A-285-74
William Moldowan (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Pratte, Urie and Ryan JJ.—
Vancouver, April 24; Ottawa, June 2, 1975.
Income tax—Deductions—Appellant engaged in horse
racing business within definition of 'farming"—Minister dis
allowing deduction of farming losses—Whether farming, or
farming in combination with some other source, appellant's
chief source of income—Income Tax Act, R.S.C. 1952, c. 148,
ss. 13, 139(1), (la).
Appellant, involved in horse racing within the definition of
"farming" under the Income Tax Act, sought to deduct the
whole of his farming losses from his 1968 and 1969 income.
The Trial Judge, upholding the Tax Review Board, disallowed
the deduction, finding that farming was not appellant's chief
source of income, nor was it a combination of farming and
some other source within the meaning of section 13(1).
Held, dismissing the appeal, the importance of a source of
income cannot be entirely divorced from the importance of the
income that it normally produces, or is expected to produce.
And, a source of income which has always been marginal, and
is expected to remain so cannot be said to be the chief source.
Farming, therefore, was not appellant's chief source of income.
As to whether a combination of farming and some other source
was appellant's chief source, "combination" implies association
or integration. If it meant simply "addition", section 13 would
have no effect, since a taxpayer engaged in farming, and having
more important sources could always claim his chief source to
be a combination of farming and some other. This is not the
object of the section, and, as the necessary connection is lacking
here, the chief source of income was not a combination of
farming and some other source.
Per Urie J. (dissenting): the appeal should be allowed. There
need be no connection between farming and the business
making up in combination therewith a source of income. The
test of "reasonable expectation of profit" is used as one of the
indicia in determining whether the taxpayer is engaged in the
"business" of farming, not in determining his chief source of
income. The Trial Judge viewed "source of income" as meaning
"source of profit", and not simply "business", as the context of
the Act requires. Because the Trial Judge was wrong in his
interpretation, his finding that "in none of the years can it be
said that his chief source of income was farming or a combina
tion of farming and some other source ..." was incorrect, and
thus, he erred in holding that section 13(1) applied to appel
lant's farming losses for 1968 and 1969.
Wilfley v. The Queen 74 DTC 6422; M.N.R. v. Robertson
[1954] Ex.C.R. 321; M.N.R. v. Grieve Estate 59 DTC
1186; Simpson v. M.N.R. 61 DTC 1117; Hammond v.
M.N.R. 11971] F.C. 341; Dorfman v. M.N.R. [1972]
C.T.C. 151; The Queen v. Juster [1973] C.T.C. 410 and
upheld [1974] 2 F.C. 398 and James v. M.N.R. [1973]
F.C. 691, discussed.
APPEAL.
COUNSEL:
C. C. Sturrock for appellant.
T. E. Jackson for respondent.
SOLICITORS:
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
PRATTE J.: This is an appeal from a judgment
of the Trial Division [T-4634-73] which, confirm
ing a decision of the Tax Review Board, held that
the appellant was not entitled to deduct, in the
computation of his income for the 1968 and 1969
taxation years, the whole of the farming losses that
he had incurred for each one of those years.
In order to dispose of this appeal it is first
necessary to consider section 13 of the Income Tax
Act.
Section 13 provides that, in certain circum
stances, a taxpayer engaged in the business of
farming is not allowed, in the computation of his
world income, to deduct the whole of the farming
loss that he may have incurred. It must be stressed
that, apart from the section, under the general
rules governing the computation of income, the
farming losses of a taxpayer engaged in the farm
ing business would, in the computation of his
world income for the, year, be entirely deductible
from his profits from other sources. It must also be
observed that section 13 does not abrogate that
general rule since it presupposes that in certain
circumstances there is no limit to the deductibility
of farming losses. One should therefore avoid
giving to section 13 an interpretation which would
either absolutely prohibit such a deduction of
farming losses or would confer an absolute right to
so deduct all such losses.
The only part of section 13 that requires inter
pretation in this case is the one setting forth the
circumstances in which a limit is placed on the
deductibility of farming losses; it reads as follows:
13. (1) When 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 ...
It is common ground that the appellant was during
the year in question carrying on a business of
"farming" within the meaning of section 13. The
application of that part of the section nevertheless
raises three questions in the circumstances of this
case, viz:
(a) When is farming a "source of income"?
(b) When is farming a taxpayer's "chief source
of income"?
(c) What is the meaning of the expression
"combination of farming and some other source
of income"?
(a) Source of Income
It is apparent from section 3 of the Act that
"business", "property" and "offices and employ
ment" are considered to be sources of income.
Farming is, therefore, a source of income when it
is carried on as a business.
Section 13 presupposes that farming may be a
taxpayer's chief source of income for a taxation
year in , spite of the fact that the taxpayer may
have incurred a farming loss for that year. A
business does not cease to be a business in a year
(and a source of income does not cease to be a
source of income in a year) for the sole reason that
it does not yield a profit in that year. Section 13(1)
does not refer to the "chief source of the taxpay
er's income" but to the "taxpayer's chief source of
income". In my view, as long as a taxpayer carries
on the business of farming, farming remains one of
the taxpayer's sources of income regardless of the
fact that the farming business may in certain years
result in losses and regardless of the fact that the
taxpayer may have no reasonable hope of operat-
ing his farming business at a profit in those par
ticular years.
(b) Chief Source of Income
I must first observe that section 13(1) refers to
the "taxpayer's chief source of income"; it does not
refer to the "source of the bulk of the taxpayer's
income". In order to qualify as the taxpayer's chief
source of income, it is not necessary, in my opin
ion, that farming be more important than all the
taxpayer's other sources of income grouped to
gether; it is sufficient that farming, as a source of
income, be more important than any of the other
sources of income.
However,—and this is perhaps the crucial ques-
tion—how does one assess the relative importance
of the various sources of income of the taxpayer?
The expression "sources of income" embraces not
only "businesses" but also "property" and "offices
and employment". How does one compare the
importance, as sources of income, of a business
and of a property? Normally, one would be tempt
ed to answer that the importance of a source of
income in any particular year is proportional to the
importance of the income it produces in that year.
But such a simple and logical answer could not be
reconciled with section 13 which presupposes that
farming may be a taxpayer's source of income for
a year in spite of the fact that the taxpayer has
incurred a farming loss in that year.'
In order to reach a conclusion in this case, I do
not find it necessary to give an exhaustive answer
to that question. It is enough for me to say that, in
my view,
1. the importance of a source of income cannot
be entirely divorced from the importance of the
' One does not give a satisfactory solution to that problem by
saying that the word "income" in section 13(1) means "gross
income" instead of profit. If it were so, the farmer, whose whole
crop would have been destroyed just before harvest time, could
not deduct the whole of his farming loss since his farming
business having yielded no gross income for that year would not
be considered as a source of income at all.
income that it normally produces or that it is
expected to produce in the future;
2. a source of income which, for a taxpayer, has
always been and is expected to remain a margin
al source of income cannot be said, as long as it
remains a marginal source of income, to be the
taxpayer's chief source of income.
(c) Combination of Farming and Some Other
Source
I do not share the view that a taxpayer's chief
source of income may be "a combination of farm
ing and some other source of income" even if there
is no "connection" of any sort between the farming
activities of the taxpayer and his other source of
income. In my opinion, the word "combination"
means more than "addition"; it implies, in my
view, a certain degree of association or integration.
It is only if two sources of income are, in some
way, integrated or interconnected that it can be
said that their combination constitutes one source
of income.
Moreover, if the expression "combination"
meant nothing more than "addition", section 13
would be devoid of any effect since the taxpayer
engaged in the business of farming and having also
other more important sources of income could
always claim (by adding "farming" to his most
important source of income) his chief source of
income to be "a combination of farming and some
other source of income".
I now turn to consider the way in which the
appeal should be disposed of.
The appellant had been engaged in the business
of farming for many years. Save for two years, in
which his farming activities yielded a small profit,
he had, every year, incurred a farming loss. I find
in the evidence ample support for the finding of
the Trial Judge that the appellant, who was a man
of some means, never 'seriously expected that his
farming activities would ever yield more than an
income of insignificant importance in relation to
his income from other sources. In those circum
stances, I am of the view that the Trial Judge was
right in holding that farming was not the appel
lant's chief source of income. Moreover, as there
was no connection or relation of any sort between
farming and the appellant's other sources of
income, the Trial Judge was also right, in my
opinion, in deciding that the chief source of income
of the taxpayer was not a combination of farming
and some other source of income.
For these reasons, I would dismiss the appeal
with costs.
* * *
The following are the reasons for judgment
rendered in English by
URIE J.: This is an appeal from a judgment of
the Trial Division dismissing the appellant's appeal
in respect of re-assessments for his 1968 and 1969
taxation years.
The Minister of National Revenue by the re
assessments limited to $5,000 in each of the years
in question deductions for losses claimed by the
appellant arising out of his horse racing business.
In so doing the Minister applied the provisions of
section 13(1) of the Income Tax Act (hereinafter
called the Act). It read in each of the taxation
years under review as follows:
13. (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, his income for the year shall
be deemed to be not less than his income from all sources other
than farming minus the lesser of
(a) his farming loss for the year, or
(b) $2,500 plus the lesser of
(i) one-half of the amount by which his farming loss for
the year exceeds $2,500, or
(ii) $2,500.
(2) For the purpose of this section, the Minister may deter
mine 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.
(3) For the purposes of this section "farming loss" means a
loss from farming computed by applying the provisions of this
Act respecting the computation of income from a business
mutatis mutand. ,.
The facts adduced in evidence are sufficiently
set out in the reasons for judgment of the learned
Trial Judge as follows:
The plaintiff has been actively engaged in horse racing from
at least as far back as the early 1960's, and in his taxation years
1968 and 1969 he was buying and selling race horses, training,
raising and boarding race horses and engaged in horse racing.
He originally started racing with one or two horses and subse
quently bought numerous race horses, as shown in Exhibit P-5,
which shows about 53 horses bought during the years 1962 to
1969, at a total cost of about $183,463. He owned all the horses
outright, except for several whose ownership he shared with
other persons. He bought the horses at auctions and privately
and through claiming races. He raced his horses at race tracks
in British Columbia and eastern Canada, and in eastern and
western United States, including well known tracks in Ontario,
Seattle, Oakland and Florida. He sold and disposed of the
horses from time to time. Exhibit P-5 also includes a schedule
of purses won by the horses to a total of $184,018, the largest
year being 1966 when the purses amounted to $29,558.
In the early years the plaintiff boarded his horses with one
Mr. T. Fenton, who had a farm and trained and cared for race
horses, but in 1966 the plaintiff decided to dispose of his
interest in a company, by which he was employed, Active
Trading Ltd., and to expand his horse racing activities, so he
leased an acre of a farm adjoining the Lansdowne Race Track
in the Municipality of Richmond, which rented acre contained
a small house, a corral and about 25 to 30 box stalls for horses,
in reality a horse farm; he engaged Fenton as a trainer and paid
him $300 per month, plus 10% of purses won; he also paid boys
who exercised the horses. He had necessary facilities at Lans-
downe farm for his expanded business. In 1968 he had 5 clients
for whom he boarded and trained horses, fees for boarding
being $80 to $100 per month, and for training $9 to $10 per
day. He testified that he expected to be able to make a
profitable living from his expanded operations and hoped to
expand them further.
In the years 1960 to 1967 the plaintiff was employed by the
said Active Trading Ltd. and received salary in those years
ranging from $11,500 to $15,900. He sold his 50% interest in
that company in 1967 for $150,000, receiving $50,000 cash,
with the remainder payable at the rate of $5,000 per month for
the next 20 months. In 1969 he received salary amounting to
$17,833 from Cascade Fasteners Ltd., a company that he
started in 1968 and later sold. He also started another com
pany, Cascade News, in 1967, whose business was the distribu
tion of racing forms in British Columbia, and he received
dividends from that company.
Exhibit D-3 is a summary of the plaintiffs income for the
years 1960 to 1972, as follows:
Office or
Year Employment Investment
Charge ou Investis-
Année emploi sements
1960 $ 11,500.00 •
1961 15,600.00
1962 15,600.00 $ 300.00
1963 15,900.00 38.66
1964 16,200.00 37.84
1965 15,900.00 1,364.08
1966 15, 900.00 1,193.86
1967 13, 500.00 1,625.43
1968 1,750.00 8,822.43
1969 17,833.40 17,048.65
1970 \' 17,309.39 19,919.72
1971 6,607.04 7,656.55
1972 22,306.00 13,384.66
There is no dispute as to the figures. They indicate that the
plaintiff's horse racing activities realized a profit of $1,593 in
1963 and $1,368 in 1964, but in every other year in the period
1962 to 1969 he sustained losses totalling almost $55,000, the
greatest being about $21,000 in each of those years.
The interpretation of section 13 has been con
sidered by the Exchequer Court and the Trial
Division of this Court on a number of occasions
and by the Appeal Division on one occasion in
which the issue raised in this appeal was not dealt
with. Among those cases are the following:
M.N.R. v. Robertson [1954] Ex.C.R. 321; M.N.R.
v. Grieve Estate 59 DTC 1186; Simpson v.
M.N.R. 61 DTC 1117; Hammond v. M.N.R.
[1971] F.C. 341; Dorfman v. M.N.R. [1972]
C.T.C. 151; The Queen v. Juster [1973] C.T.C.
410 (upheld [1974] 2 F.C. 398); James v. M.N.R.
[1973] F.C. 691 and Wilfley v. The Queen [1974]
C.T.C. 510.
In the Dorfman and James cases several princi
ples were enunciated, which were not disputed by
the parties to this appeal and with which I agree
and which I accept. They are:
1. The maintaining of horses for racing and the
training of horses, is "farming" within the mean
ing of the Act.
2. Whether or not in a given case a taxpayer is
"farming" within the meaning of that term in the
Act and for the purposes of the application of
section 13, is a question of fact.
3. The determination of a taxpayer's "chief source
of income" for a taxation year is also a question of
fact. However, while there was no discussion on
the point in these cases, it is clear that before that
fact can be established the trier of fact must
correctly apprehend the meaning of the term
"chief source of income".
4. There need not be any connection between
farming and the business making up in combina
tion therewith a source of income. In the James
(supra) case Gibson J. reviewed the history of the
legislation and concluded [at page 700] that:
... I find no statutory authority for the proposition that in
order for it to be possible to make a determination under
section 13 of the Act, whether or not the chief source of income
for a taxation year of a taxpayer is a "combination" of
farming and some other source of income that there must be
some "connection" between the business of farming and the
business from which such other source of income is derived.
With that conclusion I agree and merely add that
if it were intended that there should be some sort
of a connection between farming and the other
source of income with which its income might be
combined, Parliament could very easily have used
language clearly to express this intention. Instead,
it used the word "combination". The Shorter
Oxford Dictionary, 3rd Ed. defines "combination"
as follows:
1. The action of combining two or more separate things. 1613
2. Combined state or condition; conjunction 1597
3. Concr. A group of things combined into a whole 1532.
There is no implication from this definition of the
necessity for a connection between the things
which are combined. In fact the opposite appears
to be the case. To so imply would require that
additional words be read into the section and
would strain the natural meaning to be given to a
word. Neither result is desirable. I thus conclude
that neither the legislative history nor the diction
ary definition require that there be a connection
between the businesses or source of income making
up the combination.
The interpretation of the phrase "chief source of
income" is the real issue in this appeal and necessi
tates an analysis of the relevant sections of the
Act.
Section 3 of the Act provides that the income of
a taxpayer for a taxation year is his income for the
year from all sources, one of which is his income
from all businesses.
Sections 139(1)(p), 139(1)(e), 139(1)(ae)(i)
and 139(la)(a) read as follows:
139.(1)...
(p) "farming" includes tillage of the soil, livestock raising or,
exhibiting, maintaining of horses for racing, raising of poul
try, fur farming, dairy farming, fruit growing and the keep
ing of bees, but does not include an office or employment
under a person engaged in the business of farming;
139.(1)...
(e) "business" includes a profession, calling, trade, manufac
ture or undertaking of any kind whatsoever and includes an
adventure or concern in the nature of trade but does not
include an office or employment;
139.(1)...
(ae) "personal or living expenses" include
(i) the expenses of properties maintained by any person
for the use or benefit of the taxpayer or any person
connected with the taxpayer by blood relationship, mar
riage or adoption, and not maintained in connection with a
business carried on for profit or with a reasonable expecta
tion of profit,
139. ( l a) For the purposes of this Act
(a) a taxpayer's income for a taxation year from a business,
employment, property or other source of income or from
sources in a particular place means the taxpayer's income
computed in accordance with this Act on the assumption that
he had during the taxation year no income except from that
source or those sources, and was allowed no deductions in
computing his income for the taxation year except such
deductions as may reasonably be regarded as wholly appli
cable to that source or those sources and except such part of
any other deductions as may reasonably be regarded as
applicable to that source or those sources, and
Section 139(1)(p) defines farming. The learned
Trial Judge found as a fact that the appellant was
at the material times "farming" within the mean
ing of that subsection, and the respondent did not
dispute this finding.
Section 139(1)(e) defines "business" as includ
ing, inter alia, a "calling, trade ... or undertaking
of any kind." Certainly farming falls within one of
those categories and thus is a "business" for pur
poses of the Act, as it is in the use of the word in
every day parlance.
The reasoning process in the determination of
fact leading to the conclusion that a person is
engaged in the business of farming, it seems to me,
may involve ascertaining from the evidence, as one
of the indicia, whether or not the alleged farmer
has a "reasonable expectation of profit", as that
term is used in section 139(1)(ae)(i). In my view,
it should be emphasized that this concept provides
only one of the indicia, the weight to be given to
which will vary with the evidence adduced in each
case.
Reference then must be had to section
139(1a)(a). This section, read in conjunction with
section 3, leads to the conclusion that every busi
ness must be regarded as a source of income,
irrespective of whether in any given year it pro
duces any income, either gross or net.
Counsel for the respondent argued that since
section 4 of the Act defines income as profit,
"source of income" as used in section 13 means
"source of profit". With respect I do not agree
with this submission.
The appellant having been found to have been
farming and farming being a business and thus a
source of income, the fact that the business does
not produce any kind of income in any taxation
year is irrelevant in determining whether or not
section 13 (1) applies in a given case. The term
"source of income" in the context of the Act
means, in effect, "business". It does not mean
"source of profit".
But the matter does not end there. Because
section 13(1) requires a determination of a taxpay
er's chief source of income for a taxation year, in
order to ascertain whether or not the section
applies in a given case, the simple acceptance of
farming as a business and thus a source of income
is, in my view, insufficient. An examination must
be made of the various sources of the taxpayer's
income, if he has more than one, to ascertain
whether farming income, combined with income
from another source, represents his chief source of
income. Of course, if he has only one other source,
then his chief source must be farming together
with the other source, in which event obviously the
taxpayer is outside the purview of section 13(1). It
goes without saying that this is also true if his only
source of income is farming.
The problem is created when a taxpayer has
more than one source of income in addition to
farming. In that event while farming is always a
source of income, regardless of whether or not in a
given year any revenue has actually been generat
ed from its operations, it is necessary, in my view,
to examine all of the sources to determine whether
farming as one source and one of the others,
together give him his chief source of income. If
they do, again, section 13(1) is not applicable.
On the other hand, if his income from farming
together with the largest of his other sources is less
than the combined incomes from other sources, it
might well be necessary to consider other factors
before the conclusion is reached that section 13(1)
applies to limit losses deductible. Such a situation
might occur when, for example, in a given year, a
farmer suffers total destruction of his crops. In
such circumstances, since farming is still a source
of income, although no income has been produced
from the farm's operations, resort may be had to
other criteria to determine whether it, as a busi
ness and thus a source of income, is, in combina
tion with another, a chief source. Without
attempting in any way to exhaust the possibilities,
some of those criteria which might be considered
are the relative amounts of capital investment in
the respective sources, the reasonableness of his
expectation of profit therefrom, the amounts of
gross income and of net income derived from each
source, the proportion of time spent in each day by
the taxpayer in respect of each source, and the
prior history of the respective sources in respect of
amount of income generated. If, on all of the
evidence it could not be said that the farming and
some other source provided the chief source of
income, then section 13(1) would apply.
While I have expressed my views on the applica
tion of section 13(1) somewhat differently, I think
that my conclusions accord with the reasoning of
both Collier J. and Gibson J. in the Dorfman,
James and Wilfley (supra) cases.
The only evidence on the record in this case to
assist in the determination of the chief source of
income utilizing any of the criteria to which I have
above made reference is the profit or loss generat
ed by each source of income of the appellant in
each of the years 1960 to 1972, as shown on
Exhibit D-3 above. In the case of income from
office or employment and investment, it would
appear that in each of the years the income is the
gross income. From the appellant's tax returns for
the years 1968 and 1969 the gross income derived
from his farming operations is disclosed. In the
year 1968 the gross income was $32,634, and in
the year 1969, $24,903. In each case the earnings
were derived largely from purses won, training and
boarding fees and from the trading of horses.
In 1968, the appellant derived income of about
$1,750 from office or employment, $8,822 from
investments and $12,500 from a real estate trans
action. In 1969 he earned about $17,833 from
office or employment and $17,048 from
investments.
In each of the tax years in issue, therefore, the
largest single source of gross income was from the
appellant's farming operations. This then, in com
bination with the largest of his other sources of
income provided his chief source of income in each
of those years.
It is interesting to note that in the taxation year
1967, the appellant claimed and was allowed to
deduct a farming loss of $8,504.75, i.e. section
13(1) was not applied. His gross farming income
in that year was at its peak having been $94,678.
According to the evidence that was the year in
which he began to operate his race horse business
in a substantial way. The large income and rela
tively small loss generated in the first year of
operation makes it somewhat difficult for me to
agree with the observation of the learned Trial
Judge that "I do not think that he could reason
ably look to or depend upon it, either alone or in
combination with some other source of income, as
his chief source of income in any of the years
ahead, including the years 1968 and 1969." As I
pointed out above, in my opinion, the test of
reasonable expectation of profit is used as one of
the indicia to determine whether or not a taxpayer
is engaged in the business of farming not in the
determination of the taxpayer's chief source of
income. The Trial Judge's finding that the appel
lant was in the business of farming, on the evi
dence adduced in this case, would, I would have
thought, involved the use of this test. Thus, the
comment referred to is not only inconsistent with
his prior finding but is not, in my view, relevant in
the resolution of the issue in this appeal.
I think it is clear that the learned Trial Judge
viewed "source of income" as meaning "source of
profit". With the greatest respect, for the reasons
heretofore given, I think that he was in error in
adopting this view.
Because the learned Trial Judge in my view
improperly interpreted the meaning of the phrase
"source of income", his finding that "In none of
the years can it be said that his chief source of
income was farming or a combination of farming
and some other source of income," was erroneous.
If I am right in so concluding, then it would
appear that he was wrong in deciding that section
13(1) applied to the appellant's farming losses in
the years 1968 and 1969.
I would, therefore, allow the appeal. The re
assessments for the taxation years 1968 and 1969
should be referred back to the respondent for
further re-assessment accordingly. The appellant
should be entitled to his costs both in this Court
and in the Trial Division.
* * *
The following are the reasons for judgment
rendered in English by
RYAN J.: The facts of this case are fully set out
in the reasons for judgment of my brother Pratte
J., and my brother Urie J. I agree that the appel
lant's horse racing and related activities constitut
ed farming. I agree also that the appellant's farm
ing was a source of income within the meaning of
that term as used in section 13 of the Income Tax
Act 2 .. The learned Trial Judge found, and his
finding was not disputed, that "in the years 1968
and 1969 the plaintiff was operating a business of
buying and selling race horses, boarding and train
ing race horses owned by other persons, and racing
his own horses, and that he was doing so not as a
hobby but in the course of a commercial enterprise
with a view to profit". This finding is decisive of
the question whether farming was a source of
income during the years in question.
I am also in accord with the view that farming
or farming in combination with some other source
may be a source of income for purposes of section
13, though the taxpayer sustained a loss through
its operation during the taxation year. If this were
not so, it would be difficult to make sense of the
section.
The critical question is whether farming or
farming in combination with some other source
was the appellant's chief source of income during
the taxation years in question. Once one accepts
that a source may be a source of income in a
particular year though, through it, the taxpayer
suffers a loss in that year, one loses the possibility
of simply comparing net income from each source
as the test for determining the chief source. One
must therefore seek some other guide; and while it
is true that a source may be a source of income in
a particular year though it did not yield a profit in
that year, it nonetheless appears to me pertinent to
look at each of the taxpayer's sources from the
point of view of capacity for present or future
profit or for both when one is seeking to determine
his chief source of income in that year. The rela
tive importance of sources as sources of income
would seem to me to be in most part a function of
their capacity to produce gain. In my opinion an
appropriate path to a resolution of this difficult
problem is to give significant attention to the
taxpayer's ongoing income-earning activities in a
practical and businesslike way and in this way to
determine which of the taxpayer's sources of
income, in the ordinary run of his affairs, but
2 The relevant statutory provision is the Income Tax Act,
R.S.C. 1952, c. 148, section 13 (as amended), as applicable to
the taxation years 1968 and 1969.
taking account of his plans and his activities in
implementation of his plans', is the chief source of
his income in the sense of its usual or its foresee
able profitability or of both. In seeking an answer,
gross income, net income, capital investment, cash
flow, personal involvement, and other factors may
be relevant considerations. Following this
approach in this case, I am not satisfied on the
facts that during 1968 or 1969 farming was the
appellant's chief source of income. Indeed, I would
agree with the learned Trial Judge that it was not.
I am also of the opinion that the appellant has
not made out a satisfactory case to establish that
in 1968 or in 1969 farming, combined with
another of his sources, was his chief source for the
year. In my view, the decision as to whether the
combination of farming and some other source of
income was the taxpayer's chief source of income
involves the making of a practical judgment on the
question of whether in fact the combination con
stituted the chief source. I do not think the ques
tion is answerable simply by saying that farming
can be combined with the taxpayer's most impor
tant other source, no matter what it may be, and
thus concluding without more that the combina
tion is the chief source. Such an approach might
be put in the alternative: (a) assuming that chief
source means the most important single source,
then in every case, by combining farming with the
most important other source, the result must
always be that the combination is the chief source;
or (b) assuming that chief source means the source
that is more important than all others combined,
then the combination of farming with the most
important other source must be the chief source
whenever there are three sources or less. Only if
the assumption made in alternative (b) were valid
and there were more than three sources (including
the combination) would the Minister's.discretion-
ary power under subsection 13(2) have room to
operate, or, in the absence of an exercise of the
Minister's discretion, , would the Court have an
effective authority to make the decision. In my
opinion this approach is inappropriate when
3 See, for example, Wilfley v. The Queen 74 DTC 6422.
viewed under the aspect of the purpose of the
section, which is to place some limit on the deduct-
ibility of commercial farming losses. Just as in the
case of determining whether farming alone is the
chief source, so in the case of determining whether
farming combined with another source is the chief
source, a practical judgment must be made, and in
my opinion the judgment is to be made by way of
analogy to the process appropriate to determining
whether farming alone is the chief source. In
making this assessment, the comparative impor
tance of the combination must be assessed as if the
decision were being taken by a reasonable and
informed observer. The question to be decided is
one of fact: was the combination the taxpayer's
chief source? The answer is to be sought in a
context which, depending on the facts of the par
ticular case, may embrace the past and predictions
about the future as well as the present. The deter
mination in a particular case may be difficult, but
the section is itself far from being a model of
clarity. It appears to be a remanet of a section
which, before serious amendment, had as its pur
pose the fixing of a minimum sum, the taxpayer's
income from his chief source of income, below
which his income was deemed not to fall for
taxation purposes. I confess to being somewhat
puzzled over the objective which was sought to ble
attained by the continuance of this portion of the
former section. Because of it, a limit is placed on
the deductibility of commercial farming losses
where farming is carried on as a subordinate activ
ity even though no such limit appears to have been
placed on the deductibility of other types of subor
dinate commercial loss.
I am not satisfied on the evidence that a reason
able and informed observer, viewing the taxpayer's
activities in a practical way, would regard the
appellant's farming activities (having in mind the
record of past performance and prospects for the
future) in combination with any other of his
sources during 1968 or 1969 as his chief source of
income for the year. I am not satisfied that he
would so regard the combination whether chief
source means most important source or more
important source than all others combined.
I would dismiss the appeal.
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