[2011] 2 F.C.R. 436
A-19-10
A-20-10
2011 FCA 22
Her Majesty the Queen (Appellant)
v.
John H. Craig (Respondent)
Indexed as: Craig v. Canada
Federal Court of Appeal, Evans, Dawson and Stratas JJ.A —Toronto, October 14, 2010; Ottawa, January 21, 2011.
Income Tax — Income Calculation — Farming — Appeal from Tax Court of Canada (T.C.C.) decision allowing respondent’s appeal against Minister of National Revenue’s reassessments of income tax liability for 2000, 2001 taxation years — Respondent earning most of income from law practice but also earning income from horse business — Minister disallowing deduction of respondent’s losses in years at issue regarding horse business — Relying on Income Tax Act, s. 31(1) to do so — Respondent’s horse business not chief source of income for taxation years at issue — Federal Court of Appeal’s (F.C.A.) decision in Gunn v. Canada relied on by T.C.C. to conclude respondent’s chief source of income combination of income from farm, law practice regardless of whether income from law practice subordinate to horse operation — Appellant’s argument Gunn inconsistent with Supreme Court of Canada (S.C.C.) decision on same issue rejected — Assuming F.C.A. may depart from one of its previous decisions believed to be manifestly wrong, Gunn not such decision — Court in Gunn considering S.C.C. decision at length, largely adopting analytical framework but departing from aspect of decision in question here — T.C.C. not erring in law when applying more flexible, generous test in Gunn for purposes of Act, s. 31 — Carefully considering facts of present case, comparing them with those of other cases directed thereto — Concluding farming constituting more than sideline business in present case, Act, s. 31 not applying — While facts herein fairly close to the line, decision not based on palpable, overriding error — Appeal dismissed.
Judges and Courts — Appeal from Tax Court of Canada (T.C.C.) decision allowing respondent’s appeal against Minister of National Revenue’s reassessments of income tax liability for 2000, 2001 taxation years — T.C.C. relying on Federal Court of Appeal (F.C.A.) decision in Gunn v. Canada — Appellant arguing Gunn inconsistent with Supreme Court of Canada (S.C.C.) decision on same issue — In interests of jurisprudential stability, certainty in law, F.C.A. normally bound by its previous decisions — However, general principle not applying when previous decision made per incuriam (i.e. without regard to decision that ought to have been followed) — Court in Gunn considering S.C.C. decision at length, largely adopting analytical framework but departing from aspect of decision in question here — Gunn anything but per incuriam decision.
This was an appeal from a decision of the Tax Court of Canada allowing the respondent’s appeal against the Minister of National Revenue’s reassessments of his income tax liability for the 2000 and 2001 taxation years. While earning most of his income in the taxation years 2000 and 2001 as a partner of a law firm, the respondent also conducted a business comprising the buying, selling, breeding and racing of standardbred horses. The Minister disallowed the deduction of the respondent’s losses in those years regarding the horse business. The Minister relied on subsection 31(1) of the Income Tax Act to restrict the respondent’s allowable deductions from horse operation to $8 750 for each year. The parties agreed that the respondent’s horse activities constitute “farming” for the purposes of section 31 and are a business and a source of income for tax purposes. It was equally evident that, considered in isolation, the horse business was not the respondent’s “chief source of income” in the taxation years in question.
The main issues in this appeal were whether, in determining whether the Tax Court of Canada erred in its conclusion regarding the respondent, the Federal Court of Appeal was bound by its previous decision in Gunn v. Canada on the combination of farming income in section 31(1) of the Act and whether the Tax Court of Canada misapplied the test in Gunn.
Held, the appeal should be dismissed.
The Tax Court of Canada relied on the Federal Court of Appeal’s decision in Gunn as the primary basis for its conclusion that the respondent’s chief source of income was a combination of the income from his farm and his law practice, regardless of whether the income from his law practice was subordinate to that from his horse operation. It was argued that Gunn is inconsistent with the Supreme Court of Canada’s decision in Moldowan v. The Queen, where it was held that a taxpayer can only combine farming income and some other subordinate source of income in order to escape from section 31 of the Act. This argument was rejected. In the interests of jurisprudential stability and certainty in the law, the Federal Court of Appeal is normally bound by its previous decisions. This general principle does not apply when a previous decision of the Federal Court of Appeal was made per incuriam (i.e. without regard to a decision that ought to have been followed). In Gunn, the Federal Court of Appeal considered Moldowan at length and largely adopted its analytical framework. It departed from the aspect of Moldowan in question here by holding that farming may be combined with some other source of income so as to constitute a taxpayer’s chief source of income for the purpose of section 31 even though, between the two, farming was the subordinate source of income. Gunn was anything but a per incuriam decision and relevant precedents were not overlooked. Assuming that the Federal Court of Appeal may depart from its previous decisions that it believes to be manifestly wrong, Gunn was not such a decision. Also, judge-made rules relating to precedent are not like other legal rules in that the Supreme Court of Canada does not reverse the decision of an intermediate appellate court on the ground that it failed to follow the principle of stare decisis. In short, the Tax Court of Canada did not make any error of law in applying the somewhat more flexible and generous test in Gunn for determining the circumstances in which section 31 permits farming and non-farming income to be combined so that farming is a taxpayer’s chief source of income.
The Tax Court of Canada carefully considered the facts of the present case and compared them with those of other cases to which it was directed. It concluded on the basis of the factors and analytical framework set out in Gunn that farming constituted a significant part of the respondent’s income in 2000 and 2001 and was more than a “sideline business”. Therefore section 31 of the Act did not apply. While the facts of this case may have been fairly close to the line, the decision was not based on a palpable and overriding error.
STATUTES AND REGULATIONS CITED
Canadian Charter of Rights and Freedoms, being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982 (U.K.) [R.S.C., 1985, Appendix II, No. 44].
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 31 (as am. by S.C. 1995, c. 21, s. 8).
CASES CITED
applied:
Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57, [2006] 5 C.T.C.191, 2006 DTC 6544; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, 211 D.L.R. (4th) 577, [2002] 7 W.W.R. 1.
considered:
Moldowan v. The Queen, [1978] 1 S.C.R. 480, (1977), 77 D.L.R. (3d) 112, [1977] CTC 310; Miller v. Canada (Attorney General), 2002 FCA 370, 220 D.L.R. (4th) 149, [2003] CLLC 240-003; Young v. Bristol Aeroplane Co., Ld., [1944] K.B. 718 (C.A.); Phoenix Bulk Carriers Ltd. v. Kremikovtzi Trade, 2007 SCC 13, [2007] 1 S.C.R. 588, 278 D.L.R. (4th) 628, 360 N.R. 171.
referred to:
Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645, 212 D.L.R. (4th) 577, 2002 DTC 6969.
APPEAL from a Tax Court of Canada decision (2009 TCC 617, [2010] 3 C.T.C. 2341, 2010 DTC 1032) allowing the respondent’s appeal against the Minister of National Revenue’s reassessments of his income tax liability for the 2000 and 2001 taxation years. Appeal dismissed.
APPEARANCES
Marie-Thérèse Boris for appellant.
Glenn S. Ernst and Sandon Shogilev for respondent.
SOLICITORS OF RECORD
Deputy Attorney General of Canada for appellant.
Goodmans LLP, Toronto, for respondent.
The following are the reasons for judgment rendered in English by
Evans J.A.:
Introduction
[1] The Minister of National Revenue (Minister) appeals from a decision of the Tax Court of Canada (2009 TCC 617, [2010] 3 C.T.C. 2341), in which Justice Hershfield (Judge) allowed an appeal by John H. Craig against the Minister’s reassessments of his income tax liability for the 2000 and 2001 taxation years. These reasons apply to the appeals in respect of both years, and a copy will be inserted in Court File No. A-19-10.
[2] While earning most of his income in the taxation years 2000 and 2001 as a partner of a Toronto law firm, Mr. Craig also had employment and investment income. In addition, he conducted a business comprising the buying, selling, breeding, and racing of standardbred horses. The Minister disallowed the losses deducted by Mr. Craig in those years in respect of the horse business.
[3] Relying on subsection 31(1) of the Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, the Minister restricted Mr. Craig’s allowable deductions from horse operation to $8 750 for each year. As relevant to this appeal, subsection 31(1) provides as follows:
| Loss from farming where chief source of income not farming |
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 [Emphasis added.] |
[4] It is agreed that Mr. Craig’s horse activities constitute “farming” for the purpose of section 31 [as am. by S.C. 1995, c. 21, s. 8], and are a business and a source of income for tax purposes as defined by Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645. It is equally evident that, considered in isolation, the horse business was not Mr. Craig’s “chief source of income” in the taxation years in question.
[5] The issue in dispute in this appeal is whether “a combination of farming and some other source of income” (in this case, Mr. Craig’s law practice) constituted his “chief source of income”. If they did, section 31 does not apply, and he is not subject to the restrictions imposed by section 31 on the losses that a taxpayer may deduct from farming.
[6] The Minister bases his appeal on two grounds: first, the Judge applied the wrong legal test to determining whether Mr. Craig’s farm income could be combined with his law practice income; second, if the Judge did not err in his formulation of the relevant legal test, he misapplied it to the facts. For the reasons that follow, the Judge in my view erred in neither respect. Accordingly, I would dismiss the appeal.
Issue 1: Is this Court bound by Gunn?
[7] Counsel for the Minister says that the Judge erred in law in relying on Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57 (Gunn), as the primary basis for his conclusion that Mr. Craig’s chief source of income was a combination of the income from his farm and his law practice, regardless of whether the income from his law practice was subordinate to that from his horse operation. Counsel argued that Gunn is inconsistent with the decision of the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480 (Moldowan), where it was held that a taxpayer can only combine farming income and some other, subordinate source of income in order to escape from section 31.
[8] Counsel for the Minister submitted that, in permitting a taxpayer to avoid the effect of section 31 by combining farming and non-farming income, even when the farming income was subordinate to the other, the Court in Gunn failed to follow Moldowan. This, counsel said, breached the principle of stare decisis that stipulates that an intermediate appellate court is bound by decisions of the Supreme Court of Canada. Accordingly, Gunn was wrongly decided, and should not be followed. I do not agree.
[9] First, the argument that we should not follow Gunn does not fall within any of the exceptions to the general principle formulated in Miller v. Canada (Attorney General), 2002 FCA 370, 220 D.L.R. (4th) 149 (Miller), that, in the interests of jurisprudential stability and certainty in the law, a panel of this Court is normally bound by its previous decisions.
[10] The Court in Miller (at paragraph 10) stated that the general principle does not apply when a previous decision of the Court was made without regard to a decision that it ought to have followed. In my view, this exception refers to a per incuriam decision by the Court. This is not the case here.
[11] Writing for the Court in Gunn, Justice Sharlow considered Moldowan at length and largely adopted its analytical framework. However, she departed from the aspect of Moldowan in question here. She held that farming may be combined with some other source of income so as to constitute a taxpayer’s chief source of income for the purpose of section 31, even though, as between the two, farming was the subordinate source of income.
[12] Justice Sharlow justified her decision in Gunn on the basis of her analysis of the shortcomings of Moldowan’s requirement that farming be the predominant source of income before it may be combined with another. She grounded her criticisms of this aspect of the decision in the history and objectives of section 31, the difficulties of applying it, its tendency to produce arbitrary results, and critical commentary by judges and others.
[13] In addition, Justice Sharlow relied on post-Moldowan pronouncements by the Supreme Court of Canada on statutory interpretation, particularly warnings against reading words into a statutory text (in this case, the requirements that farming must be the “major preoccupation” of the taxpayer, and that the other income must be from a “subordinate” source), and failing to give the words of a taxation statute their straightforward meaning (“a combination of farming and some other source of income”).
[14] Gunn was thus anything but a per incuriam decision: relevant precedents were not “overlooked”. Similarly, the Court in Miller (at paragraphs 11–17) rejected the argument that the decision of a previous panel of the Court was not binding because it had failed to take account of previous jurisprudence of the Supreme Court of Canada. This Court pointed out that the previous panel clearly had considered that jurisprudence; the appellant’s essential complaint was about the way in which this Court had applied it.
[15] Second, counsel for the Minister relied on the statement by Lord Greene M.R. in Young v. Bristol Aeroplane Co., Ld., [1944] K.B. 718 (C.A.), at page 729, that the English Court of Appeal is not bound by a decision of its own that “cannot stand with a subsequent decision of the House of Lords”. However, it is clear from a statement earlier in the judgment (at page 725) that Lord Greene was referring to a decision of the House of Lords subsequent to the impugned decision of the Court of Appeal: see also T. Prime and G. Scanlan, “Stare Decisis and the Court of Appeal; Judicial Confusion and Judicial Reform?” (2004), 23 Civil Just. Q. 212, at page 213; and see Rupert Cross and J. W. Harris, Precedent in English Law, 4th ed. (Oxford: Clarendon Press, 1991), at pages 145–148, noting, however, that some judges have extended Lord Greene’s exception to include inconsistency with prior decisions of the House of Lords.
[16] Since Moldowan was decided before Gunn, we are not at liberty to depart from Gunn on the ground that it has been overruled by the Supreme Court of Canada.
[17] Third, a decision by a panel of this Court on the precedential effect of a prior decision by the Supreme Court of Canada deserves as much respect from a subsequent panel of this Court as a decision by a previous panel on any other question of law. It was stated in Miller (at paragraph 22) that a previous decision by a panel of this Court on the interpretation of the Canadian Charter of Rights and Freedoms [being Part I of the Constitution Act, 1982, Schedule B, Canada Act 1982, 1982, c. 11 (U.K.) [R.S.C., 1985, Appendix II, No. 44]] should be no more readily reversed than a decision concerning some other aspect of the law. I can think of no reason why Gunn, a decision of this Court dealing with a previous decision of the Supreme Court of Canada in a non-Charter case, should be treated as having less precedential effect than a case dealing with the Charter. The interests of certainty and stability in the law are equally applicable here.
[18] Fourth, on the assumption that this Court may depart from its previous decisions that it believes to be manifestly wrong in a sense not itemized in Miller, I am not persuaded for the reasons given by Justice Sharlow that Gunn is such a decision. Indeed, before us, counsel for the Minister paid tribute to what she called the “brilliant analysis” of Justice Sharlow in Gunn. Counsel also conceded in her memorandum of fact and law (at paragraph 46) that, in view of subsequent decisions from the Supreme Court of Canada on the interpretation of taxation statutes, the aspect of Moldowan in question here might be decided differently today.
[19] Counsel’s principal complaint was that reassessing Moldowan was exclusively the responsibility of the Supreme Court of Canada. In effect, Gunn anticipated the reversal by the Supreme Court of Canada of one of its prior decisions, even though there may be little room, if any, for an intermediate appellate court to engage in anticipatory reversal of the court of last resort: see, for example, Debra Parkes, “Precedent Unbound? Contemporary Approaches to Precedent in Canada” (2007), 32 Man. L.J. 135, at pages 144–146; see, however, Bradley Scott Shannon, “Overruled by Implication” (2009), 33 Seattle U. L. Rev. 151, doubting an appellate court’s duty to follow a Supreme Court decision which it concludes that the Supreme Court has impliedly overruled.
[20] Fifth, judge-made rules relating to precedent are not like other legal rules, in the sense that the Supreme Court of Canada does not reverse the decision of an intermediate appellate court on the ground that it failed to follow the principle of stare decisis. Rather, when the Supreme Court grants leave to appeal, the question before the Court will be whether the lower court’s decision is consistent with substantive law, including extant decisions of the Supreme Court, or whether the Supreme Court should modify its own jurisprudence on the point.
[21] In Phoenix Bulk Carriers Ltd. v. Kremikovtzi Trade, 2007 SCC 13, [2007] 1 S.C.R. 588, the Supreme Court chose to express no opinion on the merits of the practice whereby this Court normally regards itself bound by one of its prior decisions, even though it would have reached a different result. The Supreme Court allowed the appeal on the substantive ground that the earlier decision of this Court had been wrongly decided.
[22] To summarize, I am not persuaded that the Judge made any error of law in applying the somewhat more flexible and generous test in Gunn for determining the circumstances in which section 31 permits farming and non-farming income to be combined so that farming is a taxpayer’s chief source of income.
[23] I would only add that, if it had been material to the decision, I doubt if I would have agreed with the Judge’s conclusion that, even on the strict Moldowan test, Mr. Craig’s income from his horse business when combined with that from his law practice constituted his chief source of income in 2000 and 2001.
Issue 2: Did the Judge misapply Gunn?
[24] On the assumption that the Judge correctly identified Gunn as the legal test, the Minister argues that he erred in concluding that the facts of the present case satisfied it. I do not agree.
[25] In extensive reasons, the Judge carefully considered the facts of the present case (which are fully set out in his reasons for decision, are not in dispute, and need not be repeated here), and compared them with those of other cases to which counsel directed him. He concluded on the basis of the factors and analytical framework set out in Gunn that farming constituted a significant part of Mr. Craig’s income in 2000 and 2001, and was more than a “sideline business”. Hence, section 31 did not apply.
[26] The facts of this case may be fairly close to the line, and I might not have made the same decision as the Judge. However, I cannot say that his decision is based on a palpable and overriding error warranting the intervention of this Court.
[27] Counsel for the Minister essentially sought to reargue before us the case that she had lost at trial and to invite us to reweigh the factors considered by the Judge. However, the Supreme Court of Canada made clear in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paragraphs 28–36, that it is not normally the function of an appellate court to second guess a trial judge’s application of the law to the facts. Thus, in the absence of a palpable and overriding error in the application of the test, or of an error of law in formulating it, neither of which the Minister has demonstrated is present here, there is no basis for the Court to intervene.
Conclusion
[28] For these reasons, I would dismiss the appeal with costs.
Dawson J.A.: I agree.
Stratas J.A.: I agree.