Tax Court of Canada Judgments

Date: 19991221

Docket: 98-2945-IT-I

BETWEEN:

BENJAMIN LEVIT RIVEROS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] Mr. Riveros appeals from income tax assessments for 1994, 1995 and 1996 in which the Minister of National Revenue ("Minister") concluded that neither farming nor a combination of farming and some other source of income was his chief source of income in those years and, therefore, according to subsection 31(1) of the Income Tax Act ("ITA"), the loss from farming in each year is restricted to $8,750.00. The appellant's position is that he farmed for many years before he obtained employment with Chrysler Canada Ltd. ("Chrysler") in November 1992 and continued the same farm operation once employed; therefore, his chief source of income in the years under appeal was from a combination of farming and employment.

[2] The appellant and his family immigrated from Chile to Canada in 1975. His parents and grandparents farmed in Chile and he learned to appreciate the agricultural lifestyle. He originally trained in Chile as a teacher but eventually graduated as an agricultural engineer from the University of Chile.

[3] Mr. Riveros says he was attracted to Canada from information available at the Canadian Embassy in Santiago promoting farmland and technology available to farms in Canada. The embassy suggested he reside near London, Ontario since this was close to the University of Guelph, an institution with a high reputation for agricultural studies and research. In 1978 he took three courses in land economics at the University of Guelph and in 1980 enrolled in a post-graduate program in economics at the University of Western Ontario.

[4] When he first arrived in Canada, Mr. Riveros sought and obtained employment on a dairy farm in Woodstock, Ontario, near London. In 1978 he began looking to purchase a farm of his own. He was attracted to a dairy farm owned by a person ready to retire. The farm consisted of 120 acres with 18 milking cows, a milk quota and a licence for a gravel pit exploitation. He negotiated an agreement with a construction company for the gravel pit, received a recommendation from the Ontario Ministry of Agriculture, Food and Rural Affairs ("OMAF") for credit with the Canadian Credit Corporation and a favourable reaction from the latter corporation for a loan. However he could not obtain financing from an institutional lender, the manager of one lender telling him, he testified, that banks were reticent to lend money to recent immigrants. The plan to purchase this farm was aborted.

[5] Mr. Riveros continued to work and to save his capital. His wife was also employed. By 1983 they saved $22,000.00 and began again to look for a farm. This time he was more successful and in 1985 Mr. and Mrs. Riveros acquired a 100 acre farm in Wingham in Southwestern Ontario for $100,000.00. He began this farm operation in September 1985 and up to the time of trial has farmed various crops, a Hereford and Red Angus cow-calf operation and eggs.

[6] Mr. Riveros received financing for the acquisition of the farm from the Royal Bank of Canada, secured by a mortgage on the farm. He also received funds as a participant in the Beginning Farmer Assistance Program ("BFAP"), a program in which OMAF provided funds to new "bona fide" farmers; Mr. Riveros repaid the loan after five years.

[7] Mr. Riveros said the farm property consisted of a comfortable dwelling but had a dilapidated barn set aside for dairy cows and a shed. There was a complete lack of any machinery. The previous owner had rented the land to a neighbour for the two years before the purchase. The house on the farm had been rented to a couple who was using the barn for boarding horses. The horses were boarded in the upper part of the barn and the horses' waste was dumped onto the lower part of the barn and not subsequently removed. At the time Mr. Riveros acquired the farm the accumulation filled, according to his estimates, about two-thirds of the lower part of the barn and had to be cleared out.

[8] In Mr. Riveros' view, however, the land was "good" and there was room for improvement once it was cleared, levelled and drained, which he has undertaken and continues to do to the present time.

[9] Once he actually started farming the property in 1986, Mr. Riveros cancelled the lease of the land and planted feeding grain corn which, at the time, was a high revenue crop. He hired his neighbour to do the initial seeding and combining.

[10] Any income Mr. Riveros received from the farm was applied to make credit payments to buy basic farm equipment, building materials and livestock of mixed breed. Mr. Riveros acknowledged that he realized from the very beginning that since the enterprise lacked capital he would have to establish a good reputation to obtain credit. This has continued to be his "economic strategy" and, he says, has allowed him to increase his capital investment in the farm. He has supplemented his cash flow by producing approximately 300 dozen eggs per week.

[11] By 1988, after renovating his home, the house and its contents burned. There was no insurance on the house. Mr. Riveros' neighbour offered to lease him an empty house. Mr. Riveros and his family lived in that house and he worked on his own farm everyday attending to its ongoing business, feeding and tending the livestock and building a new home. The fire, Mr. Riveros stated, "put back my start-up of the farming business". Notwithstanding the fire, however, Mr. Riveros increased the farm's gross income from about $16,000.00 in 1988 to about $39,000.00 in 1991. He credits the increase in farm income to the acquisition of farm equipment, a new grain storage facility, reconditioning of silage and hay facilities, and the "practice of personal techniques of cultivation given by my professional agricultural background". Mr. Riveros is convinced he is in control of farm expenses and uses his credit to increase his capital investment in the farm.

[12] When Mr. Riveros was injured in an accident he received $25,000.00 in damages and purchased bonds with the money. He used the bonds as collateral for farm loans.

[13] In 1992 Mr. Riveros was concerned about the general depression in the price of farm product commodities as compared to farm commodities subject to managed supply, such as poultry and milk. He discussed this matter with an OMAF officer in charge of planning and developing. From this conversation he reassessed his farm operation and concluded that it should be redirected to milk production. However the acquisition of milk quota was beyond his financial capability and he is also of the view that quota will become obsolete in the near future. The most feasible alternative in the circumstances, he surmised, was the production of goat milk which is not subject to quota. Goats are small in size and easy to manage. The cost of maintaining goats is low. He determined that the minimum profitable size of herd for his farm was 100 units. Once goat milk production was running normally, he could supplement milk production with mild or feta fresh cheese to generate a stable income. In the meantime, he would continue with a cow-calf operation of Lemousin cattle.

[14] To put his plans into effect he required additional money. As a BFAP participant he was bound by its regulations and accordingly asked an OMAF officer if there would be any objection by the Ministry to him securing employment outside the farm; he would apply the income from employment to the farm. The OMAF officer advised him that employment is permitted.

[15] Mr. Riveros set several guidelines for any prospective employment outside the farm: any employment would have to have a flexible schedule and that he obtain the best remuneration for the least time allocated to it. In December 1992 he found employment at a Chrysler assembly plant in Bramalea, Ontario, approximately one hour travel time from his farm.

[16] The Chrysler assembly plant divides its 4,500 employees into three shifts of 7½ hours each. An employee, according to Mr. Riveros, has the ability to change shifts inside the same department if the change is required for any personal business of the employee. His shift work therefore was flexible and met the needs of the farm.

[17] Mr. Riveros stated that the standard work schedule at Chrysler is 1,560 hours per year with a possibility of having it reduced to 780 hours per year at the employee's request under a program for temporary part-time students. In the meantime, he said, he works at the farm approximately 2,600 hours a year, and probably more. He stated he realized when he commenced employment at Chrysler that he had only eight years available to him for employment before being compelled to retire at a pension not to exceed $600.00 per month. This, he declared, is a "cold" reality that he has been aware of since he bought the farm; the whole purpose of employment was to subsidize the farm.

[18] In 1993 Mr. Riveros acquired a new tractor and commenced making structure modifications to the barn for the purpose of adding housing for milking goats. The next year he built a grain storage bin and facilities for processing feed for cows and goats. In 1995 he designed a steel structure measuring 360 square metres and six metres in height. He was able to take advantage of his employment to discuss his drawings and calculations with mechanical engineers working at Chrysler.

[19] Unfortunately, in 1996 a fire destroyed the barn, grain storage, feed processor, skid steer and all of its contents. The heat of the fire also damaged part of the house. The barn was not insured. Mr. Riveros and his son then started to build a new steel shed having an estimated cost of $60,000.00. He stated that his time and attention was devoted to the farm and bringing the business plan he designed in 1992 to fruition.

[20] Mr. Riveros also designed a new barn with a milking parlour, cheese parlour, refrigerated storage, feed processor with goat pens and cow and calf confinements.

[21] During the years 1993 to 1996 Mr. Riveros earned the following employment income from Chrysler:

Taxation Year Income

1993 $45,145.00

1994 $48,807.00

1995 $40,322.00

1996 $45,457.00

[22] Mr. Riveros recorded farming income and losses during the years 1987 to 1996 as follows:

Taxation Gross Net

Year Income Expenses Income (Loss)

1987 $ 8,246.00 $31,407.00 ($23,161.00)

1988 $16,273.00 $44,715.00 ($28,442.00)

1989 $19,412.00 $50,091.00 ($30,679.00)

1990 $23,328.00 $52,228.00 ($28,900.00)

1991 $38,669.00 $65,359.00 ($26,690.00)

1992 $28,228.00 $57,300.00 ($29,072.00)

1993 $39,029.00 $66,857.00 ($27,828.00)

1994 $36,145.00 $68,956.00 ($32,811.00)

1995 $27,803.00 $56,935.00 ($29,132.00)

1996 $31,876.00 $60,618.00 ($27,742.00)

[23] The Minister pleaded, and Mr. Riveros acknowledged, that from 1987 to 1992 inclusive, Mrs. Riveros claimed the losses from the farm. He acknowledged at trial that both he and Mrs. Riveros paid for the farm, Mrs. Riveros making the mortgage payments. The Minister, however, in his pleadings, did not take issue with the fact that Mr. Riveros claimed all losses incurred in the farm business in 1994, 1995 and 1996 even though the business appears to have been owned by both him and his wife. The Minister's only allegation with respect to Mr. Riveros' claim of losses was that certain expenses such as goods and services tax refunds expensed, insurance expenses, accounting expenses and electricity expenses that were personal are not deductible in computing farm income and therefore his losses should be reduced. I agree the Minister was correct to reduce the farm losses in 1994, 1995 and 1996 to $28,964.58, $25,044.90 and $23,973.27 respectively. I have considered these appeals on the issues raised in the pleadings. That Mr. Riveros may be entitled to only one-half of the losses claimed, since he and his wife may have owned the farm business in equal interests, is not before me.

[24] Mr. Riveros claims that the farm is the centre of his activity where he can devote his professional training and realize the objectives of his desires. However, he is aware that to fulfil such ambitions he must acquire funds from elsewhere and these funds were available by means of being employed at Chrysler. His employment and the farm business are financially independent.

[25] Each case involving subsection 31(1) of the ITA turns on its own facts. The guidelines to be used in determining whether a subsection 31(1) assessment is a good assessment are found in the Supreme Court judgment of Moldowan v. The Queen, 77 DTC 5213, and other decisions of appellate courts. At p. 5216, Dickson J. (as he then was) opined that:

... 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 carried 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 lot look to farming, or to farming and some subordinate source of income, for his livelihood and who carried 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.

[26] The parties agree that Mr. Riveros carried on the business of farming. The issue between the parties is whether his chief source of income was from a combination of farming and his employment entitling him to be described as a class (1) farmer. At pp. 5215-5216, Dickson J. observed:

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.

[27] The factors referred to by Dickson J. are not to be considered disjunctively, but are to be considered cumulatively: The Queen v. Morrissey, 89 DTC 5080, per Mahoney J.A. at p. 5084.[1] All relevant factors, taken together, are to be used in considering the class of farmer to which the taxpayer belongs.

[28] Mr. Riveros immigrated to Canada to farm, among other reasons. His family background was in farming. Immediately on entering Canada he worked on a farm. There was no doubt in his mind that he would farm. He knew life would be tough and he and his family would have to sacrifice. His wife's income from employment was applied to the family's personal needs, of course, but the



remainder was applied in the early years to saving money to purchase a farm, and in later years to pay the mortgage on the farm. And the evidence is clear that the only reason Mr. Riveros sought employment was for farming purposes.

[29] Mr. Riveros' mode of life, commitment of time and capital, and dedication to farming all confirm his position that he is, and was, a full-time farmer who, on taking up farming in Canada, reasonably expected the farm to provide the bulk of his income or the centre of his work routine. Mr. Riveros altered the farm's direction in 1992 and obtained employment to finance this new direction. He has had his problems over the years with fires and damages that were not insured. He was quick to repair the damages. My appreciation of Mr. Riveros is that he will succeed in his endeavours and the farm will generate the bulk of his income.

[30] The farming activities of Mr. Riveros were planned with caution and reason. Mr. Riveros knew what he was up against. He discussed plans with Ontario government agricultural officials. He had his own background in agriculture as a reference. He took courses in agriculture and economics. His whole economic activity was directed to farming during the years in appeal.

[31] Chrysler permitted Mr. Riveros to absent himself from the assembly line if his presence was necessary on the farm. The ability to free himself from his employment was an important factor in Mr. Riveros choosing employment at Chrysler. His employment was for the benefit of, and subject to, the farm business. As in Miller[2] and in Hover v. M.N.R.,[3] Mr. Riveros' farming activity was not a sideline or subordinate in any way to his employment. He is not in the category of those who "earned their income in the city and lost it in the country".[4] On the contrary Mr. Riveros has gone to the city to ensure he can survive in the country.

[32] The appeals are allowed with costs, if any. Of course, he is not allowed to deduct personal expenses in computing his farm income and his farm losses will be reduced from those he claimed.

Signed at Ottawa, Canada, this 21st day of December 1999.

"G.J. Rip"

J.T.C.C.

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