Gunn v. Canada, 2006 FCA 281 (2006)

Parts:Gunn v. Canada
Reporting Judge:SEXTON J.A.
Docket Number:A-424-05
 
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Date: 20060821

Docket: A-424-05

Citation: 2006 FCA 281

CORAM: SEXTON J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

DOUGLAS G. GUNN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

Heard at Toronto, Ontario , on April 4, 2006.

Judgment delivered at Ottawa, Ontario , on August 21, 2006.

REASONS FOR JUDGMENT BY: SHARLOW J.A.

CONCURRED IN BY: SEXTON J.A.

MALONE J.A.

Date: 20060821

Docket: A-424-05

Citation: 2006 FCA 281

CORAM: SEXTON J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

DOUGLAS G. GUNN

Appellant

and

HER MAJESTY THE QUEEN

Respondent

REASONS FOR JUDGMENT

SHARLOW J.A.

[1] This is an appeal from a judgment of the Tax Court of Canada (2005 TCC 437) dismissing Mr. Gunn’s appeal from reassessments made under the Income Tax Act , R.S.C. 1985, c. 1 (5 th supp.), for the years 1997, 1998 and 1999. The only issue is whether the Judge was correct in concluding that section 31 of the Income Tax Act applied in each of those years to limit Mr. Gunn’s farm loss deduction to $8,750.

FACTS

[2] The facts are undisputed. For over thirty years, Mr. Gunn has built up a law practice and a farming business through the investment of capital and the application of skill, knowledge and hard work. His law practice required a relatively modest investment of capital and it has been profitable. His farming business required a greater capital investment, but it has resulted mostly in operating losses. Despite Mr. Gunn’s record of farming losses, it is undisputed that his farming operations comprise a business, a commercial activity undertaken for profit and with a reasonable expectation of profit.

[3] Mr. Gunn grew up near St. Thomas, Ontario, on a farm settled by his grandfather. His father raised cattle, sheep and cash crops on the farm. Mr. Gunn worked on his father’s farm during the summers when he was attending the University of Western Ontario. That is how he earned the money for his education. In 1962, Mr. Gun acquired a 25% interest in a farm. His parents and his brother were the other owners. The property was sold some years later.

[4] In 1965, Mr. Gunn graduated from the faculty of law of the University of Western Ontario. He was admitted to the bar of Ontario in 1967, and has practiced law ever since. In 1984 he formed his own firm, Gunn and Associates, in St. Thomas. At the time of the Tax Court hearing, Mr. Gunn had four lawyers working for him.

[5] In 1972, Mr. Gunn bought the property that he now calls his home farm. It is located near St. Thomas, a short distance from his law office. At that time the buildings were run down, and over the next several years Mr. Gunn and his wife together built the home that they still live in, and replaced the farm buildings on the property. The property now has five barns, in which Mr. Gunn has been raising pure-bred Hereford cattle for the past 30 years. By 2005, Mr. Gunn had an established herd of approximately 50 breeding cows.

[6] The breeding of cattle requires a considerable amount of time, attention and expertise. Mr. Gunn does most of the work involved in the cattle breeding operation himself, with the help of his wife. Until September 2004 he had a hired hand as well. He makes all of the decisions in connection with the livestock breeding. In the calving season he checks and feeds the cattle, visiting the barns twice daily, in the early morning and in the evening. His wife checks them during the day, and he is available to return home on short notice if needed. He is never away from home for more than a few days at any time. He also works on the farm during weekends, and some week days in the summer, doing much of the manual work of seeding and haying, with the assistance of people hired on a casual basis. He also does all of the paper work and record-keeping required in connection with the breeding and registration of his cattle.

[7] Between 1990 and 1997, Mr. Gunn acquired six additional farm properties in the vicinity of St. Thomas, where he grows rye, hay and his major cash crop, tobacco. Many of those properties were in very poor condition when purchased, both in relation to the soil, and the buildings and equipment. During that period Mr. Gunn invested considerable time and money to bring those properties up to the high standards that he has established for his farming operations. That work included improving the soil by adding large amounts of fertilizer that had to be trucked long distances. He also spent a lot of time and money on improvements to the buildings, and on repair of equipment that had been much neglected.

[8] More recently, Mr. Gunn has moved from the production of flue-cured tobacco to the production of air-cured burley tobacco, with a view to making his tobacco operation less labour intensive and more profitable. Air cured burley tobacco is less expensive to produce and, unlike flue-cured tobacco, it is not subject to provincial production quotas. Mr. Gunn testified at trial that, having completed the transition to burley tobacco, his tobacco production will come within the top ten percent of all producers in Ontario, in terms of yield and quality.

[9] Mr. Gunn’s usual daily routine is to work on the farm from about 6:00 a.m., and then in his law office from about 9:00 a.m. until about 4:00 p.m., returning to the farm to do more work in the late afternoon and evening. He estimated that he normally spends about 50 hours per week working at his law practice, and about 20 hours on farm work.

[10] Mr. Gunn has acted as the Chairman of the Ontario Crop Insurance Arbitration Board, and has been involved in the work of other bodies connected with agriculture and the cattle industry. He testified that m any clients of his law firm are people Mr. Gunn has met through his farming connections. Clients are encouraged to contact him by telephone or in person at the farm, and often do so. His analysis of files opened in his law firm in the years under appeal shows that between 10% and 15% of them were for clients he met through his farming activities. He suggested that many more files could be attributed indirectly to his farming contacts.

[11] Mr. Gunn’s net farming assets amount to approximately $2 million, the greatest part being land and buildings. The capital invested in his law practice is about $62,000 (before taking into account unbilled accounts and goodwill). He spends approximately 30% to 35% of his working time on the farming operations, and the balance on his law practice. Mr. Gunn’s net income from farming and his net income from his law practice since 1987 are as follows:

Year

Net professional

income ($)

Farm Income

Gross ($)

Expenses ($)

Net ($)

1987

165,663

66,719

126,156

(59,437)

1988

152,682

59,481

84,575

(25,094)

1989

268,770

30,139

88,726

(58,587)

1990

280,017

32,307

82,142

(49,835)

1991

235,854

44,873

98,645

(53,772)

1992

428,077

82,451

130,360

(47,909)

1993

256,723

105,226

191,241

(86,015)

1994

270,818

321,246

377,862

(56,616)

1995

277,869

162,554

222,011

(59,457)

1996

221,013

295,364

426,683

(131,319)

1997

308,686

217,560

272,013

(54,453)

1998

204,865

366,877

474,383

(107,506)

1999

308,447

258,489

417,417

(158,928)

2000

428,189

395,585

429,213

(33,628)

2001

331,419

225,572

272,246

(46,674)

305,890

231,452

192,293

39,159

369,356

148,406

235,390

(85,024)

247,031

326,109

229,997

96,112

[12] Mr. Gunn testified that without the financial support provided by his law practice, he could not have financed the expenditures required to improve his farming operations. He also testified that his farm losses during the 1990s and later years were greater than they might otherwise have been because of a number of nonrecurring expenditures and unforeseen events. First, Mr. Gunn spent considerable amounts of money on the rehabilitation of the farm properties he bought during that period. As of the date of trial, Mr. Gunn believed that he would have no further obligations in that respect. Second, it took Mr. Gunn some years to change the tobacco operation from flue-dried tobacco to the more profitable air-dried burley tobacco. Third, for 2003 and subsequent years, the profitability of Mr. Gunn’s cattle operation, like those of practically every cattle farmer in Canada, was adversely affected by the discovery of bovine spongiform encephalopathy ( mad cow disease) in some Canadian cattle. Fourth, had Mr. Gunn not claimed elective deductions for capital cost allowance in the years 2000 to 2004, his farm profits for those years would have increased (and losses would have decreased).

[13] Counsel for the Crown agreed, in his submissions at the end of the hearing in the Tax Court, that Mr. Gunn’s farming business had a potential for income in the years in issue as well as in later years, but he argued that the farm income potential would never match the potential for income from Mr. Gunn’s law practice. The Judge accepted that Mr. Gunn has been seriously committed to farming as a business for more than 35 years, that during the years under appeal he remained as committed to it as ever, that he remains fully committed to it, and that he intends to continue both practicing law and farming for the foreseeable future.

Section 31 of the Income Tax Act

[14] Section 31 of the Income Tax Act reads as follows:
31. (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, for the purposes of sections 3 and 111 the taxpayer's loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of

31. (1) Lorsque le revenu d'un contribuable, pour une année d'imposition, ne provient principalement ni de l'agriculture ni d'une combinaison de l'agriculture et de quelque autre source, pour l'application des articles 3 et 111, ses pertes pour l'année, provenant de toutes les entreprises agricoles exploitées...

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