D. James Campbell v. Minister of National Revenue, [1988] 1 CTC 2232

Tremblay, T.C.J.: —This appeal was heard on common evidence with the appeals of Elaine Campbell (84-2387(IT) and 85-265(IT)) on November 7, 1986 at the City of London, Ontario.

1. The Point At Issue

The point at issue is whether the appellant is correct in the computation of his income with respect to the 1979, 1980, 1981 and 1982 taxation years, to deduct $7,500, $8.428.58, $12,553 and $12,297 respectively as farming losses.

The appellant contends that since 1959 his chief occupation was farming.

However, loss of quota, health problems and financial reverses forced him to change the dairy operation to a beef operation in the last part of 1977 and the first part of 1978. In addition, he was forced to take temporary outside employment at Massey-Ferguson.

Moreover, he was temporarily forced to rent a part of his farm land and to purchase better hay from another farmer for his animals. In 1981, he started a hog operation. In 1982, due to an economic change, he returned to the dairy operation.

The appellant contends that he never ceased to be a full-time farmer and moreover that the renting income was part of the farming operation.

On the other hand, the respondent allowed only $5,000 per year for farm losses, on the main basis that the appellant had changed his main source of income and therefore he must be considered a gentleman farmer. During the years involved, the respondent contends that the appellant changed his mode and habit of work: he had an outside job and did not have time to work on the farm. Moreover, according to the respondent, the income the appellant received from the rent of his land was an income from property rather than an income from the farming business.

2. The Burden of Proof

2.01. The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessments were also deemed to be correct. In the present case, the assumed facts are described in paragraphs 11(a) to (0) of the reply to notice of appeal.

11. In reassessing the Appellant as aforesaid, the Respondent relied, inter alia, upon the following assumptions or findings of fact:

(a) the facts hereinbefore admitted and stated;

(b) the Appellant and the Appellant's spouse, in equal partnership, own and

operate farm property located in Princeton, Ontario (the "Property");

(c) during the 1979, 1980, 1981, and 1982 taxation years the Appellant was employed on a full-time basis with Massey-Ferguson earning employment income as follows:

1979	$19,459.18
1980	17,973.30
1981	16,712.00
1982	8,599.21

(d) in the 1979, 1980, 1981 and 1982 taxation years the operation of the Property, exclusive of rental income, incurred the following losses:

			APPELLANT'S
DATE	TOTAL	TOTAL	SHARE (50%)
1979		$15,000.00	$ 7,500.00
1980		16,857.16	8,428.58
1981		25,106.00	12,553.00
1982		24,595.36	12,297.68

(e) in the 1979, 1980, 1981 and 1982 taxation years the Property generated net rental income as follows:

		APPELLANT’S
DATE	TOTAL TOTAL	SHARE (50%)
1979	$ 5,698.00	$ 2,849.00
1980	7,670.00	3,835.00
1981	14,694.18	7,347.09
1982	23,028.00	11,514.00

(f) in the 1979, 1980, 1981 and 1982 taxation years the Property generated gross income from livestock and dairy as follows:

1979	$ 5,543.97
1980	940.73
1981	18,721.01
1982	28,811.57

(g) in the 1979, 1980, 1981 and 1982 taxation years the Property incurred the following current expenses from livestock and dairy operations:

	1979	1980 1980	1981	1982 1982
Livestock Purchased	$16,325.00 $ nil $16,760.00 $ 8,575.00
Feed and Straw	15,293.51	11,649.00	21,020.62	38,845.97
Veterinary Fees, Medicine
and Breeding Fees	975.23	1,465.31	1,618.25	2,375.98
	$32,593.74	$13,114.31	$39,398.87	$49,796.95

(h) the Appellant was employed by Massey-Ferguson from January, 1972, until May, 1975, and from September, 1976, to the present;

(i) during the 1979, 1980, 1981 and 1982 taxation years the Appellant’s spouse was employed on a full-time basis as a nurse;

(j) because of the Appellant's employment with Massey-Ferguson and because of the Appellant’s spouse's employment as a nurse, neither the Appellant nor his spouse had time to work the Property and therefore the Property was rented;

(k) the peak harvest period corresponds with the peak production period at Massey-Ferguson and therefore the Appellant is not able to take holidays during the harvest period;

(l) the Appellant and his spouse reside on the Property in a newly renovated and redecorated home. Also on the Property is a swimming pool and a solarium;

(m) in 1964 the Appellant suffered a back injury which prohibited him from doing any lifting or a great amount of stooping or bending from that time and through the 1979 to 1982 taxation years inclusive;

(n) at all material times the Appellant's operation of the Property was only a side-line business;

(o) during the 1979, 1980, 1981 and 1982 taxation years, the Appellant's chief source of income was neither farming nor a combination of farming and some other source of income as during the said taxation years the Appellant's chief source of income was from the employment held by him at Massey-Ferguson.

3. The Facts

3.01 The figures appearing in the reply to notice of appeal are not in dispute, neither are most of the material facts detailed in the appellant and his wife's testimonies and summarized in the pleadings and in the notice of objection.

3.02 The appellant was born in March 1932. He had only a formal education to grade 8, having left school at age 13. He had to help his parents on the farm due to the shortage of labour during the last year of the war and the years following the war.

3.03 He got married in 1957 to Elaine May who had also been brought up on a farm. After two years of city employment, they decided to return to farming.

3.04 From March 1959 to March 1965, they operated a 210-acre dairy farm with 40 milking cows on a share basis with a high school teacher.

In March 1965, they purchased the school teacher's share.

3.05 In 1964, due to a farm mishap, the appellant injured his back. Prior to the end of 1964 he was hospitalized, where tests were run on his back. He was advised that he had a definite back injury. The doctor was of the opinion at that time that, given time and proper care and rest, his back would heal. It became apparent in 1966 that, as a result of his injury, he would never be able to do any heavy lifting or a great amount of stooping or bending.

3.06 From March 1965 to 1968, they dairy farmed with the aid of their nephew, who married in 1968 and moved to Kingston. This left them with no help and, due to his continuing back ailment, the appellant was unable to carry on the heavy work of dairy farming as they did not have, nor could they obtain, the capital to mechanize their operation. In February 1968, they sold the milk cows and reduced their Farm Credit Corporation mortgage by an amount agreed upon by the Farm Credit Corporation (F.C.C.).

3.07 From 1968 to 1972, they put the fields into crops and had short-keep beef cattle until the beef grading system changed, which made the shortkeep beef operation unprofitable.

3.08 In 1972, due to poor commod'ty prices, their crops barely paid their expenses, so they obtained what they thought would be short-term work at the Massey-Ferguson Combine Plant. At that point, the company said it would need him for only one month. It turned out to be steady work and they put the fields into crops with the aid of their sons, Greg, then aged 15 and Jeff, then aged 13.

3.09 In 1973, they restarted a dairy operation. The facts described in the notice of objection summarize those given in the appellant's testimony.

We continued until July, 1973, when Greg, who had received training in 4H dairy clubs, said he would like to start dairy farming. We started in a small way, with Greg milking the cows before and after school. We continued this way until April, 1975, when Greg indicated he would like to dairy farm full-time on completion of high school. I terminated my employment in May, 1975 to operate the farm full- time and expand so we could have a two-man operation. We increased our farm mortgage, built three silos and a 60-stall dairy barn, bought silo unloaders and feed elevators and increased our herd accordingly. This was all based on the Provincial Government encouraging dairy farm expansion with grants for interest assistance based on production schedules (which we met) and the Federal Dairy Commission, as well as the Federal Minister of Agriculture announcing a five-year dairy plan. We bought enough cows to increase the herd to 60 milk cows along with Market Sharing Quota for a total of 598,458 lbs. of M.S.Q., which grossed approximately $10.00 per hundredweight. In 1976, the government imposed an arbitrary 15 percent cut in quota.

As stated, our quota was 598,458.

In April, 1976, it was cut to 525,479.

In September, 1976, it was cut to 488,783.

In May, 1977, it was cut to 474,828.

While some of this last quota was replaced with Group 1 quota on a graduated entry into Group 1 classification, our net loss of quota was approximately 90,000 lbs. @ $10.00 per hundredweight or $9,000.00 which, in fact, took away our personal living income.

This was a full-time operation for two men — myself and Greg, along with the help of Jeff, who was still in high school.

Our personal living income gone, I had to find additional income, so I applied for rehiring at Massey-Ferguson. I started working at Massey in September, 1976. I planned to work for approximately two years, until the quota situation righted itself. I was on shift work and worked every spare moment on the farm. Greg worked full-time on the farm and Jeff worked part-time on the farm, before and after school each day. I could only pay a meagre wage, along with board, to the boys, but we managed to keep in business. Greg married in March, 1977 and by May, 1977, discovered that he could not live on what I could afford to pay him. He was also disillusioned with respect to dairy farming due to all the quota cuts, etc. and, therefore, left the farm for a full-time job. My dilemma was that I had 244 acres to crop and sixty cows to milk. I was unable to do the milking myself, due to my back injury and had no help as Jeff was still in high school with exams coming up. The spring crops had to be planted but I could not afford to hire anyone nor could I get enough of an operating capital loan from the bank to hire custom operators.

Concerning his employment with Massey-Ferguson in 1976, the appellant did not take the appropriate steps to protect his seniority, because he thought the job was only temporary. The employment was terminated in May 1982 and he did not accept employment from another employer.

3.10 In September 1977, circumstances were such that they had to sell the dairy cattle. They then started a beef operation in Aberdeen Angus cattle in May 1978. Once again, the facts put forth in the notice of objection summarize those given by the appellant in his testimony.

As the newer portion of my equipment, such as silo unloaders, silage elevators and bulk milk tank had not been paid for and my older equipment needed replacing, I had to sell this equipment. As I could not do the milking myself, I sold the dairy herd with the following intentions:

(a) to continue farming on the basis of keeping and breeding Angus beef cattle; and

(b) to resume our dairy operation at such time as Jeff had finished high school and reached an age whereby we would be assured that he had matured enough to apply himself to the business of farming.

We sold our dairy cattle after numerous blood tests by The Health of Animals Department in September, 1977. We did not purchase the first of our Angus cattle until May, 1978, due to the costs of keeping them over the winter. We made further purchases of cattle in October, 1978 and with subsequent purchases and natural increases, have attained our present herd of 68 Angus.

Jeff has worked off the farm but has lived at home and helped mornings and evenings, with the exception of 6-8 months, while he was employed on a dairy farm south of Hamilton. With myself on shift work, my wife doing chores morning and night along with Jeff, we took care of the cattle.

3.11 In 1978, they had to rent 220 of their 244 acres and purchase hay from the Meaford area, which produces better hay. The notice of appeal reads as follows:

When the beef operation was started in 1977, a decision had to be made as to the most efficient method of providing feed for these cattle. The beef cattle required mostly hay, and the farm land was more suited to the production of corn. Furthermore, the taxpayer did not have the equipment or manpower to cash crop the farm. Consequently, it was decided to use a small part of the property as pasture (10 acres) for the beef cattle and rent out the remainder to cash croppers. The proceeds of the rentals were used to buy hay from the Meaford area which was of a quality superior to hay that could be produced on the partnership property.

3.12 In 1981, they restarted a dairy operation. The facts are summarized in the notice of objection:

During the summer of 1981, Jeff decided he would like to establish a dairy herd (after considering other possibilities) so he has now a small dairy herd of 18 cows (Holstein) and a few calves, and a cream quota. This leaves us with skim milk, so I have established small farrow to finish hog herd to utilize the skim milk. My wife owns the beef herd, Jeff the dairy herd and myself the pigs. Out [sic] next step will be a partnership or corporation. We have our livestock inventory built up to the point now where we will crop the farm ourselves in 1983.

3.13 The number of animals from 1979 to 1982 was as follows:

In 1984, they had 86 heads of cattle in addition to calves and hogs. In the fall of 1986, they had 45 milking cows and a total of 125 cows.

3.14 The rental arrangement for corn growing terminated in 1981. The appellant then decided to rent the same piece of land for growing beans. He has given special reasons:

In December of 1981 a man that wanted to grow beans — okay, when they grow corn, there's an atrazine (weed-killer) residue build-up in the land, so there's only certain crops you can plant after which is corn, some grains possibly. And this man from around the Innerkip area come in and he said he would like to pay us $165 an acre to grow specialized beans for 1982.

So considering we wanted to switch the land over to growing alfalfa and the risk of this residue, I thought to myself, well he might as well take the risk of the residue as me so — and by this time, we were buying the cows, buying the quota and the pigs, and this was a time of high interest, up to 24 per cent on our operating loan. And we could see this was going to be a catchy situation, so we opted for taking $165 and less risk and still buying our feed in for the dairy cattle, and the pigs, and let him take the risk on this land.

So he leased it out for '82 growing season. But in the fall, after he took the crop off we did the fall farming in '82. So actually we started our full-time operation (TS, pp. 35-36).

Sometime after 1984, the appellant and his wife formed with their son Jeff a new partnership to continue the farming business. According to the appellant, the current fair market value of the farm is $992,000. The debts total $475,000 (TS, p. 39).

3.15 Mrs. Elaine Campbell testified that during the years involved, she was a part-time registered nurse for a doctor in Brandford, working 4 days a week, about 32 hours per week.

3.16 Concerning the farm, Mrs. Campbell was responsible for the Aberdeen Angus cattle: feeding them, mothering the cow, looking after any calves that had been born during the night; social contacts connected with the Aberdeen Angus Association; she was a director of one of the Blue Water Association groups that is one segment of the Aberdeen Angus Association. She was responsible for the lawn and the garden. She helped when it was the time to unload hay. She was also responsible for the bookkeeping and for keeping records in connection with the cycles of the animals, etc.

My centre of interest is the farm. Basically that has been my whole life. I was born and raised on the farm. My ancestors were all basically farm oriented (TS, p. 69).

She hopes to continue to live on the farm until her death. All of her employment income was invested in the farm.

3.17 Mr. Gary Hutchison, an agronomist, testified as an expert. His report was filed as Exhibit A-1. His expertise is not in dispute. He has written on farm economy, farm finance, farm management and also on technical aspects of agriculture.

He obtained an honours degree in 1958 from the University of Toronto, Guelph Campus, in agricultural economics. In 1964, he obtained his master's degree in agricultural economics from the University of Connecticut. From 1965 to 1982, he has been an academic administrator at the University of Guelph, co-ordinating the correspondence program in agriculture. At present he is an associate professor in the Department of Agriculture, Economics and Business.

Moreover, he has been a farmer since 1969. He raised 700 lambs from 1970 to 1975. He reached a peak of 310 acres in 1981 with 78 Hereford crossed with Simmental cows bred Charolais and 100 Western calves in the feedlot. At present he has 100 to 150 Western calves in the feedlot. He also carries on a consulting business mainly in the areas of farm income tax, family agreements and financial management.

3.18 The first part of Mr. Hutchison's report is entitled "Time available for farming”. According to him, after 17 years of first-hand experience it is possible to carry on a successful commercial-sized farm operation and work away from the farm up to 60 hours per week and still have a reasonable family life and social life. It is a very common situation.

Stating that Mr. and Mrs. Campbell had seldom worked away from the farm at the same time, he says at page one of his report:

Consequently either or both parties had the opportunity to work at farming as many hours per week as some farmers with no off farm employment. Secondly they had family assistance which also provides an advantage over a farmer without family help. Thirdly a blue collar shift worker with little travel or preparation makes it much easier to operate a commercial sized farm than many other vocations would allow.

3.19 The second part of Mr Hutchison's report concerns the purebred beef operation. The report states, at page two:

The survivability of the purebred beef cattle industry is dependent on new entrants. Because of the heavy financial commitment of those in the industry they attempt to pass these costs on to new entrants. Unsuspecting new entrants often plunge into the business by purchasing animals at inflated prices with non farm dollars. The gross expenditures may appear to Revenue Canada-Taxation to be of sufficient magnitude based on dollar volume to be considered either the “chief source of income” or the chief source of income is a “combination of farming and some other source of income”. However, the new entrants can seldom capitalize on their investment within a reasonable time. This is often due to a combination of imprudent purchases of breeding stock and the fact new entrants cannot sell breeding stock because they are unknown or they have an unknown track record.

Severe culling of expensive animals and the long delays necessary to regroup make the purebred beef cattle business a high risk venture for those who "plunge" into the industry. The Campbells, on the other hand, both having been raised on farms, did not plunge. They purchased sufficient females at reasonable prices to commit themselves to the industry, but because of limited resources and farm experience they did not “plunge”.

However, he says that they had a purebred herd size larger than the average commercial or purebred herd found in Ontario, at roughly 16 mature females, depending on the year of comparison. The number of mature females owned by the Campbells was 13 (1979), 20 (1980), 28 (1981) and 37 (1982).

3.20 Concerning the fact that the appellant had to rent a part of his farm land from 1978 to 1981, Mr. Hutchison says, at page six of his report:

The amount of land owned by the Campbells when the dairy herd was sold in 1977 far exceeded the short term needs of the beef breeding herd. It was not possible to sever part of the farm and thus selling part of the land was not an alternative. Secondly, Mr. Campbell has indicated his equipment to operate 220 acres was incomplete and with limited finances, impractical to replace. Thirdly fierce competition made the rental alternative very attractive and fourthly alternative feed sources were available at prices comparable to the costs of growing crops under the above conditions.

4. Law — Precedents — Analysis

4.01 Law

The main provision of the Income Tax Act involved in the present appeal is found in section 31. It reads as follows:

31. (1) 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 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

31. (2) For the purpose of this section, the Minister may determine that 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.

4.02 Precedents

The following precedents were referred to the Court by the parties:

1. Graham v. The Queen, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.);

2. Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.);

3. Fleming v. M.N.R., [1986] 2 C.T.C. 2192; 86 D.T.C. 1628 (T.C.C.);

4. Poirier Estate v. The Queen, [1986] 1 C.T.C. 308; 86 D.T.C. 6124 (F.C.T.D.);

5. Juravinski v. M.N.R., [1986] 1 C.T.C. 2429; 86 D.T.C. 1274 (T.C.C.);

6. Bender v. M.N.R., [1986] 1 C.T.C. 2437; 86 D.T.C. 1291 (T.C.C.);

7. Service d'Administration Champlain v. M.N.R., [1986] 1 C.T.C. 2544; 86 D.T.C. 1453;

8. Leslie v. M.N.R., [1982] C.T.C. 2233; 82 D.T.C. 1216 (T.R.B.);

9. Hidding et al v. M.N.R., [1971] Tax A.B.C. 188; 71 D.T.C. 149;

10. The Queen v. Zavitz, [1981] C.T.C. 17; 81 D.T.C. 5007;

11. Klie v. The Queen, [1981] C.T.C. 154; 81 D.T.C. 5061 (F.C.T.D.).

4.03 Analysis

4.03.1 In this appeal, there are two points at issue. The first one is whether the appellant was a full-time farmer or only a gentleman farmer during the years involved, and the second is whether the renting income is separate from the farming income or is in connection with it.

A. Full-time farmer or gentleman farmer

4.03.2 In the well-known Moldowan case (par. 4.02(2)), Dickson, J., the present Chief Justice of the Supreme Court of Canada, says at page 315 (D.T.C. 5216), concerning the different classes of farmers:

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 subsection 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 carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 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 carries 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 exclusion provided at the beginning of subsection 31(1) (formerly 13(1) of the old Act) applies to the full-time farmer. It reads:

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 . . .

Concerning the chief source of income, Mr. Justice Dickson says in the Moldowan decision at page 314 (D.T.C. 5215-16):

Whether a source of income is a taxpayer's “chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

[Emphasis added.]

4.03.3 In the present case, it is not in dispute that in 1959 and during the years after, the appellant's chief source of income was farming (paras. 3.04 to 3.11).

It is only during the years from 1979 to 1982 that the respondent disputes the chief source. According to him, in those years, there was "a change in the taxpayer's mode and habit of work".

It is important to consider, in relation to farming, the time spent and capital committed by the appellant, along with other sources of income.

4.03.4 The main assumptions of facts of the respondent concerning his objection to the full-time farmer status of the appellant are:

(a) the employments of the appellant and his wife (paras. 11(h), (i), (j) and (k) of the reply to notice of appeal quoted in para. 2.02 above);

(b) the back injury of the appellant (para. 11(m) of the reply to notice of appeal quoted above in para. 2.02).

4.03.5 With respect to the appellant's employment at Massey-Ferguson, the uncontradicted evidence is to the effect that the appellant was employed for the first time in 1972. It was supposed to be for one month only, but it lasted until May 1975 (para. 3.08).

For a second time, he accepted work with Massey-Ferguson in September 1976, because of the lack of milk quota. He planned to work for approximately two years until the quota situation righted itself. Being sure that it would be temporary, he did not take the appropriate steps to protect his seniority with the company. In fact, his employment was terminated in May 1982. He never again accepted work away from the farm, but devoted all his time to the farm (para. 3.09).

The appellant said he had been working 40 hours per week for Massey- Ferguson and 60 hours on the farm including the hours worked by Jeff. It is important to underline that we are dealing here with a family-farm situation and not the situation of one taxpayer working on his own. Greg worked on the farm until 1977. Jeff is presently a partner with his father and mother in the farming business.

4.03.6 Concerning Mrs. Campbell's employment: it is part-time employment, 4 days, 32 hours per week. Even if in her testimony, she did not give the number of hours spent on the farm during a week, she said that “it was the centre of her work routine” (para. 3.16). The Court believes her.

4.03.7 The Court cannot ignore the uncontradicted evidence of the expert Mr. Hutchison. His expertise was accepted by the respondent. In his report filed as Exhibit A-1, he indicates that it is possible to operate a normal sized, successful farm and maintain outside employment for over 50 hours per week.

In this case, he took into consideration the fact that the two partners had outside employment and that quite often, they worked at different hours and they had the opportunity to work at farming as many hours per week as some farmers with no off-farm employment (para. 3.18).

In cross-examination, the expert, Mr. Hutchison, said that concerning the Angus purebred operation there are many farmers in Ontario for whom the purebred business is their sole source of livelihood.

He underlined that the best way is the one followed by the Campbells, starting slowly and not starting by buying very expensive animals. It is better to start with good, sound animals and gradually build up the farming operation. One must become active in the associations (Angus or Holstein, etc.).

According to Mr. Hutchison, it takes ten years to build up a purebred farming operation. Mr. Hutchison said that he knows many full-time farmers in Ontario who had a herd smaller than the Campbell's herd (para. 3.19).

4.03.8 Counsel for the appellant referred to the Graham case (para. 4.02(1)). This is a decision of the Federal Court of Appeal (one judge dissenting), to the effect that the appellant, a full-time employee at Ontario Hydro, was declared a full-time farmer. This case is pending before the Supreme Court of Canada.

4.03.9 Counsel for the respondent referred to the Zavitz case (para. 4.02(10)). This decision was rendered by Grant, J. of the Federal Court-Trial Division.

Commenting on the first lines of subsection 31(1) (quoted above in para. 4.01), Grant, J. says at page 20 (D.T.C. 5009-10):

There is no doubt that the taxpayer's chief source of income in the year in question was not that of farming because his salary as a Justice of the Peace and his pension were far in excess thereof. The cases have referred to the ambiguity prevailing in the section by reason of the words "nor a combination of farming and some other source of income”. The problem of interpretation thereof arises because it is drafted in the negative. In the interpretation thereof I believe the word “combination” is most important. Such word envisages some contribution of income from each of the two sources referred to. The words "other source" denote that there must be some income from farming within the exclusionary provision. The shorter Oxford English Dictionary defines the word combination as:

(a) the action of combining two or more separate things;

(b) combined state or condition;

(c) a group of things combined into a whole.

If the taxpayer is a part-time farmer whose receipts from his farming operation do not exceed his income expenses therefrom then he has no source of income therefrom and there can be "no combination of farming and some other source".

[Emphasis added.]

According to counsel for the respondent, this supports the proposition that there must be some income per se from farming. As there are only losses, the appellant has only a right to the restricted losses provided for in subsection 31(1).

It seems to me that this is in contradiction with what Dickson, J. says in the Moldowan case at page 313 (D.T.C. 5215):

The next thing to observe with respect to subsection 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer's income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words "source of income".

[Emphasis added.]

Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of a profit.

In my view, this indicates that a source of income may exist, even though there is not some income per se from farming and that therefore, there is a loss.

4.03.10 Pursuant to the evidence, the taxpayer has made a number of changes (dairy operation to beef operation, to hog operation, to dairy operation) in the particular enterprises he has engaged in on his farm.

These changes were dictated by the appellant's financial conditions. In my opinion, they were made as being the best judgment that the appellant could exercise in the management of the business. At no time however, did the appellant give up farming nor did he change his emphasis on farming as the centre of his work routine.

The creation of the Aberdeen Angus herd was not a last resort. It was a move that was regarded with great enthusiasm. For Mrs. Campbell, it was the realization of a long dream.

4.03.11 Considering the time spent by the Campbell family, the nature of the farming operation and the capital committed, I have no hesitation in deciding that during the years involved the appellant's chief source of income was farming, his back injury notwithstanding.

4.03.12 Considering the capital committed, it is over $475,000 net of liabilities (para. 3.14 in fine). Even the employment income of the appellant and his wife was invested in the farming business. Therefore, the criterion of the Supreme Court of Canada (para. 4.03.2) is also met.

B. Renting income separate or in connection with farming income

4.03.13 In my opinion, the uncontradicted facts described in paragraph 3.11 and the opinion of the expert (para. 3.20) convince me that the renting income was in connection with the farming income.

5. Conclusion

For these reasons, the appeal is allowed with costs and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.