Stackhouse v. The King

Stackhouse v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-11-08
Neutral citation
2023 TCC 156
File numbers
2019-1444(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2019-1444(IT)G
BETWEEN:
DIANNE L. STACKHOUSE,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeals heard on June 13 and 14, 2023, at Fredericton, New Brunswick
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Karen D. Stilwell
Romain Viel
Benjamin Roizes
Counsel for the Respondent:
Stan McDonald
Sam Perlmutter
JUDGMENT
UPON hearing the evidence and submissions of counsel for the Appellant and counsel for the Respondent;
IN ACCORDANCE with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act for the 2014 and 2015 taxation years, by notices dated June 27, 2017, are dismissed with costs to the Respondent.
The parties shall have 60 days from the date of this judgment to agree on costs. If the parties are unable to agree on costs, the Respondent shall have a further 30 days to make submissions on costs not to exceed ten pages and the Appellant shall have a further 30 days after the date of the Respondent’s submissions to make submissions in response to the Respondent’s submissions not to exceed ten pages.
Signed at Ottawa, Canada, this 8th day of November 2023.
“J.R. Owen”
Owen J.
Citation: 2023 TCC 156
Date: 20231108
Docket: 2019-1444(IT)G
BETWEEN:
DIANNE L. STACKHOUSE,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Owen J.
[1] Doctor Dianne Stackhouse (the “Appellant”) appeals reassessments under the Income Tax Act (the “ITA”)[1] of her 2014 and 2015 taxation years (individually, the “2014 Taxation Year” and the “2015 Taxation Year” and, collectively, the “Taxation Years”) by notices dated June 27, 2017 (the “Reassessments”).
[2] The Reassessments restrict to $17,500 losses from farming incurred by the Appellant in the amounts of $530,363 and $595,904 for the 2014 Taxation Year and the 2015 Taxation Year, respectively. In making the Reassessments, the Minister of National Revenue (the “Minister”) relied on subsection 31(1).
I. The Minister’s Assumptions [3] In reassessing the Appellant for the Taxation Years, the Minister relied on the assumptions of fact in paragraph 9 of the Reply, which state:
a) the facts stated and admitted above;
b) at all material times the Appellant’s chief source of income was from her practice as a medical doctor;
c) in the 2014 and 2015 taxation years, the Appellant reported net professional income from her medical practice in the amounts of $648,605 and $697,050, respectively;
d) in the 2014 and 2015 taxation years, the Appellant reported revenue from her farming activities in the amounts of $176,433 and $31,128, respectively;
e) during the same taxation years, the Appellant claimed expenses relating to her farming activities in the total amounts of $706,796 and 627,032, respectively, primarily related to salaries, capital cost allowance and machinery costs;
f) the Appellant’s claimed farm expenses greatly exceeded the reported farm revenue;
g) the Appellant claimed farm losses for every year since 1987 with the exception of 1993 and 1994;
h) the Appellant also claimed restricted farming losses in 1980, 1981, 1982, 1984, 1985 and 1986;
i) the Appellant failed to provide any budget, projection or business plan to turn around the failure of the farming operation to sustain any degree of profitability; and
j) the Appellant did not have a reasonable expectation of profit from farming activity in the 2014 and 2015 taxation years.
[4] Paragraph 9(b) of the Reply states that at all material times the Appellant’s chief source of income was from her practice as a medical doctor. Paragraph 9(j) of the Reply states that the Appellant did not have a reasonable expectation of profit during the Taxation Years.
[5] In accordance with the decision of the Supreme Court of Canada in Johnston v. MNR, [1948] SCR 486 (“Johnston”), the Minister is entitled to make assumptions of fact in support of the assessment or reassessment of a taxpayer. In Johnston, Rand J. stated the general rule regarding assumptions by the Minister as follows at 489:
Notwithstanding that it is spoken of in section 63 as an action ready for trial or hearing the proceeding is an appeal from the taxation and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.
[Emphasis and double emphasis added]
[6] In R. v. Anchor Pointe, 2003 FCA 294, Rothstein J.A., as he then was, explained the current practice regarding assumptions of fact in pleadings at paragraph 2:
The facts in a tax appeal are peculiarly within the knowledge of the taxpayer. The practice is for the Crown to disclose in its pleadings, assumptions of fact made by the Minister upon which his determination of the tax owing is based.
[7] Section 48 and subsection 49(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”) set out what the pleadings of the appellant and the respondent, respectively, shall state in an appeal to the Tax Court of Canada.
[8] Section 48 accomplishes this by requiring the notice of appeal to be in the stipulated form (form 21(1)(a) for most appeals) while subsection 49(1) expressly states the required content of a reply as follows:
49. (1) Subject to subsection (1.1) every reply shall state
(a) the facts that are admitted,
(b) the facts that are denied,
(c) the facts of which the respondent has no knowledge and puts in issue,
(d) the findings or assumptions of fact made by the Minister when making the assessment,
(e) any other material fact,
(f) the issues to be decided,
(g) the statutory provisions relied on,
(h) the reasons the respondent intends to rely on, and
(i) the relief sought.
[Emphasis added]
[9] Paragraph 49(1)(d) of the Rules expressly requires the respondent to state the findings or assumptions of fact made by the Minister when making the assessment under appeal. Paragraph 49(1)(d) does not authorize the pleading of answers to questions of mixed fact and law.
[10] The requirements regarding pleadings stated in section 48 and subsection 49(1) of the Rules are consistent with two general principles governing pleadings.
[11] The first general principle is that pleadings are to set out facts rather than argument or statements of law.[2] Section 48 and subsection 49(1) of the Rules provide limited exceptions to this general principle by requiring the inclusion of a statement of the issues to be decided, the statutory provisions relied upon, the reasons relied upon, and the relief sought. These additional matters appear under separate headings in the pleadings that follow the statement of the facts.
[12] The second general principle is that a conclusion on a question of mixed fact and law is a conclusion of law[3] because it is a legal inference[4] that is drawn by applying a legal standard to a set of facts.[5]
[13] The first general principle implies that a party cannot plead a conclusion on a question of mixed fact and law because such a conclusion is not an inference of fact but an inference of law. The factual contents of pleadings stipulated by section 48[6] and paragraphs 49(1)(a) to (e) of the Rules and the reference of Rand J. in Johnston to “every such fact found or assumed” also indicate such a restriction.
[14] A party may state a legal inference or point of law in the sections of the pleadings that follow the statement of the facts such as in the reasons relied upon. However, because a conclusion on a question of mixed fact and law requires facts, any such statement is meaningless and therefore potentially prejudicial if not supported by facts stated in the pleadings.[7]
[15] In Agracity Ltd. v. R., 2015 FCA 288, the Federal Court of Appeal addressed assumptions of mixed fact and law in a manner consistent with the forgoing:
[38] The Tax Court Judge struck paragraph 14(c) and the first sentence of paragraph (h) from the reply on the basis that this paragraph and this sentence stated conclusions of law.
[39] Paragraph 14(c) and the first sentence of paragraph (h) of the reply are as follows:
14. The Deputy Attorney General of Canada further states the following additional facts in support of the reassessments under appeal:
. . .
c) the series of transactions would not have been entered into between persons dealing at arm’s length since no arm’s length party would accept the risks of the said series of transactions and yet forego the benefits of the series of transactions given NewAgco-Barbados limited functions, lack of assets and having no employees;
. . .
h) the series of transactions entered into by AgraCity amounts to a sham or window dressing designed to deceive the Minister into concluding that NewAgco-Barbados, not AgraCity, was undertaking a business and incurring real risks. [ . . . ]
[40] It seems to me that both of these provisions are questions of mixed fact and law. Paragraph c) would require the judge to determine what persons dealing at arm’s length would do in this particular situation. This would require a determination of the applicable standard to be used and then the application of that standard to the facts. As well, whether the facts would lead to the conclusion that the series of transactions is a sham is also a question of mixed fact and law. These statements should not be stated to be facts.
[41] In Anchor Pointe Energy Ltd. v. Canada, 2003 FCA 294, [2004] 5 C.T.C. 98 and Canadian Imperial Bank of Commerce v. The Queen, 2013 FCA 122, [2013] 4 C.T.C. 218, this Court emphasized the requirement that assumptions of fact must be restricted to only the facts and are not to include statements of mixed fact and law. The facts are to be extricated from such statements. Although paragraph 14 of the reply in this case does not state the facts that were assumed by the Minister in reassessing, it is still indicating that what is included in this paragraph are facts. The characterization of statements as statements of fact or mixed fact and law does not change simply because these are stated to be additional facts and not stated to be assumed facts. The Crown should not be excused from misidentifying statements of mixed fact and law as statements of fact just because it has included these statements as additional facts.
[Emphasis and double emphasis added]
[16] Agracity confirms that assumptions of fact must be restricted to facts and are not to include statements of mixed fact and law. Agracity also confirms that simply moving statements of mixed fact and law under a different heading in the pleadings does not excuse identifying such statements as statements of fact.,[8]
[17] In R. v. Adboss, Ltd., 2023 FCA 201 (“Adboss”), the Federal Court of Appeal reiterates the principles stated in Agracity:
Legal statements or conclusions of law have no place in the Minister’s factual assumptions: Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294 at para. 25. Similarly, factual elements in a statement of mixed fact and law should be extricated, so that the taxpayer knows exactly what factual assumptions it must demolish in order to succeed: Preston at paras. 8, 25 and 31. That said, not every conclusion of mixed fact and law that appears as an assumption must necessarily be struck: Preston at para. 31.[9]
[18] It is not always easy to identify questions of mixed fact and law. For example, there are cases where a legal standard adopted by a statutory provision requires nothing more than a determination of fact. In Graat v. R., [1982] 2 SCR 819 at 839, the Supreme Court of Canada addressed the meaning of “impaired” as used in section 234 of the Criminal Code, R.S.C. 1970, c. C-34:
A non-expert witness cannot, of course, give opinion evidence on a legal issue as, for example, whether or not a person was negligent. That is because such an opinion would not qualify as an abbreviated version of the witnesses factual observations. An opinion that someone was negligent is partly factual, but it also involves the application of legal standards. On the other hand, whether a person’s ability to drive is impaired by alcohol is a question of fact, not of law. It does not involve the application of any legal standard. It is akin to an opinion that someone is too drunk to climb a ladder or to go swimming, and the fact that a witness’ opinion, as here, may be expressed in the exact words of the Criminal Code does not change a factual matter into a question of law. It only reflects the fact that the draftsmen of the Code employed the ordinary English phrase: “his ability to drive…is impaired by alcohol” (s. 234).
[Emphasis added]
[19] In Brutus v. Cozens, [1973] AC 854 (“Brutus”), the Law Lords had previously adopted the same approach. Lord Reid described the approach as follows:
The meaning of an ordinary word of the English language is not a question of law. The proper construction of a statute is a question of law. If the context shows that a word is used in an unusual sense the court will determine in other words what that unusual sense is. But here there is in my opinion no question of the word “insulting” being used in any unusual sense. It appears to me, for reasons which I shall give later, to be intended to have its ordinary meaning. It is for the tribunal which decides the case to consider, not as law but as fact, whether in the whole circumstances the words of the statute do or do not as a matter of ordinary usage of the English language cover or apply to the facts which have been proved. If it is alleged that the tribunal has reached a wrong decision then there can be a question of law but only of a limited character. The question would normally be whether their decision was unreasonable in the sense that no tribunal acquainted with the ordinary use of language could reasonably reach that decision.[10]
[Emphasis and double emphasis added]
[20] The question of whether a legal standard requires nothing more than a finding of fact is not always easy to answer. A common area where this arises is with respect to issues of fair market value (“FMV”). FMV is not a question of mixed fact and law notwithstanding that a commonly cited meaning exists in the jurisprudence because that meaning is describing a finding of fact.[11]
[21] This is confirmed by the evidentiary practice in matters involving issues of FMV. If there is a question as to the FMV of something then it is generally answered by expert evidence. The jurisprudence has long held that the opinion evidence of an expert witness consists of one or more factual inferences drawn from facts.[12] Indeed, an expert witness cannot give evidence regarding a legal inference:
With respect, we do not believe that the witness Claerhout should have been permitted to give an opinion as to when the appropriation occurred. It was a question of law for the judge as to what constitutes an appropriation. It was for the judge to determine, in compliance with the legal definition, if and when an appropriation took place. This was not something on which an expert witness could give evidence.[13]
[Emphasis added]
[22] Returning to paragraphs 9(b) and 9(j) of the Reply, a “chief source of income” and a “reasonable expectation of profit” (“REOP”) are legal concepts peculiar to tax law[14] rather than terms of ordinary usage with well-understood meanings. Consequently, what constitutes a taxpayer’s “chief source of income” and whether a taxpayer has a REOP are questions of mixed fact and law. The statements in paragraphs 9(b) and 9(j) of the Reply therefore do not place an onus on the Appellant as they are conclusions of law (i.e., legal inferences drawn by applying the legal standard to the facts) rather than assumptions of fact, and because there are no extricable facts in the paragraphs.
[23] I also note with respect to paragraph 9(j) that the application by the Minister of subsection 31(1) to the Appellant’s farming losses implies the existence of a farming business (as opposed to a hobby or personal endeavor) and therefore if a REOP was relevant to the existence of a source of income the statement in paragraph 9(j) would contradict the Minister’s assessing position.
II. The Agreed Facts A. The Partial Agreed Statement of Facts and Joint Book of Documents [24] At the commencement of the hearing, the parties presented a partial agreed statement of facts (the “PASF”), which states:
1. The Appellant resides at 205 Austin Road, Cambridge-Narrows, New Brunswick.
2. The reassessments that are the subject of this appeal (the “Reassessments”) are restricted losses claimed by the Appellant in the 2014 and 2015 taxation years in the total amounts of $530,363 and $595,904, respectively, pursuant to subsection 31(1) of the Income Tax Act.
3. The Appellant objected to the Reassessments by Notices of Objection dated September 22, 2017.
4. By Notice of Confirmation dated February 4, 2019, the Minister of National Revenue (the “Minister”) confirmed the Reassessments.
5. At all relevant times, the Appellant owned and operated a certified organic beef farm business sometimes referred to as Angus East Organics located in Cambridge-Narrows, New Brunswick (the “Farm”).
6. At all relevant times, the Appellant was also a practicing medical doctor.
7. During the taxation years in issue, the Farm employed several full-time employees and various seasonal and part-time employees.
8. In the 2014 and 2015 taxation years, the Appellant reported net professional income from her medical practice in the total amounts of $648,605 and $697,050, respectively.
9. In the 2014 and 2015 taxation years, the Appellant reported revenue from her farming activities in the total amounts of $174,433 and $31,128, respectively.
10. In the 2014 and 2015 taxation years, the Appellant claimed expenses relating to her farming activities in the total amounts of $706,796 and $627,032, respectively, primarily related to salaries, capital cost allowance and machinery costs.
11. The Appellant claimed farming losses for every year since the 1987 taxation year, with the exception of the 1993 and 1994 taxation years.
12. The Appellant claimed restricted farming loses in the 1980, 1981, 1982, 1984, 1985 and 1986 taxation years.
[25] The parties also submitted a joint book of exhibits. The parties agreed that each of the exhibits was authentic and relevant. The parties also agreed that the exhibits are proof of the truth of their contents. I entered the joint book into evidence as Exhibit AR-1, and I will refer to the individual exhibits by their tab number.
III. The Evidence [26] The Appellant testified on her own behalf. I found the Appellant to be a credible witness.
[27] Mr. Caleb Siu, currently a rulings officer with the Canada Revenue Agency (the “CRA”) based in Toronto, testified briefly for the Respondent. Mr. Siu was the appeals officer that reviewed the Appellant’s notice of objection and prepared a spreadsheet regarding the income/loss of the Appellant from her medical practice and her farming operation. The contents of the spreadsheet are not in issue.
A. Background [28] The Appellant grew up on a “mixed farm”[15] located in Long Creek, Queens County, New Brunswick which is approximately 15 miles from the Appellant’s farm. The Appellant is the eldest of six children.
[29] As a child, the Appellant would perform various farm related tasks including, when she was about ten, selling surplus eggs to customers, which she described as her little business.
[30] At the age of 17, the Appellant left the family farm to attend Dalhousie University where she earned a medical degree in 1974. During her studies, she would return home during school breaks and work on the family farm as well as in a local nursing home in a non-medical capacity. Following graduation, the Appellant carried out a one-year medical internship in Halifax, Nova Scotia and St. John, New Brunswick, which she completed in June 1975.
[31] After completing the internship, the Appellant began her medical practice in the village of Cambridge-Narrows, Queens County, New Brunswick.
B. The Farm [32] Shortly after starting her medical practice, the Appellant purchased an abandoned farm of approximately 350 acres located near the village of Cambridge-Narrows. At that time, approximately 150 acres of the land was cleared, and the farmhouse and other buildings were in a dilapidated state. The Appellant rented a small house in the village of Cambridge-Narrows while she considered whether the farmhouse was liveable.
[33] The Appellant described her objective in purchasing the farmland as follows:
To build that farm up to be a viable business opportunity, in conjunction with my medical work in a rural setting.[16]
[34] The Appellant consulted with the New Brunswick Department of Agriculture as to the best way to get the farm producing and they assisted with a management plan. Initially, the Appellant focussed on building the fertility of the soil.
[35] The Appellant started with Christmas trees and apple trees, which required her to register as a professional agriculture producer. Her intention was to see if the trees would develop enough to make a viable farm business. The Appellant also took various steps to get the soil ready to grow hay to feed the three ranch horses she had at the time.
[36] The farm was equipped to handle horses and in the 1980s, the Appellant purchased a purebred Arabian stallion to crossbreed with her ranch horses. The Appellant stopped breeding horses 20 years ago.
[37] In the 1990s, the Appellant switched her focus to crops of soybeans, oats, buckwheat, winter rye and winter wheat. To that end, the Appellant began to purchase and lease additional farmland.
[38] In the early to mid-1990s, the Appellant acquired a small herd of Highland cattle to start the bovine side of the farming business. The Appellant chose Highland cattle because they had less demanding nutritional needs in comparison to more commercially viable breeds and could forage on grasses and small bushes.
[39] In 1996, the Organic Crop Improvement Agency headquartered in Nebraska certified the Appellant’s farm for growing organic grains.
[40] The Registered Professional Agriculture Producers Plan (“RPAP”) issued certificates and authorizations to the Appellant.[17] The producer’s number and authorization issued by RPAP allowed the Appellant to access provincial agriculture programs and benefits for farming including tax reductions for fuel and lower cost registrations for farm vehicles.
[41] The Appellant’s goal during the 1990s was to expand and diversify the farm so it could produce various crops at various times of the year and raise livestock. The Appellant believed that additional acreage and diversity of production would shelter the farm from the risk of losing a single crop or a single livestock.
[42] The Highland cattle were lean and after consumer demand switched to a fattier beef, the Appellant sold the Highland cattle circa the year 2000 and in 2002 acquired 103 Aberdeen Angus cattle.
[43] The Appellant’s objective was to create a herd of certified organic beef cattle, which took several years to achieve due to the rigorous requirements for the certification of cattle as organic beef. In New Brunswick, the Atlantic Certified Organic Cooperative Limited (“ACOC”), a division of the Canadian Organic Certification Agency, enforced the organic beef certification standards.
[44] By 2006, the Appellant’s farm had young calves that the Appellant could market as certified organic beef. However, it was not until 2008 that the closest abattoir - located in Sussex, New Brunswick - agreed to meet the requirements for butchering organic beef. The Appellant’s arrangement with the abattoir allowed for the butchering of 6 to 12 certified organic beef cattle per year.
[45] To create a more viable farming operation, the Appellant’s boyfriend at the time (“GC”) secured an environmental farm plan in 2009,[18] which allowed for expansion of the farm. The Appellant explained that GC was in the construction business and would be doing any construction required by an expansion. This required that GC comply with the applicable environmental standards.
[46] Around 2011, the Appellant began to consider the possibility of constructing a processing facility on the farm to address the limited availability of processing for organic beef and the wasted by-products resulting from that processing. The proposed processing facility would process organic beef for human and pet consumption.
[47] The Appellant paid for a study[19] to determine if a processing operation was viable. The study concluded that there would be a financial benefit to having a processing plant on the farm. GC (through his construction company) started the construction shortly thereafter. The Appellant paid for the construction and was to be the sole owner of the new processing facility when completed.
[48] At all times, the Appellant owned all of her farm’s assets and paid all of the expenses of her farm.
[49] In 2014, the Appellant owned 829 certified organic beef cattle bred from the original herd purchased in 2002. In 2015, the herd dropped to 801 due to the sale of over-age cattle.
[50] The 2014 and 2015 applications for ACOC certification identified the farm by the initials DSGC.[20] In chief, the Appellant explained that GC prepared and kept track of many of the PID numbers. GC also dealt with the construction aspects of expanding the farm such as permits.
[51] In cross-examination, the Appellant explained that GC tried to be “super involved” but that one of her employees (“MJ”) prepared the ACOC application documents and that MJ was responsible for the accuracy of those documents.
[52] Counsel for the Respondent asked the Appellant if GC was more involved in the management of the farm than her testimony in chief suggested and the Appellant responded as follows:
I can’t tell you what happened when I was working in my medical office, but I do know there was a lot of conflict, he might have tried to supervise the employees most of the time. Part of the conflict was they resented that and they took the direction from me.[21]
[53] When further pressed, the Appellant repeated that GC “tried” to act in a managerial role and “tried” to supervise the employees.
[54] In 2014 and 2015:
the farm consisted of a total of 5,314 acres,[22] the farmhouse where the Appellant lived, a detached garage and three large animal shelter and storage buildings (a 100’ by 100’ structure, a 60’ by 120’ structure with an attached 45’ by 140’ structure and a 108’ by 160’ structure). In addition, the Appellant had started the construction of two additional storage buildings and the building for processing the organic beef,
the Appellant’s farm equipment consisted of tractors, tillage equipment, haying equipment, wagons, transport vehicles, trailers and farm trucks, and
the Appellant employed four full-time employees and three seasonal part‑time employees to work on the farm. The statements of farm income for 2014 and 2015 show salaries, wages and benefits of $280,483.66 and $240,669.44, respectively.[23]
[55] The Appellant described her typical weekday as waking around 5 a.m., working on the farm until leaving for the 10 km commute to her medical clinic between 7 a.m. and 9 a.m., returning between 2 p.m. and 5 p.m. and working on the farm until 10 p.m. to midnight. The Appellant conservatively estimated that she worked on the farm approximately 5 hours each weekday and anywhere from eight to 16 hours per day on weekends depending on the time of year.[24]
C. The Medical Practice [56] In 2014 and 2015, the Appellant carried on her medical practice in a building located at 2112 Lakeview Road, Cambridge-Narrows. The village of Cambridge-Narrows owned the building and charged the Appellant rent of $250 per annum for the Appellant’s use of the building.
[57] The Appellant employed three part-time employees in her medical practice. The Appellant described her typical weekday at the medical practice as starting between 7 a.m. and 9 a.m. and ending between 2 p.m. and 5 p.m. Based on her handwritten appointment book for 2015, the Appellant estimated that she worked approximately 1549 hours in 2015 plus 24 to 32 hours per month for non‑appointment work such as urgent or emergency calls. This adds up to a range of 1,837 to 1,933 hours per year.
[58] The Appellant could not find her appointment book for 2014 but believed the hours that she worked in 2014 would be comparable.
[59] The Appellant was also required to complete 45 hours of continuing education every two years, which she would typically accomplish by taking a one‑week course bi‑annually.
[60] In cross-examination, counsel for the Respondent canvassed several areas relating to the Appellant’s medical practice. The following is from that cross‑examination.
[61] The Appellant billed the province electronically at a rate per visit fixed by the province. The Appellant stated that only part of her billing records for 2015 were available and that they showed a per-visit billing rate of $43.50.
[62] The three part time employees of the medical practice were clerical personnel with some limited medical expertise with respect to home care and patient-to-patient contact. One of the employees did a major part of the cleaning and did patient charts. The other two shared the reception work, did patient charts and filed patient reports. The building had two secure areas for storing patient files.
[63] The Appellant performed all the medical duties associated with her medical practice. The Appellant was subject to periodic review by the Atlantic Provinces Medical Peer Review.
[64] The Appellant’s medical practice did not require any significant capital investment and the operating expenses were limited to employee salaries and benefits, insurance premiums, automobile expenses and typical office type expenses such as a telephone line and office supplies.
[65] The Appellant’s statements of professional income for 2014 and 2015 show revenue of $805,321.17 and $851,621.05, respectively, and net professional income of $648,605 and $697,050, respectively.[25] The Appellant led a frugal life and used most of her net income to fund the farm.
[66] Mr. Siu testified regarding the income tax reporting history of the Appellant. Mr. Siu prepared a spreadsheet based on the Appellant’s tax filings from 2007 to 2015.[26] The purpose of the spreadsheet was to demonstrate trends over this period.
[67] The spreadsheet indicates that from 2007 to 2015 the Appellant earned aggregate revenues of $5,599,554 and aggregate net income of $4,145,580 from her medical practice and earned aggregate revenues of $290,244 and incurred aggregate losses of $4,006,097 from her farming business. For the same period, the Appellant earned dividends of $432,925, interest of $1,488 and other income of $144,542.
[68] In addition, the spreadsheet indicates that the Appellant’s net annual income from her medical practice increased from $251,746 in 2007 to $697,050 in 2015.
D. The Submissions of the Appellant and the Respondent (1) The Appellant [69] The Appellant submits that the issue is whether a combination of farming and some other or a subordinate source of income constitutes the chief source of income of the Appellant.
[70] Parliament amended subsection 31(1) on March 20, 2003 to overrule the interpretation of subsection 31(1) adopted by the Supreme Court of Canada in Craig v R., 2012 SCC 43 (“Craig”) by adding language to the preamble that was used by the Supreme Court of Canada in Moldowan v R., [1978] 1 SCR 480 (“Moldowan”).
[71] The new wording of subsection 31(1) uses the terms “source”, “chief source” or “subordinate source”. The ITA does not define these terms.
[72] The concept of a “source of income” is fundamental to the scheme of the ITA. In Stewart v. R., 2002 SCC 46 (“Stewart”), the Supreme Court of Canada explained a business source of income as follows:
51 Equating “source of income” with an activity undertaken in pursuit of profit accords with the traditional common law definition of “business”, i.e., “anything which occupies the time and attention and labour of a man for the purpose of profit” (…)
[Emphasis added by Appellant]
[73] Stewart rejected the notion that, in order to have a source of income that is a business, a taxpayer had to have a reasonable expectation of profit.
[74] Subsection 31(1) must be interpreted in a manner that is consistent with the finding in Stewart that a business source of income is “anything which occupies the time and attention and labour of a man for the purpose of profit” with no further inquiry into whether the taxpayer’s expectation of profit is reasonable.
[75] The essential characteristics of a “chief source” are that it (i) occupies the bulk of the taxpayer’s time, attention, labour, and resources, or forms the center of the taxpayer’s work routine; and (ii) generates the bulk of the income that the taxpayer relies upon for his or her livelihood.
[76] If one of a taxpayer’s sources of income exhibits both essential characteristics of a chief source of income, that source stands alone as the taxpayer’s chief source of income. If the taxpayer does not have a standalone chief source of income but has two sources of income that each meet one of the essential characteristics, the taxpayer’s chief source of income will be a combination of the two sources. In that scenario, the taxpayer’s “subordinate source” is the source that occupies the lesser portion of the taxpayer’s time, attention, and labour or that does not form the centre of the taxpayer’s work routine.
[77] The history of subsection 31(1) indicates that Parliament was distinguishing between farmers and individuals whose principal occupation was not farming. Parliament was not distinguishing between successful and unsuccessful farmers. If Parliament had intended that a “subordinate source” be determined solely with reference to reasonable or actual profitability, it could have enacted clear statutory language to that effect. An example of such language is found in subparagraph 110.6(1.3)(a)(ii).
[78] The Appellant had two sources of income – the farm and the medical practice – that each satisfied one of the two essential characteristics of a chief source of income. However, only the farm constituted the Appellant’s main preoccupation and the centre of her work routine as evidenced by the commitment of her time, capital, energy and dedication.
(2) The Respondent [79] The Respondent submits that the issue is whether farming is the Appellant’s chief source of income in combination with some other subordinate source. In making this determination, the Court should apply amended subsection 31(1) in a manner that honours Parliament’s intention to restores the legal test adopted in Moldowan.
[80] Parliament materially changed the combination question raised by subsection 31(1) by imposing a requirement that farming be the predominant source of income, in combination with another subordinate source. By adding the explicit requirement that the second source of income be subordinate to farming, Parliament directly addressed the criticism of Moldowan in paragraph 39 of Craig addressing the requirement in Moldowan that farming must be the predominant source of income when viewed in combination with another source.
[81] Parliament’s changes to subsection 31(1) reflect the three classes of farmers described in Moldowan. The Moldowan test for “chief source of income” is both a relative and objective test, not a pure quantum measurement, and requires the Court to consider, with respect to each of the Appellant’s sources of income, the amount of time spent, the capital invested, and the profitability, both actual and potential. The distinguishing features of a “chief source” are the Appellant’s reasonable expectation of income from either a single source of income or a combination of various sources, and ordinary mode and habit of work.
[82] The Tax Court has previously found with respect to the Appellant’s 1997 and 1998 taxation years that her chief source of income was a combination of farming and her medical practice. The Appellant’s net income from her medical practice has since increased from $73,984 and $88,991 in 1997 and 1998 to $648,480 and $697,050 in 2014 and 2015.
[83] The evidence establishes that at all relevant times farming alone was not the Appellant’s chief source of income and that in accordance with the ordinary meaning of “subordinate” farming was subordinate to the Appellant’s medical practice as a source of income. Consequently, the Appellant’s chief source of income was her medical practice as her predominant source in combination with farming as a subordinate source.
[84] Because farming was neither the Appellant’s chief source of income, nor her predominant source in combination with a subordinate source, the Appellant may deduct only $17,500 of her losses from farming in each of the Taxation years.
IV. Analysis A. The Meaning of Subsection 31(1) [85] For taxation years ending prior to March 21, 2003, the introductory text of subsection 31(1) stated:
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
[86] I will refer to this version of subsection 31(1) as the “original version”.
[87] For taxation years ending after March 20, 2013, Parliament amended the introductory text of subsection 31(1) to state:
31.(1) If 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 that is a subordinate source of income for the taxpayer, then 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 is deemed to be the total of . . .
[88] I will refer to this version of subsection 31(1) as the “amended version”.
[89] As with any appeal dealing with the meaning of a statutory provision, I must apply the approach to statutory interpretation mandated by the Supreme Court of Canada. The Court recently reiterated the required approach in R. v. Breault, 2023 SCC 9 at paragraph 25:
Every statutory interpretation exercise involves reading the words of a provision “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament” . . .
[90] The Supreme Court also recently reiterated that the “particularity and detail of many tax provisions … lead [the Court] to focus carefully on the text and context in assessing the broader purpose” (R. v. Loblaw Financial Holdings Inc., 2021 SCC 51 at paragraph 41).
[91] The text of subsection 31(1) is deceptively straightforward. The restriction on the deductibility of farm losses in subsection 31(1) applies to a taxation year of the Appellant if the Appellant’s chief source of income for that taxation year was neither farming alone, nor a combination of farming and another source of income that was subordinate to the farming source of income.
[92] The difficulty lies in what Parliament meant by the words “chief source of income” and “subordinate source of income” and on what basis a court is to determine whether farming, or farming and some other subordinate source of income, is the Appellant’s chief source of income. Before embarking on an analysis of these issues, however,