Date: 19991021
Docket: 98-2442-IT-I
BETWEEN:
BERNICE T. PAGET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] These are appeals with respect to the 1994 and 1995 taxation years.
[2] In computing income for the 1994 and 1995 taxation years, the Appellant deducted the amounts of $26,239.13 and $25,623.93 respectively as farming losses.
[3] The Minister of National Revenue (the "Minister") reassessed the Appellant for the 1994 and 1995 taxation years by Notices of Reassessment dated October 6, 1997 to disallow farming expenses in the amounts of $4,239 and $2,709, which have not been appealed, and to restrict the Appellant's remaining farming losses in accordance with subsection 31(1) of the Income Tax Act (the "Act").
[4] The Appellant appeals the reassessments and submits the reassessments are incorrect on the grounds that the Minister has wrongfully restricted the taxpayer's farming losses pursuant to section 31 of the Act.
[5] The Appellant operates a farm in Hartland, New Brunswick. The farm is operated year round on a full time basis. The Appellant's farming operations consist of raising beef cattle and growing crops. By the taxation years in question, the Appellant had invested over $350,000 in capital. The farm was originally 200 acres of land and now exceeds 700 acres. The farm is well organized, the Appellant does some of the bookkeeping, participates in the making of the farm decisions and does some physical work that does not involve heavy manual labour.
[6] The Appellant is employed as a registered nurse. She earned, from her job as a nurse, income of $41,100.60 in 1994 and $43,069.23 in 1995. The Appellant states that the income she receives from her nursing job helps operate the farm and that without it the farm would not have been able to operate since the beef market was in a down turn.
THE MINISTER'S ASSUMPTIONS
[7] In assessing the Appellant, the Minister relied on the following assumptions:
a) at all material times the Appellant was employed full time as a nurse;[1]
b) the Appellant earned $41,110.60 and $43,069.23 from her full time employment as a nurse during the 1994 and 1995 taxation years respectively;1
c) the Appellant reported farming income (losses) as follows:
Taxation Gross Net
Year Income Expenses Income
1994 13,297.94 39,537.07 (26,239.13)
1995 38,825.51 64,449.44 (25,623.93)1
d) the Appellant's spouse has been farming since 1968 and he owned and operated the farm at issue from 1975 until 1988 when he declared personal bankruptcy;[2]
e) the Appellant purchased the assets of the farm in 1988 and 19891 and her spouse continued to operated the farm as a full time farmer;[3]
f) the Appellant's spouse was not an employee of the farming operation during the 1994 and 1995 taxation years;1
g) the Appellant's spouse is responsible for the majority of the primary duties relating to the operation of the farm including: maintaining the livestock, planting and maintaining the crops, maintaining the equipment, negotiating sales, purchasing supplies and bookkeeping;[4]
h) the Appellant provided capital for the farm operation;1
i) the farm operation was operating similar to a business partnership;[5]
j) the Appellant's chief source of income during the 1994 and 1995 taxation years was neither farming nor a combination of farming and some other source of income.4
EVIDENCE AT TRIAL
[8] During 1988 and 1989, the Appellant purchased the assets of the farm. She used personal savings as well as borrowed funds to acquire the assets. The purchase of assets included the purchase of seven head of cattle. From 1989 to 1999, the herd has grown from 7 to 156. Other farmland was acquired through lease, purchase and land clearing.
[9] In 1988, the Appellant changed her position as head nurse at the Carleton Memorial Hospital in Woodstock, New Brunswick to that of a shift nurse at the same hospital. The significance of this change was that as head nurse she worked five days per week (20 days out of 28 days) whereas as a shift nurse, she worked 12 days out of every 28 days. The time not on duty as a nurse was and still is spent on her farming and household activities.
[10] The Appellant used her nurse's income to supplement, augment and build the farm business.
[11] The farm is operated with the assistance of her spouse, her children and a part time employee. The farm, for the years in question, is a full time year round farming business.
[12] The exhibits filed by the Appellant as part of the evidence show the significant increase in livestock inventory and land acquisition. The capital value growth of the farm assets has grown from $89,300 in 1989 to $468,350 in 1999. Future projections for the year 2000 indicate net profitability (Exhibit A-6).
[13] While losses have been significant and continuous the farm has developed, grown and somewhat stabilized into a viable business.
ANALYSIS
[14] The Minister submits that the Appellant's chief source of income during the years in question was neither farming nor a combination of farming and some other source of income and that therefore according to subsection 31(1) of the Act, the deductible farming losses should be restricted.
LEGISLATION
[15] Subsection 31(1) of the Act reads as follows:
(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 businesses 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) 1/2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, 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 or 37.1" were deleted;
exceeds
(ii) the amount determined under subparagraph (a)(i).
(emphasis added)
JURISPRUDENCE
[16] Hence, the Court must decide what the taxpayer's chief source of income consists of. In The Queen v. Timpson, 93 DTC 5281, MacGuigan J.A. for the majority of the Federal Court of Appeal stated that deciding whether or not the taxpayer had a reasonable expectation of profit was only part of the test as it is useful in determining if it is "a source of income" but is of no help when determining if it is "a chief source of income". He then stated at page 5282:
We find this case to be on all fours with Poirier where we said (at 6336):
It is ... now clear that what is required for a determination that farming is a chief source of income is a favorable comparison of farming with the other source of income as to such matters as the time spent, the capital committed, and the profitability, both actual and potential. ...
Applying the present view of the law to the facts in the case at bar, it is patent to us that farming was in a subordinate position to the respondent's employment occupation. Farming comes closest to a rough equality on the time factor, but it lags far behind on the capital and income tests.
(emphasis added)
[17] In First Farm Inc. v.The Queen, 93 DTC 1237, this Court reviewed Hover v. M.N.R., 93 DTC 98 (T.C.C.). It is said at page 1239:
In terms of a reasonable expectation of profit, Bowman, J. of this Court in Hover v. M.N.R., 93 DTC 98, at page 106 has stated:
Once it is conceded, either by the very fact of applying section 31 or otherwise, that a business exists, the taxpayer's reasonable expectation of profit ceases to be a factor in determining whether he is to be subject to the restrictions of section 31. It is true that the concession implicit in the fact that the Minister applied section 31 is not necessarily binding on the court if the facts clearly establish that there was no hope of ever making a profit.
(emphasis added)
[18] Bowman, J. in Hover, supra, pages 107-108 commented on sources of income as follows:
The Act does not specifically require that the other source of income be either subordinate or sideline. It would seem that if farming can be combined with another source of income, connected or unconnected, it can as readily be combined with a substantial employment or business as with a sideline employment or business. Indeed, if the other source were merely subordinate or sideline it would not prevent farming alone from being itself the taxpayer's chief source of income without combining it with some other unrelated subordinate source.
Given the amount of income that the dental practice produced and the amount of cash it contributed to the farming operation it cannot be described as either subordinate to farming, in terms of the revenue that it produced, or a sideline business. It was an essential adjunct and complement to the farming operation. Without it the farming operation could not have been commenced nor could the substantial capital expenditure and start-up costs have been incurred. In this sense it formed an integral part of the combination. While I am of course bound to follow the principles enunciated by Dickson, J., I must attempt to apply them to the facts before me and I must conclude, if I am to give effect to the word "combination", that by "subordinate" he intended to include a source of income that although substantial is integral to the very existence of the farming operation.
(emphasis added)
[19] In Hover, supra, Bowman, J. further held at page 110:
I have therefore concluded on the evidence that the appellant's chief source of income was a combination of farming and dentistry and that section 31 does not apply to the determination of his income for the 1984, 1985 and 1986 taxation years.
[20] To support the Respondent's position, counsel for the Respondent cited Dixon v. R., [1998] 1 C.T.C. 2167 (T.C.C.). In that case, the Appellant was a nurse who decided to start a farming operation which consisted of breeding, training and racing standardbred horses. Her nursing income was around $47,000 per year and she invested about $162,000 into the farm. Judge Bowman of this Court found that her farming operation could not be her chief source of income nor a combination of farming and some other source of income. He stated at page 2171:
It was her principal occupation, the focus of her activities and her livelihood. However much time and money she spent on farming in 1994 and earlier years, it had not reached the point at which it can be said that she had changed occupational direction and committed her energies and capital to farming as a main expectation of income, to use the words of Dickson J. in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.).
[21] In this case, however, considering the findings that the Appellant invested considerable capital in the farm and that she became a shift nurse instead of a head nurse in order to spend more time on the farm, it can be said that "she had changed occupational direction and committed her energies and capital to farming as a main expectation of income".
[22] In Henderson v. The Queen, 98 DTC 1904 (T.C.C.), the Appellant was a civil engineer who decided to start a cattle farm. As an engineer, his income was in excess of $150,000 and he stated at the hearing that he hoped that some day the farm would yield a gross annual income of $30,000. Hence, the Minister assumed that the income derived by the Appellant's engineer position was, and in the future probably would remain, his chief source of income. Therefore, Judge Dussault of this Court found that farming could not be the Appellant's chief source of income nor a combination of farming and some other source of income. He cited a paragraph from The Queen v. Donnelly, 97 DTC 5499 (F.C.A.) at pages 5500-5501:
Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income.[6]
[23] In this case, the Appellant took her farming business seriously, she cut back the number of days that she worked as a nurse to be able to spend more time working on the farm. The farm was not a hobby or sideline business. I conclude the direction of the farm is leading up to substantial profitability and it is a reasonable presumption that in the future the farm will replace the Appellant's nursing income completely.
CONCLUSION
[24] The Respondent has concluded the farm had a reasonable expectation of profit. The Appellant made a substantial investment of capital into the farming activities. She performed physical labour, made organizational and administrative decisions. The amount of time spent was considerable and in excess of that she exercised as a shift nurse, that is, upon acquisition of the farm she reorganized her work schedule so that she could devote the majority of her work time to farming. The farm is fully operational beef farm with some hay sales. For the Appellant, the farm was and is indeed her principal preoccupation and occupation, that is, the focus of her daily activities and where she sought to achieve a livelihood. In 1994 and 1995, being a nurse, to the Appellant was a means to an end when she changed and reduced her role as a head nurse, she changed her occupational direction. For the taxation years 1994 and 1995, I find the combination of nursing and farming had become the taxpayer's chief source of income. Section 31 does not apply to the determination of the Appellant's income for 1994 and 1995 taxation years.
DECISION
[25] The appeals are allowed for 1994 and 1995 and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct losses in the amount of $26,239.13 for 1994 and $25,623.87 for 1995.
Signed at Ottawa, Canada, this 21st day of October 1999.
"D. Hamlyn"
J.T.C.C.
[1] Accepted by the Appellant at trial.
[2] Accepted by the Appellant at trial.
[3] The Appellant submitted she operated the farm as a full time farmer.
[4] Partially accepted by the Appellant at trial. The Appellant submitted the spouse was responsible for heavy physical labour.
[5] Not accepted by the Appellant at trial.
[6] This decision has been upheld by the Federal Court of Appeal.