Donald a Holley v. Minister of National Revenue, [1973] CTC 539, 73 DTC 5417

Sweet, DJ:—This is an appeal from the reassessment of income of the appellant for the taxation year 1968. The notification by the Minister under section 58 of the Income Tax Act indicates that in particular the assessment was confirmed on the ground that expenditures to the extent of $5,000 claimed as a deduction from income by the taxpayer in the 1968 taxation year were personal or living expenses within the meaning of paragraph (ae) of subsection (1) of section 139 and so were disallowed in accordance with the provisions of paragraph

(h) of subsection (1) of section 12 of the Act.

The appellant is a surgeon practising in Quesnel, British Columbia. He was the registered owner of a 187-acre farm known as Aldonna Ranch purchased in 1963. The disallowed deduction was in connection with a loss arising out of the operation of that farm.

The farm is situated about 8 miles from Quesnel. There are all- weather roads connecting the farm with Quesnel. Capital expenditures for the land, buildings (not including the residence), fencing, farm machinery, tractor and automotive equipment in respect of the years 1963, 1964, 1965, 1966, 1967 and 1968 totalled $52,480.36. In 1968 there were sales of capital items amounting to $3,780. Accordingly the net expenditures in respect of those capital items from 1963 to 1968 (both inclusive) were $48,700.36. Dr Holley said that in addition, during that period, he built a residence on the farm at a cost of $60,000. There he went to reside with his wife, two daughters and two sons and it is there that he now lives.

Dr Holley gave evidence to the effect that his plan, apart from living on the premises, was to farm it and although he was not strictly confining his activities on the farm to horses his main interest was horses. He said that his purpose in acquiring the farm was to build it up and to start, mainly, a horse-raising business. In 1968 he did not plan to give up his medical practice. He still is a practising surgeon. «

In section 5 of “Notice of Appeal by way of Statement of Claim” dated October 7,1971 there is, inter alia:

The purpose of operating the Aldonna Ranch has been to breed and cross breed Arabian horses for show purposes and for sale and to make a profit thereby. The Plaintiff and his family have expended a considerable amount of time and expense attempting to build up the stock of the ranch and to set up a breeding program.

Then again in the ‘‘Notice of Appeal by way of Statement of Claim” there is “The Plaintiff’s farming operation is the breeding of registered Arabian horses”. Paragraph 12 of that document is:

The plaintiff is in the business of horse breeding with a view to profit from the sale of Arab and other horses raised by him, and is therefore conducting a farming operation the losses in respect of which are deductible by virtue of section 13.

After completion of all the oral testimony and during argument counsel moved to amend the statement of claim as follows:

1. Add paragraph 9 A to read;

“As a subsidiary activity the Plaintiff has maintained some cattle on the Aldonna Ranch, and as the quantity of hay produced on the said Ranch has increased, he has increased the herd of cattle with the purpose of making a profit therefrom by the sale thereof.”

2. Amend paragraph 12 to read;

“The Plaintiff is in the business of farming, being horse breeding with a view to profit from the sale of Arab and other horses raised by him, and growing and selling cattle, and is therefore conducting a farming operation the losses in respect of which are deductible by virtue of section 13.”

3. Amend Paragraph 11 by inserting the word “mainly” between “is” and “the” in the first line thereof.

Counsel for the respondent consented and an amendment was ordered accordingly.

Portions of the Income Tax Act to be considered were:

12. (1) In computing income, no deduction shall be made in respect of

(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,

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 farmin 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 determine 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 purpose 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 mutandis.

139. (1) In this Act,

(e) “business” includes a profession, calling, trade, manufacture 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;

(p) “farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

(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, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

Counsel for the appellant referred to D C Matthews v MNR, [1972] CTC 2643; 72 DTC 1526, a matter before the Tax Review Board. The appellant taxpayer had operated two properties as tree farms. In respect of the 1969 taxation year the Minister denied the appellant the right to claim any benefits under section 13 of the Income Tax Act and assessed him on the ground that the expenses claimed were personal and living expenses within* the meaning of subparagraph 139(1)(ae)(i) and therefore not deductible by virtue of paragraph 12(1)(b).

The following is from the reasons for the decision allowing the appeal (pp. 2644-5 [1527-8]):

Subparagraph 139(1)(ae)(i) speaks of the expense of properties not maintained in connection with a business carried on with. a reasonable expectation of profit. The word “farming” isn’t even mentioned in the section. On the other hand, section 13 deals specifically with farming and although it set a limit in respect of losses claimed as a result of farming where it is not a principal source of income, it does not speak of ‘‘a reasonable expectation of profit”. If one could apply subparagraph 139(1 )(ae)(i) to farm- ing in the same manner as to the expense of maintaining properties for the use of the taxpayer, then farming of marginal land, and perhaps other types of farming such as “hobby farming”, might well come under that particular section of the Act.

However, without stressing the obvious, it seems to me that Parliament enacted the provisions of subsections 13(1) and (2) to curtail farming enthusiasts taxwise without, in the national interest, placing too great a restriction on their love of farming. Hobby farmers may indulge their hobby, but the Act places a limitation on the amount of loss such taxpayers can claim. In other words, Parliament decided, in effect, that a reasonable expectation of profit if not a criterion for farming per se. This means that section 13 takes precedence over the limitation contained in subparagraph 139(1)(ae)(i) and, aS a consequence, the business of farming has been lifted out of that provision of the Income Tax Act.

I am therefore of the opinion that land owned by a taxpayer and used for the growing of natural or primary products, including trees, and under management with a view to ultimate marketing, regardless of the time element, constitutes farming within the meaning of paragraph 139(1)(p) irrespective of subparagraph 139(1)(ae)(i) of the Income Tax Act. It is my view that in this case subparagraph 139(1)(ae)(i) has been incorrectly and inappropriately applied by the Minister.

Respectfully I do not reach the same conclusion as did the learned member of the Tax Review Board in the Matthews case. I think that section 13 and subparagraph 139(1)(ae)(i) can and must be read together and in doing so regard is to be had to the definition of “farming loss” in subsection (3) of section 13, a subsection which was not specifically mentioned in the reasons in Matthews. It seems to me that that definition with its association of ‘‘farming loss” with “business” is a clear indication that to obtan the benefit of any farming loss pursuant to subsection 13(1) the farming done must be in the nature of a business and not a hobby which is not carried on for profit or which is without a reasonable expectation of profit.

When section 13 is taken as a whole, including all its subsections, it is my opinion that it is clear that when Parliament enacted the section its intention was to deal with situations where the farming had commercial characteristics. In any event, as I see it, that is the result of the wording and “farming loss” has a commercial connotation and a loss from hobby farming which is not carried on for profit or which is without a reasonable expectation of profit is not included.

An undertaking must be carried on for profit or with a reasonable expectation of profit for it to come within the generally held concept of the commercial. Profit or the reasonable expectation of it is inseparable from the basics of business. This, I think, is recognized by the wording of subparagraph 139(1 )(ae)(i).

Furthermore, and in any event, because of the obvious purpose and concept of the Income Tax Act in its entirety it would require clear and unequivocal language for an interpretation which would permit a deduction of losses occasioned by farming, not as a business, but merely as a pleasurable activity per se and without a reasonable expectation of profit. In my view section 13 certainly does not contain such language.

Counsel for the appellant referring to the wording of paragraph 139(1){ae) submitted that even if the Aldonna Ranch expenses are expenses of properties not maintained in connection with a business carried on for profit or with a reasonable expectation of profit, they are not the expenses of properties maintained for the use or benefit of the taxpayer but that they are expenses of farming. “Personal or living expenses” are not limited to those described in subparagraph 139(1)(ae)(i). Paragraph 139(1)(ae) merely makes it clear that the expenses described in subparagraph (i) are included in “personal or living expenses”.

Expenses incurred in pursuit of a hobby which is without profit and without a reasonable expectation of profit are personal or living expenses.

If Dr Holley farmed on the ranch as a hobby and not as a business and without profit and without a reasonable expectation of profit and incurred a toss, the expenses incurred by him in pursuit of that hobby were personal and living expenses in the same way as say expenses incurred by him in the maintenance of a golf course on the ranch for his personal use would have been.

An “Analysis of Farming Activities”, filed as Exhibit 7, contains some distortions partly arising out of the fact that until filing for the year ending December 31, 1972 the appellant filed his income tax return on a cash basis and for 1972 changed to an accrual basis. However that analysis, together with the “Submission Respecting Exhibits 2 and 7” signed by solicitors for both parties, leads to the conclusion that there was a cumulative net loss from the “farming activities” during the period 1965 to 1968, both inclusive, of something in the neighbourhood of $25,000 and a cumulative net loss during the period 1965 to 1971, both inclusive, of something in the neighbourhood of $50,000. On the analysis (Exhibit 7) the year 1972 shows a marked improvement over prior years but it is distorted by bringing into sales for that year livestock inventory shown as $5,900 which is inconsistent with other years. Certainly the farming was not a financially profitable activity.

Dr Holley was a busy surgeon with a lucrative practice. In summaries of income and deductions filed with his income tax returns his net professional income was shown as follows:

The evidence was to the effect that except while on vacation: he went to the hospital five days a week; saw patients in his office five days a week; in 1968 his professional working hours were from 8:00 am to 5:00 or 6:00 pm five days a week; in 1968 he went to his office or the hospital on weekends on occasion and he would do about twelve operations a week.

He said in effect that he spent weekends at the farm and took a total of six weeks a year off from practice during part of which time he worked on the farm, during part of which he went to medical meetings or something of that nature and during part of which he travelled.

One would expect he would spend some time away from his practice at the ranch because that was his home. There he had built a residence and there he lived with his wife, two sons and two daughters. I have no doubt that he did some work there when he was home but to me it seems obvious that the demands on his time from his busy practice would leave but little time and indeed insufficient time for a carrying on of a commercial farming pursuit including horse-breeding.

Farming as a commercial operation requires the close attention of the farmer even if he merely acts in a managerial capacity if there is to be a reasonable expectation of profit. Work and attention is an essential ingredient in the farming process. This I find Dr Holley did not and could not give it. I am not unmindful of the assistance Dr Holley said was rendered by his wife and his hired help when he had it, but I find that this did not bring the work to the level of adequacy for a reasonable expectation of profit.

Whatever may be the sufficiency of that work in farming merely as a hobby I find on the evidence of Mr J M Winram, an agricultural consultant, called by the respondent, it falls short of requirement if the farming is done with a reasonable expectation of profit.

Also in my view, the history of the matter demonstrates an absence of any reasonable expectation of profit and lack of any significant concern that there be profits.

Dr Holley said in effect that in the development of a horse-raising operation: corrals, stabling structures, pastures and areas to produce hay for feed were needed; there must be basic breeding stock and for this one can either buy young stock at a lower price and develop it or adult stock at a high price; it takes four years for a horse to mature for breeding and the gestation period is eleven months, and he started with young horses.

The following is a schedule of purchases, sales and. loss of horses 1963-1970 shown on Exhibit 1 in these proceedings:

Cattle

1 Dairy Cow	300
1 Beef Cow	300
2 Yearling Steers	450
7 Mixed Calves	875
	1,925
Total Value of Livestock Inventory —
December 31, 1971	$12,075

It is noted that the cost of the breeding stock {which does not include the saddle horses) acquired in 1963 was $3,100 and that the inventory of all the livestock, other than the donkey, leased mare and cattle, as at December 31,1971, according to Exhibit 5, totalled $10,050, the entire livestock inventory, not including the leased mare, but including the cattle, then being $12,075.

The increase over the 8-year period is not such as to indicate a serious attempt to develop an adequate stock for a viable commercial horse-breeding enterprise with a reasonable expectation of profits and this particularly having regard to the fact that from and including 1963 through 1970 only six horses were sold according to Exhibit 1 and two of those were saddle horses.

Statements of farming income and expenses (Exhibit 2) contained in the appellant’s income tax returns show the following items of gross income from the Aldonna Ranch:

Even taking into consideration that during the early years of developing sales of horses would not be substantial, considerably more than what is shown would be expected during the 7-year period (1965. to 1971 both inclusive) if the farming activity were commercial in nature or if it were meant to be commercial in nature.

When one considers those gross receipt figures with relation to the considerable capital expenditures in connection with this farm (and without including the money spent for the residence) they are not indicative of an intention to carry on a business. Added emphasis is given to this when regard is had to the extent to which the purchasing power of the dollar diminished during that 7-year period. Of course the question as to whether the advantage which might enure to a taxpayer pursuant to section 13 is to be available to him is not answered merely by the financial success or failure of the farming activity. However, if it would be obvious to any knowledgeable person that there could be no reasonable expectation of profit from the activity the taxpayer carrying on the activity does not qualify for a reduction by virtue of section 13.

I do not think Dr Holley made the expenditures associated with his farming which he did because he did not realize the situation. Although he was a busy surgeon he had a farming background which made him no stranger to conditions and what he might expect from the horse-breeding and the other activities on the farm.

The fact that Dr Holley under the circumstances existing here permitted his farming losses to continue and continued to make expenditures as long as he did notwithstanding those losses points to a situation wherein profits or the expectation of profits were not the motivating factors in his farming activity.

Viewing the situaton on the basis of the circumstances existing in 1968 and having regard to the manner in which the farming activities were then carried on and had been carried on up to that time, it is my opinion that it was manifest then that there could be no reasonable expectation of profit. Furthermore, taking into consideration all the relevant facts I conclude that from the very outset in 1963 there could have been no reasonable expectation of profits. I find, too, that there was no time during the period in respect of which evidence was given when there could have been a reasonable expectation of profits having regard to the manner in which the farming activities were carried on.

I find:

The farming, including the horse-breeding and the horse-raising, done by Dr Holley at the Aldonna Ranch was not done for profit nor with a reasonable expectation of profit.

That farming, including his activities in connection with horses, was not done as a business. It was a hobby, not motivated by the hope of profit. Dr Holley used this ranch as a residence and as a place to pursue and enjoy that hobby.

The expenses Dr Holley incurred in connection with the farming were personal and living expenses.

Dr Holley was not entitled to any benefit or relief under and was not entitled to make any deduction by virtue of section 13:

The appeal is dismissed.

The appellant is to pay the respondent’s costs of the appeal.