

The Court heard testimony from Karen Lurana Erikson (“Karen”). I cannot subscribe much weight to her testimony. She had no knowledge of how many horses were sold in Canada each year, and she admitted that there was a lot of the sport horse market that she did not know about. The ones that did come to her attention were probably the most noteworthy ones. Karen went into the breeding sport horses in 1984 and has been continuously involved in that business. Unlike the Appellant, she immediately went out and bought her breeding stock. She stated “I went and purchased the pure bred warm bloods”. She admits that to date, her breeding operation has not been able to make a profit, and stated in October of 1997 at the hearing, that she expected to report a profit for 1997. There is no evidence before me how much the expected profit might be.

Analysis

Subsection 31(1) of the Act provides:

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, the taxpayer’s loss, if any, for the year from all farming business carried on by the taxpayer shall be deemed to be the total of ...

The leading decision in this area is the Supreme Court of Canada decision in Moldovan v. R.(1977), 77 D.T.C. 5213 (S.C.C.). At page 5216, Dickson, J. (as he then was) outlined the three classes of farmers, namely:

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 from 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.

I am satisfied that the Federal Court of Appeal in R. v. Donnelly (1997), [1998] 1 C.T.C. 23 (Fed. C.A.) [A-604-93] restates the law as set by the Court of Appeal in numerous previous cases. The Court stated therein:

A determination as to whether farming is the taxpayer’s chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer’s other income source in terms of capital committed, time spent and profitability both actual and potential. The test is both a relative and objective test. It is not a pure quantum measurement. All three factors must be weighted with no one factor being decisive. Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on the taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income.

When I take all of the evidence before me, and consider the facts, the Appellant has not convinced me that in the foreseeable future that the farm operation will ever become the Appellant’s chief source of income by itself, nor in combination with other income.

I am cognizant of the fact that the Appellant spends at least equal time on the farm and that he has committed capital to the operation. Although it is not the test before me, and the Minister by restricting his losses has admitted that the Appellant has a reasonable expectation of profit, on the evidence before me, I accept the Respondent’s position that on the Appellant’s admission “There was not enough income from the farm to keep it going”, that the conclusion to come to from that is the Appellant did not have a reasonable expectation of profit in 1993 and 1994.

There is no evidence before me that in any way demonstrates that the farming operation will produce sufficient profit to allow the Appellant to abandon outside employment, or that if a profit is produced, it will be anything but a small percentage of his outside income. There were a set of figures presented to the Court that were never accepted into evidence, nor were they in any way substantiated. I do not use these figures, as they are not in evidence and even if they were, I would have given them no weight.

Upon the evidence before me, it appears to me that the Minister has been generous to the Appellant in allowing the restricted losses and that the best that can be said for the Appellant is that this was a sideline business.

It is for these reasons that the appeal is being dismissed.

Appeal dismissed.