C.B.A. Engineering Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Vancouver, June
14, 15, 16, 17; Ottawa, July 7, 1971.
Income Tax—Farming loss—Limitation on deduction—
Consulting engineers operating farm as promotional ven-
ture—whether ` farming"—Intention to make profit eventual-
ly—Income Tax Act, s. 13.
To promote its engineering consulting business appellant
company acquired 1000 acres of reclaimed land and
brought them into cultivation. In 1964 and 1965 it suffered
losses of over $13,000 and $43,000 on the operation of the
farm, and sought to deduct these losses in computing its
income for those years.
Held, section 13 of the Income Tax Act applied, and
appellant could only deduct $5000 of its farming loss in
each of those years. Even though the farm was operated
only as incidental to its consulting business, appellant was
nonetheless engaged in "farming" within the meaning of s.
13. It expected that the farm would eventually realize a
profit.
INCOME tax appeal.
E. C. Chiasson for appellant.
T. E. Jackson for respondent.
CATTANACH J.—These are appeals by the
appellant herein against its assessments to
income tax for the taxation years 1964 and
1965.
The question for determination raised in
these appeals is whether the appellant was
farming as part of its business or as one of its
businesses and consequently whether the
deductibility of its farming losses from income
from other sources is limited to $5,000 in
accordance with the provisions of s. 13(1) of
the Income Tax Act.'
The appellant is a joint stock company incor
porated in 1956 pursuant to the laws of British
Columbia. It carried on the business of consult
ing engineering in the fields of bridge construc
tion, dam construction, hydro electric develop
ment, soil and foundation tests and in the
dyking and drainage of lands covered by water
or subject to flooding and the reclamation of
those lands.
The appellant company emerged from a ven
ture of Dutch interests in reclaiming land in the
Fraser River Valley in the area of Pitt Mead
ows. A company was incorporated under the
name of Pitt Polder Ltd which employed engi
neers to reconstruct dykes in the area, install
more effective pumping and drainage systems.
In order to retain those engineers for a longer
time than was needed for the completion of the
Pitt polder project other engineering projects
were sought for them. When larger projects
became available to those engineers such as, in
the first instance, the engineering design of the
Port Mann bridge over the Fraser River, the
appellant company was formed. At first the
shares in the appellant were all owned by Pitt
Polder Ltd. As the projects undertaken by the
appellant became more numerous and important
the shareholding changed. Engineers, in addi
tion to those originally engaged in the polder
project, were employed by the appellant and the
engineers became the shareholders, as well as
did other business interests, to the extent that
the shareholding of Pitt Polder Ltd was reduced
to 15 per cent in preference shares thereby
assuring Pitt Polder Ltd a regular income from
dividends.
The appellant became increasingly success
ful. One of its major works was the design of
the Arrow dam for the B. C. Hydro and Power
authority on which it was engaged ffm 1960 to
1969.
The business of the appellant was that of a
general engineering company primarily in the
field of civil engineering works. In order to
keep a constant flow of work the appellant
sought to enter into foreign work. Foreign work
was out of phase with Canadian work and
would serve to counter-balance work based
solely in Canada.
The ethics of the engineering profession pro
hibit direct advertising but do not preclude the
use of professional cards nor the publication
and circulation of brochures extolling the ser
vices an engineer or engineering company can
offer to prospective clients.
In order to place itself in a more favourable
position in seeking work from clients in foreign
lands the appellant decided to extend its engi
neering consulting business to include agricul
tural engineering. The type of work sought by
the appellant was in the field of civil engineer
ing but the various jobs upon which it submitted
plans or proposals had different contents. For
example in a land reclamation project the appel
lant considered it advantageous to be knowl
edgeable about the agricultural use to which the
reclaimed land could be ultimately put. The
purpose was to inspire confidence in the pros
pective client by being able to offer a complete
integrated resource development service rather
than a mechanical engineering service exclu
sively so that the appellant would be chosen to
do the work.
With this end in view the appellant secured
an amendment to its memorandum of associa
tion to include the following paragraph in its
objects:
To carry on the business of farming consultants and
agricultural consultants and to report on, and undertake
research with respect to farming and agricultural and to
operate farms in connection therewith.
The appellant engaged the services of a con
sulting agriculturalist who was also an agrono
mist specializing in soils and crops, with high
qualifications and an international reputation.
The appellant then leased 1,000 acres of
reclaimed land from Pitt Polder Ltd for a 14
year term at a comparatively modest annual
rental.
The appellant then began a program of up
grading the dykes and drainage ditches and over
a six year period brought 7 . 00 acres under
cultivation.
There is no question that the engineers
employed by the appellant became more skilled
in connection with the building of dykes, the
placement of pumps therein, effective methods
of drainage and that they acquired more knowl
edge of the hydrology of the lower Fraser
River, but no work of an experimental nature
was carried on. Rather it was an application of
known skills and the end result was a farm no
different from other farms in the immediate
area.
It was suggested in evidence and in argument
that the farm was to serve as a "show-case" for
prospective clients demonstrative of the agricul
tural engineering skills possessed by the appel
lant. However it was conclusively established in
evidence that the farm did not serve this pur
pose. There were no visits to the farm by any
prospective clients except a casual few who
happened to be in Vancouver, B.C.
On the other hand the operation of this farm
was featured in brochures circulated by the
appellant to prospective clients, as was the
availability of the services of a consulting
agriculturalist and the brochures highlighted the
experience of the appellant's engineers in this
particular field. These features were also
emphasized in the presentation for works on
which the appellant was bidding.
The consulting agriculturalist recommended
the planting of a number of different crops on
the land. First legumes were grown to improve
the fertility of the soil. A hybrid corn was
grown successfully and with a much higher
yield than normally. This success was so
marked that neighbourhood farmers followed
the example of the appellant and produced corn
crops. It is anticipated that winter wheat and
blueberries will be grown in commercial
quantities.
At this point I should mention that the appel
lant's embarkation into agricultural engineering
or at least its employment of the consulting
agriculturalist has been beneficial to the appel
lant and to its clients in several major construc
tion projects. During the construction of dams,
bridges and the installation of hydro lines large
areas were stripped of top soil and vegetation.
The resultant scarring was unsightly and dan
gerous because in mountainous areas the stabili
ty of the soil was lost. On the recommendation
of the appellant's consulting agriculturalist a
mixture of grass seed appropriate to the soil
was sown by a method of aerial broadcast, also
recommended by the appellant's agriculturalist,
which restored the appearance and stability of
the denuded soil. However I must add that this
restoration was accomplished by the knowledge
of the agriculturalist rather than from any
knowledge acquired in the operation of the
farm.
To defray the cost of the operation of the
farm the appellant conducted a feed lot opera
tion on the leased land. This operation has
developed into a profitable one after the initial
years. The fodder grown on the farm is almost
sufficient to obviate the purchase of feed.
The appellant claimed as deductions for
losses in respect of its farming operations on
the leased land the amounts of $13,474.81 and
$43,321 in its 1964 and 1965 taxation years
respectively.
As to the 1964 taxation year the Minister
limited the appellant's deduction of the loss in
that year to $5,000 under s. 13(1) of the Income
Tax Act rather than $13,474.81 as claimed by
the appellant.
As to the 1965 taxation year the Minister
limited the deduction of the appellant's loss of
$43,321 to $11,502, that is to the amount of
$5,000 under s. 13(1) of the Income Tax Act in
addition to an amount of $6,502.
The amount of $6,502 is made up of a loss of
$5,773 in respect of the appellant's feed lot
operation and $730 claimed by the appellant as
a capital cost allowance also in respect of the
appellant's feed lot operation.
It is obvious that the Minister, by allowing
the amount of $6,502 referred to in the para
graph immediately above, did not consider the
operation of a feed lot as falling within the
meaning of the word "farming" in s. 13 of the
Act. This is not an issue before me.
There is no dispute between the parties as to
the accuracy of the figures involved. The sole
dispute lies in the propriety of the Minister
limiting the appellant's deductible expenses
incurred in its operation of the "farm" to
$5,000 in each of its taxation years under
review.
It is expedient, therefore, that I should sum
marize the rival contentions advanced on behalf
of the parties as I understand them.
On behalf of the appellant it was contended,
(1) that on the facts the purpose of the appel
lant in carrying on the farming operations was
to generate more consulting engineering busi
ness and as such the expenses so incurred were
an outlay or expense made for the purpose of
gaining or producing income from the consult
ing engineering business of the appellant and so
within s. 12(1)(a) of the Act; 2
(2) that the appellant was not engaged in
"farming" within the meaning of that word as
used in s. 13 of the Act because
(a) even if the activity conducted by the
appellant may fall within the definition of
"farming" by s. 139(1)(p) of the Act,' that is
not conclusive in the application of s. 13 if in
reality the expense was incurred in further
ance of the engineering business, and
(b) section 13 of the Act has no application
unless the appellant was in the "business" of
farming in that it had the intention of making
money from farming.
On the other hand it was contended on behalf
of the Minister that if the loss was incurred in
"farming" as defined in s. 139(1)(p) that loss
must be computed in accordance with s. 13(3)
and may only be deducted from other income of
the appellant to the extent prescribed by s.
13(1). Once the loss is determined to have
arisen from farming in the circumstances con
templated in s. 13(1) the purpose of the farming
operation is of no consequence. The question to
be determined is what is being done and not
why it is being done. Added to this it was
pointed out that it has been consistently held
that a company may engage in more than one
business.
On the evidence adduced I have no hesitation
in concluding that the appellant was motivated
in extending its engineering consulting business
to include the agricultural aspects thereof by
the reasonable expectation that in doing so it
would generate more business for itself in all
engineering fields and that the operation of the
farm at Pitt Meadows was incidental to that
overall purpose. While the farm did not serve as
a show-case, nevertheless it did serve to pro
vide experience for the appellant's engineers
and this experience, as well as the farm opera
tion, was truthfully featured in the brochures
circulated by the appellant and in its presenta
tions on prospective work: This led to the
appellant being selected for several minor
works and, as the president of the appellant
testified, also resulted in the appellant being
"short listed" among the applicants for work so
that it became one of a dozen of the applicants
being considered rather than one in a thousand,
so that the chance of the appellant being select
ed for work was enhanced manifold.
I accept as a fact that the appellant in under
taking the operation of the farm was actuated
by those business considerations and I would
conclude therefore that expenses incurred by
the appellant in the operation of the farm were
expenses incurred for the purpose of producing
income from the consulting engineering busi
ness of the appellant.
However, this conclusion does not resolve
the matter. I must consider whether the provi
sions of s. 13 preclude the deduction of such
expense as an expense incurred for the purpose
of producing income within s. 12(1)(a).
In such consideration it is expedient to recall
the basic scheme of Part I of the Income Tax
Act. That Part is divided into Divisions: Divi
sion A provides for the liability for tax, Division
B provides for the computation of income, and
Division C provides for the computation of
taxable income which is defined in s. 2(3) as
income for the year as computed under Division
B less deductions permitted by Division C.
By s. 3 (which is within Division B) the
income of a taxpayer for a taxation year is its
income from all businesses. By s. 4 income for
a taxation year from a business is the profit
therefrom. Therefore to determine the income
of a business, the profit therefrom must be
determined which involves the setting off
against the revenue derived from the business
the expenditures laid out to earn that revenue.
Under Division B, the computation of
income, Parliament enacted s. 13 which is a
special provision applicable to the deductibility
of farming losses where a taxpayer is engaged
in farming and the taxpayer's chief source of
income is neither farming, nor a combination of
farming and some other source of income.
Section 13 contemplates three possibilities:
(1) the farming losses of a full-time farmer
where farming is the chief source of income (or
a combination of farming and something else) in
which event all losses are deductible,
(2) farming losses incurred in a farming oper
ation with the expectation of profit or the even
tual expectation of profit but where farming is
not the taxpayer's chief source of income, nor
part of it, in which event the deductibility of
losses is limited by s. 13, and
(3) an operation which is in the nature of a
hobby, pastime or way of life, the losses from
which are not deductible, being personal or
living expenses.
It is clear, when the farming activity of a
taxpayer falls within s. 13, that Parliament must
have intended that the losses incurred in farm
ing are not to be deducted except in the manner
and to the extent authorized by that section.
Such intention is evident from a reading of s. 13
with the other sections of the Act. It is a specif
ic section designed to cover a specific set of
circumstances in Division B dealing with com
putation of income. Being a specific section it is
axiomatic that it takes precedence over a gener
al section.
Section 3 of the Act clearly contemplates that
a taxpayer (which includes a company) may
carry on more than one business. In the present
instance the Minister alleges that the appellant
had two businesses, one farming and the other
consulting engineering, whereas the appellant
maintains there was but one, that of consulting
engineering.
Section 13(3) requires that a loss from farm
ing shall be computed by applying the provi
sions of the Act respecting the computation of
income from a business. When there is more
than one business, each business is a source of
income. Section 139(1a) of the Act directs that
income from a source is to be computed in
accordance with the Act, that is to say, by
following the provisions of the Act applicable to
the computation of income from each source on
the assumption that the taxpayer had no income
except from that particular source. In so com
puting income from a source the taxpayer is
entitled to no exceptions except those relating
to that source.
The crucial issue, upon which the matter
turns, is whether what the appellant did con
stituted farming within the meaning of that
word as used in s. 13.
There is no dispute between the parties that
the appellant's chief source of income is neither
farming, nor a combination of farming and
some other source. On the evidence it would be
impossible to sustain such a dispute.
Farming is defined in the Shorter Oxford
Dictionary as "the business of cultivating land,
raising of livestock, etc." and by s. 139(1)(p)
"farming" is defined as follows:
"farming" includes tillage of the soil, livestock raising or
exhibiting, maintaining of horses for racing, raising of poult
ry, fur farming, dairy farming, fruit growing and the keeping
of bees, but does not include an office or employment under
a person engaged in the business of farming;
The word "includes" as used in s. 139(1)(p) is
so used to enlarge the meaning of the word
"farming" and must be construed as com
prehending the word "farming" in its natural
dictionary import and also those things which
the section declares it shall include.
What the appellant did on the land it leased
was undoubtedly farming within the above defi
nition. It tilled the soil and planted crops. It
realized revenue from those crops. While the
losses incurred far out-weighed the revenue
received, there is no reason not to believe that
the appellant entertained an expectation that the
farm would eventually realize a profit, as did
the neighbouring farmers from whose farms the
appellant's farm does not differ materially, if its
farm continued to be worked in a husbandlike
manner as it was under the guidance of the
agriculturalist employed by the appellant. Fur
thermore, the appellant was not adverse, but
was in fact anxious, to put the land leased to
profitable use, otherwise it would not have
embarked upon the feed lot operation, and
farming is another means to the same end.
I conclude that the appellant was engaged in
farming as contemplated by the statute and,
therefore, I cannot accede to the appellant's
contention that the operation of the farm was
part of the appellant's engineering business.
While it is true that the appellant's motive in
operating the farm was for the ultimate purpose
of increasing its income from its engineering
business, that does not alter the fact that what
the appellant did was the conduct of a farming
business.
Having so concluded it follows that the appel
lant falls precisely within the provisions of s. 13
of the Act and, in my view, that is conclusive of
the matter for the reasons I have expressed
above.
Therefore, in my opinion, the Minister was
correct in assessing the appellant as he did and
accordingly the appeals are dismissed with
costs.
1 13. (1) Where a taxpayer's chief source of income for a
taxation year is neither farming nor a combination of farm
ing and some other source of income, his income for the
year shall be deemed to be not less than his income from all
sources other than farming minus the lesser of
(a) his farming loss for the year, or
(b) $2,500 plus the lesser of
(i) one-half of the amount by which his farming loss for
the year exceeds $2,500, or
(ii) $2,500.
2 12. (1) In computing income, no deduction shall be made
in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of
gaining or producing income from property or a business
of the taxpayer,
3 139 . (1) In this Act,
(p) "farming" includes tillage of the soil, livestock
raising or exhibiting, maintaining of horses for racing,
raising of poultry, fur farming, dairy farming, fruit grow
ing and the keeping of bees, but does not include an
office or employment under a person engaged in the
business of farming;
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.