A-604-93
Her Majesty the Queen (Appellant)
v.
Andrew Donnelly (Respondent)
Indexed as: Canadav. Donnelly (C.A.)
Court of Appeal, Denault J.A. (ex officio), Décary and Robertson JJ.A."Toronto, September 24; Ottawa, October 15, 1997.
Income tax — Income calculation — Farming — Appeal from T.C.C. decision farming chief source of taxpayer's income, permitting deduction of full amount of farming losses from professional income — Taxpayer urologist — In 1970 joining partnership, enabling him to reduce hours worked, devote more time to horse-breeding farm — Yearly losses could not have been sustained without taxpayer's professional income — Taxpayer must establish farming (1) giving rise to reasonable expectation of profit; (2) chief source of income, to deduct full amount of farming losses — Determination of whether farming chief source of income dependent upon cumulative effect of capital committed, time spent, profitability — Tax Court erred in assessment of evidence as to taxpayer's occupational direction, potential profitability of horse-breeding business — No change in occupational direction — As to profitability, evidence to support finding of reasonable expectation of —substantial— profits from farming required — No evidence showing what profit taxpayer might reasonably have earned but for setbacks giving rise to loss, and whether amount substantial compared to professional income — Medical practice chief source of income — Horse-breeding merely sideline — Hobby farmers seeking tax relief should pursue legislation, not litigation — Courts cannot afford to encourage hopeless cases.
This was an appeal from the Tax Court of Canada's decision permitting the taxpayer to deduct the full amount of farming losses incurred in 1986, 1987 and 1988 from his professional income. The taxpayer was a urologist. In 1970 he joined a medical partnership which enabled him to reduce his hours of work, and devote more time to farming. By 1980 the taxpayer and his farming partners were buying, breeding and racing standard-bred horses, with the intention of racing some and using the prize winnings to offset expenses. Profits would be derived from the breeding side, but because of start-up losses, the taxpayer did not anticipate a profit until at least 1983 or 1984. During this period the taxpayer experienced two setbacks, namely, the death of one of his business partners and the collapse of the North American market for both standard-bred and thoroughbred horses because of changes to American laws regarding horse syndications as tax shelters. The taxpayer liquidated all of his investments (RRSPs and an apartment building) and employed the proceeds in the horse-farming business. The yearly losses from the taxpayer's breeding and racing activities could not have been sustained without the taxpayer drawing upon his professional income. The Minister conceded that there was a reasonable expectation of profit. The Tax Court held that farming was the taxpayer's chief source of income, and that but for the setbacks endured, the farming business could have provided the "bulk" of the taxpayer's income.
Held, the appeal should be allowed.
According to Moldowan v. The Queen, in order to deduct farming losses from other income, the taxpayer must establish that farming (1) gave rise to a "reasonable expectation of profit" and, (2) was his "chief source of income". If the taxpayer is unable to satisfy the first test, no losses are deductible. If he satisfies the first test, but not the second, then a restricted farm loss is imposed. The Tax Court failed to appreciate the distinction between the test to be applied in determining whether farming is a taxpayer's chief source of income and that which applies when assessing whether a taxpayer has a reasonable expectation of profit.
The cumulative factors of capital committed, time spent and profitability will determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. No one factor is decisive. There was no doubt that the taxpayer had committed significant capital investment to the horse-breeding activity. But the Tax Court erred in its assessment of the evidence presented in terms of the taxpayer's occupational direction and the potential profitability of the horse-breeding business. The taxpayer did not change occupational direction in 1980 such that medicine became a sideline to his farming endeavour. The shift in focus from thoroughbred to standard-bred horses was a business decision, not a change in occupational direction. There was no indication that the taxpayer was phasing out his medical practice. Finally, the taxpayer required his medical income to live off and fund the purchase of new horses and other aspects of the horse operations.
Taxpayers must establish that the net income that could reasonably be expected to be earned from farming was substantial in relation to their other income source. In tax law, a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the profitability factor, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. Evidence to support a finding of reasonable expectation of "substantial" profits from farming is required. No evidence was presented to show what profit the taxpayer might reasonably have earned, but for the two setbacks which gave rise to the loss, and whether that amount would have been considered substantial when compared to his professional income. The taxpayer should have provided evidence to enable the Tax Court to estimate quantitatively what that profit might have been. The Tax Court addressed the matter solely in terms of whether there was a business, i.e. whether there was a reasonable expectation of profit. It did not analyze what profit might have been earned by the taxpayer in the taxation years in question. Having regard to the fact that no one factor is decisive and to the primary findings of fact made by the Tax Court Judge, the taxpayer's chief source of income for the years in question came from his medical practice. The horse-farming business was merely a sideline business.
The fact is that hobby farmers who purchase or breed race horses rarely have a reasonable expectation of profit but carry on with blatant indifference to the losses incurred. If they wish to seek tax relief, they should resort to legislative channels rather than litigation before the Tax Court of Canada. The judicial system can no longer afford to encourage taxpayers to launch these hopeless cases.
statutes and regulations judicially considered
Income Tax Act, S.C. 1970-71-72, c. 63, s. 31 (as am. by S.C. 1973-74, c. 14, s. 7; 1979, c. 5, s. 9; 1988, c. 55, s. 16).
cases judicially considered
applied:
Moldowan v. The Queen, [1978] 1 S.C.R. 480; (1977), 77 D.L.R. (3d) 112; [1977] CTC 310; 77 DTC 5213; 15 N.R. 476.
distinguished:
R. v. Graham, [1985] 2 F.C. 107; [1985] 1 C.T.C. 380; (1985), 85 DTC 5256; 59 N.R. 221 (C.A.).
referred to:
Timpson (R.) v. M.N.R., [1993] 2 C.T.C. 55; (1993), 93 DTC 5281; 157 N.R. 237 (F.C.A.); Poirier (B.) Estate v. Canada, [1992] 2 C.T.C. 9; (1992), 92 DTC 6335; 142 N.R. 156 (F.C.A.); Connell (J.P.) v. M.N.R., [1992] 1 C.T.C. 182; (1992), 92 DTC 6134; 139 N.R. 204 (F.C.A.); Roney (C.H.) v. M.N.R., [1991] 1 C.T.C. 280; (1991), 91 DTC 5148; 124 N.R. 368 (F.C.A.); Morrissey v. Canada, [1989] 2 F.C. 418; [1989] 1 C.T.C. 235; (1988), 89 DTC 5080; 95 N.R. 140 (C.A.); Gordon (R.T.) v. The Queen, [1986] 2 C.T.C. 280; (1986), 86 DTC 6426; 6 F.T.R. 53 (F.C.T.D.); Mott (P.S.) v. M.N.R., [1988] 2 C.T.C. 127; (1988), 88 DTC 6359; 20 F.T.R. 33 (F.C.T.D.); Mohl (G.) v. Canada, [1989] 1 C.T.C. 425; (1989), 89 DTC 5236; 27 F.T.R. 97 (F.C.T.D.); Graham (P E) v The Queen, [1983] CTC 370; 83 DTC 5399 (F.C.T.D.).
APPEAL from Tax Court of Canada's (Donnelly v. Canada, 91-2054 (IT), Beaubier J., judgment dated 17/9/93, T.C.C., not reported) decision permitting the taxpayer to deduct the full amount of certain farming losses from his professional income. Appeal allowed.
counsel:
Kathryn R. Philpott for appellant.
Roy E. Stephenson for respondent.
solicitors:
Deputy Attorney General of Canada for appellant.
Stephenson & Stephenson, Toronto, for respondent.
The following are the reasons for judgment rendered in English by
Robertson J.A: Though it has been 20 years since Moldowan v. The Queen, [1978] 1 S.C.R. 480 was decided, we continue to hear appeals involving taxpayers who earn their income in the city and lose it in the country. In this appeal, the respondent taxpayer, a medical practitioner, sought to deduct from his professional income the full amount of farming losses incurred in the 1986, 1987 and 1988 taxation years. According to Moldowan, the taxpayer must satisfy two tests in order to succeed. First, he must establish that the farming operation gave rise to a "reasonable expectation of profit" and, second, that his "chief source of income" is farming (the so-called "full-time" farmer). If the taxpayer is unable to satisfy the first test no losses are deductible (the so-called "hobby" farmer). If he satisfies the first test but not the second then a restricted farm loss of $5,000 (now $8,500) is imposed under section 31 of the Income Tax Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1973-74, c. 14, s. 7; 1979, c. 5, s. 9; 1988, c. 55, s. 16)] (the so-called "part-time" farmer).
In the present appeal the Minister of National Revenue conceded that the farming operation gave rise to a reasonable expectation of profit. That concession was made with full knowledge that the taxpayer's farming endeavour had not generated a profit in 21 years (1972-1992). With respect to the Minister's contention that farming was not the taxpayer's chief source of income, the Tax Court of Canada disagreed, holding that the taxpayer could reasonably have looked to his farming business to provide the "bulk" of his income [Donnelly v. Canada , 91-2054 (IT), Beaubier J., judgment dated 17/9/93, T.C.C., not reported]. The Minister now argues that the Court below was in error in making that determination. I agree. In my respectful view, the Tax Court Judge failed to appreciate the distinction between the test to be applied when determining whether farming is a taxpayer's chief source of income and that which is applicable when assessing whether a taxpayer has a reasonable expectation of profit. When the issue is placed in this perspective it is not difficult to understand why the Minister was willing to concede the latter point. As is explained below, the legal test for establishing farming as a chief source of income is, on an evidential level, a more onerous one.
At all material times, the taxpayer was a practising urologist who between 1959 and 1970 conducted a sole practice. In 1970 he joined a partnership which enabled him to reduce his hours of work considerably. The partnership enabled the taxpayer to concentrate his practice into a 24-hour work week and provided him with an annual vacation leave of between 12 and 17 weeks. During the weeks he was practising medicine the taxpayer would spend an additional 40 hours a week on his farming operation. During vacation periods the taxpayer would spend up to 16 hours a day pursuing that venture. In short, the taxpayer "lived, ate and breathed horses" (Appeal Book, Appendix 1, at page 116).
Commencing in 1972 the taxpayer became involved in the thoroughbred industry. By 1975 the taxpayer determined that standard-bred horses were a more "reliable investment", and together with James Rankin and a third party, he turned his attention to this aspect of the horse-farming industry. By 1980 the taxpayer and his partners were buying, breeding and racing standard-bred horses. Their intention was to race some horses and use the prize winnings to offset expenses. Profits would be derived from the breeding side but because of start up losses the taxpayer did not anticipate a profit until at least 1983 or 1984. During this period the taxpayer experienced two setbacks. In 1983 Mr. Rankin was killed in an accident at which time the taxpayer revised his estimate for profitability to 1985 or 1986. Then in 1985 the North American market for both standard-bred and thoroughbred horses collapsed resulting in a substantial drop in horse prices. The collapse was triggered by changes to American tax laws which made the treatment of horse syndications (tax shelters) less attractive to investors. This in turn created a glut in the horse market and a severe drop in horse prices.
The evidence accepted by the Tax Court Judge was that after 1984 the taxpayer had liquidated all of his investments (RRSPs and an apartment building) and employed the proceeds in the horse-farming business. From 1972 to 1992 inclusive, the taxpayer's breeding and racing activities produced losses approaching two million dollars. It is common ground that the yearly losses could not have been sustained without the taxpayer drawing upon his professional income. For the 1986, 1987 and 1988 taxation years the taxpayer's net professional income versus net farming losses was as follows:
Medical Farming Medical Farming
Gross Gross Net Net
Year Income Income Income Loss
1986 $204,397 $ 80,338 $142,239 $(176,453)
1987 $222,038 $189,935 $176,020 $(128,424)
1988 $239,913 $106,730 $211,605 $(134,639)
Despite the losses sustained by the taxpayer in each of the years spanning two decades, the Minister assessed him on the basis of there being a reasonable expectation of profit. The principal issue before the Tax Court was whether the taxpayer was entitled to deduct the full amount of the loss in each of the years or restricted to the $5,000 amount imposed under section 31 of the Act. The principal findings of the Tax Court Judge are as follows.
From 1983 and throughout the taxation years in question the standard-bred horse-breeding business "engaged the majority of [the taxpayer's] time and virtually all of his money." The Tax Court Judge observed that the "unimpugned" expert evidence of Dr. McCarthy, a veterinarian, friend and business partner of the taxpayer, was that "start-up losses" with respect to the breeding side of the business can persist for up to 10 years. Following these findings the Tax Court Judge began his formal analysis by stating at page 15 of the oral reasons: "It remains to be determined if [the taxpayer] was in business." Following that assertion the Tax Court Judge concluded that in 1980 there was a "change in direction" from the taxpayer's medical practice to the horse-farming business. The fact that the taxpayer had committed all of his capital to that business reinforced that conclusion. Further on the Tax Court Judge concluded that the practice of medicine had become a sideline to the "standardbred breeding business". Finally, he determined that but for the setbacks endured by the taxpayer his horse-breeding operation would have provided the "bulk" of his income for the three taxation years in question. I turn now to the relevant principles of law.
A determination as to whether farming is a taxpayer's chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer's other income source in terms of capital committed, time spent and profitability, actual or potential. The test is both a relative and objective one. It is not a pure quantum measurement. All three factors must be weighed with no one factor being decisive. Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act. The extent to which the evidential burden regarding the profitability factor or test differs from the one governing the reasonable expectation of profit requirement is a matter which I will address more fully below.
In summary, the cumulative factors of capital committed, time spent and profitability will determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. These guiding principles flow from the following decisions: Moldowan (supra); Timpson (R.) v. M.N.R., [1993] 2 C.T.C. 55 (F.C.A.); Poirier (B.) Estate v. Canada, [1992] 2 C.T.C. 9 (F.C.A.); Connell (J.P.) v. M.N.R., [1992] 1 C.T.C. 182 (F.C.A.); Roney (C.H.) v. M.N.R., [1991] 1 C.T.C. 280 (F.C.A.); Morrissey v. Canada, [1989] 2 F.C. 418 (C.A.); Gordon (R.T.) v. The Queen, [1986] 2 C.T.C. 280 (F.C.T.D.); Mott (P.S.) v. M.N.R., [1988] 2 C.T.C. 127 (F.C.T.D.); and Mohl (G.) v. Canada, [1989] 1 C.T.C. 425 (F.C.T.D.).
[A.]En résumé, les capitaux investis, le temps consacré à l'activité et la rentabilité sont les facteurs cumulatifs qui détermineront si l'agriculture sera considérée comme une "entreprise secondaire" visée par les dispositions relatives à la perte agricole restreinte. Ces principes directeurs découlent des décisions suivantes: Moldowan (supra); Timpson (R.) c. M.R.N., [1993] 2 C.T.C. 55 (C.A.F.); Succession Poirier (B.) c. Canada, [1992] 2 C.T.C. 9 (C.A.F.); Connell (J.P.) c. M.R.N., [1992] 1 C.T.C. 182 (C.A.F.); Roney (C.H.) c. M.R.N., [1991] 1 C.T.C. 280 (C.A.F.); Morrissey c. Canada, [1989] 2 C.F. 418 (C.A.); Gordon (R.T.) c. La Reine, [1986] 2 C.T.C. 280 (C.F. 1re inst.); Mott (P.S.) c. M.R.N., [1988] 2 C.T.C. 127 (C.F. 1re inst.); et Mohl (G.) c. Canada, [1989] 1 C.T.C. 425 (C.F. 1re inst.).
There is no question in this case that the taxpayer committed significant capital investment to the horse-farming activity. As noted earlier his losses were approaching the $2 million mark. This factor is in his favour. It is the two remaining elements of time spent and profitability which are more problematic for the taxpayer.
With respect to time spent, I am not persuaded that the taxpayer changed occupational direction in 1980 such that medicine became a sideline to his farming endeavour. I reach that conclusion for three reasons. Firstly, the taxpayer's shift in focus from thoroughbred to standard-bred horses in 1980 represents a business decision, not a change in occupational direction. From the time he purchased his first horse in 1972, the taxpayer's farming activities focused on the purchase and breeding of horses. Secondly, the evidence indicates that the taxpayer entered into his current medical partnership arrangement in 1970. While he may have endeavoured to reduce his workload or take more vacation time, the record does not indicate any appreciable change in the taxpayer's medical practice. During the three years in question, the taxpayer continued to see approximately 74 patients a week at his clinic (Appeal Book, Appendix 1, at page 197). In 1988, he performed 612 surgeries (supra, at page 196]. As of 1993, the taxpayer was still taking on approximately 18 new patients per week (supra, at page 201). There is no indication he was phasing out the medical practice. This leads inexorably to my third point: the taxpayer acknowledged that he required his medical income to live off and fund the purchase of new horses and other aspects of the horse operations (supra, at page 216). Under these circumstances, it is difficult to see how he can be described as having changed his occupational direction. It cannot be denied that the time devoted to horse farming was significant, but this quantitative factor alone does not accurately reflect the reality that the taxpayer was financially dependent upon his medical practice and primary income-earning occupation.
Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming.
In the present case, it was incumbent on the taxpayer to establish what he might have reasonably earned but for the two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. While there is no doubt that the loss of Mr. Rankin, and the changes in American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.
In my respectful view, neither the taxpayer nor the Tax Court Judge pursued the issue in the manner outlined above. Rather they continued to address the matter solely in terms of whether there was a business, that is to say whether there was a reasonable expectation of profit. Given the Minister's concession on this point, the Tax Court Judge's analysis, commencing at page 15 of his reasons, is misdirected. This misdirection manifests itself at pages 16 and 17 of the reasons for judgment:
Both the Crown and the Appellant consider that the Appellant can expect a profit. Given the concrete evidence of the quality of foals listed for sale, the Court finds that even in 1986, 1987 and 1988 the Appellant had a reasonable expectation of profit which has been (in hindsight) negatively impacted by the unexpectedly long-term effects of the changes in the United States Internal Revenue Code and the current continuing recession. It was, in 1986, 1987 and 1988, reasonable to expect that his horse-breeding business would provide the bulk of his income, even compared to his medical income. In 1986, 1987 and 1988 he could reasonably expect to look to his horse-breeding operation alone for his income, especially in those years when the full impact of the tax changes and the current recession had not taken effect. It was possible to anticipate that racing would cover current expenses and that a good breeding programme would provide substantial profit.
The Tax Court Judge did not engage in an analysis of what profit might have been earned by the taxpayer in each of the three taxation years in question. No doubt this gap was occasioned in part by the taxpayer's failure to adduce the necessary evidence as reflected in the testimony of Dr. McCarthy. His evidence was directed at whether the horse-farming operation gave rise to a reasonable expectation of profit. He admitted that he had never reviewed the taxpayer's books nor compared the business' revenue and expenses (see Appeal Book, Appendix 1, at pages 20 and 79-80). He could offer no opinion on the potential profitability of the horse-farming business.
In oral argument, counsel for the taxpayer sought to persuade us of the profitability of the farming operations by reference to the evidence from the examination for discovery of Rosemarie Weber, the Revenue Canada Assessment Officer who handled this file. Portions of the transcript from the examination were read in at trial (see Appeal Book, Appendix 1, at pages 221-227). Ms. Weber stated that in her opinion, the horse-farming activity had a reasonable expectation of profit, based on the quality of horses purchased by the taxpayer and his knowledge of horses generally. That evidence, however, supports only the concession that there was a reasonable expectation of profit (see Appeal Book, Appendix 1, at pages 221-227). Once again, there is a failure to appreciate the onus that was on the taxpayer to satisfy the Judge below that he would have or could have reasonably earned a profit of "X" dollars but for the unforeseen setbacks. This the taxpayer did not do and it is improbable that he could have met the evidential burden. I say this because the documentary evidence reveals that in those taxation years where the taxpayer was about to earn a profit, he would simply purchase a horse or two with the result that the farming operation incurred a loss.
Dans son argumentation, l'avocat du contribuable a cherché à nous convaincre de la rentabilité des activités agricoles du contribuable en se référant à l'interrogatoire préalable de la répartitrice de Revenu Canada qui a traité le dossier, Rosemarie Weber. Des passages de la transcription de cet interrogatoire préalable ont été versés au dossier au procès (voir le Dossier d'appel, appendice 1, aux pages 221 à 227). Mme Weber a déclaré que, selon elle, l'entreprise d'élevage de chevaux avait une expectative raisonnable de profit, vu la qualité des chevaux achetés par le contribuable et sa connaissance des chevaux en général. Toutefois, ce témoignage appuie uniquement la reconnaissance d'une expectative raisonnable de profit (voir le Dossier d'appel, appendice 1, aux pages 221 à 227). Une fois de plus, il n'a pas été tenu compte du fardeau qui incombait au contribuable de convaincre le juge du tribunal d'instance inférieure qu'il aurait ou pourrait avoir raisonnablement réalisé un bénéfice de "X" dollars n'eussent été les deux contretemps. Il ne l'a pas fait, et il est peu probable qu'il aurait pu s'acquitter de ce fardeau. Je dis cela parce que la preuve documentaire révèle qu'au cours des années d'imposition pendant lesquelles le contribuable allait faire un bénéfice, il achetait tout simplement un ou deux chevaux, de sorte que l'entreprise d'élevage subissait une perte.
The taxpayer admitted that he did not predetermine from year-to-year the amount he would spend in the purchase of new horses. His records indicate that any money earned from the horse business, as well as additional income transferred from the medical practice, was used to purchase new horses. Arguably, his actions do not indicate any desire to earn income from the horse-farming business during the taxation years in question. Rather, it would seem that his consistent reinvestment in new stock pointed to a desire to improve his stables, perhaps with the hope that he could retire in the future and live off the horse-farming income at that time.
Finally, the taxpayer relies on R. v. Graham, [1985] 2 F.C. 107 (C.A.). To my knowledge, this is the only case where a taxpayer has succeeded before the Court of Appeal in arguing that his farming business provided his chief source of income, despite employment in another area. In my opinion, there are two ways to distinguish Graham. First it can be argued that the Court applied an outmoded test which was further redefined in subsequent jurisprudence: see Morrissey v. Canada, supra. In Graham the Court applied a two-stage analysis. Was there a reasonable expectation of profit and, if so, what was the taxpayer's "ordinary mode and habit of work"? At page 113 the Court concluded that, "in the very unusual circumstances of this case", the taxpayer's employment did not preclude the Trial Judge from finding that the main preoccupation of the taxpayer was farming [Graham (P E) v The Queen , [1983] CTC 370 (F.C.T.D.)]. The second method of distinguishing Graham is the classical one"on the facts.
In Graham, the majority of the Court allowed a taxpayer to deduct full farm losses despite the fact that he held full-time employment with Ontario Hydro. The taxpayer, who was raised on a farm, arranged a flexible shift schedule around his hog-farming operation and took his holidays, days without pay and shift trades to accommodate planting and harvesting time. He also made arrangements with his employer to leave work in the case of an emergency at the farm. The taxpayer worked eight hours a day at his employment and a further 11 hours a day on the farm. Both the taxpayer's wife and 16-year-old son performed the necessary tasks during his absences from the farm. Finally, the taxpayer was able to obtain needed financing from the Ontario Farm Loan Board which did not lend money to part-time farmers: see [1983] CTC 370 (F.C.T.D.), at page 374. Against this background the majority viewed the principal issue in terms of whether a person could have employment in two full-time occupations at the same time. The dissenting judge (Marceau J.A.) viewed the issue in terms of a taxpayer who held a full-time job, was "seriously" involved in farming but who could not expect to generate "significant" profits from the latter enterprise.
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 Morrissey v. Canada , supra, at pages 420-423. More often than 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.
[B.]Il est bien établi que l'article 31 de la Loi vise à empêcher les "gentlemen-farmers" qui disposent d'un revenu considérable de déduire la totalité des pertes agricoles qu'ils subissent: voir l'arrêt Morrissey c. Canada , supra, aux pages 420 à 423. Plus souvent qu'autrement, cet arrêt est invoqué par les agriculteurs qui sont disposés à poursuivre l'exploitation de leur entreprise en demeurant ouvertement indifférents aux pertes subies. Concrètement et sur le plan juridique, ces agriculteurs sont des agriculteurs amateurs, mais le ministre leur accorde la déduction limitée prévue à l'article 31 de la Loi. Ces affaires concernent presque toujours des éleveurs de chevaux qui achètent ou élèvent des chevaux en vue de les faire courir. En vérité, ces entreprises ont rarement même une expectative raisonnable de profit, encore moins les éléments essentiels pour constituer la principale source de revenu de leur propriétaire.
It may well be that in tax law a distinction is to be drawn between the country person who goes to the city and the city person who goes to the country. In future, those insisting on obtaining tax relief in circumstances approaching those under consideration should do so through legislative channels and not through the Tax Court of Canada. The judicial system can no longer afford to encourage taxpayers or their counsel to pursue such litigation in the expectation that hope will triumph over experience.
To summarize, a determination as to whether farming is the chief source of income is dependent upon the cumulative effect of three key factors: capital committed, time spent and profitability. In my respectful opinion, the Tax Court Judge erred in his assessment of the evidence (inferences drawn from accepted facts) presented both in terms of the taxpayer's occupational direction and the potential profitability of the horse-farming business. Having regard to the fact that no one factor is decisive and to the primary findings of fact made by the Tax Court Judge, I conclude that the taxpayer's chief source of income for the years in question came from his medical practice. The horse-farming activity was merely a sideline business. Accordingly, I would allow the appeal with costs here, and in the Court below, set aside the judgment of the Tax Court Judge and affirm the Minister's reassessments for the taxation years in question.
Denault J.A. (ex officio): I agree.
Décary J.A.: I agree.