Date: 20021017
Neutral citation: 2002 FCA 392
BETWEEN:
ANNA KROEKER
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Edmonton, Alberta, on September 25, 2002.
Judgment delivered at Ottawa, Ontario, October 17, 2002
REASONS FOR JUDGMENT BY: DESJARDINS J.A.
CONCURRED IN BY: SEXTON J.A.
SHARLOW J.A.
Date: 20021017
Neutral citation: 2002 FCA 392
CORAM: DESJARDINS J.A.
SEXTON J.A.
SHARLOW J.A.
BETWEEN:
ANNA KROEKER
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] This appeal from a decision of the Tax Court of Canada (see Kroeker v. Canada, [1999] T.C.J. No. 348 (QL), dated June 11, 1999 and [1999] T.C.J. No. 396 (QL), dated July 5, 1999), originally raised two issues, namely:
1. whether the appellant Anna Kroeker's chief source of income for the taxation years 1993, 1994 and 1995 was a "combination of farming and some other source of income" within the meaning of section 31 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"); and
2. whether her husband's "salary" was deductible from the partnership under which they were operating the farm.
[2] We were informed at the hearing that the appellant and her husband have been divorced since 1998, that the appellant has no mandate to represent her husband, that he has never filed a notice of objection, a notice of appeal or a waiver, and that he has never been a party to these proceedings. In the circumstances, the second issue has been dropped and need not be answered.
[3] The first issue, however, remains very much alive.
The Facts
[4] The appellant and her husband, who both had farming backgrounds, operated a farm near Swift Current, Saskatchewan, as a farming partnership during the relevant years. There was never a written partnership agreement nor an express unwritten partnership agreement between them. They had agreed, however, that his income would approximately equal hers and that he would work full-time on the farm while she would hold employment off the farm as well as work on the farm.
[5] The appellant was employed as a controller by REM Manufacturing, Swift Current. Her earnings from that employment were $50,940 for 1993, $61,240 for 1994 and $60,000 for 1995. It was a condition of her employment with her employer, a farm equipment manufacturer, that she be given both flexibility and time off whenever the farm operations required it, particularly during calving season, harvest time and whenever dealings with the farm's lenders and suppliers were necessary. Even when she was working off the farm, the time she spent on the farm was substantial.
[6] The appellant testified that all of her off-farm earnings went into the farming partnership. She also stated that the partnership, since 1992, operated a mixed farming business, roughly half grain farming (barley and wheat) and half raising of livestock (cow-calf operation). The farming partnership had no profit from 1991 until 1997 inclusive. In 1998, it had its first net income in the amount of $24,411.00.
[7] The respondent applied the restricted farm loss provisions of section 31 of the Act, on the basis that the appellant's farming income was allegedly a sideline to her employment as controller for a farm equipment manufacturer and that she could not look to farming to earn her livelihood. The respondent admitted however that farming is "the focus of her life" (see letter from Revenue Canada, Appeal Book, Tab 22, p. 156) and "that the farm has a reasonable expectation of profit during the years in question." (See the decision of the Tax Court of Canada in Kroeker v. Canada, June 11, 1999, reported at [1999] T.C.J. No. 348 (QL).)
The Decision of the Tax Court of Canada
[8] On the only issue that concerns us, namely the first one, the Tax Court Judge found that the appellant's chief source of income was not farming nor a combination of farming and some other source of income. In so doing, he relied on certain dicta by Robertson J.A. in R. v. Donnelly, [1998]1 F.C. 513 (C.A.), paragraphs 12 and 13, that with respect to the section 31 profitability factor, evidence had to be provided to support a finding of reasonable expectation of "substantial" profits from farming. The Tax Court Judge concluded that the appellant, who had purported to establish that the partnership had changed its direction in the period 1990 through 1992 from a mixed farm with an emphasis on grain operation to a cow-calf operation, had provided no written projection of profitability nor any evidence as to how net profits could derive from a cow-calf operation. He even cast doubt on the credibility of her testimony.
The Relevant Provision
[9] Section 31 of the Income Tax Act provides:
| 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 the taxpayer's loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of (a) the lesser of (i) the amount by which the total of the taxpayer's losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming business carried on by the taxpayer exceeds the total of the taxpayer's incomes for the year, so determined from all such businesses, and (ii) $2,500 plus the lesser of
(A) ½ of the amount by which the amount determined under subparagraph (i) exceeds $2,5000, and (B) $6,250, 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 37.1" were deleted, exceeds (ii) the amount determined under subparagraph (a)(i).
(1.1) For the purposes of this Act, a taxpayer's "restricted farm loss" for a taxation year is the amount, if any, by which (a) The amount determined under subparagraph (1)(a)(i) in respect of the taxpayer for the year exceeds (b) the total of the amount determined under subparagraph (1)(a(ii) in respect of the taxpayer for the year and all amounts each of which is an amount by which the taxpayer's restricted farm loss for the year is required to be reduced because of section 80.
(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.
(my emphasis) |
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31. (1) Lorsque le revenu d'un contribuable, pour une année d'imposition, ne provient principalement ni de l'agriculture ni d'une combinaison de l'agriculture et de quelque autre source, pour l'application des articles 3 et 111, ses pertes pour l'année, provenant de toutes les entreprises agricoles exploitées par lui, sont réputées être le total des montants suivants: a) la moins élevée des sommes suivantes: (i) l'excédent du total de ses pertes pour l'année, déterminées compte non tenu du présent article et avant toute déduction prévue aux articles 37 ou 37.1 et provenant de toutes les entreprises agricoles exploitées par lui, sur le total des revenus, ainsi déterminés, qu'il a tirés pour l'année de ces entreprises, (ii) 2 500 $ plus la moins élevée des sommes suivantes:
(A) 1/2 de l'excédent du montant visé au sous-alinéa (i) sur 2 500 $ (B) 6 250 $ b) l'excédent de la somme visée au sous-alinéa (i) sur la somme visée au sous-alinéa (ii): (i) la somme qui serait déterminée en vertu du sous-alinéa a)(i) compte non tenu du passage « et avant toute déduction prévue aux articles 37 ou 37.1 » , (ii) la somme déterminée en vertu du sous-alinéa a)(ii).
(1.1) Pour l'application de la présente loi, la perte agricole restreinte d'une contribuable pour une année d'imposition correspond à l'excédent éventuel du montant visé à l'alinéa a) sur le total visé à l'alinéa b) : a) le montant déterminé selon le sous-alinéa (1)a)(i) relativement au contribuable pour l'année; b) le total du montant déterminé selon le sous-alinéa (1)a)(ii) relativement au contribuable pour l'année et des montants représentant chacun un montant qui, par l'effet de l'article 80, est à appliquer en réduction de la perte agricole restreinte du contribuable pour l'année.
(2) Pour l'application du présent article, le ministre peut déterminer si le revenu d'un contribuable, pour une année d'imposition, ne provient principalement ni de l'agriculture ou d'une combinaison de l'agriculture et de quelque autre source.
(je souligne) |
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Analysis
[10] The starting point in my analysis is the decision of the Supreme Court of Canada in Moldowan v. the Queen, [1978] 1 S.C.R. 480, where Dickson J. (as he then was) sets out the
meaning of the phrase "source of income" in the context of farming losses under the provision of Section 13, which preceded the present section 31. What he stated was the following:
The next thing to observe with respect to s. 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 art words "source of income."
_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 profit. Source of income, thus, is an equivalent term to business:__Dorfman v. M.N.R. [[1972] C.T.C. 151.] See also s. 139(1)(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.
There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking:__The Queen v. Matthews [(1974), 74 D.T.C. 6193]. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.
Whether a source of income is a taxpayer "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 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 question of fact in the circumstances.
...
[11] Dickson J. then set out the meaning of the word "combination" and thus described three classes of farmers:
It is clear that "combination" in s. 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 carries 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 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 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. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.
[12] The issue, in the case at bar, is whether the appellant's "chief source" of income for a taxation year is farming or "a combination of farming and some other source".
[13] There are no suspicions that the appellant's activity might be a hobby or personal endeavour (see Stewart v. Canada, [2002] S.C.J. No. 46 (QL) at para. 5). Farming (see "farming" in s. 248 of the Act) is not a hobby for the appellant. She is not, for instance, indulging in maintaining horses for racing. The respondent has admitted, as stated earlier, that farming is "the focus of her life." Considering that the respondent has also admitted "that the farm has a reasonable expectation of profit during the years in questions", it follows that the appellant's farming activity is a business. The activity is commercial and constitutes a source of income.
[14] Dickson J. sets out three classes of farmers. What we have to decide is whether the appellant falls within the first or the second class of farmers. Is farming reasonably expected to provide the bulk of her income? Is it the centre of her work routine? Does she look to farming for her livelihood? If the answers are in the affirmative, she falls within the first class of farmers and is entitled to the full losses of her farming activities. If, on the other hand, farming is a sideline business and she does not look to farming or farming and some subordinate source of income for her livelihood, she falls within the second class of farmers and is entitled to limited losses only.
[15] Moldowan, supra, teaches us that whether a source of income is a taxpayer's "chief source" of income is both a relative and an objective test. It is decidedly not a pure quantum measurement. The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from the 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.
[16] In The Queen v. Morrissey, [1989] 2 F.C. 418 (C.A.) (leave to appeal to the Supreme Court of Canada refused, (1980) 100 N.R. 157), a majority of this Court, at p. 428, reminds us that:
Moldowan also says, dealing with the difference between classes 1 and 2, "while a quantum measurement of farming income is relevant, it is not alone decisive". While the determination that farming is a chief source of income is not pure quantum measurement, it is equally not a determination in which quantum can be ignored. (my emphasis)
[17] The appellant contributed capital, time and labour to her farming activities.
[18] The Tax Court Judge cast doubt on the appellant's testimony that all of her REM income went into the farm. He stated at paragraph 10 of his Reasons that "[t]his testimony has to be untrue since money had to be spent for food, clothing, family and household needs and care for the children and her REM income was the only source for this." When read in the transcript, however, it appears that what the appellant was referring to in her examination in chief
(transcript, p. 111, line 25, to p. 112, line 4) was the fact that no money was spent on investments, fancy cars or holidays. The following exchange took place:
Q The money that you earned off-farm from Rem Manufacturing during the years in question and later, where did that money go? What was it spent on?
A It was all paid to farm expenses.
Q No investments, no fancy cars, no holidays?
A No.
She was not cross-examined on that point.
[19] The Tax Court Judge said that the appellant failed to establish that for the years 1993, 1994 and 1995, farming would be her ultimate source of income and that she also failed to demonstrate how that was to be achieved, when it would happen or fix a quantum of profit and state when that profit would be substantial (see paragraph 10 of his Reasons). He further said that there was no evidence that the farm partnership could, in 1993, 1994 and 1995, reasonably be expected to provide "substantial" profits from farming.
[20] In doing so, the Tax Court Judge relied on certain dicta by Robertson J.A. in R. v. Donnelly, supra, at paragraphs 12 and 13, and in particular when Robertson J.A. said at paragraph 12:
Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 o $1 million. It is well recognized in law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming. (my emphasis)
[21] Donnelly, supra, must be distinguished from the case at bar. The taxpayer in that case was involved in raising horses for racing. It is in that context, therefore, that the demonstration of a reasonable expectation of "substantial" profits was deemed to be required. Moldowan, supra, itself does not refer to such requirement. It simply states that "while a quantum measurement of farming income is relevant, it is not alone decisive." In Morrissey, supra, a majority of the Court formulates the test in the following manner: "[w]hile the determination that farming is a chief source of income is not pure quantum measurement, it is equally not a determination in which quantum can be ignored".
[22] It should be noted that Robertson J.A. further writes in Donnelly, supra, at paragraphs 18, 19 and 20:
In Graham, the majority of the Court allowed a taxpayer to deduct full farm losses despite the fact that he held full-time employment with Ontario Hydro. The taxpayer, who was raised on a farm, arranged a flexible shift schedule around his hog-farming operation, and took his holidays, days without pay and shift trades to accommodate planting and harvesting time. He also made arrangement with his employer to leave work in the case of an emergency at the farm. The taxpayer
worked eight hours a day at his employment and a further eleven hours a day on the farm. Both the taxpayer's wife and sixteen year old son performed the necessary tasks during his absences from the farm. Finally, the taxpayer was able to obtain needed financing from the Ontario Farm Loan Board which did not lend money to part-time farmers: see Graham v. R. (1983), 83 D.T.C. 5399 (Fed. T.D.), at 5403. Against this background the majority viewed the principal issue in terms of whether a person could have employment in two full-time occupations at the same time. The dissenting judge (Marceau J.A.) viewed the issue in terms of a taxpayer who held a full-time job, was "seriously" involved in farming but who could not expect to generate "significant" profits from the latter enterprise.
In the end, Graham stands or falls on its unique facts. But there is at least one lesson that can be derived from the case. It seems to me that Graham comes closer to a case in which an otherwise full-time farmer is forced to seek additional income in the city to offset losses incurred in the country. The second generation farmer who is unable to adequately support a family may well turn to other employment to offset persistent annual losses. These are the types of cases which never make it to the courts. Presumably, the Minister of National Revenue has made a policy decision to concede the reasonable expectation of profit requirement in situations where a taxpayer's family has always looked to farming as a means of providing for their livelihood, albeit with limited financial success. The same policy considerations allow for greater weight to be placed on the capital and time factors under section 31 of the Act, while less weight is given to profitability. I have yet to see a case where the Minister denies such a taxpayer the right to deduct full farming losses because of a competing income source. Perhaps this is because it is unlikely a hog farmer such as Mr. Graham would pursue the activity as a hobby.
As well known, section 31 of the Act is aimed at preventing "gentlemen" farmers who enjoy substantial income from claiming full farming losses: see Morrisey v. R., supra at 5081-82. More often then not it is invoked in circumstances where farmers are prepared to carry on with a blatant indifference toward the losses being incurred. The practical and legal reality is that these farmers are hobby farmers but the Minister allows them the limited deduction under section 31 of the Act. Such cases almost always involve horse-farmers who are engaged in purchasing or breeding horses for racing. In truth, there is rarely even a reasonable expectation of profit in such endeavours much less the makings of a chief source of income.
... (my emphasis)
[23] Whatever credibility is attached to the appellant's testimony, the undisputed facts in this case speak for themselves. The appellant's capital, time and labour were "focussed" on the farm.
The potential profitability of her farm was such that in 1998, the farm ended up with a profit. Farming was a family enterprise. Little distinguishes this case from The Queen v. Graham, [1985] 2 F.C. 107 (C.A.).
[24] I find that the appellant falls squarely within the first class of farms described by Dickson J. in Moldowan, supra.
[25] I would answer in the affirmative that the appellant's chief source of income for the taxation years 1993, 1994 and 1995 was a "combination of farming and some other source of income". I would allow this appeal on this issue only, I would set aside the decision of the Tax Court of Canada and I would refer the reassessments back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to all her farming losses for the years 1993, 1994 and 1995. I would dismiss this appeal for the remainder.
[26] Costs should be awarded both in this Court and in the court below, in an amount of $7,500.00 in toto.
"Alice Desjardins"
J.C.A
"I agree
J. Edgar Sexton J.A."
"I agree
K. Sharlow J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-465-99
STYLE OF CAUSE: Anna Kroeker v. Her Majesty the Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: September 25, 2002
REASONS FOR JUDGMENT : DESJARDINS J.A.
CONCURRED IN BY: SEXTON, SHARLOW J.J.A.
DATED: OCTOBER 17, 2002
APPEARANCES:
Mr. Neil W. Nichols FOR THE APPELLANT
Mr. Gérald Chartier FOR THE RESPONDENT
SOLICITORS OF RECORD:
Nichols & Company FOR THE APPELLANT
Edmonton, Alberta
Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada