Minister of National Revenue v. William R Kellough, [1976] CTC 82, 76 DTC 6060

Mahoney, J:—The issue is the disallowance by the plaintiff of deductions of the operating losses of the defendant’s farm from his taxable income for 1967 and 1968, in the amounts of $3,693 and $3,421 respectively. The Minister made no determination under subsection 13(2) of the Act, as it stood in the years in question, in respect of either taxation year. Accordingly, in my view, the question is simply whether the expenses incurred by the defendant in respect of the farm were incurred in the reasonable expectation of producing income, as provided in paragraph 12(1)(a).

12.(1) in computing income, no deduction shall be made in respect of

(a) an: outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer, . . . .

In other words, in the circumstances, was the farm, which he called Kellwood Experimental Farms, a bona fide business undertaking or was: it, in fact, a personal retreat or second home during 1967 and 1963?

The defendant is a real estate consultant and land economist carrying on business from a location in Toronto. The business was, from 1954 through the taxation years in question, a sole proprietorship carried on under the name and style of “W R Kellough & Associates”. The defendant says that, in that business, he has specialized in agricultural matters more than anyone else in the Metropolitan Toronto area. During the early 1950s, the defendant acted for the Ontario government in its acquisition of right-of-way for the then new Highway 401 west of Toronto. He concluded, for a variety of reasons, that practical as well as theoretical knowledge of farming would be of advantage to him in his business. He started looking for a farm in 1958 and, after two years, found one. His criteria were: (1) a farm he could afford, (2) in an average farming area well away from urban speculative influences and (3) close to average size. He preferred a rolling countryside.

He bought the subject property, some 150 acres, part of lots 1 and 2, concession 12, St Vincent Township, Grey County, which is approximately 97 miles from Metropolitan Toronto on Highway 10 north. Grey County is Ontario’s principal beef producing area with some dairying but mainly cow/calf, beef producing, operations. The farm was quite run down which, according to the plaintiff, brought it down to a price he could afford. The first two years he owned it were spent in cleaning up and looking into ways of restoring its productivity.

In 1963, he started buying grade-bred Herefords which he began crossbreeding by artificial insemination with Holsteins. A neighboring farmer tended the farm on a joint venture basis. The time spent there by the defendant and family members was mainly on weekends and extended weekends. Over the years the defendant has charged himself from $300 to $550 annually, depending on use, for personal use of the farm house. He says $3800 has been the going rate in the neighborhood. The adequacy of this amount is not raised in the reassessments.

In 1966, the defendant went on a 14 country inspection tour of European agriculture sponsored by the Canadian National Railway and the federal Department of Agriculture. He came back with a good many ideas which he determined to put into practice. He decided to dispose of his existing herd, then some 40 head, build up the pasturage on the basis of European practices, and then acquire another herd. The program is described in a document entitled “Keliwood Experimental Farm 1967-1972 Program”, dated September, 1966 and revised on the basis of the first year’s experience in September, 1967. This appears under Tab 18 ‘of Exhibit D-1. I do not intend to -recite it-but do accept it as a genuine. plan of action and find that it was pursued reasonably closely. \

Originally, the defendant had hoped to realize a profit from his. farming operations in. 1966. The hope was not met and undertaking the new program necessarily deferred the realization of a profit . When, in October, 1971, he appeared before the Tax Review Board, 1972 was the year of the expected first profit. In fact, 1974 turned out to be the year.

Pursuing the plan, the defendant sold off the bulk of his herd during 1966: more were sold during 1967. There were no livestock sales. in 1968. Farm income for 1967 consisted of $150 for sale of livestock, $150 for sale of crops and the $300 rent the defendant charged himself. In 1968 it was the rent and $157 for crop sold. He acquired no new. cattle after 1965 until, in the fall of 1972, he started to rebuild the herd. The herd is based on Charolais stock which the defendant is crossbreeding. He acquired an Angus bull in the fall of 1974 and a Charolais bull in the fall of 1975. Through 1967 and 1968, the defendant kept his farm equipment but did not, as he has since, add to it.

During 1967 and 1968, the defendant spent 40 to 50 hours a week on the farm, usually on weekends and with his son. His daughters used it “perhaps ten times a year”. There was no mention of his wife using it. The house has four bedrooms. The defendant did most of the work to make it livable himself. The major expenditure was a new furnace. It does get some use when he shows the farm to clients.

Th farm manager, who owned a small farm but lacked equipment, continued on the joint venture arrangement until 1968 when he gave up his own farm and went into construction. He later bought 100 acres of his own and now manages both his own and the defendant’s farm as well as 30 rented acres. He worked on a share of sales basis until the fall of 1975 but it now on salary.

The defendant is of the opinion that his farming activity has been beneficial to his real estate consulting practice. It may have been. His position is that it is to be regarded as an integral part of his overall business. On the evidence, I cannot accept that argument, although that was the basis of the decision by the Tax Review Board. However, I am not prepared to accept the plaintiff’s position that the farm was, in 1967 and 1968, a mere personal retreat. No doubt it was used as a personal retreat but that does not alter the fact that it was also a working farm. I am satisfied that the defendant was, in those years, carrying on the business of farming with a reasonable expectation of profit.

On the evidence before me, the defendant was bona fide engaged in the business of farming with the reasonable expectation of a profit from 1963 through 1966, if not in 1961 and 1962 as well. Likewise, he was again so engaged in farming in 1972 through 1975. A major reorganization of any business frequently entails the postponement of the realization of profits in the short term as one price for the realization of greater profits in the long term. I see no reason why business of farming ought to be regarded differently. The defendant was as much engaged in the business of farming in 1967 and 1968 as, on the evidence, he was before and has been since. The outlays and expenses made or incurred in that business during those years were made or incurred for the purpose of producing income from the business and there was a reasonable expectation that such income, in the form of profits from a business, would be produced.

The appeal is dismissed. This is a case to which subsection 178(2) of the Act, as it now stands, applies. The defendant was entitled to costs in any event. As agreed, in lieu of taxation, they are allowed at $1,500.