T-2792-71
Chester G. Harris (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Heald J.—Calgary, November 6;
Ottawa, November 14, 1974.
Income tax—Losses on farm—Purchase for clearance and
cultivation—Part-time operation—"Business"—"Reasonable
expectation of profit"—Income Tax Act, R.S.C. 1952, c. 148
as am., ss. 11(16), 12(1)(a), (b), (h), 139(1)(e) and (ae)—
Public Lands Act, R.S.A. 1955, c. 259, as am.
The appellant, who was of farm background and had
subsequently been employed in city jobs related to agricul
ture, made an agreement in 1964 to purchase from the
Alberta Government 320 acres of uncleared land for $2,440.
He fulfilled the requirements for breaking and seeding addi
tional acreage each year and built a home to comply with the
requirement that he commence living on the property after
the seventh year of the agreement. From 1965, when he
entered into possession, to 1967, he continued to work at his
city employment but spent most of his weekends and his
summer holidays clearing the land. In 1966 and 1967 he had
no income from the farm but charged against his income
from city employment his expenses from the farming opera
tion. In the years 1968-1970 he showed no income or
expenses front farming. In 1971 he moved his home to the
farm and commuted to his city job. The farm continued to
show a loss from 1971 to 1973. This appeal was from the
disallowance of the expenses claimed for the taxation years
1966 ($1,000) and 1967 ($1,600).
Held, allowing the appeal, the evidence established that
the appellant was engaged in the business of farming, within
the definition of "business" in section 139(1)(e) of the
Income Tax Act and the provision for deduction of expenses
"from a business that is farming" in section 11(16). The
appellant had not purchased the farm as a hobby or holiday
retreat, nor was it a sham or device. It was a farming
undertaking which, from the first, occupied a great deal of
appellant's time, attention and labour, expended for the
purpose of profit The operation would probably commence
to show a profit next year or the year after. There was a
"reasonable expectation of profit" from the business, within
the definition off "personal or living expenses" in section
139(lxae).
The Queen v. Matthews [1974] C.T.C. 230, applied.
Holley v. M.N.R. 73 DTC 5417, distinguished.
INCOME tax appeal.
COUNSEL:
L. R. Duncan for appellant.
C. D. MacKinnon for respondent.
SOLICITORS:
Fenerty, McGillivray, Robertson, Brennan,
Prowse, Fraser, Bell & Hatch, Calgary, for
appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered in English by
HEALD J.: This is an appeal in respect of
income tax assessments for the taxation years
1966 and 1967 wherein the respondent disal
lowed a farm loss of the appellant in the sum of
$1,034.59 in the taxation year 1966 and in the
sum of $1,671.32 in the taxation year 1967.
The appellant is 37 years of age. He was born
on a farm in Alberta where he lived until he was
about 13 years old. At that age, he left the
family farm to do farm work on other farms as a
hired hand. He continued in this employment
until he was about 17. For the next two years,
he was apprenticed as a butcher with an Alberta
grocery firm, serving at various locations in
Alberta. He then spent some 2i years in the
Royal Canadian Mounted Police. In August of
1960, he returned to the grocery firm as a meat
cutter. He continued working for either the gro
cery firm or a meat packing firm at Red Deer,
Alberta until about 1966 when he accepted
employment with the Health of Animals
Branch, Meat Inspection Branch, Federal
Department of Agriculture, stationed at Red
Deer. This employment with the Federal Gov
ernment at Red Deer has continued until the
present time and has been, at all times a full-
time job.
The appellant said in evidence that he had
been involved in agriculture practically all of his
life and that he had always wanted to go farm
ing on his own, and that the only obstacle stand
ing in his way was lack of financial resources,
since his only source of income was his rather
modest wages from his employment.
He said that about the only way he could get
started in farming at a low cost was to attempt
to acquire land through a homestead sale from
the Government of the Province of Alberta. He
was finally successful in acquiring a half section
of land (320 acres) by this method on December
21, 1964 when he entered into a homestead sale
agreement with the Alberta Government cover
ing said half section which was situated some 64
miles north west of Red Deer. Pursuant to the
agreement, appellant obtained possession of the
property on January 1, 1965. At time of pur
chase, subject land was solid timber and bush,
consisting of some light scrub and some heavy
timber suitable for lumber. There was no road,
no fences and no buildings on the property at
time of purchase. The appellant testified that, in
his view, subject property was capable of being
farmed economically as a cow-calf operation
using range cattle inasmuch as he believed it
would raise a good hay crop and would be
suitable for pasture after being cleared and cul
tivated. He said that when he puchased this
land, it was his intention to leave his full-time
employment within 2 years to make farming his
full-time vocation. In 1965, appellant cleared
some 2 acres on which he built a small shack
suitable for him to live in temporarily when he
was at the property. In 1965, he commuted
most weekends from Red Deer to the property.
He also spent his two week holiday in 1965
working at the farm. In 1966 and 1967, he also
spent most weekends and his summer holiday
on the farm. During the winter months of those
years, he hired a third party to clear the bush
from some 85 acres of said land and do some of
the breaking thereon. During 1966 and 1967, he
himself was also engaged in the clearing and
breaking of said 85 acre portion. During this
period he also purchased a second-hand tractor
and the other implements necessary for the
breaking and eventual seeding of said parcel. He
also erected some barbed-wire fencing on a
portion of subject land. He also erected a gra
nary on the property in 1966 and 1967. Thus,
the position of the farm at the end of 1967 was
that there was 85 acres cleared and ready to be
seeded to grass in the spring of 1968.
Appellant received no income from said prop
erty during the taxation years 1966 and 1967.
However, he did seek to charge the expenses
incurred by him in respect of said properties
against his income from employment. In 1966,
appellant sought to deduct from income the sum
of $1,034.59, which may be broken down as
follows:
Gasoline & oil $ 55.11
Repairs 121.23
Clearing or levelling land 800.00
Capital cost allowance—
(depreciation on a tractor
and a disc for a portion
of the year) 58.25
Total $1,034.59
The corresponding deduction claimed for
1967 was $1,671.32 which is broken down as
follows:
Building repairs $ 204.80
Fence repairs 25.95
Gasoline & oil 86.49
Repairs, licence, insurance 68.38
Feed and straw 8.20
Clearing or levelling land 1,200.00
Capital cost allowance—
(depreciation on tractor
and disc for the
full year) 77.50
Total $1,67132
The sole issue in the appeal is the propriety of
such deductions.
In 1968, appellant sowed 85 acres to barley,
oats and tame grass. 1968 was the only year he
seeded any grain or grass seed. In the fall of
1968, he harvested about 700 bushels of barley
and 200 bushels of oats. After 1968, because of
the success of the seeding to tame grass, said 85
acres were suitable for pasture. Also in 1968 the
appellant purchased some hogs on a share basis
with a friend, and the grain produced from the
land in 1968 was used to feed the hogs. Also in
1968, the appellant cut some 27,000 board feet
of lumber and dry-piled it on a clearing in the
bush. However, unfortunately for the appellant,
this lumber was all destroyed by a fire on said
property in May of 1968. Since that time, the
appellant has cut other lumber from subject
property and has sold it to others (to the extent
of $570 in 1972 and $675 in 1973).
After 1968, said 85 acres were used as a
pasture for cattle by a neighbour of the appel
lant's. In the taxation years 1968, 1969 and
1970, the appellant claimed no farming
expenses nor did he show any farming income.
The appellant said that he did not continue with
his hog venture after 1968 because the market
price of hogs was low and the market price of
feed grain was high and thus, in his view, a hog
operation was not economically viable. He said
that he did not engage in a cattle operation
during those years because of lack of financial
resources. Finally he was able, in 1971, to make
a calf-sharing agreement with a friend. By this
time, an additional 25 acres had been cleared.
Under this arrangement, he has been able to
acquire ownership over the years since 1971
of 13 cattle and one bull. He was also able to
sell 6 calves this fall. In 1971, he and his family
moved to the farm from Red Deer and have
resided there on a permanent basis ever since.
Exhibit 10 filed at the trial summarizes his
farming operations during the last 3 years as
follows:
Year Expenses Income Loss
1971 1,144.20 56.12 1,088.08
1972 2,761.78 1,143.50 1,618.28
1973 3,366.08 1,470.60 1,895.48
Appellant said that he is presently in the process
of clearing another 100 acres; that he antici
pates farming on a full-time basis by approxi
mately 1976 and that he foresees a profit from
the farm and that his goal is to develop a herd of
approximately 100 cows, which, in his view,
would be sufficient to support him, his wife and
their two children. He agrees that to support
100 cows, he will need more pasture land. How
ever, he said there was other Crown land near
subject land which he was going to try to obtain
on a grazing lease basis. He said that the gross
revenues from farming had been increasing, not
dramatically, but increasing nevertheless, and
on this basis, he was sure it would soon be a
profitable operation. He also estimated that for
the taxation year 1974, his farm receipts would
just about equal his farm expenses. Since
moving to the farm in 1971, appellant has
retained his full-time job in Red Deer and has
commuted back and forth from the farm to Red
Deer.
It is the appellant's submission that, at all
material times, he was engaged in the business
of farming from which he anticipated a profit,
but in respect of which he has thus far incurred
a loss which is deductible under the Income Tax
Act as being expenses incurred for the purpose
of gaining or producing income and as such,
deductible under section 12(1)(a) of the Act or
expenses incurred in the business of farming or
clearing land deductible under the provisions of
section 11(16) of the Act.
Section 11(16) reads as follows:
11. (16) Notwithstanding paragraphs (a), and (b) of sub
section (1) of section 12, there may be deducted in comput
ing a taxpayer's income for a taxation year from a business
that is farming, amounts paid by him in the year for clearing
land, levelling land or laying tile drainage for the purpose of
carrying on the farming business.
The respondent submits, on the other hand,
that section 11(16) (supra) has no application to
the facts of this case because, in his submission,
the appellant was not engaged "in the business
of farming or clearing land" as that term is used
in said section 11(16) (supra).
The respondent makes a second submission
to the effect that deduction of subject losses are
prohibited by sections 12(1)(a), (b) and (h) of
the Act, said subsection (h) being modified by
section 139(1)(ae)(i) of the Act. These sections
read as follows:
12. (1) In computing income, no deduction shall be made
in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of
gaining or producing income from property or a business
of the taxpayer,
(b) an outlay, loss or replacement of capital, a payment
on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as express
ly permitted by this Part,
(h) personal or living expenses of the taxpayer except
travelling expenses (including the entire amount expended
for meals and lodging) incurred by the taxpayer while
away from home in the course of carrying on his business,
139. (1) In this Act,
(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 reason
able expectation of profit,
Accordingly the basis of this second submis
sion is that even if I conclude that this appellant
was in "the business of farming", subject ex
penditures are not deductible because they were
not "in connection with a business carried on
for profit or with a reasonable expectation of
profit" (underlining mine).
Dealing initially with the question as to
whether this appellant was engaged in the "busi-
ness of farming", on the evidence adduced, I
am satisfied that the appellant was engaged in
the "business of farming". Appellant's entire
background is one of farming. He said that he
had always wanted to go into farming on his
own, but that he had been prevented from doing
so because of his lack of funds. I found him to
be a credible witness and I accept his evidence
in this regard. The opportunity to purchase the
homestead land from the Alberta Government
gave him the opportunity he had been waiting
for—the opportunity to buy land at a low price
(the entire half section for $2,440).
This is not a case where the farm was pur
chased as a hobby or as a "holiday retreat" nor
was appellant's farming operation a mere sham
or device. Under the agreement of purchase and
under the provisions of The Public Lands Act of
Alberta', the appellant was required to break
and seed additional acreage each year. Appel
lant was also required, after the seventh year of
the agreement, to live on the property for at
least three months in every year. The appellant
has complied with these terms and has, since
1971, lived on the property the year 'round. His
actions, since acquisition, have been consistent
with the operation of a business, having regard
to the severe limitations placed on him by lack
of capital and income (his gross income during
these years being approximately $5,000-$6,-
000). I cannot conceive of anyone acquiring a
farm consisting of solid bush 64 miles from his
residence as a hobby or a vacation retreat. Fur
thermore, I cannot believe that the appellant
would have legally obligated himself to break
and crop the land and to live there permanently
if he had not seriously intended to be in the
business of farming.
The term "business" is defined in the Income
Tax Act in section 139(1)(e) as follows:
139. (1) In this Act,
(e) "business" includes a profession, calling, trade, manu
facture 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;
I agree with Mahoney J. where, in the case of
The Queen v. Matthews 2 he expressed the view
that:
Subject to the exclusion of an office or employment, this
statutory definition does not, in my view, narrow the broad
definition that:... "anything which occupies the time and
attention and labour of a man for the purpose of profit is
business" (Smith v. Anderson (1880) 15 Ch. D. 247 per
dessel M.R. at 258).
It seems to me that this appellant has satisfied
all of the requirements both of the statutory
' R.S.A. 1955, c. 259, ss. 171, 172 and 172(a), as
amended.
2 [1974] C.T.C. 230 at 235.
definition and of the definition of Jessel M.R.
quoted (supra).
Appellant was engaged in a farming undertak
ing, which, from the outset, occupied a great
deal of his time, attention and labour. I am 'also
satisfied on the evidence that appellant's pur
pose was profit. I cannot believe that anyone
would spend the backbreaking hours and days
and months which appellant spent on this farm
in clearing it, felling the trees, piling the lumber
and then building his home and seeding the
cleared portion as a hobby or for pleasure.
Appellant said his purpose was profit, that he
eventually expected to make a living on the
farm for his family and I accept his evidence in
this connection.
Turning now to the respondent's submission
that even if the appellant was engaged in the
business of farming, said business was not car
ried on for profit or with a reasonable expecta
tion of profit. In support of this submission, the
case of Holley v. Minister of National Revenue 3
was cited. In my view, that decision is distin
guishable on its facts from the case at bar. In
the Holley case (supra) Sweet D.J. found that
what the appellant did was more in the nature of
a hobby and "a pleasurable activity per se". In
that case, the appellant was .a surgeon practising
at Quesnel, B.C. The farm he acquired was only
8 miles from Quesnel connected thereto by all-
weather roads. The facts in that case are entire
ly different from those here present.
After giving consideration to all the facts and
circumstances of this case, I have concluded
that there was "a reasonable expectation of
profit" in the appellant's farming business.
Through hard work and diligence, the appellant
had made substantial progress in the first three
years, to the point where he had 85 acres
cleared and seeded to grass. By 1971, some 110
acres were cleared and he commenced to
acquire a modest herd of cattle. Through the
73 DTC 5417.
years 1971 to 1973, he had increased his
income from the farm although the farming
operation was still showing a loss. However, he
said that in 1974, the farm income would just
about equal the farm expenses. Surely, this is
substantial progress, having regard to the appel
lant's lack of adequate financial resources. He is
presently in the process of clearing another 100
acres. This will give him a total of 210 acres for
pasture for his cattle. The evidence was that it
takes approximately 11 acres of pasture to ade
quately sustain one cow. Thus he will shortly be
in a position to sustain some 60 head of cattle.
His goal is a herd of 100 head but he is already
taking steps to acquire additional pasture land. I
found his evidence in this connection to be
reasonable and realistic. I have no doubt that, in
all probability, the appellant's farming operation
will commence to show a profit next year or the
year after. As Mahoney J. said in the Matthews
case (supra) 4 :
Each case where the realization of profit is so postponed
will have to be examined on its own merits to ascertain that
the profit is not merely notional and that the expectation of
profit is indeed reasonable.
An examination of the facts and circumstances
of subject case has convinced me that appel
lant's expectation of profit was indeed reason
able. In my view, this appellant has satisfactori
ly explained the reasons why it is taking so long
to make his farming business a profitable ven
ture, the main reason being his lack of funds. It
would, in my opinion, be quite unfair to penalize
this taxpayer for his lack of adequate financial
resources and to infer from that circumstance, a
lack of intention on his part to engage in the
farming business on a commercial basis. This
appellant has done everything he could possibly
do, within the limits of his own financial
resources, to engage in farming and given his
determination and his industry, and having
regard to the progress he has made through the
years, I am satisfied that the expectation of
profit is reasonable.
4 [1974] C.T.C. 230 at p. 236.
I have accordingly concluded that the deduc
tion of the losses claimed for the taxation years
1966 and 1967 was proper.
The appeal is therefore allowed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.