Tax Court of Canada Judgments

2003-1404(IT)G

BETWEEN:

DOUGLAS G. GUNN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on February 24, 2005, at London, Ontario,

By: The Honourable Justice E.A. Bowie
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Charles M. Camirand

____________________________________________________________________

JUDGMENT

The appeals from reassessments of tax made under the Income Tax Act for 1997, 1998 and 1999 taxation years are dismissed, with costs.

Signed at Toronto, Ontario, this 12th day of July, 2005.

"E.A Bowie"

Bowie J.

Citation: 2005TCC437

Date: 20050712

Docket: 2003-1404(IT)G

BETWEEN:

DOUGLAS G. GUNN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

BowieJ.

[1]      These appeals are brought from reassessments made under the Income Tax Act (the Act) for the taxation years 1997, 1998 and 1999. The Appellant is both a farmer and a lawyer. During the years in question he sustained substantial losses in his farming operations, while making substantial income in his law practice. The Minister of National Revenue has accepted that the Appellant is a genuine farmer, and that farming is a source of income for him. However, he takes the view that farming is not, either alone or in combination with the practice of law, the Appellant's chief source of income, and so he has applied section 31 of the Act to limit the losses from farming that the Appellant may apply in the computation of his total income under section 3 of the Act to $8,750 for each of the three years. The Appellant's position is that farming and the practice of law, in combination, are his chief source of income, and that he is therefore entitled to take the full amount of his farming losses into account each year.

[2]      The Appellant was the only witness, and his evidence was not challenged by counsel, for the Respondent. The following are the assumptions of fact pleaded by the Respondent in paragraph 8 of the Reply:

8           In so reassessing the Appellant, the Minister relied on, inter alia, the following assumptions:

            a)          the Appellant has been practising law since 1967;

b)          in the late seventies, the Appellant became self-employed and started his own law firm, Gunn & Associates, in 1984;

c)          the Appellant earned the following income (losses) from his legal profession and from his farming business;

Date	Professional Income (Net)	Farming Income (Gross)	Farming Expenses	Farming Income (Net)
1987	$165,663	$66,719	$126,156	($59,437)
1988	152,682	59,481	84,575	(25,094)
1989	268,770	30,139	88,726	(58,587)
1990	280,017	32,307*	82,142*	(49,835)*
1991	235,854	44,873	98,645*	(53,772)*
1992	428,077	82,451	130,360*	(47,909)*
1993	256,723	105,226	191,241	(86,015)
1994	270,818	321,246	377,862	(56,616)
1995	277,869	162,554	222,011	(59,457)
1996	221,013	295,364	426,683	(131,319)
1997	308,686	217,560	272,013	(54,453)
1998	204,865	366,877	474,383	(107,506)
1999	308,447	258,489	417,417	(158,928)
2000	428,189	395,585	429,213	(33,628)
2001	331,419	225,572	272,246	(46,674)

* As reassessed by the minister.

d)          during the 1997, 1998 and 1999 taxation years, the Appellant spent more time practising law than farming.

e)          the Appellant's chief source of income during the 1997, 1998 and 1999 taxation years was neither farming nor a combination of farming and some other source of income.

Subparagraphs 8 a) to 8 d) are not disputed by the Appellant. 8 e) is, of course, disputed, as that is the question that ultimately I must answer, after considering all the primary facts. The evidence also showed the following financial results for the years after 2001:

Date	Professional Income (Net)	Farming Income (Gross)	Farming Expenses	Farming Income (Net)
2002	$305,890	$231,452	$192,293	39,159
2003	369,356	148,406	235,390	(85,024)
2004	247,031	326,109	229,997	96,112

[3]      The Appellant grew up on a farm near St. Thomas, in south-western Ontario, that had originally been settled by his grandfather. His father raised cattle, sheep and cash crops on the farm, and the Appellant worked with him during the summers when he was attending the University of Western Ontario. He graduated from the faculty of law there in 1965, and was admitted to the bar of Ontario in 1967. He has practiced law since then, and in 1984 he formed his own firm, Gunn and Associates, in St. Thomas. At the time of the hearing in 2005 he had four other lawyers working for him in the practice.

[4]      Over the course of the last 40 years or so, the Appellant has built up both his law practice and his farming operation through the application of skill, knowledge and hard work. In 1962 he acquired a 25% interest in a farm property. In 1972 he bought what he refers to as his home farm, near St, Thomas. At that time the buildings were run down, and over the next several years he and his wife together built the home that they still live in, and replaced the farm buildings on the property. They now have five barns, in which they have been raising pure-bred Hereford cattle for the past 30 years. By 2005 he had an established herd of approximately 50 breeding cows on this farm, and had acquired a number of other farm properties in the neighbourhood where he grows rye, hay and his major cash crop, tobacco.

[5]      The Appellant does most of the work involved in the cattle operation himself, with the assistance of his wife. Until September 2004 he had a hired hand as well. He makes all the decisions in connection with the livestock breeding. Usually he breeds in April in order to have calves born in the early months of the following year. In the calving season he checks and feeds the cattle, visiting the barns twice daily, in the early morning and in the evening. His wife checks them during the day, and he is available to return home on short notice if needed. He is never away from home for more than a few days at any time. He also works on the farm during weekends, and some week days in the summer, doing much of the manual work of seeding and haying, with the assistance of people hired on a casual basis as required. He also does all the paper work and record-keeping required in connection with the breeding and registration of the cattle. His usual routine is to work in his law office from about 9:00 or 9:30 a.m. until about 4:00 p.m., doing the farm work before and after these hours. He estimated in his evidence that he normally spends about 50 hours per week working at his law practice, and about 20 hours on farm work.

[6]      Between 1990 and 1997 the Appellant acquired six additional farm properties in the vicinity of St. Thomas. Many of these were in very poor condition, both in relation to the soil, and the buildings and equipment. During this period he did a great deal of work and spent a great deal of money improving the soil on these farms, with the addition to them of large amounts of fertilizer that had to be trucked long distances. He also spent a lot of time and money on improvements to the buildings, and on repair of equipment that had been much neglected. Among these properties is a tobacco farm that had been engaged in producing flue-cured tobacco. The Appellant testified that he has since shifted the emphasis from flue-cured to air-cured burleigh tobacco production, with a view to making this operation less labour intensive and more profitable. The burleigh crop is less expensive to produce and is not subject to production quotas, as is the flue-cured crop.

[7]      The Appellant also referred in his evidence to synergies between his law practice and his farming operations. Many of the clients of the law practice are people the Appellant has met through his farming connections. He has acted as the Chairman of the Ontario Crop Insurance Arbitration Board, and has been involved in the work of other bodies connected with agriculture and the cattle industry. Through all of these, he has come into contact with many people who have later become clients, or have referred clients to him. His analysis of the files he opened in the years under appeal shows that between 10% and 15% of them were for clients whom he met through his farming activities. He suggested that many more may be attributable to his farming contracts, although less directly.

[8]      The decision of the Supreme Court of Canada in Moldowan[1] remains the governing authority for the determination of the issue before me. In that case Dickson J. (as he then was) described the three classes of farmers contemplated by section 13 of the 1952 Income Tax Act in the following way:

           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 carries 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 carries 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.

[9]       Although section 31 of the present Act is expressed in words somewhat different from those of section 13 of the former Act, this description of the categories of farmers remains applicable today. In considering into which of these categories the Appellant fits, I am bound to consider the relative amounts of capital he has committed to his farming enterprise and his law practice, the amount of time he spends on each, and their relative potential profitability.

[10]     The Appellant's evidence satisfies me that he has been seriously committed to farming as a business for more than 35 years, that during the years under appeal he remained as committed to it as ever, and that he remains fully committed to it today. He intends to continue both practicing law and farming for the foreseeable future. His net farming assets are approximately $2 million, the greatest part being land and buildings. In contrast, the capital invested in his law practice is about $62,000.[2] He spends approximately 30% to 35% of his working time on the farming operations, and the balance on his law practice. In the years between 1990 and 1997, he made substantial additions to his farm holdings, and he has invested considerable time and money in bringing them up to the high standards that he has established for his farming operations. This reflects both his concern for the environment and his determination to develop and maintain a high quality agricultural business. He has diversified his cash crops to include tobacco, both flue-cured and air-cured, and this has made a considerable improvement in the farm income statements.

[11]     The Appellant's losses incurred in his farming activity over a period of 15 years have been substantial and, until 2002, unrelenting.[3] There is no particular pattern to these losses, except that they peak in 1996 and again in 1999, when they exceeded 50% of his net professional income. They declined markedly in 2000 and 2001, and he recorded profits from farming of $39,159 in 2002, and $96,112 in 2004. The Appellant attributes his substantial losses in the years under appeal to interest expense, the large expenditures associated with improving his recently acquired farms, and to the high cost of tobacco production. All these are significant factors in the years under appeal, but they do not explain the losses incurred in the years before his expansion in the 1990s.

[12]     The Appellant referred, of course, to the Supreme Court's judgment in Moldowan. He also relied on a number of trial decisions of this Court and the Federal Court. I do not find these latter decisions to be of any assistance. As the appellate courts have made clear, all these cases turn on their own particular facts; they must be resolved by the application of principle to those facts. In all the trial decisions that the Appellant referred to there were highly relevant facts established that are not present in this case. In Kasper v. The Queen,[4] Jerome A.C.J. held that the Appellant was not subject to the limiting effect of section 31 because by the time of the years under appeal - 1997 and 1998 - "... she had changed her mode and habit of work to the management of her horse breeding farm from her active participation in the operation of Motor Express Terminals Ltd."[5] Similarly, in White v. The Queen,[6] Rouleau J. held that by the time of the years in issue the taxpayer had "... changed his occupational direction from medicine to farming".[7] Jerome A.C.J. held in The Queen v. Wylie[8] that in 1979 - the first of several years under appeal - the taxpayer moved onto the farm property, made an enormous commitment of his own time and that of all the members of his family, and changed his work routine to make farming the centre of it.[9] O'Connor J. of this Court found in Mott-Trille v. The Queen[10] that the Appellant there spent almost equal amounts of time attending to his law practice and his beef and dairy farm, and that his "major preoccupation" was farming.[11] Perron v. The Queen[12] is another case in which the Court found that a change in occupational direction had taken place by the relevant point in time. Lamarre Proulx J. held there that "... almost all of [the taxpayers'] time was spent on farming activities".[13]

[13]     The Appellant also relied on two recent decisions of the Federal Court of Appeal reversing decisions of this Court that had dismissed appeals in farm loss cases. In Kroeker v. The Queen[14] the admissions made by the Respondent's counsel that farming was "... the focus of [the Appellant's] life ..." and that her capital, time and labour were all "focussed" on the farm[15] were crucial. In Taylorv. The Queen[16] it was, it seems, determinative that the trial judge had found as a fact that the Appellant spent more time on farming than on earning his employment income.[17] The apparently pivotal facts of these cases are simply not present here.

[14]     While the Appellant has been serious about his farming from the beginning, and has throughout the years spent a very significant amount of his time on it, and invested a great deal of money in it, it has never displaced the practice of law as the activity that consistently takes up the major part of his time and provides his livelihood. He has undergone no change in occupational direction. Although he did expand his agricultural holdings during the 1990s, the evidence does not persuade me that by doing so he was in any way changing the focus of his life and his activities. In fact both his professional income and his farm losses were, if anything, on a slightly upward trend during this period.

[15]     Although the Supreme Court has recently been critical[18] of the obiter statements in the Moldowan case concerning the search for a source of income, it has never resiled from its ratio decidendi. The test that I have to apply is that expressed by Dickson J. in the following paragraph:[19]

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.

[16]     The manner in which Moldowan is to be applied was considered by the Federal Court of Appeal in The Queen v. Morrissey.[20] Speaking for the majority of the Court, Mahoney J.A. said there:

On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

I have set out, fairly I hope and certainly at some length, the basis for the Respondent's policy-based argument that the test of Moldowan ought to be applied as it was by the trial judge to achieve Parliament's desired result. I should not have done so had I not been persuaded that the government's intentions as told to Parliament in 1951 and 1952 may indeed not have been realized. Parliament chose to draw the line between gentleman farmers and real farmers in terms of source of income. It may not have intended to treat taxpayers like the Respondent as it intended to treat gentleman farmers, nor to deny gentleman farmers any relief at all. There may be a serious argument for remedial action, however I have not been persuaded that the Moldowan test is so elastic as to permit it to be judicially provided. The judiciary must interpret what Parliament has said, which is not necessarily what it may have intended to say.

[17]     As I have said, the evidence does not establish that the Appellant had shifted the focus of his working life from law to farming in the years under appeal, or indeed that he had done so by 2005. Of the factors that I must consider, only the capital invested might militate in favour of the Appellant. It is not disputed that the bulk of his working time is spent in his law office, where he has a number of fulltime employees working for him, in addition to his own practice to attend to. I appreciate that the comparison of the taxpayer's income from farming and from law is not simply a mathematical exercise. However, up to and including the years in issue the record shows a decade of very large losses, of which the largest two are the last year before the years under appeal, and the last of the three years under appeal. Over the same decade, the Appellant's income from law had a strong upward trend, with the first and second years under appeal being two of the three most productive years of his practice in the period. Nor does the evidence establish that there is any reason to expect that to change greatly in the future. Although there have been profits from the farming in 2002 and 2004, the evidence does not persuade me that this is a trend that will necessarily continue. Nor can the losses simply be discounted as startup losses. It is true that in 1999 the Appellant went into tobacco farming on the basis of an ownership operation, rather than through sharecropping as he had previously operated. No doubt this exacerbated his losses in that year - it had by far the largest loss in the evidence before me. It was only a matter of degree, however; his losses for the 12 prior years cannot be explained that way. It is likely too, on the Appellant's evidence, that some, if not all, of the modest profit in 2002 was attributable in part to expenses incurred during the startup years of 1999 to 2001. There was evidence that the income from tobacco is not realized until the calendar year after the majority of the expenses have been incurred.

[18]     It is true that the Appellant has farming assets of approximately $3.354 million. However $2.5 million of that is made up of land and buildings, some of which were put to agricultural use during the relevant time period, and some of which were not. I think it is a reasonable inference that the capital the Appellant invested in land and buildings was not at risk in the way that capital invested in machinery or inventory might be. I do not consider this to be a factor strong enough to outweigh the relative application of the Appellant's time and effort, or the relative potential for profit of the law practice and the farm.

[19]     There remains the Appellant's argument that the financial success of his law practice is attributable to a synergy between it and his farming operation, and that I should therefore conclude that the two together, in combination, comprise his chief source of income, with the result that section 31 of the Act has no application to him. In support of this argument, he relies on the judgment of Rip J. in Gestion S.A.P. Inc. v. Canada[21]. In that case the taxpayer owned a beef and dairy farm whose losses it sought to deduct from the profit of its chain of food stores. Rip J. held that the taxpayer's chief source of income was a combination of farming and the food stores, and that section 31 therefore had no application to it. In that case, however, the raison d'être of the farming operation was specifically to provide high quality beef to the Appellant's food stores. The farm was purchased and integrated into the food store operation under one corporate roof for just that purpose, because the principal shareholder had observed that success in the retail food business was dependant on having a supply of high quality meat. The degree of integration is summed up by Rip J. in the penultimate paragraph of his reasons:

The reasons for the purchase of the farm and the type of farming undertaken by the appellant were for the appellant's retail business. On the facts of the case the appellant's farming and retail operations were not connected by a mere narrow thread but by an umbilical cord: the farm owed its existence to the retail operation of the appellant, was nurtured by the retail operation and, on the evidence, existed for the retail operation. The farm and the retail operation had a common object: to increase sales and profits of the appellant. The two were more than merely related. They acted in combination to accomplish a goal of producing income and when the retail operations ceased, so did those of the farm.

[20]     The same cannot be said of this case. Lawyers attract clients for all sorts of reasons and through numerous avenues. I have no doubt that Mr. Gunn obtained many clients over the years as a result of contacts made in the course of his farming business. However the evidence falls far short of establishing the kind of synergy that existed between the retail food business and the farming business of Gestion S.A.P. Inc. I do not think that it can be said, on the evidence adduced at trial, that the farm was a major contributor to the success of the Appellant's law practice. By 1997, the Appellant has been a successful practitioner in St. Thomas for more than 20 years, and employed several lawyers. I do not conclude from the evidence that his practice owed its existence, or even its success, to his farm.

[21]     In summary, the Appellant's farming was, in the words of Dickson J, "... a sideline business ...".[22] It was not, either alone or in combination with his law practice, his chief source of income. The Minister properly applied section 31 in assessing the Appellant. The appeals are dismissed, with costs to the Respondent.

Signed at Ottawa, Canada, this 12th day of July , 2005.

"E.A. Bowie"

Bowie J.

CITATION:

2005TCC437

COURT FILE NOS.:

2003-1404(IT)G

STYLE OF CAUSE:

Douglas G. Gunn and Her Majesty the Queen

PLACE OF HEARING:

London, Ontario

DATE OF HEARING:

February 24, 2005

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:

July 12, 2005

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Charles M. Camirand

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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