Tax Court of Canada Judgments

Date: 20000823

Docket: 98-1593-IT-G

BETWEEN:

BRIAN ROY FINCH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard at Saskatoon, Saskatchewan on August 8 and 9, 2000. Mr. Finch and his wife, Brenda, testified.

[2] The Appellant has appealed assessments for his 1992, 1993 and 1994 taxation years restricting his farm losses pursuant to section 31 of the Income Tax Act (the "Act"). The following portions of section 31 are important to this case:

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 ...

...

(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.

Subsection 9(2) of the Act reads:

(2) Subject to section 31, a taxpayer's loss for a taxation year from a business or property is the amount of the taxpayer's loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source with such modifications as the circumstances require.

[3] Mr. Finch was born April 11, 1949 and raised on his parents' farm north of Kelvington, Saskatchewan, where he worked his parents' lands together with his father and a brother. Mrs. Finch was born on March 6, 1953, and was raised on her parent's farm, south of Kelvington, Saskatchewan, where she also worked on her parents' farm from early childhood. Mr. Finch lived with his parents on the family farm until June of 1971 when he married Brenda. Upon marriage Brian and Brenda lived on Mr. Finch's parents' farm in a house trailer, without running water or toilet facilities.

[4] In 1968 Mr. Finch took employment from November to May of 1969 as a labourer working upon a dam in northern Manitoba. With his wages he purchased a mower for cutting hay and a welder, both of which he used on his parents' farm. He worked on the farm throughout the summer and fall of 1969. During the period from November, 1969 to May, 1970 he again worked in northern Manitoba returning to his parents' farm in May 1970 where he worked with his father until harvest was completed in the fall. With his earnings of the previous winter he purchased a half share in a 706 IHC tractor. In September of 1970, and in contemplation of marrying and needing a farm of his own, Mr. Finch negotiated for a half section (320) acres of farm land being the E1/2 26-39-12-W2 for a price of $15,500. As Mr. Finch only had $7,500 he applied to the Farm Credit Corporation for a loan and upon the Farm Credit Corporation classifying him a being entitled under the statute loaned the balance of the purchase price taking a mortgage upon the land as security with a 29 year payment term. During the winter of 1970-71 Mr. Finch again took employment in northern Manitoba returning to his parents' farm in May. During the period May to November he again worked on his parents' farm and seeded his first crop on the land purchased in 1970.

[5] After their marriage Mr. Finch continued to work on his parents' land and Mrs. Finch continued to work on her parents' farm. They bought a cream separator and started milking Mr. Finch's cows and selling the cream. During the winter of the year 1971-72 they left their animals in the care of his father and they found employment at The Pas, Manitoba, where Brian worked as a caretaker of the skating rink and Brenda worked as a secretary in a store. In the spring of 1972 they returned to the farm where again Mr. Finch assisted his father and Mrs. Finch helped her father. In this season they seeded his land, the cows, then numbering 6, were milked and cream sold. Mr. Finch, using the combined money of himself and Brenda, bought a 14 foot IHC 100 series drill with grass seeder and packers.

[6] During the winter of 1972-73 they sought employment in Edmonton and both found jobs and worked during that winter. In May, 1973, they returned to the farm and Mr. Finch again helped his father and Brian and Brenda farmed their land. Again, cows were milked and cream marketed. In July, 1973 Mr. Finch purchased the SE1/4 19-39-11-W2 for $12,000 and, again, the Farm Credit Corporation assisted advancing a further $6,000 and combining said land in the security granted on the purchase of the prior half section. The $6,000 payment was a gift from Brenda's father. In 1973 Mr. Finch purchased a 1965 Deutz tractor with front-end loader, a one-way disc, harrows, grain auger, hopper box and grain trailer. Their herd at this stage had reached 20 animals. As Mr. Finch's father-in-law had sold his land, Brenda was free to help in all aspects of their family farm. In December they had their first child, Clint.

[7] Mr. Finch and his wife remained on the farm during the following winter, and in the spring of 1974, they commenced building a house and to do so borrowed from the Kelvington Credit Union. In September, 1974, Mr. Finch purchased two parcels of land totalling 15 acres adjoining his land. In 1974 the creamery to which they sold cream closed and their market for cream was lost. Thereafter the milk was fed to the pigs. In 1974 they added pigs and chickens to their operation.

[8] In 1975 Mr. and Mrs. Finch farmed his three quarter sections and worked with Brian's father in his father's farming operations. An 18 foot IHC vibrashank cultivator and a 14 foot IHC deep tillage cultivator were purchased. Their second child, Brandy, was born in March. Mrs. Finch operated field equipment and helped with the animal chores throughout the summer and fall of 1975.

[9] In 1976 Mr. Finch acquired a 460 Case combine and a cultivator. Mr. Finch and his wife farmed their land and still helped Mr. Finch's father. The herd consisted of 13 cows and they had pigs, goats and chickens. In 1977 they had 15 cows, together with pigs, goats, chickens and horses. A well was dug and the house connected up for water as were watering bowls for livestock. Mr. Finch still helped his father. In 1978 a third child, Neil, was born. Mr. Finch had 11 cows and they were milking the cows along with the goats. A 1954 three ton truck was purchased. Mr. Finch still worked with his father.

[10] In 1979 they started farming on their own. Mr. Finch purchased a nine foot hay scythe by trading in a 1969 IHC pull-type combine. Throughout all of these years all of the equipment that they purchased was old and second-hand. Together, they maintained and repaired it. In the vernacular, this is called "sweat equity".

[11] In January, 1980 Mr. Finch purchased a further 169.9 acres for $20,000.00 financed by Farm Credit Corporation. The combined loans were renewed for a further 29 years. In this year Mr. Finch had 28 days of employment as a diamond driller's helper. A 1968 IHC 856 tractor was purchased financed by the Canadian Imperial Bank of Commerce, a 50 foot sprayer and a #12 MF square baler, and a garden tiller were purchased. Their fourth child, Earl, was born in October.

[12] In 1981 Mr. Finch got most of three months off-farm employment during January through March as a diamond driller. During his absence from the farm his wife and children did the chores. The herd was then 17 cows plus the other animals. A water pump for dugouts and a bale trailer were purchased. Due to medical problems suffered by Mr. Finch, seeding was carried out by his wife and children. At this point, it should be appreciated that, since 1981, Mrs. Finch has operated the farm and handled the cattle at all the times that Mr. Finch has been away. In calving season, continuing for about two months and ending in May, this means checking the cows every four hours, day and night; herding a birthing cow from the cold outdoors into a calving shed, which is essentially unheated but a shelter; pulling the calf with bare, wet hands and arms and keeping this pattern up. If Mrs. Finch was working in the fields, their young children would check the cows and run out into the field and call Mrs. Finch if there was a problem. In 1981 there were 17 cows; today there are 101 cows. They have to be fed on the farm with hay in the winter; calves have to be weaned and fed chop and they have to be herded and checked in the pasture in the summer. All the while field work, machinery operation and maintenance must continue. Major machinery repairs had to wait for Mr. Finch's return at times, but Mrs. Finch operated the farm and repaired and maintained machinery. The two of them worked the farm in tandem and decided on farming practices together. To them and to everyone who was in the courtroom, they are a team. All of their equipment was old and second hand and cheap. They acquired other old machines for parts and repaired their own. Therefore, capital cost allowance and repair costs and capital costs were kept down. There is no barn, just a calving shed; they shelter their cattle with straw and hay bales. Simultaneously, until he began working in the Cominco mine near the North Pole in 1990, Mr. Finch was living in tents at nights during January, February and March in Northern Saskatchewan and the North West Territories and working outside during the days, diamond drilling. There it is often 50 degrees below. It was a tough, difficult life for the whole family and to this day it has not become easier because, since 1990 began, it has gone on for 12 months of the year as they tried to maintain their farm obligations and struggle to adapt to the agricultural marketplace. It has been a way of life that people on salaries and with benefits who work less than 40 hours a week in an office cannot comprehend and, in many cases, cannot believe exists in Canada.

[13] In 1982 the herd was 15 cows. Mr. Finch purchased a front-end loader with which to handle stacked bales. In 1983 Mr. Finch purchased an IHC 1086 tractor with cab financed by John Deere Financing. In 1984 Mr. Finch had close to three months off-farm employment in January through March, diamond drilling. In 1985 Mr. Finch obtained work in January until March in the North West Territories as a driller's helper. Mr. Finch's wife and children took care of the herd in his absence. Mr. Finch purchased a 14 foot Kello disc which was financed by the Canadian Imperial Bank of Commerce. He also purchased a hopper box and a utility trailer. Early frost conditions resulted in crop loss and a realization under crop insurance of $2,166.92 in place of the normal crop. No crop was combined; it was cut and baled for feed.

[14] In 1986 Mr. Finch purchased of 160 acres (NE 13-18-12) for $54,000. Farm Credit Corporation approved the acquisition and loaned Mr. Finch the purchase money plus additional funds with which to pay Mr. Finch's obligation to the Canadian Imperial Bank of Commerce on the purchase of the 1985 disc. The amounts advanced totalled $63,000. Mr. Finch also purchased 320 acres for $160,000. financed by Farm Credit Corporation. The loan was consolidated with the prior loans from Farm Credit Corporation. The land purchased in 1986 was sumerfallowed. To farm the now seven quarter section farm Mr. Finch purchased a 1979 IHC 1086 tractor with loader. The tractor was financed through John Deere Finance. Mr. Finch also purchased a 2000 bushel hopper bin. Drought and early frost conditions were encountered. With loss of crop in 1985 followed by loss in 1986 Mr. Finch started having difficulty in meeting financial commitments. In 1986 Mr. Finch had three months work in January through March, in northern Saskatchewan.

[15] In 1987 Mr. Finch got off-farm employment from February until May and applied his earnings to acquire an IHC 402 combine and a drill with packers. The Kelvington area farmers suffered from drought and $20,937.79 was received from crop insurance. Mr. Finch's loan with Farm Credit required payments of about $36,000 a year. In addition, payments to the Kelvington Credit Union were required. In 1987, various negotiations first began with creditors. In 1988 Mr. Finch secured off-farm employment for three months being January through March.

[16] During the period from January 1, 1972 until December 31, 1988, Mr. Finch showed net farm profits and during 12 of the 17 years his income from agriculture exceeded off-farm income even after the interest payments were charged as an expense. Mrs. Finch's calculations are as follows:

YEAR	FARM INCOME BEFORE INTEREST DEDUCTION	INTEREST DEDUCTION	NET FARM PROFIT	OFF-FARM INCOME
1972	$ 1,323.27	$ 922.63	$ 400.64	$ 2,508.49
1973	$ 646.12	$ 91.02	$ 555.10	--
1974	$ 2,193.57	$ 1,143.85	$1,049.72	--
1975	$ 2,172.95	$ 1,316.26	$ 856.69	--
1976	$ 4,555.52	$ 2,045.95	$2,509.57	--
1977	$ 5,450.96	$ 3,150.41	$2,300.55	--
1978	$ 4,501.38	$ 3,260.23	$1,241.15	--
1979	$10,325.60	$ 3,371.45	$6,954.15	--
1980	$ 7,113.12	$ 4,811.46	$2,301.66	$ 7,569.50
1981	$16,473.77	$ 9,188.87	$7,284.90	$ 4,920.18
1982	$16,998.50	$ 7,619.42	$9,379.08	$ 28.01
1983	$10,169.60	$ 8,465.44	$1,704.16	--
1984	$17,170.23	$ 9,329.20	$7,841.03	$ 6,502.51
1985	$11,207.84	$10,157.27	$1,050.37	$13,133.00
1986	$ 7,940.87	$ 6,914.07	$1,026.80	$ 2,858.84
1987	$ 7,062.00	$ 6,500.00	$ 562.00	$11,342.33
1988	$ 5,314.03	$ 3,653.77	$1,660.26	$12,712.53
	$130,619.13		$48,677.83	$61,575.39

[17] Early in 1989 Farm Credit Corporation threatened foreclosure against the lands and seizure and disposal of pledged farm machinery. Mr. Finch applied to the Farm Debt Review Boards apparently under both Canada's Farm Debt Review Act, S.C. 1986 c. 33 and Saskatchewan's Farm Land Security Act, SS 1984-5-6, C.F. 8.01. Mrs. Finch did virtually all of the negotiations, calculations and correspondence. The mediator arranged a debt adjustment with the Farm Credit Corporation which required Mr. Finch to pay forthwith $45,000 with the refinancing subject to Mr. Finch seeking and taking full-time employment off the farm until the debt was retired in order to earn at least $20,000 per year to inject into the farm. The $20,000 clause was a condition which Farm Credit officials imposed orally in May, 1989, during early negotiations. Their view was that without off farm income to carry their loan, the farm could not be made viable. This evidence came in as hearsay which was not objected to. However the Court finds that as a result of the May meeting, the Finches clearly understood that to be a condition of the 1989 settlement. Mr. Finch's father loaned him the $45,000 which was paid to Farm Credit Corporation upon interest owed. (Eventually, his father forgave that loan.) Mr. Finch secured a short term job as a driller's helper in the North West Territories until the end of March when employment was secured with Cominco. The employment required Mr. Finch to live in drilling camps in the Territories which moved from place to place as drilling programs were changed. Mr. Finch got time off to put in the crop with the help of his family and on September 1^st got further time off to help with harvest. All earnings went toward payment of the debt load.

[18] Commencing in January, 1990 Mr. Finch obtained a full-time mining job with Cominco to work 8 weeks in camp then 4 weeks at home at their mine on Cornwallis Island, 600 miles from the North Pole in what is now Nunavut. The family members performed the labour requirements on the farm in Mr. Finch's absence. A part of Mr. Finch's earnings was used to purchase a 601 White pull- type swather. Brian has no holidays but after the first five years employment he could and has taken extended leaves from time to time to work the farm. He works seven days every week for 11 hours per day when in and lives in motel-like accommodations.

[19] In January and December, 1992, purebred Shorthorns were purchased and added to the herd and, so that the cattle could be handled by Brenda and the children, a calving chute was purchased as well as a chop feeder. In 1992 the entire crop was lost from frost and there was no harvest and in 1993 the crop was snowed under and no harvest resulted. After further relief application to the Farm Debt Review Board resulted in a further compromise with Farm Credit Corporation in December, 1992.

[20] The Finches summerfallowed alternate halves of grain land every year, a normal Saskatchewan practice. However, they suffered from weather problems from 1987 on as follows:

1987 frost

1988 drought

1989 drought

1990 drought

1991 drought

1992 drought

1993 2 old combines broke down and before custom combining

could begin, the crop was snowed under

1994 wet late crop in the field over the winter

1995 frost

1996 frost

1997 frost

1998 slight frost

Low grain prices persisted and worsened through these years.

[21] Exhibit R-1 details the Appellant's financial history from 1987 through 1999. ("Farm Loss after adjustment" is the column showing Revenue Canada's assessment loss figures before the restriction was assessed under section 31). It reads:

BRIAN ROY FINCH

SCHEDULE OF INCOME AND LOSSES

Year	Salary	Farm Gross	Total Farm Expenses	Ratio of Expense to Income	Land Interest Included	CCA Included	Note	Farm Loss After Adj	Actual Farm Loss Recorded
1987	$11,842	$54,627	$54,065	1.0	$6,500	$8,868		$562	$562
1988	12,712	61,963	60,303	1.0	3,653	15,522		1,660	1,660
1989	32,808	73,392	110,369	1.5	69,065		(a)	(21,977)	(36,977)
1990	86,563	55,994	97,264	1.7	12,626	24,468	(a)	(56,270)	(41,270)
1991	75,083	78,775	130,449	1.7	19,902	18,438	(a)	(29,557)	(51,673)
1992	74,507	51,331	88,405	1.7		16,759	(b)	(50,110)	(37,074)
1993	72,601	101,479	132,512	1.3	42,820	15,199	(c)	(28,264)	(31,033)
1994	89,272	24,941	90,065	3.6	16,549	11,872	(d)	(60,099)	(65,124)
1995	87,228	20,477	90,605	4.4	15,304	6,546	(e)	(70,128)	(70,128)
1996	103,092	26,523	102,202	3.9	26,691	8,082	(f)	(75,679)	(75,679)
1997	104,620	24,938	90,832	3.6	6,989	6,222	(g)	(65,894)	(65,894)
1998	97,288	42,381	112,831	2.7	16,355	9,828		(70,450)	(70,450)
1999	81,661	58,413	122,158	2.1				(63,745)	(63,745)
	$929,277	$675,234	$1,282,060		$236,454	$141,804		($589,951)	($606,825)

Notes:

89-90 (a) Adjusted loss includes $15,000 cattle inventory election

91-92 (a) Adjusted loss includes $22,116 cattle inventory election

1992 (b) After audit and appeals adjustments of $9,080. Loss restricted

1993 (c) After audit and appeals adjustments of $2,769. Loss restricted

1994 (d) After audit and appeals adjustments of $5,025. Loss restricted

1995 (e) Loss restricted

1996 (f) Loss restricted

1997 (g) Loss restricted

[22] Mr. and Mrs. Finch's circumstances were very difficult. They were forced to deal with a number of government agencies because they were unable to pay their creditors and their property taxes. In particular these government agencies and the years and advice or orders they gave are as follows:

Year	Agency	Result
1986 (Exhibit A-1)	Farm Credit Corporation (Federal Government lending agency) Advisory Services Program	Provided financial and farm planning to the Appellant
1986 (Exhibit A-2)	Saskatchewan Farm Purchase Program (Saskatchewan Department of Agriculture)	Provided interest rebate subsidy for money borrowed to purchase farm land
1987 (Exhibit A-3)	Farm Debt Review Board (under the Farm Debt Review Act) and correspondingly a Board under the Saskatchewan Farm Land Security Act	3 November 1987 applied for assistance because behind in FCC payments
1989 (Exhibits A-10 and A-11)	Farm Land Security Board	16 January 1989 Offered mediation to Appellant
1989 (Exhibit A-13)	Farm Credit Corporation proposal accepted by Mr. and Mrs. Finch	7 June, 1989 terms: 1. (Oral) Get additional $20,000 per year off-farm income into the farm 2. Inject $45,000 by July 1, 1989 3. Etc.
1992 (Exhibit A-23)	Farm Credit Corporation proposal accepted by Mr. and Mrs. Finch	December 24, 1992 after another mediation new terms were agreed upon which have been carried out.

The Saskatchewan Farm Purchase Program, and similar program for home purchasers, was instituted to provide general interest subsidies to farmland and home purchasers in Saskatchewan during the high interest years of the 1980's. These were general programs available to everybody. Similarly, the Farm Land Security Board and the Farm Debt Review Board were instituted in the mid-1980s when governments realized how general and all-consuming the farm financial crisis had become.

[23] In 1999 Brian's father died and left him ¼ section of land and $80,000, which he used to pay down his indebtedness. As a result, on August 8, 2000 the Appellant's only debt to Farm Credit Corporation was about $21,000. His property taxes are current. In 1998 they purchased a new baler and financed it for $18,500 and a new conditioner and hopper bin; in January, 2000, they purchased a second-hand grain truck for $10,000.

[24] In 1992 the Finches converted to organic farming in order to obtain better grain prices. They are more than double normal grain prices. (The organic grain certification process to convert the land, and allow it to clear itself of fertilizers and chemicals required five years in 1992. Organic farming reduces costs dramatically by removing the expense of chemicals and fertilizers.) They also began the purchase of purebred Shorthorn cattle, purchasing 15 cows in January, 1992 and 12 cows in December, 1992 to convert the farm to a cow-calf operation. This conversion was occurring during the 1992 mediation process and before the December 10, 1992 Farm Credit Corporation proposal was presented, which they accepted on December 24, 1992. They are now certified organic grain growers and are in the process of obtaining qualification as organic beef farmers. They now have 101 cows and 65 calves. Everything is in Mr. Finch's name.

[25] These innovations in 1992 were a response to the weather problems that the grain operation had encountered.

[26] Their son, Clint, is now a journeyman high power lineman in Australia; Brenda has a Bachelor of Education and is in Australia; Neil has a Bachelor of Education and is presently in Saskatchewan; and Earl graduated from high school in 1998 and is presently at home. All of the children paid for their own educations with student loans.

[27] Mr. Finch's entire employment income went into the farm, as did all the gifts and inheritances he received from his parents. Until 1998, all of the equipment the Finches purchased was second hand, and often quite old. But it was cheap and the repair and maintenance costs were very low by any standard, including the repair and maintenance costs which new machinery requires. From the examination and argument of the Respondent during the Hearing, it appears that Revenue Canada found the old equipment objectionable – it reduced C.C.A. But some people, including the Finches, try to buy what they can afford, and try to pay for it somehow. This degree of responsibility has become rare in Canada; nonetheless, people are entitled to run their businesses as they see fit. The Court finds that their equipment purchases were responsible and business-like, and represent ordinary and modest operating purchases.

[28] The 1992 occurrences on the Finch farm must be itemized to emphasize their importance as a turning point for the Appellant and the farm. In chronological order they are:

1. January, the purchase of the beginning of an organic Shorthorn purebred cattle herd, leading to a cow-calf farm operation. This plus the December purchase of Shorthorn's constitutes a start up of a purebred cow-calf farm, and the phase out of the old mixed farm. It was the beginning of a learning phase.

2. May-June, the start-up of an organic grain operation without fertilizers or sprays in order to realize higher grain prices. This was also the beginning of a learning process and a transition, which at that time required a five year interval to achieve organic certification. Moreover, their hay and feed grains also required a somewhat shorter season than wheat, so as to avoid early frosts.

(These changes, together, were similar to a tax solicitor with an office practice converting to a courtroom criminal law practice. Both of these changes were known and understood by the Board mediator and by Farm Credit Corporation when the December, 1992, agreement was achieved.)

3. The realization by the Finches, their creditors and the mediator that after six years of weather problems and low commodity prices, they were in a major farm depression (which has since unexpectedly continued to 2000) which required very large off-farm income to enable the farm and the farmer to survive. For this to happen Mr. Finch's off-farm income, which commenced in 1990 at the insistence of Farm Credit Corporation, combined with the farm's income were together treated by the creditors, the mediator and the Finches as the chief source of income to meet the farm obligations for the years to come. The goal of all parties in both 1989 and 1992 was to restore the farm to economic viability (See Exhibit A-24, Farm Credit Corporation document). All of these knowledgeable parties treated Mr. Finch as a farmer with off-farm income, both in law and in fact.

4. On December 24, 1992, the Finches accepted Farm Credit Corporation's proposal.

[29] This case is different from other reported cases in that both Mr. and Mrs. Finch were born and raised on farms, farmed all their working lives and together farmed throughout their married life on their own farm. Mr. Finch had to go outside the farm operation to obtain the income necessary to operate the farm during what the Court finds is a farm depression caused by the continued persistent unusual weather conditions and continuous low commodity prices. The ordinary section 31 case occurs where a high income person acquires a farm which loses money.

[30] Since 1990, the farm operation and work has largely fallen upon Mrs. Finch. She has worked the crops, and tended the cattle without pay. The children have helped for very nominal pay totalling around $10,000 per year. They began chores at age 3, took responsible chores at age 6 and were doing some farm operations on their own at 11 years of age - all in a district that has 40 º below winters regularly. Simultaneously Mr. Finch devoted himself to the farm when out of the mine site and took all the leave that he could to participate in farm operations. A number of questions were asked relating to Mr. Finch's time at the mine in the Arctic. The premise of the questions was that he could not spend all that time in the Arctic and be on the farm at the same time. However Mr. Finch and the family (and the government farm authorities) understood from 1989 that Mr. Finch had to take this job if the farm operation was to survive, and at the same time Mr. Finch, Mrs. Finch, and the family would have to devote themselves wholly to the farm. This is what they did.

[31] In the light of these facts, the definition of "farming" in subsection 248(1) of the Act reads:

"farming" includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

There is no definition of a farmer in the Act. But Canada's Farm Debt Review Act, 1986, c. 33 describes a "farmer" in section 2 as an "individual ... engaged in farming". It then defines "farming" as "the production of field-grown crops..., the raising of livestock, poultry ..."

Black's Law Dictionary defines a "family farmer" as:

"A person or entity whose income and debts primarily arise from and family-owned and operated farm;"

The Appellant, Mrs. Finch and their children lived on the farm. All of them, from an early age, produced field-grown crops and raised livestock and poultry. The farm is still the residence of both Brian and Brenda Finch. (This is noteworthy because Brian's income taxes in the North West Territories would be less than in Saskatchewan.) It was the residence of all of their children while they grew up and did their chores. Farming was the principal occupation of each of them while they resided on the farm, whether they got paid or not. Brenda has foregone outside employment, a salary and possible benefits to operate the farm. All of Brian's debts arise from a family owned and operated farm. Brian obtained employment and the consequent salary for the sole purpose of operating the farm and paying down its debts. His salary has been devoted to paying those debts and operating the farm. They have no registered retirement savings plans or similar savings. In these circumstances, both Brian's income and his debts primarily arise from a family owned and operated farm as does Brenda's lack of income and their apparent lack of equity of any kind in the farm for many of its years of operation. It is a farm at which, and for which, the entire family works. It is and has always been a family farm.

[32] It was clear during the hearing that Revenue Canada misapprehended the concept of a family farm as it relates to the Finches when it reassessed them under section 31. In Rathwell v. Rathwell [1978] 2 S.C.R. 436, Dickson, J. speaking for the majority (including Laskin, C.J.) adopted the reasoning of Laskin, J. in his great and solitary dissent in Murdoch v. Murdoch [1975] 1 S.C.R. 423 at 439. Mr. Justice Bora Laskin, failed to move his fellow judges of that day. But he moved every provincial legislature in Canada to amend its laws to allow wives a half share in their spouse's property. In adopting Laskin, J.'s thinking for the majority of the Supreme Court of Canada in 1978, Dickson, J. described to the traditional view of the married woman and married man, when he said at page 443 of Rathwell:

"In earlier days the view was taken that on marriage "man and woman are one and that one is the man." The introduction generally of Married Women's Property Acts made it possible for wives to hold separate property but did little otherwise to improve the lot of married women. The custom by which real estate acquired by a married couple was taken in the name of the husband, coupled with the reverence paid to registered title, militated against wives. The view expressed in Rimmer that matrimonial property ought not to be governed by the strict considerations commonly applied between strangers survived Gissing and Pettitt, but was coldly received by the Court in Thompson v. Thompson".

That earlier cold view is reflected by the assessments in this case respecting Mr. Finch's employment income. The Minister's Reply pays reverence to the quantum of Mr. Finch's employment cheque. But the assessments failed to look to the cause of that employment which is the dire straits of the Finch family farm and of the family living and working on that farm.

[33] In The Queen v. Andrew Donnelly (F.C.A.) 97 DTC 5499 at 5503 Robertson, J.A. said:

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 is well known, section 31 of the Act is aimed at preventing "gentlemen" farmers who enjoy substantial income from claiming full farming losses: see The Queen v. Morrisey, supra at 5081-82. More often then [sic] 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.

[34] The Finches are not gentlemen farmers. In fact, this case is in direct contradiction to Robertson, J.'s judgment in the first paragraph quoted. Moreover, Mr. Finch's off-farm work was as a direct result of Farm Credit Corporation's requirement that Mr. Finch obtain $20,000 in off-farm income in 1989. This off-farm income was known and recognized in the mediation that followed, particularly in 1992, by both provincial and federal government agencies. To them the job was subordinate to the farm and Mr. Finch was a farmer within the meaning of Canada's Farm Debt Review Act.

[35] Moreover, that 1992 mediation and Farm Credit proposal in December, 1992 indicates that subjectively Mr. Finch expected to profit and objectively the government authorities expected that the farm itself would be viable with the off-farm income in 1992. Those determinations were prospective and did not constitute the hindsight of the years of drought and frost which followed, accompanied, as Mrs. Finch pointed out, by very low farm commodity prices. None of these continuous disasters could be foreseen. Furthermore, the December, 1992 proposal terms were met by the Finches in 1993 and 1994 despite their subsequent vicissitudes. To the Court this means that they expected a profit and thought, as Mrs. Finch testified, that within 2 or 3 years from December, 1992 they would be clear of arrears of debt and that Mr. Finch could quit his mining job and just farm. The Court believes that to have been correct in each of 1992, 1993 and 1994. If that had occurred, the profit from the farm would have been significant, because it would have supported the family in the same way that it had during its earlier profitable years. It might have been modest, but that is their way of life and they could have lived off of it on the farm without any outside income. But that could not occur in the face of continuing drought and frost conditions, which reduced grain sales as follows:

1989 $41,493

1990 $21,688

1991 $19,764

1992 $17,249

1993 $ 6,021

1994 nil

1995 $7,326

(Exhibit R-2)

[36] For the same reasons, cattle feed problems related to the weather caused feed costs to rise and their second hand farm machinery purchases (because they could not afford new machinery) resulted in repair costs in the $10,000 to $15,000 range which the Court finds are very modest for a farm operation of this size.

[37] Mrs. Finch (the farm's bookkeeper) was asked to estimate the income which the farm could achieve from organic grain farming. She estimated wheat production, on average, as follows:

Seeded acres 240

Bushels per acre x25

6,000

Organic Price per bushel

$5 - $8 (average calculated by the Court) $6.50

$39,000

They expect their Shorthorn herd (presently 100 cows) to become a total of 120 cows. Annual calf production should then be about 100 calves which, carried over the winter, are presently selling at around $750 per head according to Mrs. Finch's evidence. This would yield:

$75,000

Total: $114,000

$114,000 and constitutes what the Court considers to be an average, conservative, income to the farm as taken from Mrs. Finch's testimony. The farm's average expenses claimed from 1992 to 1999 inclusive are between $103,000 and $104,000 per year, including about $10,000 per year of interest and capital cost allowance. (Interest costs are now reduced significantly.) To the Court this amounts to a viable farm with "significant" income. To expect that is to expect a reasonable profit. It is clear that the Farm Debt Review Board and Farm Credit Corporation thought that in 1992, or they would never have permitted that deal to proceed.

[38] However the Court must determine objectively if the Appellant had a reasonable expectation of a significant profit in 1992, 1993 and 1994 prospectively, having regard to his income in those years.

[39] For this purpose, the Court finds that the Appellant was in fact starting up an organic grain and a Shorthorn cow-calf operation in 1992. Therefore, the Appellant is entitled to a start up period. While Dickson, J.'s criteria were laid out for the "taxpayer", this is a true family farm. Mr. and Mrs. Finch are and have always been a team. Thus, the Moldowan and other judicial criteria should be applied to them jointly. Using the criteria described by Dickson, J. in Moldowan v. The Queen, 77 DTC 5213, the Finches had both profits and losses in their previous 20 years of farming; they had complete practical training; their course of action was to develop a cow-calf operation and to operate an organic grain farm with the existing equipment and land and to use off-farm income to help pay off debts and operate the farm pursuant to the deals they had made and were making in 1992 with the approval of the Farm Debt Review Board and Farm Credit Corporation. As calculated, the venture had a reasonable expectation of a reasonable profit.

[40] The question then remains as to whether the Appellant's employment income and the farm income, together, constitute a chief source of income. Bowman, J. reviewed this question in Dr. John V. Hover v. The Minister of National Revenue, 93 DTC 98, an "old" 1990 tax case. After extensive quotes from Moldowan he said:

The aspect of "combination" causes me concern. We have it on high authority that there is no reason why there should be any connection between farming and another source of income with which it is combined to create a chief source of income. We have it on equally high authority that a "combination" cannot mean a mere addition of two sources (see also The Queen v. Poirier). I am faced therefore with the conceptual problem of determining whether two unconnected sources of income which bear no physical relationship to one another can be combined into one chief source. The Supreme Court of Canada dealt with the question in the following frequently quoted passage in Moldowan at page 5216:

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 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 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.

The portion of the passage quoted that causes me concern is contained in the description of a category II farmer, in the words:

farming and some subordinate source of income

(emphasis added)

and in the subsequent portion:

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.

(emphasis added)

The same language was used by the Federal Court of Appeal in The Queen v. Roney, 91 DTC 5148 at 5153-4. At page 5155, Desjardins, J.A., speaking for the court states:

In the light of the evidence before us, I do not think that the respondent was a person whose major preoccupation was farming. He was someone who was testing the water, so to speak. For him, farming was a sideline.

The same cannot be said of Dr. Hover. Farming was for him no sideline nor was he merely testing the water. He had plunged fully and without reservation into the water. As early as 1984, and increasingly thereafter, it was for him a major preoccupation. If Class II farmers are those who carry on farming as a sideline business, as Moldowan and Roney suggest, I cannot conclude that Dr. Hover falls into that category. His commitment of time, capital, energy and dedication to farming precludes such a finding.

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.

[41] In the light of these and other comments, the following should be pointed out in this case:

1. Farming was the Appellant's only business, and it was a family farm in every sense of the phrase.

2. Mr. Finch took permanent employment in 1990 to help carry the farm on the direction of Farm Credit Corporation and the Farm Debt Review Board to save the farm, expecting it would only require two or three years of employment, whereupon it would be making a reasonable profit and he could quit his job. Moreover, all of that income and all of the gifts Mr. Finch received went into the farm. In these circumstances, the question becomes: "How much more 'combined' can you get?"

3. The continual, long-lasting occurrences of weather and low prices which have been described, are real and are public knowledge. They have occurred to farmers generally in North America and constitute a farm depression, which in this Court's view exceeds the farm disaster of the Great Depression of the 1930's: that view is generally and publicly expressed throughout the North American agricultural industry. Every year, something different and unexpected has happened which has prevented a recovery - the loss of the Crow Rate in western Canada, the removal of rail lines and cheap transport, drought, frost, low prices, higher costs (Mr. Finch testified that during the last five years when cattle prices rose, farm equipment prices associated with a livestock farm doubled), higher fuel costs, and the amalgamation of farm suppliers and customers into oligopolies. More than 80% of Saskatchewan farmers work at off-farm jobs to survive.

4. The water analogy of Desjardins and Bowman, J.J. is rather pretty in those cases compared to the Appellant's: he took a job to try and get his farmer's head above the water.

[42] In this case the Finches looked to farming and the employment income for their livelihood. The farm was their livelihood for almost 20 years before full-time employment was required so that they and their farm could survive. Mrs. Finch worked the farm while her husband was away at the mine in a manner that would shame the average employee. They are a team and he came back to the farm whenever he could to work it and, together, they put all of this employment income into it as they had agreed to do. It was not a sideline business to either of them - it was their whole life and they have devoted their lives to it. It was the centre of their work routine for both of them and the major preoccupation of each of them. All of their capital and income was devoted to it and all of their time was devoted to it. His job was only taken to keep the farm operating. With that assistance, and on a start-up basis, the farm operation had a reasonable expectation of achieving a significant profit as a result of the conversion in 1992 during each of 1992, 1993 and 1994. The combination of the income from the farm and from Mr. Finch's employment constituted a chief source of income in this case. The appeal is allowed.

[43] In the Court's view this assessment and appeal should never have occurred for the following reasons:

1. Robertson, J.A.'s judgment as quoted in Donnelly described a reasonable government policy respecting professional farmers;

2. the fact that there are not cases brought by the Government of Canada where farmers in this position have been in the Courts;

3. the mediations of 1989 and 1992 by provincial and federal government bodies and their requirements upon the Appellant to obtain employment which were repeatedly told to the Respondent;

4. the great majority of farmers across Canada are in similar positions and file income tax returns reporting that to the Respondent;

5. the farm depression which is general public knowledge and is surely known to the Government of Canada; and

6. the fact that the organic and cow-calf conversion start-up occurred in 1992.

This view is not intended to point a finger at either the assessment auditor or the Justice counsel. The evidence is that the Finches copied various correspondence respecting these assessments to high government officials and representatives. Thus, it appears that Revenue Canada may have some kind of a bureaucratic number of years beyond which the losses are reassessed, which was applied in this case.

[44] In these circumstances, this case is an abuse of the Appellant and of the Court process. It required him to hire a very able and well known farm and commercial lawyer, who has approximately 45 years experience at the bar and is well experienced in tax litigation. He conducted the case efficiently and well. The Appellant is entitled to the equivalent of solicitor-client costs. The case began in 1998 and the trial lasted a full day and one-half in Saskatoon, although two full days were correctly set aside for the Hearing. This judge practised in Saskatchewan for more than 25 years. The preparation and conduct of a two-day trial by a counsel junior to Mr. Sanderson, would require a modest fee of about $30,000 for a two-day trial through to 1990. This Hearing only lasted a day and a half, because of the thorough preparation and efficient conduct of counsel. For these reasons, the Appellant is awarded costs, which are fixed in the lump sum of $25,000.

Signed at Vancouver, British Columbia, this 23rd day of August, 2000.

"D. W. Beaubier"

J.T.C.C.