Croutch v. The Queen, 86 DTC 6453, [1986] 2 CTC 246 (FCTD)

Rouleau, J.:—This is an appeal commenced by way of statement of claim pursuant to section 172 of the Income Tax Act, S.C. 1970-71-72, c.63 as amended, against a decision of the Tax Court of Canada dated January 25, 1984 dismissing the plaintiffs appeal of notices of reassessment issued by the defendant on December 3, 1981 with respect to the plaintiffs 1977, 1978, 1979 and 1980 taxation years. The plaintiff now seeks to have the notices of reassessment set aside and vacated.

Since 1961 the plaintiff has resided on a farm located near Janetville, Ontario. At that time the plaintiff had no previous experience in conducting a farming operation and for the first three years he worked on the farm on a full-time basis. Throughout the taxation years in question, from 1977 to 1980, the plaintiff was employed as a construction supervisor. In 1977 the plaintiff worked on the farm from May to August spending the remaining months employed in construction; in 1978 he worked on the farm from February to July and was employed in construction during the rest of the year. Throughout the years of 1979 and 1980 the plaintiff worked in construction for the whole year, devoting only his spare time to the farming endeavour. On the weekdays, when the plaintiff was employed as a construction supervisor, he was absent from the farm from approximately 7:00 in the morning until 6:00 in the evening, a portion of this time being used to commute the 65-mile distance between the farm and his place of employment.

The evidence discloses that, for the years in question, the plaintiff was carrying on a two-fold farming operation; crop farming and horse- breeding. From 1977 to 1980 the plaintiff used approximately 20 acres of the farm to plant crops. Any surplus hay, barley and oats not required for the plaintiffs horse-breeding operation was sold. The plaintiffs income tax return for the year 1977 shows that a crop of hay was sold for an amount of $610, in 1978 a crop of hay was again sold for $150 and in 1979 another crop was sold for $450. The plaintiffs tax return for the 1980 taxation year indicates that he sold oats, barley and wheat for an amount slightly less than 2,000.

It was the plaintiffs intention to breed horses of good bloodlines and in 1978 he purchased a horse to breed with First Secretary, the first-born son of Secretariat. He bred five mares to First Secretary and eventually his mares bore three daughters of First Secretary. The plaintiff entered some of his horses in shows, although the total prizes received during the years from 1977 to 1980 did not exceed $250 per horse. In 1980 the plaintiff decided to put more emphasis on crop farming and less on horse breeding but he continued to maintain an interest in horses.

For the 1977,1978,1979 and 1980 taxation years, the plaintiff reported the following losses from his farming operation which he claimed as deductions in computing his income:

All expenses claimed by the plaintiff were disallowed by Revenue Canada on the basis that the plaintiff had no reasonable expectation of profit from his farming endeavour and therefore was not engaged in the business of farming in accordance with subsection 9(2) of the Income Tax Act. That being so, the defendant’s position is that the plaintiff is precluded from deducting his expenses pursuant to paragraph 18(1)(a) of the Act. In addition, the defendant maintains that the plaintiff’s farming expenses were merely personal or living expenses and accordingly he is precluded from deducting them in computing his income by reason of paragraph 18(1 )(h) of the Income Tax Act.

Where farm losses are incurred by a taxpayer whose chief source of income is nether farming nor a combination of farming and some other source, he may, pursuant to section 31 of the Income Tax Act, deduct only part of the loss. “Farming”, which is defined in section 248 of the Act, includes tillage of the soil, livestock raising or exhibiting, the maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees. “Personal or living expenses” also defined in section 248, include, inter alia, the expense of properties maintained for the use of the taxpayer or his family and not maintained in connection with a business carried on for profit or with a “reasonable expectation of profit”. Together, these provisions are designed to limit, and in some cases, disallow, the deduction of what are commonly referred to as “hobby farm” losses in the computation of a taxpayer’s income. Therefore, pursuant to section 31 of the Act, a taxpayer who carries on a farming operation with a reasonable expectation of profit, but who does not look to farming as his chief source of income or part of it, may claim up to $5,000 of his losses against other income. However, a taxpayer who owns a farm and uses it primarily as a hobby or a pastime or a country place to live in, will not, by virtue of the definition of personal and living expenses, be entitled to deduct any part of his loss.

The leading case in this area of law is the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. In that case the issue to be determined was whether the taxpayer’s chief source of income was farming or some other source. The Court held that in order to have “a source of income” a taxpayer must have a profit or a reasonable expectation of profit. Therefore, where a taxpayer operates a farm as a hobby, with no reasonable expectation of profit, he is not entitled to claim any deduction at all in respect of expenses incurred; if however, there is a reasonable expectation of profit, even where there is a loss, the farming operation will constitute a source of income.

In the Moldowan decision, Mr. Justice Dickson (as he then was) examined the criteria which might be considered in the determination of a “reasonable expectation of profit”. At 313 (D.T.C. 5215) he states:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193.

The Court’s conclusion in Moldowan was that the Income Tax Act envisages three classes of farmers:

1. a taxpayer for whom farming was reasonably expected to provide the bulk of his income or the centre of his work routine;

2. a taxpayer who, although he does not look to farming or to farming and some other source of income as his chief source of income, does carry on a farming operation as a sideline business;

3. a taxpayer who does not look to farming or to farming and some other source of income for his livelihood but rather who carries on some farming activities as a hobby.

A taxpayer who falls within the first class of farmer may deduct his farming losses from other income without restriction, those who fall within class 2 are entitled to deduct farming losses from other income but are restricted in the amount deductible by section 31 of the Income Tax Act, whereas the taxpayer in class 3 is not entitled to deduct any of his farm losses as they constitute non-business losses and are treated as mere personal living expenses.

There have been numerous cases on whether a person is carrying on farming. Many appeals have been made by “hobby farmers” whose farm losses have been held to be personal living expenses. For example, see Sebum v. M.N.R., [1970] Tax A.B.C. 550; 70 D.T.C. 1360 (T.A.B.); Von Transehe v. M.N.R., [1970] Tax A.B.C. 613; 70 D.T.C. 1432 (T.A.B.). Usually the taxpayers involved had full-time jobs or carried on business elsewhere and devoted little time or energy to the farming operation.

In reviewing the facts of the case before me, I think it is a fair assessment that between the parties there is not much conflict on the evidence. Rather the difference between the plaintiff and the defendant is substantially one of weight and inferences. In applying the law as stated above to the facts of this case, I am of the opinion, for the reasons which follow, that the plaintiff did not have a reasonable expectation of profit from his farming endeavour for the four taxation years, in question. As previously mentioned, the evidence indicates that the crop side of the plaintiff’s farming operation consisted of the sale of surplus stock, that portion of the crops which he did not require for his own use; in 1977 a crop of hay was sold for $610, in 1978 a crop was sold for $150, in 1979 a crop sold for $450 and in 1980 a larger crop was sold for approximately $2,000. The plaintiff argues that the sale in 1980 is an indication that he was attempting to increase the scope of his crop operation. However, there is no evidence on which to base such a finding. The more substantial sale is for one year only; there is no evidence as to the amount of the sales in subsequent years and accordingly I am unable to find, based on the facts before me, that there was any trend which confirms that the plaintiff had a reasonable expectation of profit from his crop farming operation.

Jurisprudence has established that the breeding, raising and selling of thoroughbred horses is an undertaking involving high risk. See for example, Moldowan v. The Queen, supra and Kerr et al. v. M.N.R., [1984] C.T.C. 2071; 84 D.T.C. 1094 (T.C.C.). The plaintiff in this case had no experience or formal training in thoroughbred horse-breeding even though it is a highly specialized field which differs significantly from the breeding and raising of other types of horses. The evidence shows that the plaintiff sold horses in each of the years in question for amounts varying from $100 to $900 and also obtained breeding fees in the order of $500 to $900 per year. Balanced against this however are the substantial fees incurred by the plaintiff for breeding expenses, amounts ranging from $3,000 to $4,500. Again this evidence does not support a finding that the plaintiff had a reasonable expectation of profit from the horse-breeding part of his farming operation.

Other circumstances of this case are indicative of the fact that the claimant did not have a reasonable expectation of profit and accordingly was not looking to farming as either a primary or subordinate source of income. During the years in question the plaintiff was, for the most part, engaged in full-time employment as a construction supervisor, an employment which required long hours of absence from the farm. The majority of the time spent on the farming operation by the plaintiff was during his spare time in the evenings and on weekends and holidays. There is no evidence of a plan wherein the plaintiff indicated how he expected to ever make a profit from the farming operation in question; there is no evidence that such a plan had been formulated at the outset of the operation or at any point in time in the course of carrying on the farming operation. In Gagnon et al. v. M.N.R., [1985] 2 C.T.C. 2153; 85 D.T.C. 493 (T.C.C.), Cardin, T.C.J. states at 2154 (D.T.C. 494-5):

With respect to the 1979 and 1980 taxation years, I have a great deal of difficulty in seeing how the appellants could have had a reasonable expectation of profit from the kind of farming activities which they carried on in 1978. The appellants failed to present any evidence showing that they had examined the farm's profitability before purchasing it. There was no planning of farm activities and no projections made with regard to any profits they might have hoped to realize from the purchase of this farm. Their investment in the farm and the farming activities which they chose to carry on do not seem to me to have been conducted in a manner that would result in a profit.

In addition, one must consider that the plaintiff had been carrying on the horse-breeding aspect of his farming operation since 1968. By 1977, the first of the four taxation years in dispute, the plaintiff was entering his tenth year of carrying on this business and had never made a profit. Nor did he enjoy a profit in any of the subsequent years up to 1980. Consistent annual losses for a period exceeding a decade can only lead to a conclusion that the plaintiffs farming operation did not constitute a business. There is no evidence of exceptional circumstances which would allow for an objective determination that there was a reasonable expectation of profit for the years under review.

It is my view therefore, that during the years in question, the plaintiff did not carry on his farming operation with a reasonable expectation of profit. The expenses incurred by him in connection with the farm constitute personal and living expenses and the plaintiff is not entitled to deduct these amounts in the computation of his income for the taxation years in question.

For the reasons herein expressed the plaintiffs appeal is dismissed with costs.

Appeal dismissed.