Date: 19990107
Docket: 96-1630-IT-I
BETWEEN:
BRIAN J.P. YOUNG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on December 4, 1997, at Edmonton, Alberta, by the Honourable Judge M.A. Mogan
Reasons for judgment
Mogan, J.T.C.C.
[1] In the taxation years 1991, 1992 and 1993, the Appellant was a full-time employee at a petrochemical facility in Alberta and he also operated a farm. In each of those years, the Appellant's employment income was in the range of $70,000 and his farm suffered a loss in the range of $20,000. When computing income for each of those years, the Appellant deducted the full amount of his farm loss from his employment income. When assessing tax for those three years, the Minister of National Revenue disallowed the deduction of the full amount of the farm loss but allowed the Appellant to deduct the restricted farm loss under subsection 31(1) of the Income Tax Act. The taxpayer objected to those assessments. In response to the objections, the Minister allowed the full amount of the farm loss as a deduction for 1993 but confirmed the assessments for 1991 and 1992 on the basis that the Appellant could deduct only the restricted farm loss. The Appellant has appealed with respect to the taxation years 1991 and 1992 and has elected the informal procedure.
[2] By allowing the deduction of the restricted farm loss for 1991 and 1992, the Minister has acknowledged that farming is a business for the Appellant and not a hobby. In other words, the issue in this appeal is not "reasonable expectation of profit". The only issue is whether the Appellant's chief source of income for 1991 and 1992 was farming or a combination of farming and some other source of income within the meaning of subsection 31(1) of the Act. In recent years, there have been a number of significant cases in the Federal Court of Appeal interpreting and applying subsection 31(1). In The Queen v. Poirier, 92 DTC 6335, in a short unanimous judgment, the Court stated at page 6336:
... It is also now clear that what is required for a determination that farming is a chief source of income is a favourable 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. ...
[3] Before attempting that comparison, it is necessary to consider the circumstances in which the Appellant was employed and also carried on his farming operation. The Appellant was born in 1954 on a mixed farm northeast of Prince Albert in the province of Saskatchewan. In 1966 (when the Appellant was 12 years of age) his family moved to Alberta and eventually to another mixed farm near Joffre which is about 12 miles east of Red Deer. Throughout the time when the Appellant finished school and went on to college and university, he spent weekends at the family farm and made himself available for projects like seeding and harvesting. When he finished his formal education, it was his intention to farm but, during the 1970s, the prices of grain were high with the result that the value of land was also high. In the latter part of the 1980s, the prices of grain and other farm commodities had generally declined and the value of land had declined accordingly. For example, land near Joffre which was selling in the 1970s for $1,200 an acre was selling in 1988 for approximately $600 an acre.
[4] In 1988, the Appellant was married with three children who were born in 1979, 1982 and 1987. In 1988, the Appellant and his wife purchased a quarter section of land (160 acres) near Joffre just one mile west of where the Appellant's father and brother farmed. The quarter section was what the Appellant called bare land because it did not have any buildings or fences. It cost the Appellant $112,000 at $700 per acre. The Appellant and his wife raised a down payment of $26,000 from the sale of their house in town and placed a mortgage of $86,000 on the quarter section to finance its purchase. Within a year, the Appellant had built a dwelling for his family on the farm at a cost of $82,000 and he sowed his first crop in 1989. Because the Appellant was short of money, it was his intention to borrow from his father and brother whatever equipment was necessary to farm his new land.
[5] The Appellant's off-farm employment was working for Novacor Chemicals Ltd. ("Novacor") at a facility three miles east of his farm. He was an area emergency director co-ordinating emergency responses. He was not an emergency response person in the traditional sense of being a fire-fighter or a para-medical person. His job was to co-ordinate operational activity within Novacor to minimize process upsets which are the events that might call for an emergency response. According to the Appellant, he had expertise on the plant site and was trusted to manage an emergency situation from an operational and loss prevention and medical point of view. Basically, his job was to manage emergency situations.
[6] Throughout the 1991 calendar year, the Appellant worked three 12-hour shifts each Monday, Tuesday and Wednesday. The 36 hours which he worked during those shifts were the only hours he worked for Novacor each week. The rest of his time was available for farming. In 1992, his duties at Novacor changed and he worked a regular 40-hour week Monday to Friday at eight hours per day. The Appellant did emphasize, however, that his job at Novacor in 1992 was result-oriented and not time-oriented. He was not tied to a particular shift or time schedule. He could choose the eight hours that he worked each day. In cross-examination (Transcript p. 56), the Appellant agreed that in 1991 and 1992 he worked an average of five hours per day on the farm for a weekly average of 35 hours. Therefore, in the two years under appeal, the Appellant's time spent at farming was about equal to the time spent at his employment by Novacor.
[7] In 1991, the Appellant was growing approximately 145 acres of barley on his quarter section. He would do some tillage before seeding and then seed by the middle of May. He borrowed his brother's equipment both to sow the seed and to harvest his barley in the fall. Barley was selling for approximately $1.25 per bushel in 1991 compared with a price of approximately $3.00 per bushel at the end of 1997. In 1992, the Appellant changed to growing beans and canola but lost part of his crop because of bad weather that summer. Set out below is a table prepared from Exhibits A-1 to A-7 inclusive showing the Appellant's income from employment and the result of his farming operation for each of the years 1991 to 1996.
|
Source |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
|
Employment |
$75,542 |
$67,580 |
$70,652 |
$72,802 |
$76,096 |
$78,626 |
|
Farm Revenue |
15,539 |
11,590 |
38,810 |
40,953 |
40,004 |
52,927 |
|
Farm Expenses |
37,685 |
30,435 |
65,079 |
63,887 |
64,882 |
69,115 |
|
Farm Loss |
22,146 |
18,845 |
26,269 |
22,934 |
24,878 |
16,188 |
[8] In 1991, the Appellant and his wife decided that they would change from being grain farmers to raising Arabian horses. Over the next two years, they spent time educating themselves with respect to the breeding, raising and training of Arabian horses. In 1993, they constructed a significant building 185 feet by 65 feet wide. At the front end of the building was a barn facility with 12 stalls for horses, a tack room for tack boxes and a washroom. At the other end of the building was a heated arena in which horses could be trained during the winter months. The barn/arena facility was constructed at a cost of approximately $130,000 but it was not available to accept any horses until October 1993. This change in direction which the Appellant's farm took in 1993 may have prompted the Minister to allow the deduction of the full farm loss for that year. This is only conjecture on my part because there is no evidence with respect to the Minister's reasoning. In any event, I am required to decide the "chief source of income" issue for only 1991 and 1992.
[9] As stated by the Federal Court of Appeal in the passage from Poirier quoted above, I am required to consider such matters as time spent, capital committed, and profitability both actual and potential. I have already concluded in paragraph 6 above that the Appellant's time spent at farming in 1991 and 1992 was about equal to the time spent at his employment by Novacor. Before considering the other two matters (capital committed and profitability), I will be guided by the more recent decision of the Federal Court of Appeal in The Queen v. Donnelly, 97 DTC 5499 in which Robertson J.A. stated at page 5500:
A determination as to whether farming is a taxpayer's chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer's other income source in terms of capital committed, time spent and profitability, actual or potential. The test is both a relative and objective one. It is not a pure quantum measurement. All three factors must be weighed with no one factor being decisive. 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. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act. ...
[10] With respect to capital committed, the Appellant and his wife purchased a quarter section of bare land in 1988 for $112,000 investing $26,000 of their own capital and obtaining a mortgage for $86,000. Almost immediately, they built a house costing $82,000. If I allocate the cost of land between the house (no more than one acre) and the farm (159 acres), and then ignore the tiny portion of cost referable to the house, it can be seen that the Appellant and his wife had only $26,000 of their own capital and $86,000 of borrowed capital invested in the farm when the purchase closed near the end of 1988. Apart from putting up fences, there is no evidence of any other construction on the land until the summer and fall of 1993 when the barn/arena facility was built. In other words, during 1991 and 1992, the only significant capital which the Appellant and his wife committed to farming was the cost of the bare land. Because the Appellant's other source of income was employment and not some business or professional practice, he did not have any capital committed to his employment. On a stand-alone basis, capital committed favours farming as a "chief source" but the nature of employment does not require any capital to be committed by any employee.
[11] In my opinion, if a taxpayer operates a farm as a business (not a hobby) and seeks to apply his whole farm loss against income from some other source, the criterion of capital committed is less relevant if the other source of income is employment which does not require the investment of any capital at all. To permit any kind of comparison, each source of income should require the investment of some capital as in an active business, the practice of a profession or the ownership of real property or securities. Otherwise, an individual earning a salary of $500,000 could easily create a "chief source" factor in his favour by purchasing a farm for $100,000. The Federal Court of Appeal stated in Donnelly that all three factors must be weighed with no one factor being decisive. I am weighing all three factors but placing relatively little weight on the factor capital committed for 1991 and 1992.
[12] Profitability is the Appellant's stumbling block. It is a fact that his farm operated at a loss in each year from 1991 to 1996. I am concerned, however, only with 1991 and 1992. The most important amounts in those two years are gross farm revenues of $15,539 in 1991 and $11,590 in 1992. See the table in paragraph 7 above. Even if the Appellant had no farm expenses at all in 1991 or 1992 and his gross farm revenues were pure profit, such notional profit in 1991 would be only 20% of his employment income and, in 1992, would be only 17%. There were, of course, substantial farm expenses which not only exceeded gross farm revenues but created losses of $22,146 in 1991 and $18,845 in 1992. See the table in paragraph 7 above. I cannot be persuaded that farming was the Appellant's chief source of income, either alone or in combination with some other source, in the years 1991 or 1992.
[13] The Appellant's representative relied heavily on the decision of the Federal Court of Appeal in The Queen v. Graham, 85 DTC 5526. I adopt the manner in which Graham was distinguished by the same Court in Donnelly (supra) at pages 5502 and 5503. In particular, at page 5503, Robertson J.A. stated:
... 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. ...
In the present appeal, I find that the Appellant in 1991 and 1992 was not an "otherwise full-time farmer" who was forced to seek additional income in the city. On the contrary, the Appellant purchased his quarter section of land for farming three miles west of the Novacor plant where he was a full-time employee. For the Appellant, farming was a "sideline business" as those words were used by the Supreme Court of Canada to describe a class 2 farmer in Moldowan v. The Queen, 77 DTC 5213 at 5216. In each year under appeal, the Minister has permitted the Appellant to deduct the restricted farm loss of $8,750. The Appellant is not entitled to any greater relief. The appeals are dismissed.
Signed at Ottawa, Canada, this 7th day of January, 1999.
"M.A. Mogan"
J.T.C.C.