Tax Court of Canada Judgments

Docket: 2003-830(IT)I

BETWEEN:

CAROL A. KELLY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on November 7, 2003 at Vancouver, British Columbia

Before: The Honourable Justice T. O'Connor
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Shawna Cruz

____________________________________________________________________

JUDGMENT

          The appeal from the reassessments made under the Income Tax Act for the 1998 and 1999 taxation years is allowed, without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 27th day of January 2004.

"T. O'Connor"

O'Connor, J.

Citation: 2004TCC45

Date: 20040127

Docket: 2003-830(IT)I

BETWEEN:

CAROL A. KELLY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

O'Connor, J.

[1]      The issue in this appeal is whether the Appellant's farm losses in the years 1998 and 1999 are fully deductible or as contended by the Minister of National Revenue ("Minister"), limited to the amount provided for in section 31 of the Income Tax Act.

[2]      Initially there was considerable disagreement between the Appellant and the Respondent on the amounts of the various expenses disallowed or varied. There were three different businesses carried on by the Appellant and the expenses and income related thereto are shown on the 1998 and 1999 farm income statements, the 1998 and 1999 greenhouse rental statements and the 1999 bookkeeping/tax statement all of which form part of these Reasons for Judgment and appear at the end of the Reasons. As counsel for the Respondent explained at the hearing of this appeal I need not be concerned with analysing all of these figures because the Minister will be able to calculate the exact amounts of the income or losses of the three businesses based upon the said annexed statements which evidence the agreement of the parties on the various amounts. For example, taking the 1998 Farm Income Statement, wherever there is a checkmark beside a disallowed farm expense the Minister has now conceded that that amount is to be allowed in addition to the amount allowed at the objection stage. So in the 1998 Farm Income Statement the first checkmark is beside the figure $2,447.26 for Feed, etc. This means the Appellant is allowed the expense of $2,447.26 in addition to the $1,873.53 for a total amount allowed of $4,320.79.

[3]      Where an amount is struck out, for example the $247.80 for supplies, the Appellant has agreed that that amount has been correctly disallowed.

[4]      Where there is a checkmark and a new number entered, for example the $2,023.10 for Motor vehicle the Minister has conceded that $2,023.10 is the amount to be allowed.

[5]      The foregoing comments apply to all of the annexed statements.

[6]      Since all amounts have been agreed to the only issue in this appeal, as mentioned, is whether the farm losses in the years 1998 and 1999 to be calculated from the annexed 1998 and 1999 Farm Income Statements are fully deductible or limited to the section 31 amounts.

[7]      I find the principal facts to be as follows:

a)        During 1998 the Appellant was employed as a chief financial officer by the Cheam Indian Band earning a salary of $41,743.00. In 1999 for health reasons she took a lesser position as an Accounting Supervisor at a reduced salary of $36,080. Her hours of work were essentially 8 a.m. to 4 p.m.

b)       Originally the Appellant and her husband owned a 43 and a half acre farm used principally for the breeding and care of Simmental cows. In November 1997, the Appellant and her husband sold that first farm principally because of serious health problems affecting the Appellant and they subsequently acquired a smaller farm near Chillawack, British Columbia having 2.28 acres upon which were located their residence, a barn, some greenhouses and some pasture.

c)        For the first three years with respect to the smaller farm the Appellant states "I had tremendous expenses ... on the farm because it had to be ... fences built. It had to be laid out for the animals. We boarded the animals out while we did all the work that had to be done. As you can see from 1998 to 2002 the losses were quite high the first three years and then the next two they started to come in line.

d)       The exact loss figures are set out in the Appellant's Counter Reply and are as follows:

1998 - $20,032.00

1999 - $22,000.00

2000 - $20,125.82

2001 - $3,063.63 Separate Statements Farm portion

2002 - $471.26 Separate Statements Farm portion

e)        The Appellant further states: "...and so like I say, I've always been a full-time farmer, I've worked out, of course to support the farm, my family but I've always considered the farm - I had always hoped the farm would provide an income, a living, at some point. I was getting to the breakeven point in 2002 ..."

f)        The Appellant produced a diagram of the smaller farm. It contained the principal residence. Also the Appellant and her husband put a fence in and a paddock cement down for the animals. There was a barn at the back of the house, in essence a big workshop, three greenhouses and stalls for the animals. The Appellant also stated "... we had two tractors. We had a trailer for hauling the animals. We had a manure spreader, a chopper, a - two hay wagons. When - you've perhaps seen them, bale lifters that put the - you put the bales right on. You drag it behind. The baler, we had all those things, and ...".

g)        In 1998 and 1999 the Appellant and her husband had approximately 6 to 8 Simmentals on the smaller farm. In 1997 and prior years they had on the larger farm approximately two to three times that number of cattle. The smaller farm was sold in July of 2003.

h)        With respect to time spent in farm activities the Appellant indicated that morning and evening feedings would take three to four hours a day and she spent further time in the evening on bookwork for the farm. The bull calves were sold for breeding stock to beef farmers, the females would be sold to other breeders. All animals were purebred registered animals.

j)         The sale income in 1998 was approximately $7,000 and in 1999 approximately $6,000.

k)        The Appellant and her husband also attended fairs and in particular the Pacific National Exhibition ("PNE") fair where they would show their Simmentals. There were approximately three small fairs of approximately two to three days each in 1998 and 1999 and the big fair, the PNE fair which lasted six days each year.

Submissions

[10]     The Appellant submits that during the relevant years her primary source of income was a combination of farming and some other source namely her employment income which was used to acquire farm assets and pay farm expenses. Therefore her losses should not be restricted. She points to the three basic hectors of capital employed, time spent and profitability, both actual and potential. Counsel for the Respondent points to the low amount of income, the considerable losses in the years in question, the health problems of the Appellant which prevented her from any serious physical work on the farm and concludes that the losses should be restricted as provided for in section 31 of the Act.

Analysis and Decision

[11]     The term "farming" is defined in subsection 248(1) of the Act as follows:

"Farming" - "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;

[12]     The leading case on the question raised in this appeal is the Supreme Court decision in Moldowan v. The Queen, 77 DTC 5213. It is useful to quote Dickson J. at page 5215 et seq in commenting on subsection 13(1) (now section 31):

The next thing to observe with respect to s. 13(1) is that it comes into play only when the taxpayer has had a farming loss for the year. That being so, it may seem strange that the section should speak of farming as the taxpayer's chief source of income for the taxation year; if in a taxation year the taxpayer suffers a loss on his farming operations it is manifest that farming would not make any contribution to the taxpayer's income in that year. On a literal reading of the section, no taxpayer could ever claim more than the maximum $5,000 deduction which the section contemplates; the only way in which the section can have meaning is to place emphasis on the words 'source of income'.

Although originally disputed, it is now accepted that in order to have a `source of income' the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R. [72 DTC 6131], [1972] C.T.C. 151. ...

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 DTC 6193. ...

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.

...

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 replace 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.

[13]     The principal criteria set out by the Supreme Court in Moldowan in relation to a chief source of income are therefore:

                             (i)       time spent;

                             (ii)       capital committed;

                             (iii)      the profitability both actual and potential.

These, as noted, are not the only criteria, because the Supreme Court clearly indicated that they are "inter alia". Before analyzing these criteria I must say that I accept absolutely the credibility of the Appellant.

Time Spent

I conclude that the Appellant satisfied this criterion. The evidence reveals that she spent a fair amount of time in the farm operations not only the three to four hours of feeding time, but also the bookwork, arranging sales and purchases of supplies and attendance at the fairs and the PNE. Moreover, she lived with her husband in the residence on the farm.

Capital Committed

Once again I have concluded that the Appellant meets this criterion. Monies were invested in the acquisition of the farms, the construction of fences and other farm structures and the acquisition of equipment and livestock. Farming was clearly not a hobby.

[14]     I adopt, with approval, the analysis of Joyal, J. in Hadley v. The Queen, 1985 DTC 5058 at pages 5063-4:

The findings I have made with respect to the Plaintiff's farming operations must be viewed within the framework of intentions and expectations. While it is true that the operations, as financially unsuccessful as they were, might indicate prima facie that the Plaintiff should come within the second category of `sideline' operators as articulated by Dickson, J. in the Moldowan case, the Plaintiff's intentions and expectations are, in my view, material to the conclusions I have drawn. To a great extent, in reviewing past history, a trier of facts must adopt something akin to an armchair approach as that expression is used in the interpretation of testamentary instruments. The intentions and expectations must be analyzed in the light of the taxpayer's activities and of the economic situation relating to beef farming which existed at that time.

...

Furthermore, as I have found earlier in these reasons, the Plaintiff is not the type of person who would gladly risk a million dollars in an operation on the simple expectation that in the event of losses, half of them would be absorbed by deductions from his other income.

...

It is my view therefore that the conclusion I have reached is on the basis of a factual situation which has unique and distinguishing features. Numerous precedents cited to me by Counsel on both sides might be relevant or persuasive but I would doubt that any one of them would be conclusive. I prefer to be guided by the principles enunciated in the Moldowan decision. I think that my conclusion is in conformity with these principles and in keeping with the legislative intent of section 31.

Profitability - Actual or Potential

[15]     The farm did not show a profit in 1998 to 2002. The question becomes therefore, was there a reasonable expectation of profit? There is ample authority to the effect that in assessing pursuant to section 31 of the Act, the Respondent is tacitly admitting that the Appellant was operating a business and not indulging in a mere hobby but the question remains, was there a reasonable expectation of profit? There were losses in the years in question, but they were not large considering the nature of the operation and they were being considerably reduced from 1998 to 2002 and can reasonably be considered as start up.

Start-up costs

[16]     Concerning the start-up costs, it was held in Moldowan, supra, that the permissible amount to be deducted depends on the class the taxpayer finds himself in. Dickson, J. stated referring to the class (1) farmer at p. 5216:

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.

Combinations of Income as a Chief Source of Income

[17]     Bowman, J. in Hover v. M.N.R. 93 DTC 98 ( at pp. 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 expenditures 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.

And 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.

In so deciding, Bowman, J. held that an interrelation existed between the two sources that permitted the combination. The interrelation was a provision of financing from dentistry to farming in the sense that the other business formed an integral part of the combination. I have come to the same conclusion in this case.

[18]     In conclusion, in my opinion, the criteria to establish a chief source of income as being farming or a combination of farming and another source of income have been met. Section 31 was not applicable to the Appellant and the Appellant is entitled to the total of the farming losses claimed for the two years in question. Thus, the appeals are allowed, without costs, and the matter is referred back to the Minister for reconsideration and reassessment on the foregoing basis.

CAROL A KELLY

1998 FARM INCOME STATEMENT

	Claimed by Appellant	Allowed at objection stage	Disallowed farm expenses
Farm Income	$7,259.16	$7,259.16
EXPENSES
Supplies	1,463.21	1,215.41	247.80
Feed, supplements, straw, bedding	4,320.79	1,873.53	2,447.26√
Veterinary, medicines	487.84	487.84	0
Macinery repairs/insurance	1,846.90	1,495.83	351.07√
Fence/building repairs	5,462.33	4,595.00	867.33√
Custom Work & machinery rental	2,396.95	0	2,396.95√
Electricity	360.00	360.00	0
Office	387.81	0	387.81√
Property Tax	388.97	388.97	0
Small Tools	341.20	341.20	0
Advertising	92.88	92.88	0
Motor vehicle	5,300.08	891.94	2,023.10 4,408.14√
Telephone	741.48	185.37	334.03 556.11√
Janitor/Garbage	1,104.18	500.70	102.78 603.48√
Travel/Promotion	1,687.62	1,687.62	0
Total expenses	26,382.24	14,116.29	12,265.95
Farm Loss	($19,123.08)	($6,857.13)*
Farm Loss Allowed		($4,678.57)*

*Restricted farm loss allowed as follows: $2,500.00 plu 50% (6,857.13 - 2,500.00)

CAROL A KELLY

1999 FARM INCOME STATEMENT

	Claimed by Appellant	Allowed at objection stage	Disallowed farm expenses
Farm Income	$5,649.69	$5,649.69
EXPENSES
Supplies	391.79	1,127.51	$(735.72)
Feed	4,924.03	3,643.17	1,280.86√
Livestock purchases	1,577.84	0	1,577.84√
Veterinary, medicines	870.42	695.62	174.80
Machinery repairs/insurance	2,389.42	1,969.72	419.70√
Fence/building repairs	400.20	400.20	0
Burn permit	25.00	25.00	0
Electricity	360.00	360.00	0
Advertising	102.00	102.00	0
Garbage	64.20	0	64.20√
Other Insurance	245.75	245.75	0
Interest	241.28	0	241.28√
Office Expense	841.21	0	591.21 841.21√
Fees	102.00	0	102.00√
Property Tax	376.54	376.54	0
Hauling	30.00	0	30.00√
Motor vehicle	3,135.43	653.99	1,227.73 2,481.44√
Small Tools	109.54	0	109.94√
Maintenance/repairs	364.65	364.65	0
Hoof trimming	115.80	115.80	0
Mobility/cell phone	1,045.07	261.27	783.80√
Sawdust	293.00	179.76	113.24√
Promotion	1,334.47	1,334.47	0
Janitor	672.00	0	672.00√
Total expenses	$20,012.04	$11,855.45	$8,156.59
Farm Loss	(14,362.35)	($6,205.76)
Farm Loss Allowed		($4,352.88)*

*Restricted farm loss allowed as follows: $2,500.00 plus 50% (6,205.76-2,500.00)

CAROL A KELLY

1998 GREENHOUSE RENTAL STATEMENT

	Claimed by appellant	Allowed on objection	Disallowed Rental Expenses
Rental Income	$3,482.94	$3,482.94
EXPENSES
Insurance	$427.00	$427.00	$0
Interest	3,913.82	978.46	2,935.36
Maintenance/repairs	1,261.69	1,188.46	73.23
Motor vehicle	3,144.61	165.26	2,979.35
Office	347.80	70.34	277.46
Property Tax	388.97	388.97	0
Utilities	902.94	758.96	143.98√
Custom work K. Kelly	2,396.95		$500 2,396.95√
Total Expenses	$12,783.76	$3,977.45	$8,806.31
Net Rental (loss) income	($9,300.82)	($494.41)

CAROL A KELLY

1999 GREENHOUSE RENTAL STATEMENT

	Claimed by appellant	Allowed on objection	Disallowed Rental Expenses
Rental Income	$6,077.90	$6,077.90
EXPENSES
Insurance	$245.75	245.75	0
Interest	3,217.33	804.33	2,413.00
Maintenance/repairs	1,198.08	600.41	597.64
Motor vehicle	2,607.62	521.52	2,086.10
Office	383.43	383.43	0
Property Tax	376.54	376.54	0
Utilities	1,631.70	759.55	872.15√
Garbage	60.00	0	60.00√
Janitor	684.00	0	$342.00 684.00√
Total Expenses	$10,404.42	$3,691.53	$6,712.89
Net Rental (loss) income	($4,326.52)	$2,386.37

CAROL A KELLY

1999 BOOKKEEPING/TAX STATEMENT

	Claimed by appellant	Allowed on objection	Disallowed Business Expenses
Bookkeeping Business Income	$2,500.00	$2,500.00
EXPENSES
Business tax/licence	$100.00	$100.00	0
Insurance	100.00	49.15	50.85
Motor vehicle	311.30	311.30	0
Office	1,410.75	542.21	868.54√
Propeerty Tax	379.59	75.31	304.28
Telephone/Utilities	660.00	439.68	220.32
Garbage	64.20	0	64.20√
Total Expenses	$3,025.84	$1,517.65	$1,508.19
Net Business (loss) income	($525.84)	$982.35

Signed at Ottawa, Canada, this 27th day of January 2004.

"T. O'Connor"

O'Connor, J.

CITATION:

2004TCC45

COURT FILE NO.:

2003-830(IT)I

STYLE OF CAUSE:

Carol A. Kelly and H.M.Q.

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

November 7, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice T. O'Connor

DATE OF JUDGMENT:

January 27, 2004

APPEARANCES:

Counsel for the Appellant:

The Appellant herself

Counsel for the Respondent:

Shawna Cruz

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada