Citation: 2007CCI146
Date: 20070403
Docket: 2004-674(IT)G
BETWEEN:
DIANNE L. STACKHOUSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] These appeals are from reassessments for the appellant's 1997 and 1998 taxation years. The Minister has restricted the appellant's farm losses for those years in accordance with subsection 31(1) of the Income Tax Act ("the Act"). The issue is whether the appellant's chief source of income was farming or a combination of farming and some other source of income during the 1997 and 1998 taxation years.
[2] The appellant was born in 1950 and has been involved in farming since she was ten years old. As a child, she contributed to the operation of the family farm by milking the cows and helping with other chores. She ran her own egg business with hens she bought from money raised by collecting pop bottles. Being the eldest of six children, she always helped her mother after coming home from school.
[3] The appellant left home to attend university, obtaining a Bachelor of Science degree and a medical degree. She decided to practise medicine in a rural rather than urban area, since she had grown up in the country and could not see herself spending the rest of her life in a closed-in environment.
[4] She therefore moved to Cambridge, New Brunswick, where she purchased a 350-acre farm in 1975. She moved there in 1977 with her four horses: one purebred stallion and three mares. She raised crossbred foals and sold them, grew crops to feed the horses and tilled the soil, all the while working at building a rural medical practice.
[5] When the appellant bought the farm in 1975, only 50 acres of land were cleared. In 1982, she bought Arabian horses thinking that there was a market for purebred stock. She raised foals for sale and soon realized that more land would have to be cleared, for 50 acres could not support the number of horses she had. Part of the original 350 acres was consequently, cleared. At the same time, the appellant constructed a barn and built fences. She also acquired more land so that she now owns 800 acres, of which half are cleared.
[6] In 1994, she met Gerry Caissie, her common-law partner, who had recently retired from the construction business and was very much interested in the farm. Over the years, the appellant became very reluctant to use chemicals on her crops. They both discussed ways to preserve the topsoil when clearing the land and to grow crops in an environmentally friendly way. They minimized burning and found a way to compost organic material on a large scale, the intent being to move into organic farming. They obtained the required compost licence and built a composting facility.
[7] The appellant made her first attempt at growing soy beans in 1995; she also raised other crops both on her farm and on leased land. Spreadsheets of crop rotations since 1994 indicate the number of acres being cultivated, the location of the crops and the types of crop.
[8] In 1996, the farm was certified as an organic farm, with a total of 311 acres qualifying as organic. In 1997, the number of acres so qualifying went up to 591, increasing to 970 in 1998. The appellant wanted to blend the ideals of an organic farm operation on a larger scale with profitability and manageability. The certification as an organic farm came from the Organic Crop Improvement Association (OCIA) which is an agency based in the United States having its own certification criteria and its own inspectors. In 1998, the farm was certified organic by the Maritime Certified Organic Growers Co-op Limited (MCOG), which is a local maritime organic certification body with less stringent criteria than the OCIA. The appellant's farm is also IFOAM (International Federation of Organic Agriculture Movements) accredited. IFOAM is an MCOG certification that permits the sale of a farm product either on the farm or by direct delivery to customers. IFOAM provides worldwide accreditation allowing exports to the European and possibly Japanese markets. These accreditations were maintained by the appellant over the years.
[9] In 1998, there was an opportunity to grow commercial hemp for fibre through federal and provincial government programs. The appellant applied for an industrial hemp licence and started growing hemp in 1998 from seeds provided by the government. Since government was investing money in the textile industries, the appellant grew hemp organically as her primary crop and projected that the farm would be profitable in that year. Not only was the program cancelled by the government in 1999, but the 1998 crop had had to be destroyed as the tetrahydrocanibol (THC) content in the hemp was too high. No crop insurance was available for the hemp. The appellant looked into the possibility of growing marijuana for medicinal purposes but that did not materialize.
[10] In addition to tilling more land every year, the appellant has also acquired new land through leases from various land owners around her farm. This land was mostly leased from senior citizens or from family members who lost interest in their property but did not want the land to grow into brush. In all cases, the appellant made sure that the land could be certified organic. This land also allowed the appellant to diversify because a farmer cannot depend solely on one crop given all the business variables, the weather and other issues. More land was added for that reason and also in order to feed the cattle she acquired in 2002. In recent years, the appellant has not grown cash crops as she has mostly grown feed for the cattle. Since the tax years in issue, her vision for the farm has been organic beef production. The appellant purchased purebred Red Angus and Black Angus stock in 2002. She chose the Angus breed for its superior profit potential compared to other breeds. They bought 103 head of cattle.
[11] The appellant works on the farm. In both taxation years under appeal, she worked at her medical practice part of the day on Monday, Tuesday, Wednesday and Friday. She spent two hours in the morning and two hours after supper on those days and all day Thursdays and weekends, doing farm labour, putting in a minimum of 40 hours per week on the farm. The scheduling of her patients' appointments depended on the weather and on what had to be done on the farm. She would see patients evenings or afternoons. By 2002, more money was required to support the farm's expansion and she worked all day Thursdays in a Frederictonclinic. All of her income other than what is required to live on is invested in the farm. It was the appellant's intention to have a farm and a medical practice concurrently and eventually to retire from her medical practice and work on the farm.
[12] The labour performed by the appellant on the farm consists of mixing cattle feed, operating farm equipment, monitoring the health of the cows and horses, checking fences to make sure they are electrified not down or otherwise broken, and making the rounds in the pasture in the evenings to verify the well-being of the animals, giving them injections and taking blood samples.
[13] In 1996, 1997 and 1998, there were one or two employees on the farm, excluding her common-law husband. In some years, there were more employees, such as students hired to do manual work. All were supervised by the appellant herself and her common-law husband.
[14] For both of the taxation years at issue, the appellant was considered by the province of New Brunswick to be a farmer for the purposes of the provincial sales tax farm exemption and has been so considered since 1979. Initially, that meant a provincial tax exemption on purchases of equipment and machinery for the farm, and only farmers could benefit from it.
[15] The appellant's investment in capital assets for the period from 1995 to 2005 totals $28,949 for her medical practice and $741,776 for the farming operation. As for the revenue generated by the farm, it shows a decrease from 1998 while revenues from the medical practice have been on the rise over the years. Her net income from her medical practice for both years under appeal was $73,984 and $88,991 respectively. Her net farm losses for the same years were $138,086 and $56,954.
[16] Mr. Claude Bertheleme, an agronomist with the New Brunswick Department of Agriculture, Fishery and Aquaculture (the "Department") testified regarding the current state of organic farming in New Brunswick and the services offered by his department to organic farmers since 2001. He stated that the size of the organic market in New Brunswickis such that it is becoming more than a niche and that opportunities exist in all sectors of organic agriculture. He also testified concerning the difficulties associated with starting an organic farming operation in New Brunswick and spoke of various programs that are now offered but that were not available back in 1996, 1997 and 1998.
[17] Mr. Bertheleme became familiar with the appellant's farm in 2001 when he was hired as an organic specialist. His department was involved in nutrient management planning, that is, in this instance, planning for the most appropriate use of manure and fertilizers in anticipation of the appellant deciding to keep cattle on the farm. A plan was developed for the appellant. Considering land base and animal inventory, the appellant's farm is the largest organic farm in New Brunswick. The cow and calf herd on a conventional beef farm is between 58 and 64 head. The appellant's farm has 195 head of cattle.
[18] The witness was also familiar with the appellant's crop rotation calendar (Exhibit A-4). Given the total acreage being used in comparison to other farms in New Brunswick, the appellant's farm is considered a large farm. In terms of the evolution of the appellant's farm over the course of the witness's involvement, the operation was initially what is referred to as a cash crop farm, as the intent was to cultivate a significant acreage of cereal and protein crops for the domestic market and for export. The farm evolved over a period of a few years and is now shifting toward raising cattle and producing forage crops and perhaps growing fewer cash crops. He appeared confident that the market for organic beef farmers is quite strong, as more people are turning to organic foods.
[19] The appellant's farm may be categorized as a beef operation, being one amongst the six or seven such organic operations in New Brunswick. The farm is also involved in forage and grain production.
[20] With respect to farmers who want to get involved in organic farming, Mr. Bertheleme indicated that the process is more complicated than for conventional farming for several reasons. One of these is that organic farmers have to adhere to a very strict protocol and standard, and within that standard the production methods are quite detailed, some being permitted and some not. Likewise, with regard to products and inputs that are typically used on conventional farms, some may be used in an organic system, while others may not. A fair amount of knowledge is therefore required. Indeed, organic farming is referred to as a knowledge-based system, one in which farmers really have to know what they are doing. Quick-fix remedies are not as readily available to organic growers as they would be to conventional farmers.
[21] The appellant's common-law husband gave evidence concerning his involvement on the appellant's farm and more particularly regarding how he had had to familiarize himself with organic farming by visiting farms in Ontario and reading many books on the subject. He has many plans to expand the farm and expects that the organic beef operation will turn things around. He spends many hours a week working the farm and shares responsibilities with the appellant. They discuss its operation, and even though he works more with the equipment than does the appellant, she drives tractors and is very much involved in that aspect of the operation.
Appellant's position
[22] The appellant submits that section 31 of the Act does not apply, as she comes within the first class of farmers described by Mr. Justice Dickson in Moldowan v. The Queen, [1978] 1 S.C.R. 480, at page 487, in that she is a farmer "for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine". Consequently, for the years under appeal, in which she sustained farming losses, she is free of the limitation of subsection 31(1) of the Act. The appellant, it is submitted, has been a farmer for most, if not all, of her life. She grew up on a farm and pursued farming as a way of life following her medical studies.
Respondent's position
[23] It is the respondent's position that the farm operation is not the centre of the appellant's work routine. Her involvement in her medical practice was her chief source of income for the years under appeal and she thus does not meet the criteria that one must satisfy in order to be a farmer in the first class described in the Moldowan decision. The respondent therefore submits that the appellant's chief source of income was neither farming nor a combination of farming and some other source of income, with the result that the farming losses are restricted by subsection 31(1) of the Act.
[24] The relevant section of the Act reads as follows:
31(1) Loss from farming where chief source of income not farming
Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 the taxpayer's loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of
(a) the lesser of
(i) the amount by which the total of the taxpayer's losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by the taxpayer exceeds the total of the taxpayer's incomes for the year, so determined from all such businesses, and
(ii) $2,500 plus the lesser of
(A) ½ of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and
(B) $6,250, and
(b) the amount, if any, by which
(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1" were deleted,
exceeds
(ii) the amount determined under subparagraph (a)(i).
[25] The opening words of section 31 set out the test for its application. The test asks two questions. The "principal question" is whether farming is the taxpayer's chief source of income, and the "combination question", is whether the taxpayer's chief source of income is a combination of farming and some other source of income. Section 31 applies only if the answer to both questions is no.
[26] In a recent Federal Court of Appeal decision, Gunn v. Canada, [2006] F.C.J. No. 1256 (QL), Madam Justice Sharlow reviews the legislative history of section 31 in the hope of determining the meaning of the phrase "chief source of income" or finding guidance on how to approach what she calls the "combination question", but found nothing. She also questions the purpose of section 31 in as much as it precludes certain farmers from claiming tax relief for farming losses in excess of a statutory threshold, and asks why some farmers were chosen to bear this particular tax burden while others were spared. She reviews cases dealing with that section and its purpose, but is unable to find a satisfactory explanation for the existence of section 31 of the Act.
[27] She then does a review of the "jurisprudential" cases having to do with section 31, referring to the leading case of Moldowan (supra), in which Mr. Justice Dickson proposes a number of principles to assist in determining how a farmer is to be categorized and whether section 31 applies or not. She deals with the criticism of, and difficulties that are posed by, the Moldowan decision, particularly with regard to addressing the "combination question" and with regard to how that question should be interpreted. Madam Justice Sharlow goes on to state that in the fiscal context, statutory interpretation must be informed by the recognition that, in a self-assessing tax system that respects the right of taxpayers to plan their tax affairs intelligently, taxpayers require rules that are consistent, predictable and fair, citing on that point Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601.
[28] In paragraph 82 of the Gunn decision (supra),the Federal Court of Appeal states that the "combination question" in section 31 of the Act is capable of bearing a more straightforward meaning than that assigned to it by Mr. Justice Dickson in Moldowan, a meaning whereby it is not necessary for the farmer to have a combination of sources of income in which farming predominates. That court concludes as follows in paragraph 83:
In my view, the combination question should be interpreted to require only an examination of the cumulative effect of the aggregate of the capital invested in farming and a second source of income, the aggregate of the income derived from farming and a second source of income, and the aggregate of the time spent on farming and on the second source of income, considered in the light of the taxpayer's ordinary mode of living, farming history, and future intentions and expectations. This would avoid the judge-made test that requires farming to be the predominant element in the combination of farming with the second source of income, which in my view is a test that cannot stand with subsequent jurisprudence. It would result in a positive answer to the combination question if, for example, the taxpayer has invested significant capital in a farming enterprise, the taxpayer spends virtually all of his or her working time on a combination of farming and the other principal income earning activity, and the taxpayer's day to day activities are a combination of farming and the other income earning activity, in which the time spent in each is significant.
[29] Both counsel agree that Moldowan is still the leading authority and the correct test to apply in the interpretation of subsection 31(1) of the Act. The appellant's counsel however, favours the view that the conclusions in Moldowan should be looked at in light of more recent Supreme Court decisions requiring that the analysis of tax legislation be done in a textual, contextual and purposive manner to find a meaning that is harmonious with the Act. Each counsel has put forward his position by addressing the aggregation of the various relevant economic factors (capital, income and time) referred to in Moldowan.
[30] Counsel for the respondent argues that the appellant's farming operation was merely a sideline business during the taxation years under appeal and that her chief source of income was her medical practice; this puts her in the second class of farmers described in Moldowan. With respect to capital invested, counsel agrees that the amount invested by the appellant in the farm is substantial, but argues that that factor alone is not decisive, as all three factors must be weighed. Relying on Moldowan, counsel submits that only the time devoted by the appellant, and not by others, to the farm should be considered. On the issue of profitability, counsel submits that both actual and potential profitability must be considered and that the evidence presented does not show that there was any potential for profit with respect to either of the taxation years under appeal. Counsel finally relies on Watt v. Canada, [2001] F.C.J. No. 517 (QL), to suggest that the appellant's farming operation was merely subordinate to the main activity from which all of the income was derived, that actual or potential profitability is required in order to classify farming as the appellant's chief source of income, and that the appellant's farming income, although not alone decisive, is relevant and cannot be ignored.
[31] The appellant's counsel distinguished Moldowan from the present case by stating that, in Moldowan, the taxpayer was involved in many businesses, one of which was farming (horse racing), whereas, in this case, the appellant is only involved in one venture, namely, the organic farming business. Counsel further cites the Gunn decision as authority for the proposition that proving that a person's chief source of income is a combination of farming and some other source of income does not require the other source of income to be subordinate to farming. On the issue of substantial profitability, counsel submits that this is not a major factor in determining the application of section 31; he relies in this regard on R. v. Donnelly, [1997] CarswellNat 1562 (F.C.A.), and Kroeker v. The Queen, 2002 DTC 7436 (F.C.A.). Counsel further submits that the dissenting view of Madam Justice Desjardins in The Queen v. Morrissey, 89 DTC 5080 (F.C.A.), should be adopted in support of the proposition that profitability is only one factor of several to be taken into account and that quantum alone is not a deciding consideration. Counsel submits that income was generated in the years under appeal, but profits were not achieved. He further submits that the appellant always expected that the income from organic farming would permit her to reduce the time she spent in her medical practice. For the purposes of section 31, everyone's involvement with the farm should be considered, and not just the appellant's. On the profitability issue, the appellant anticipated making a profit as early as 1998 from the cultivation of hemp.
Analysis
[32] There is no doubt that farming has always been at the centre of the appellant's interests and that the evidence presented demonstrates her involvement in that activity from her childhood to this day. Having grown up on a farm, the appellant had a farming background and, apart from the period when she attended university, she continuously devoted her time to farming activities.
[33] Over the years, and despite the difficulties she encountered, she continued to pursue her farming operation to the point that it is now considered to be the largest organic farm in New Brunswick. There is no doubt that the appellant's farm has evolved over the years and has expanded to such a degree that, in comparison to other farms in New Brunswick, it is considered large in terms of acreage in use (1,738 acres) and the number of animals.
[34] The appellant's interest in organic farming goes back to 1996 when little information was available on the subject. She embarked on a difficult venture and there is no doubt that the appellant's investment of time and capital in the project as well as her interest in marketing a better quality product drove the undertaking forward. The income obtained through her medical practice was significant but the scheduling of her patients' appointments depended on the weather and on what had to be done on the farm. She devoted four days a week to her medical practice but spent four hours of each of those days on the farm; the rest of the week was devoted to the farm. She therefore spent as much time, if not more, on the farm as she did on her medical practice. She arranged appointments with patients in such a way as to accommodate her farming activities. All of her income, other than what was required to live on, was invested in the farm. She testified that it was her intention to operate a farm and carry on a medical practice concurrently and eventually to retire from the medical practice to operate the farm.
[35] The evidence also establishes that every time the appellant embarked on a farming venture, she had profit in mind. As an example, she started growing hemp in 1998 in the hope of large profits. That hope evaporated when she was ordered to destroy the crop because of high THC content a matter over which she had no control - leaving her with a lost crop for which insurance was not available. The hemp program was cancelled by the government in 1999. The appellant also gave evidence that since 1997 and 1998 the vision for the farm has been focused on organic beef production, which has in fact materialized, as in 2002 103 head of Angus cattle were purchased.
[36] Given the fact that organic farming may involve a longer process before results are seen and requires more training than conventional farming, and also given the fact that when the appellant embarked upon the organic farming venture in 1996 little information was available, it is only normal that she had to experiment with various crops in order to obtain satisfactory results. Notwithstanding, the appellant expected to make a profit from hemp back in 1998 and 1999. It would not be unreasonable to conclude that there is a potential for profit from the appellant's farming operation, considering that she started in 1996 and considering also the evolution of the farm since then. The appellant has developed her farming operation on a large scale and has made a shift to organic beef production. She now has the biggest organic farm in New Brunswick. It is also noteworthy that Mr. Bertheleme's testimony indicates that the demand for organic products is on the increase and that the organic market is expected to keep growing.
[37] Given the scale of the appellant's farming operation and the amount of capital invested, farming is definitely not a mere sideline business with no potential for profit. The time spent by the appellant on the farm is considerable and that fact cannot be detracted from the fact that her common-law husband also works on the farm. In Kroeker (supra), both Ms. Kroeker and her husband were working on the farm, as are the appellant and her common-law husband in this case, and that fact was not considered as being an obstacle to allowing the appeal. I have also considered The Queen v. Graham, [1985] 2 F.C. 107 (C.A.), a case whose facts are similar to this case in that the appellant committed all of his resources to his farm such that his employment was his sideline activity, not farming, as he was allowed by his employer to attend to his farming obligations whenever emergencies arose.
[38] The appellant's capital, time and labour were focused on the farm. I therefore conclude that her chief source of income was a combination of farming and her medical practice during the 1997 and 1998 taxation years. The appeals are allowed and the reassessments for both taxation years are referred back to the Minister for reconsideration and reassessment on the basis that section 31 of the Act does not apply to restrict the deduction of the appellant's farming losses. The appellant is allowed her costs.
Signed at Ottawa, Canada, this 3rd day of April 2007.
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