Henry Gordon Stratton v. Minister of National Revenue, [1966] CTC 637, 66 DTC 5422

GiBson, J.:—In this appeal the issue is whether the appellant, a married person, who had heretofore transferred certain farm property to his wife, is entitled for the taxation year 1963 to deduct the loss in that year from the operations of such property, or whether by reason of Section 21(1)* [1] of the Income Tax Act it is only the income,{ in the sense of the profit from the operations of such property and not the loss that is attributable to the appellant.

The facts are as follows:

The appellant is a physician practising psychiatry at the City of Windsor.

On or about April 16, 1951 the appellant purchased in the joint names of himself and his wife a farm, being the east one- half of Lot 20 in Concession 2 in the Township of Malden in the County of Essex and resided thereon. The farm was worked by one Thomas H. Bratt, who grew crops and sold the farm produce to the Harrow Farmers Co-operative. Under an oral arrangement with Bratt, two-thirds of the proceeds from the sale of the produce was sent by the Co-operative to Bratt and one-third to the appellant and his wife. The responsibilities of the appellant and his wife were to pay for electricity, municipal taxes, the upkeep of the farm and buildings and one-third of the cost of fertilizer. The farming operation in each year from the acquisition of the farm by the appellant and his wife until the disposal by the appellant of his one-half interest to his wife resulted in a loss to the appellant and his wife.

On or about August 10, 1960, the appellant transferred his one-half interest in the said farm to his wife, Gwen Stratton.

Shortly before the transfer to the appellant’s wife of the appellant’s remaining one-half interest in the farm the appellant and his wife moved to Windsor and the farm was occupied by Bratt, who continued to work the farm in accordance with an oral agreement between himself and the appellant’s wife, as owner. Under that agreement:

(a) Blatt paid $500 rent annually to Mrs. Stratton, the appellant’s wife ;

(b) Bratt paid the cost of electricity consumed on the farm;

(c) the appellant’s wife paid for the upkeep of the farm and one-third of the cost of fertilizer (two-thirds thereof being paid by Bratt) ;

(d) when fertilizer was purchased from the Harrow Farmers Co-operative the appellant’s wife and Bratt were each billed directly by the Co-operative for their proportionate share of the cost and when fencing, stock spray and other miscellaneous items were purchased, the appellant’s wife was billed directly by the Co-operative ;

(e) Bratt was entitled to two-thirds of the proceeds from the sale of farm produce and the appellant’s wife was entitled to one-third. By arrangement with the Co-operative cheques for Bratt’s and Mrs. Stratton’s proportionate share of the sale price of farm produce sold were sent to Bratt and Mrs. Stratton directly ;

(f) municipal taxes on the farm and insurance on the farm buildings were paid by Mrs. Stratton.

In the taxation year 1963 the appellant’s wife sustained a loss on the farming operation of $1,322.88, made up as follows:

Receipts

Expenses (incurred and paid by Mrs. Stratton)

For the taxation years 1960, 1961 and 1962 the appellant, in computing his income, deducted the losses incurred by his wife on the farming operation without objection from the respondent.

In computing his income for 1963 the appellant deducted the loss of $1,322.88 sustained by his wife and this deduction was disallowed by the respondent.

At no time did the appellant or his wife physically participate in, supervise, direct or advise on the actual farming operations.

The question for determination on this appeal is whether upon a proper construction of the Income Tax Act and in particular Section 21(1) thereof, the said loss sustained by the appellant’s wife on the farming operations may be taken into consideration to reduce the appellant’s taxable income for the taxation year 1963.

Section 3 of the Act prescribes that The income of a taxpayer for a taxation year for the purposes of this Part (Division B— Computation of Income) is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses, (b) property, and (c) offices and employments.”

“Income . . . from all sources’’ for a taxation year in Section 3 of the Act means net income. (See George H. Steer v. M.N.R., [1965] 2 Ex. C.R. 458; [1965] C.T.C. 181; and Wood v.

By Section 21(1) of the Act Parliament has also prescribed that property transferred by a taxpayer to his spouse is a “source” of his income, additional to the specified sources mentioned in Section 3.

And Section 12(1) (a) and (b)f [3] do not alter the general scheme of the Act in respect to certain ‘‘sources’’ of income so as to render taxable gross revenue rather than net income.

But here the loss is from property owned by the appellant’s wife, and there is no basis not only on ordinary principles of commercial accounting acceptable and within the purview of the general scheme of the Act or otherwise, but also in interpreting Section 21(1) of the Act, for utilizing this loss to reduce the taxable income of the appellant for the taxation year 1963.

This appeal is therefore dismissed with costs.

* (September 7, 1966, Unreported.)