Date: 19980225
Dockets: 96-936-IT-G; 96-937-IT-G
BETWEEN:
MICHEL LANCTÔT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Read from the bench at Sherbrooke, Quebec, on August 21, 1997)
ARCHAMBAULT, J.T.C.C.
[1] Michel Lanctôt is appealing income tax assessments made by the Minister of National Revenue ("the Minister") for the 1990 to 1994 taxation years inclusive ("the relevant period"). The issue is whether Mr. Lanctôt's income during the taxation years in question came primarily from a combination of farming and some other source.
[2] The Minister argued that Mr. Lanctôt's income did not come primarily from farming and some other source and, in making his assessments for each of the years at issue, limited Mr. Lanctôt's farm losses to $8,750 in accordance with the provisions of s. 31 of the Income Tax Act ("the Act"). All the appeals were heard on common evidence.
[3] During the relevant period Mr. Lanctôt carried on the profession of a dentist in Montréal and operated a farming business in the Stanstead area. Since childhood Mr. Lanctôt had dreamed of becoming a farmer. His father, a druggist, had bought land at Beloeil where a few animals were raised. During his youth Mr. Lanctôt worked on an uncle's farm and learned haymaking.
[4] In 1953, aged 19, he took a mechanics course for a year; however, his father encouraged him to undertake university studies instead and to have a profession that would enable him to earn a better living. He entered the faculty of medicine at Ottawa but halfway through switched to law.
[5] In August 1958, having successfully completed daytime courses, he received a diploma from the Institut Teccart Inc. in radio-electronics. He also took a 15-lesson correspondence course in the fundamentals of carpentry and on November 31, 1965 was given a certificate of merit with distinction.
[6] Mr. Lanctôt once again changed his area of study and entered the dentistry faculty of the University of Montréal: he completed his studies in 1969 when he was about 35 years old. He subsequently opened his own clinic very near the Hôtel-Dieu in Montréal.
[7] Although his father's objective had now been achieved, Mr. Lanctôt stated he never really wanted to become a dentist and never liked the profession. However, he always retained his interest in farming: he continued visiting farm shows regularly and watched for an opportunity of buying a farm for himself. He also continued taking courses that might be useful to him in operating a farm. Accordingly, in 1977/1978 he took a 90-hour course in building electricity.
[8] In 1987, 18 years after starting his clinic, he accepted a colleague's offer to purchase the clinic for about $50,000. After the sale the purchaser offered to have Mr. Lanctôt work for him and Mr. Lanctôt agreed to work four days a week. He was then about 53 years old.
[9] As he did not get on too well with this new colleague, he left in March 1988 and went to practise his profession in a clinic located in another part of Montréal. He worked there for three days a week, which amounted to some 32 or 33 working hours weekly. He worked on Tuesdays and Thursdays from 8:00 a.m. to 9:00 or 10:00 p.m. and on Fridays from 8:00 a.m. to 1:00 or 2:00 p.m. He had to pay 40 percent of his fees for rental and general administration and pay his own laboratory fees.
[10] A few months later, in October 1988, his search for a farm finally ended. Mr. Lanctôt made an offer to purchase a farm located quite close to Stanstead in the Eastern Townships. Agreement was reached on the sum of $152,000 and the deed of purchase signed on May 1, 1989.
[11] According to Mr. Lanctôt, the purchase of this farm would enable him to retire from dentistry and begin a new career. He was convinced that his farming operation could support him: he thought he could make a clear profit of $30,000 from it. His children were grown and working: two of them were agronomists working as sales representatives and the third was a heavy machinery operator. Mr. Lanctôt seems to have led a quite frugal life and it appeared to the Court that he could live on a more modest scale.
[12] The farm he bought consisted of 482 acres of land, a small farmhouse with four bedrooms, an old stable 40' x 150', a long shed for farm equipment, a 20' x 60' silo for storing grass and a smaller silo in the stable for storing grain. He also acquired second-hand equipment for $15,000. As the farm had not been in operation for some years at the time of the purchase, Mr. Lanctôt had to do a lot of repairs to the buildings and rebuild the fences. His neighbour, who testified, estimated that Mr. Lanctôt installed about 10 kilometers of fences.
[13] He began his farming operations with the rearing of cows and calves. He purchased seven Highland cows. As he found that the sale of these animals did not produce any profit, he bought about 10 Salers cows and increased his herd by adding cross-bred cows: his herd came to some 80 head of cattle.
[14] This type of operation continued until 1994, when he decided to switch to sheep rearing. He thought there was a good market for this type of stock since Quebec did not produce all that it consumed. He thought he would have more success with this other type of rearing.
[15] A technician at the Ministère de l'Agriculture et des produits alimentaires du Québec ("MAPAQ") confirmed that it was possible to live from rearing sheep in Quebec when a farm was big enough. In a document dated January 18, 1994, the technician confirmed that the total number of acres of hay owned by Mr. Lanctôt, that is, 125 acres, and those he planned to purchase or lease, that is, 100 additional acres, could allow him to feed a flock of at least 600 to 650 ewes, and this was the size of flock which Mr. Lanctôt wished to acquire. He could look after it by himself, with casual help for haymaking and lambing.
[16] Mr. Lanctôt's stable gave him the space needed to shelter about 185 ewes during the lambing period. As lambing did not all occur at the same time it was possible to do a rotation and occupy the shed he owned. According to the MAPAQ technician, Mr. Lanctôt needed another shelter of 3,000 square feet in area, and that did not have to be entirely closed in: two walls would suffice. Mr. Lanctôt's forage silo also sufficed for a flock of 200 ewes.
[17] From 1990 onwards Mr. Lanctôt lived at the farm and kept his St-Lambert house as a second residence until 1994. He made the trip between Stanstead and Montréal daily to work at his clinic and return to the farm.
[18] He rose at 5:00 a.m., saw to the animals and left at 6:00 a.m. for Magog, where he took the 6:30 a.m. bus: he could sleep in the bus to recover his lost sleep. He arrived in Montréal at about 9:00 a.m. and then left by bus at 7:00 p.m., returning to the farm at 10:00 p.m. His neighbour confirmed that he saw him make this trip even in bad weather when he would not himself have returned from Montréal in such circumstances.
[19] Mr. Lanctôt might work on looking after his sheep until midnight, and in lambing time he spent a large part of the night on it. In the relevant period his clinical hours fell from 30 or 32 hours a week to about 20 or 22 hours, divided between Tuesdays and Thursdays.
[20] Mr. Lanctôt estimated he spent about 60 to 66 hours a week at his farm. Though he had no training in agriculture he learned on the job, as he said, and all his other knowledge, namely his medical training and knowledge of other fields, served him in operating the farm. He is a member of the Association des éleveurs de moutons des Cantons de l'Est, the area in which the largest farms in Quebec are located. He also has his card as a forestry and farm producer.
[21] His net income from the practice of dentistry for 1990 to 1996 was as follows:
Dentistry
YearNet income
1990 $79,518.28
1991 $42,235.04
1992 $53,340.04
1993 $53,293.04
1994 $54,597.54
1995 $44,612.26
1996 $49,756.97
[22] In addition to spending by far the greater part of his time at his farm, he invested most of his financial resources in it. He mortgaged his house in St-Lambert to secure a loan of $154,000, used to finance the purchase of the farm. The house was sold in December 1994. In 1993 he also sold an industrial building the actual net value of which, $60,000, was also reinvested in his farm.
[23] In making an assessment of Mr. Lanctôt in 1994 the Minister's auditor acknowledged that he was operating a business. However, the auditor did not think this business was Mr. Lanctôt's main source of income. He placed great importance on the fact that Mr. Lanctôt had made a low gross income and repeated operating losses. He did not think that the farm could become Mr. Lanctôt's livelihood.
[24] The farming gross income and losses for 1990 to 1996 are as follows:
YearIncome Losses
1990 0 $57,283.29
1991 $11,793.38 $71,103.00
1992 $12,275.22 $53,607.78
1993 $43,705.56 $58,319.64
1994 $ 7,347.47 $36,715.55
1995 $21,722.90 $27,067.95
1996 $11,594.24 $21,312.68
[25] To determine the profitability of his farming operation Mr. Lanctôt filed a projection of gross income which the operation of a flock of 260 ewes would produce beginning in 1995: this study was prepared for the purpose of these appeals. According to Mr. Lanctôt, the projections were based on conservative assumptions and assumed only a natural growth of the flock taking into account the ordinary loss of animals.
[26] In 1995 Mr. Lanctôt owned about 165 ewes and expected to acquire 100 others. In his submission, such an operation would become profitable and in about 1998/1999 produce sufficient profit to provide him with a living. He estimated his expenses at about half the returns from the sale of lambs and yearling ewes.
[27] As mentioned above, Mr. Lanctôt wanted to buy a 100-acre piece of land adjoining his own and purchase other ewes. However, the Minister's reassessments alarmed his lenders, namely the financial institutions, which refused him the money needed to finance the purchase of the adjoining piece of land and other ewes. The financial institutions refused him the money as long as his tax problem remained unsolved.
[28] As he felt the purchase of the adjoining land at $30,000 was a good deal, Mr. Lanctôt deemed it was better to sell his flock of ewes in 1996 and to purchase this land on May 30, 1997. Nevertheless, he has not given up his plan to raise sheep and intends to approach the financial institutions again.
[29] At present, Mr. Lanctôt is continuing to practise dentistry two and a half days a week: he says it would be difficult to return to that profession full time.
Analysis
[30] The issue in the instant case is not whether a source of income or a business existed. The question is rather whether the farming business was a principal source of income.
[31] The courts have several times indicated the approach that should be followed in determining this. In Moldowan v. The Queen, [1978] 1 S.C.R. 480, at 487, Dickson J. said the following:
It is clear that "combination" in s. 13 cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important other source of income, thereby constituting his chief source. I do not think s. 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.
In my opinion, the Income Tax Act as a whole envisages three classes of farmers:
(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.
(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.
(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.
The reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming. But it recognize [sic] that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of "chief source" to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.
[32] In Her Majesty The Queen v. Benoît Poirier, A-132-86, a decision rendered on March 25, 1992, MacGuigan J.A. added:
It is also now clear that what is required for a determination that farming is a chief source of income is a favourable comparison of farming with the other source of income as to such matters as the time spent, the capital committed, and the profitability, both actual and potential . . .
At p. 2, he went on:
It must be remembered that it is the cumulative impact of the various factors for determination that governs, not any one factor taken disjunctively . . .
[33] Here, I think that if we look at all these factors together we must conclude that in 1990 Mr. Lanctôt changed the focus of his concerns, farming became his major concern and the practice of dentistry became secondary.
[34] If we look at the various relevant factors, the first being that of time, we can see that Mr. Lanctôt spent 60 to 66 hours a week running his farm whereas he spent only 20 or 22 hours practising dentistry. It should also be added that Mr. Lanctôt lived at Stanstead and had to travel daily by bus to get to Montréal in order to practise his profession as a dentist there on Tuesdays and Thursdays.
[35] As to the second factor, that of capital, the evidence showed that Mr. Lanctôt invested practically all his available financial resources in purchasing and operating his farm. He actually sold his house in St-Lambert in 1994, which he subjected to a large mortgage to finance the purchase and operation of his farm. He also disposed of another asset, an industrial building, of which he invested the actual net value in the farm.
[36] In connection with Mr. Lanctôt's practice of dentistry, it should be noted that he sold his own clinic in 1987 and that from that year onward he paid the rental and administrative costs by giving up 40 percent of his fees to the clinic where he worked. There is thus no evidence to show that from 1988 onwards he invested any capital in the practice of his profession as a dentist.
[37] As to the third factor, that of profitability, the evidence was that Mr. Lanctôt got into farming by significantly reducing his activities in the field of dentistry and that he invested all his energies and capital in making his farming operation profitable. He did this thinking that he could derive sufficient income from this activity to support himself. I feel that Mr. Lanctôt's belief was justified.
[38] Mr. Lanctôt provided income and expenditure projections for the sheep rearing operation. I would have liked clearer evidence of the profitability of this activity; however, the income and expenditure projections were not disputed by the Minister. Furthermore, the auditor did not question Mr. Lanctôt's credibility, and I feel that in this the auditor was correct.
[39] The fact that Mr. Lanctôt never liked practising his profession, sold his clinic in 1987 and lived a rather frugal life indicates to me that his farming operation was to be his main source of income and that he was going to give up his practice of dentistry. I also note that this career change by Mr. Lanctôt occurred at about the age of 53, an age when some people are thinking of retiring. Mr. Lanctôt also indicated he intended to be involved in the operation of his farm for many years to come, perhaps even until age 80, if his health permitted.
[40] Accordingly, looking at all the factors in accordance with MacGuigan J.A.'s comments in Benoît Poirier, I think that from 1990 onwards Mr. Lanctôt's farming operation became his major concern and, combined with his other sources of income, in particular his income from dentistry, his main source of income.
[41] For all these reasons, Mr. Lanctôt's appeals are allowed, with costs.
Signed at Ottawa, Canada, this 25th day of February 1998.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 5th day of June 1998.
Benoît Charron, Revisor