[1] The applicant has applied for judicial review of the decision of a Tax Court Judge in an informal proceeding. The case is reported as Taylor v. Canada, [2001] 3 C.T.C. 2126, [2001] T.C.J. No. 288 (QL) (T.C.C.). The issue is whether section 31 of theIncome Tax Act, R.S.C. 1985, R.S.C. 1985, c. 1 (5^th supp.) applies to limit Mr. Taylor's deduction for farm losses in 1996 and 1997.

[2] In the Tax Court the Crown had properly conceded that Mr. Taylor was carrying on a farming business and had a reasonable expectation of profit. As a result the only issue before the Tax Court was whether farming, either alone or in combination with employment income, was Mr. Taylor's chief source of income. In terms of the analytical framework in Moldowan v. The Queen, [1978] 1 S.C.R. 480, the issue was whether Mr. Taylor was a person for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine (a class 1 farmer), or a person who carries on farming as a sideline business (a class 2 farmer).

[3] The Tax Court Judge found that Mr. Taylor was part of a traditional farming family and has a deep commitment to the land. The Tax Court Judge recognized that Mr. Taylor had invested substantial capital in his farm, and that he spent considerable time working on his farm, probably more than he spent earning his employment income, but concluded that Mr. Taylor was a class 2 farmer because of his failure to establish that the farm could reasonably be expected to produce "substantial" income in future.

[4] It is clear from the reasons of the Tax Court Judge that he would have reached the opposite conclusion except for his interpretation of Canada v. Donnelly (C.A.), [1998] 1 F.C. 513. He had concluded that Donnelly imposed a threshold test, "reasonable expectation of substantial profit", that must be satisfied before a farmer can escape the limitations of section 31. This case has much in common with Kroeker v. Her Majesty the Queen, 2002 FCA 392, in which this Court reversed a Tax Court judgment that had also applied Donnelly in that fashion.

[5] In reading Donnelly as imposing a "substantial" profit requirement, the Tax Court Judge in this case made the same error of law as the Tax Court Judge in Kroeker, and for that reason his decision cannot stand. We see nothing to distinguish the facts of this case from the facts in Kroeker.

[6] Counsel for the Crown argued that Kroeker is distinguishable from this case because in Kroeker there was evidence that in at least one year after the years under appeal, the farm had turned a profit, whereas in this case there was no such evidence. We do not find that point persuasive. In this case, the final year for which the Tax Court Judge had financial information clearly would have showed a profit except for an elective deduction in the form of capital cost allowance. While capital cost allowance and other elective deductions should not be ignored in the Moldowan analysis, it is not correct, in our view, to treat such deductions as decisive in determining the profit and loss in a single critical year. The facts in this case indicate that over the entire twelve year period for which there was evidence, the farm would have been profitable in at least six years if no capital cost allowance had been claimed.

[7] For these reasons, this application for judicial review will be allowed, the decision of the Tax Court Judge will be set aside and Mr. Taylor's appeals will be allowed and the assessments referred back to the Minister for reassessment on the basis that Mr. Taylor's farm losses for the years under appeal are not restricted.

"K. Sharlow"

J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-342-01

STYLE OF CAUSE: KEN M. TAYLOR v. HER MAJESTY THE QUEEN

PLACE OF HEARING: Calgary, Alberta

DATE OF HEARING: November 4, 2002

REASONS FOR JUDGMENT

Delivered from the Bench: SHARLOW, J.A.

DATED: November 4, 2002

APPEARANCES:

Mr. Ken M. Taylor, Litigant in Person FOR THE APPLICANT

Calgary, AB

Ms. Margaret McCabe FOR THE RESPONDENT

Edmonton, AB

SOLICITORS OF RECORD:

Mr. Ken M. Taylor, Litigant in Person FOR THE APPLICANT

Mr. Morris Rosenberg FOR THE RESPONDENT

Deputy Attorney General of Canada

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