R & W Such Holdings Ltd. v. Canada
T-2386-83
Heald D.J.
30/7/96
18 pp.
Appeal from reassessments by respondent under Income Tax Act in respect of 1977-1980 taxation years-MNR reassessing plaintiff on basis latter's chief source of income neither farming nor combination of farming and other source of income-Plaintiff incorporated under laws of Alberta-In 1950's, Wolfgang Such and father Rudolph established construction and rental business at Calgary-Business assets at time of incorporation including 29 duplexes, one 12-unit apartment building-Plaintiff acquiring land for farming operation in December of 1973 for approximately $20,000-Farm operation owned different kinds of animals since inception: prong horn antelope, black tail deer, sika deer, fallow deer, mule deer, white tail deer, elk, moose, mountain goats and big horn sheep-Plaintiff earning income from farm operation by shipping stock to U.S.A. for trophies, by purchase and sale of stock and by selling elk antlers and other by-products from animals-Robert Such, son of Wolfgang, assuming control of plaintiff corporation on January 1, 1994, current president-Allocating half of time to farm operation and half to building rental business-During 1977-1980 taxation years, Wolfgang drove out to farm nearly every day, usually remained there all day-Whether restrictions of Act, s. 31(1) apply to plaintiff for 1977-1980 taxation years-Starting point in determining issue S.C.C. decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480-Whether plaintiff's chief source of income for 1977-1980 taxation years farming or combination of farming and other source of income-If so, plaintiff not restricted by s. 31(1) to $5,000 farm loss-Reasonable expectation of profit from farm operation during relevant taxation years-Court may consider evidence relating to farm operation in subsequent taxation years-Following factors must be taken into consideration in determining whether farm operation chief source of income: 1) time spent; 2) capital committed; and 3) potential and actual profitability-Plaintiff having two sources of income: farm operation, building rental operation-Time spent between two operations clearly favouring farm operation-Building rental operation involving significant commitment of capital as plaintiff owned 30 rental properties-During relevant taxation years plaintiff had more capital committed to building rental operation than to farm operation-As early as 1981, farm operation began to show positive adjusted net income, albeit substantially less than that earned by building rental operation same year-Farm operation developing significant potential for profit-Relative and objective comparison of two operations, when related to criteria of actual and potential profitability, favouring farm operation-Losses suffered by farm operation from 1974 through 1980 reasonably expected start-up losses because of nature of operation, uniqueness at time of inception-Plaintiff's major preoccupation farm operation-Building rental operation sideline business-For 1977-1980 taxation years, farm operation in combination with building rental operation plaintiff's chief source of income-S. 31(1) not applicable to plaintiff-Appeal allowed-Income Tax Act, S.C. 1970-71-72, c. 63, s. 31(1) (as am. by S.C. 1973-74, c. 14, s. 7; S.C. 1979, c. 5, s. 9).