A-3-79
Hutterian Brethren Church of Wilson (Appellant)
(Plaintiff)
v.
The Queen (Respondent) (Defendant)
Court of Appeal, Pratte, Heald and Ryan JJ.—
Edmonton, November 6, 7 and 8; Ottawa, Decem-
ber 3, 1979.
Income tax — Income calculation — Deductions — Reli
gious community carrying on successful, commercial farming
operations — Appeal from Trial Division's decision to dismiss
appeal from income assessments — Although all attacks made
in Trial Division were made on appeal, issues examined of
whether or not appellant entitled to exemption in s. 149(1)(J) of
the Income Tax Act, and whether or not appellant entitled to
deduct actual value, rather than cost, of services provided by
its members — Income Tax Act, S.C. 1970-71-72, c. 63, ss.
69(1)(c), 149(1)(f).
Appellant appeals Trial Division's dismissal of its appeal
from income tax assessments. Counsel reiterated on appeal all
the attacks that had been made in the Trial Division. The
arguments included the contention that appellant was a chari
table organization entitled to benefit from the exemption in
section 149(1)(f) of the Income Tax Act and the contention
that appellant, in any event, was entitled to deduct in comput
ing its income the actual value, as opposed to the cost, of the
services provided to it by its members.
Held, the appeal is dismissed.
Per Pratte J.: In dealing with the contention that appellant as
a charitable organization is entitled to benefit from the exemp
tion provided in section 149(1)(f), it is not necessary to deter
mine whether part of the appellant's income was available for
the personal benefit of its members or to determine whether
appellant's religious purposes qualified as charitable purposes.
The evidence shows that the business of farming for profit was
appellant's main activity during the years in question and that
most of its resources were used to buy farm land and agricul
tural equipment. Appellant could not benefit from section
149(1)(J) because it did not devote all its resources to chari
table activities carried on by itself. The business of farming
does not become a charitable activity within the meaning of
that section for the sole reason that it is carried on by a
charitable person with the intention of using the income derived
from that business for charitable purposes. Section 69(1)(c)
does not help appellant since it has acquired no property from
its members and has not received anything from them by way
of gift.
Per Heald J.: The services provided by the members of the
colony to the appellant were not in the nature of a gift but
rather were provided pursuant to the covenants with the Com
pany as set out in the memorandum of association and pursuant
to the contract between the appellant colony and its members.
Section 69(1)(c) has no application to the situation in this case.
Appellant contended that it was not being allowed deductions
allowed all other commercial corporations, but those corpora
tions are only allowed those properly deductible expenses which
are claimed and proven.
Per Ryan J.: The business purpose of the Corporation was
not merely an aspect of a single overriding religious purpose.
The Corporation had a business as well as a religious object—
farming on a commercial basis. The motivation of the individu
als who farmed may well have been religious but the farming
itself was conducted by the Corporation as a business. The
business profits were not available as such to the members of
the Corporation but were available for the future use of the
Corporation in the pursuit of its objectives, religious and com
mercial. All the resources of the Corporation cannot be said to
be devoted to charitable activities carried on by it, even assum
ing that its religious objects were for legal purposes charitable.
Hofer v. Hofer [ 1970] S.C.R. 958, distinguished. Wipf v.
The Queen [1975] F.C. 162, considered.
APPEAL.
COUNSEL:
J. A. Matheson for appellant (plaintiff).
P. Ketchum and B. Saunders for respondent
(defendant).
SOLICITORS:
J. A. Matheson, Edmonton, for appellant
(plaintiff).
Deputy Attorney General of Canada for
respondent (defendant).
The following are the reasons for judgment
rendered in English by
PRATTE J.: In support of this appeal, the appel
lant's counsel reiterated all the attacks that had
been made in the Trial Division [[1979] 1 F.C.
745] against his client's income tax assessments
for the years 1967 to 1975. In my view, all those
attacks were rightly rejected by the Judge below
and I only wish to comment briefly on two of the
appellant's contentions.
One of those contentions is that the appellant is
a charitable organization which was, as such, en-
titled to benefit from the exemption provided for in
section 149(1)(f) of the Act.'
In order to dispose of this contention, it is not
necessary, in my view, to determine whether part
of the appellant's income was available for the
personal benefit of its members; it is not necessary,
either, to determine whether the appellant's reli
gious purposes qualified as charitable purposes.
One of the main objects for which the appellant
was established was, according to its memorandum
of association,
to engage in and carry on farming, agriculture, stock-raising,
milling and all branches of these industries.
The evidence also shows that the business of farm
ing for a profit actually was, during the years here
in question, the appellant's main activity and that
most of its assets were used to buy farm land and
agricultural equipment. In those circumstances, it
is clear, in my view, that the appellant could not
benefit from section 149(1)(f) because it did not
devote all its resources to charitable activities car
ried on by itself. The business of farming is neither
a religious nor a charitable activity; it is a com
mercial activity. And this is so even if that busi
ness is carried on by persons believing farming to
be the only activity compatible with a truly reli
gious life and intending to use their income to
assist their co-religionists. As stated by Pigeon J.
in his dissenting opinion in the Hofer case: 2
What is religion, what is a Church in the eyes of the law does
not depend on the religious beliefs of any confession.....
Moreover, a commercial activity like farming for a
profit does not become a charitable activity within
the meaning of section 149 for the sole reason that
it is carried on by a charitable person with the
intention of using the income derived from that
business for charitable purposes.
' 149. (1) No tax is payable under this Part upon the taxable
income of a person for a period when that person was
(/) a charitable organization, whether or not incorporated,
all the resources of which were devoted to charitable activi
ties carried on by the organization itself and no part of the
income of which was payable to, or was otherwise available
for the personal benefit of, any proprietor, member or share
holder thereof;
2 Hofer v. Hofer [1970] S.C.R. 958 at p. 980.
The appellant also contended, and this is the
second point with which I wish to deal, that it was,
in any event, entitled to deduct, in the computation
of its income, the actual value (not the cost) of the
services provided to it by its members. The appel
lant based that contention on section 69(1)(c) of
the Income Tax Act, S.C. 1970-71-72, c. 63, under
which:
69. (1) .. .
(c) where a taxpayer has acquired property by way of gift,
bequest or inheritance, he shall be deemed to have acquired
the property at its fair market value at the time he so
acquired it.
This section, however, does not help the appel
lant since it has acquired no property from its
members and has not received anything from them
by way of gift.
For those reasons, I would dismiss the appeal
with costs.
* * *
The following are the reasons for judgment
rendered in English by
HEALD J.: I have had the advantage of reading
the reasons for judgment of my brother Pratte J. in
this appeal. I agree with him that the appellant is
not entitled to benefit from the exemption pro
vided by section 149(1)(f) of the Income Tax Act.
I also agree with his reasons for arriving at that
conclusion.
I also agree with Mr. Justice Pratte that the
appellant is unable to bring itself within the provi
sions of section 69(1)(c) of the Income Tax Acta
since it has acquired no property from its mem
bers, by gift or otherwise. Clauses 2(o) and (p) of
the appellant's memorandum of association pro
vide:
(o) That each and every member of the Company shall give
and devote all his or her time, labour, services, earnings and
energies to the Company and the purposes for which it is
formed, freely, voluntarily and without compensation or regard
of any kind whatsoever other than hereinafter expressed;
3 Section 69(1)(c) reads as follows:
69. (1) Except as expressly otherwise provided in this
Act,
(c) where a taxpayer has acquired property by way of gift,
bequest or inheritance, he shall be deemed to have
acquired the property at its fair market value at the time
he so acquired it.
(p) The members of the Company shall be entitled to be
supported, maintained, instructed and educated by the Com
pany according to the rules, regulations, requirements and
by-laws of the Company and the Christian religion, religious
teachings and beliefs promoted, engaged in and carried on by
the Company during the time and so long as they are members
of the Company and obey, abide by and conform to the rules,
regulations, requirements and by-laws of the Company, but not
otherwise howsoever;
In the case of Wipf v. The Queen'', where the
provisions of the memorandum of association were
identical to clauses 2(o) and (p) supra, this Court
held that the memorandum of association and the
articles of association constitute a contract be
tween the Company and each of its members. The
following passage from the judgment of Ryan J. in
the Wipf case (supra) applies with equal force, in
my view, to the case at bar s :
Extensive farming operations were conducted during the
taxation years in question in each of the colonies. The actual
services were performed by the appellants who are members of
the companies and other members of the companies and by
members of their families. In my opinion, however, the farming
was done by the companies acting pursuant to the power
conferred on them by clause 3 of the Memorandum of Associa
tion to engage in farming and related undertakings. The ser
vices provided by the appellants were provided under their
covenants with the companies as set out in the Memorandum of
Association.
It is, accordingly, my view that the services
provided by the members of the colony to the
appellant were not in the nature of a gift but were
rather provided pursuant to the covenants with the
Company as set out in the memorandum of asso
ciation supra and pursuant to the contract between
the appellant colony and its members. The con
sideration for the provision of those services is the
covenant of the Company to support, maintain,
instruct and educate the members of the colony,
their husbands, wives and children as more par
ticularly set out in clause 2(p) of the memorandum
of association quoted supra. It is therefore clear, in
my view, that section 69(1)(c) of the Act has no
application to the situation in this case.
The only other contention of the appellant on
which I wish to comment is its submission as set
out in paragraph 45 of its memorandum as follows:
4 Wipf v. The Queen [1975] F.C. 162. The Court of Appeal
judgment herein was affirmed by the Supreme Court of
Canada.
5 Ryan J. at pp. 168-169.
45. The amended returns as filed claimed that all the surplus
revenue over and above expenses was a community gift to the
Church. No dollar valuation was placed on the labour factor
(other than food, clothing and shelter) contributed by all of the
individuals of the Colony from the age of 6 years and up as
indicated by the evidence. On the other hand the assessments
did not allow as a deduction from income any valuation of the
labour factor, which, of course, is allowed for all other commer
cial corporations.
The learned Trial Judge in dealing with this
phase of the matter stated at page 750:
The actual cost to each colony of labour, being the cost of
goods and services supplied to and consumed by members and
their families has been allowed. The cost of outside purchases is
deducted from revenue in arriving at taxable income while the
value of goods and services produced on the colony is simply
ignored for both revenue and expense purposes. There is no
basis for the proposition that the fair market value of donated
labour should be deducted from the net profit of a colony. It is
not among the deductions from income allowed to a taxpayer in
the calculation of taxable income.
I agree with the learned Trial Judge that the
appellant would not be entitled to deduct from its
net profit the fair market value of donated labour
if there had been donated labour. I also agree that
to the extent the appellant has claimed the actual
cost of labour, it has been allowed and this of
itself, is sufficient to dispose of appellant's submis
sion so far as this appeal is concerned. However,
the appellant is obligated by contract to provide to
the members of the colony and their families, inter
alia: food, clothing, necessary medical, dental,
optical and pharmaceutical services and housing.
It seems to me that the cost of providing all of
these essential items is a properly deductible
expense to the appellant since it truly represents its
cost of obtaining the services of its members and
their families which are so necessary to the proper
operation of their very extensive farming activities
and which it agreed by contract to provide. Look
ing at the appellant's amended tax returns for the
years under review, it is obvious that appellant's
farming venture in addition to being extensive is
also quite profitable and successful. The evidence
establishes that the appellant owns some 8,502
acres of farm lands in the Lethbridge area of
Southern Alberta; that of this total acreage, some
6,000 acres is under cultivation; that the cost of
this land to the appellant was approximately
$290,000 but that because of greatly increased
prices of farm land in latter years, it is, at the
present time, worth considerably more than the
$290,000 which the appellant paid for it. Appel
lant's gross profit in 1973 was $597,000; in 1974 it
was $721,000; and in 1975 it was $990,000. Turn
ing to the expenses claimed by the appellant, in
1975, for example, an item entitled "church
expenses" in the sum of "$38,256.79" was said to
include the cost of feeding the colony members
over and above the food produced on the farm plus
medical and clothing costs. However, the evidence
is unsatisfactory as to whether the "church
expense" item includes all of the matters which the
appellant is obligated to provide under its contract
with its members. Mr. J. K. Wurz, in giving
evidence at page 115 of the transcript, states there
are "... a lot of other items" but unfortunately
those items are not specified or quantified. The
evidence is that there are 110 individuals in the
appellant colony for whom the appellant is respon
sible. To properly house them, the appellant has
constructed three four-dwelling houses; has fur
nished and maintained those houses; has erected a
community laundry with large modern laundry
machines; and, has erected, equipped and main
tained a modern community kitchen where the
meals are prepared and served for the entire com
munity. Since the "church expense" item is not
broken down and since costs related to housing
cannot be identified in the other expense items
claimed and allowed, it is not possible to determine
with precision whether or not all properly charge
able housing costs have been claimed. 1 cite hous
ing costs only as an example. There may well be
other cost items that could be claimed which have
not been claimed. In perusing appellant's financial
statements, it is apparent that the "church
expense" item is a very modest figure in all of the
years under review when compared to the gross
profit figure. As stated, it was $38,256.79 in 1975
compared to a gross profit figure of over $990,000.
In 1974, it was $39,128.85 compared to a gross
profit figure of over $721,000. In 1973, it was
$22,771.72 compared to a gross profit figure of
over $597,000. When one considers the fact that
there are some 110 individuals covered by the
appellant's contractual obligation, these figures
seem inordinately low even after having regard to
the evidence to the effect that the colony provides
approximately one half of its own food require
ments. However, as I stated earlier, the Minister
of National Revenue has allowed to the appellant
the amounts claimed for these items. Thus, the
fact that the items may be lower than actual cost
to the appellant does not assist the appellant in this
appeal. The appellant is only entitled to deduct the
allowable items properly claimed by it and proper
ly authenticated by it. The onus is on a taxpayer to
claim and establish properly deductible expense
items, not on the Minister of National Revenue.
I make these comments by way of answer to the
appellant's submission that it is not being allowed
to make deductions which are allowed for all other
commercial corporations. Those corporations will
likewise be allowed only those properly deductible
expenses which are claimed and proven.
I also agree that the learned Trial Judge rightly
rejected all of the other attacks made on the
appellant's income tax assessments for the years
1967 to 1975 inclusive.
For these reasons, I would dismiss the appeal
with costs.
* * *
The following are the reasons for judgment
rendered in English by
RYAN J.: I have had the advantage of reading
the reasons for judgment of Mr. Justice Pratte. I
agree with his conclusions and with his reasons for
reaching those conclusions. I have also had the
advantage of reading Mr. Justice Heald's reasons
and I agree with what he says. I therefore agree
with both that the appeal should be dismissed with
costs.
Without limiting in any way my agreement with
Mr. Justice Pratte and Mr. Justice Heald, I would
add a comment on a matter which caused me some
concern.
My concern was based on a passage from the
reasons for judgment of Mr. Justice Ritchie in
Hofer v. Hofer 6 and a passage from the reasons of
Mr. Justice Freedman (as he then was) in the
same case when it was before the Manitoba Court
of Appeal'. Mr. Justice Ritchie said:
I am satisfied after having read a great deal of the material
submitted by both sides in this case and after having considered
the analysis thereof as contained in the judgments of the
learned trial judge and the Court of Appeal, that the Hutterite
religious faith and doctrine permeates the whole existence of
the members of any Hutterite Colony and in this regard I adopt
the language which the learned trial judge employed in the
course of his reasons for judgment where he said:
To a Hutterian the whole life is the Church. The colony is
a congregation of people in spiritual brotherhood. The tan
gible evidence of this spiritual community is the secondary or
material community around them. They are not farming just
to be farming—it is the type of livelihood that allows the
greatest assurance of independence from the surrounding
world. The minister is the spiritual and temporal head of the
community.
It follows in my view that, notwithstanding the fact that the
Interlake Colony was a prosperous farming community, it
cannot be said to have been a commercial enterprise in the
sense that any of its members was entitled to participate in its
profits. The Colony was merely an arm of the church and the
overriding consideration governing the rights of all the Breth
ren was the fulfilment of their concept of Christianity. To the
Hutterian Brethren the activities of the community were evi
dence of the living church. In this context I find it impossible to
view the Interlake Colony as any form of partnership known to
the law.
And Mr. Justice Freedman said:
The way of life of the Hutterites is in many respects distinc
tive and unique. Perhaps its dominant characteristic is the
interpenetration of religion into every aspect of Hutterian
existence. In the secular sense Hutterites carry on life as
farmers; but this pursuit has a motivation closely connected
with the religious impulses which govern their life. It is because
farming is a rural pursuit, enabling the members of the Colony
conveniently to live within themselves as a religious unit, away
from the disturbing and disruptive influences of urban life, that
it has been selected as the avenue in which they will be
gainfully employed. In that connection the learned trial Judge
quotes Prof. H. L. Trevor-Roper thus:
Each Bruderhof ... is an agricultural family ... but it is not
only or mainly an economic organism. It is a church which
has chosen this organism as a means to realize religious
beliefs and a religious way of life.
The learned trial Judge concluded that the Interlake Colony of
Hutterian Brethren was a congregation of the Hutterian Breth
ren Church; and I agree.
6 [1970] S.C.R. 958, at pp. 968 and 969.
7 (1968) 65 D.L.R. (2d) 607, at pp. 609 and 610.
The learned Trial Judge in this case said in his
reasons that nothing in the evidence would lead
him to a conclusion "radically different" from that
expressed by Mr. Justice Ritchie in relation to the
facts in the Hofer cases.
The problem which concerned me was whether,
assuming that the farming which was being car
ried on by the Corporation was being carried on as
part of an overriding religious purpose, the profits
from the farming could not be said to have been
used solely for the purposes of that religious activ
ity. And if one were also to assume that the
religious activity had the element of public benefit
essential for legal purposes to a charity, could it
not be said that all of the resources of the Corpo
ration, the "organization", were being devoted to
charitable activities carried on by the organization
itself?
I am satisfied, however, that the correct analysis
of the evidence in this case is that the business
purpose of the Corporation was not merely an
aspect of a single overriding religious purpose. The
Corporation had a business as well as a religious
object farming on a commercial basis an activ
ity which was pursued on a large scale and pur
sued profitably. The motivation of the individuals
who farmed may well have been religious. But the
farming itself was conducted by the Corporation
as a business. The business profits were not, of
course, available as such to the members of the
Corporation. They were, however, available for the
future use of the Corporation in the pursuit of its
objectives, religious and commercial. In these cir
cumstances, it can hardly be said that all of the
resources of the Corporation were devoted to
charitable activities carried on by it, even assum
ing that its religious objects were for legal pur
poses charitable.
8 I would note that in the Hofer case the questions involved
were concerned with whether certain members of a Hutterite
colony, who had been expelled because they had left the
Hutterian faith, had a property interest in the assets of the
colony and whether they had been properly expelled. These are,
of course, very different questions from the question in this
case, the taxability of the income of the Corporation.
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.