Dougal Lea Ltd. vs. Dairy Farmers of Ontario (DFO)

In the matter of the Milk Act and Section 16 of the Ministry of Agriculture, Food and Rural Affairs Act.

And in the matter of: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Dougal Lea Ltd., of Smithville, Ontario, from a decision of the Dairy Farmers of Ontario to deny its request for an exemption from the 15% transfer assessment on the sale of its quota.

Appearances:

Paul McDougall, principal of the appellant corporation
Donald Good, counsel for the appellant
Laura McDougall, witness for the appellant
George MacNaughton, representative for the respondent
Geoffrey Spurr, counsel for the respondent
David Murray, witness for the respondent

Decision of the Tribunal

This appeal was heard on June 21, 2010 in the Tribunal boardroom, Guelph, Ontario. Dougal Lea Ltd. (Dougal Lea) appealed to the Tribunal from a decision of the Dairy Farmers of Ontario denying its request for an exemption from the 15% transfer assessment on the sale of its quota.

Background to the Appeal

DFO policies require an assessment of 15% on certain dispositions of quota by a producer. The details, exemptions (including an exemption for the last 10 kgs of quota), and calculations that resulted in the final assessment figure are not in dispute in this appeal. Dougal Lea disposed of its quota on the quota exchanges of May and June 2008, and a total transfer assessment of 7.186 kg was charged on the disposition. This means that 15% of the assessment was not offered for sale, but was retained by DFO, whose usual practice is then to distribute it to other producers as a general increase in quota or to use it to manage the overall volume of quota. The remainder of the production quota that had been held by Dougal Lea was then offered for sale on the exchange and purchased by other producers.

Dougal Lea has appealed the application of the transfer assessment on the grounds that special circumstances exist that make the application of the assessment inappropriate. The special circumstances are that one of the two primary operators of the dairy farm had died unexpectedly shortly after learning that she had an aggressive cancer, while the operators' plan had been to continue to operate the farm for many years.

The Issues

The issue for determination is whether Dougal Lea's situation comprises special circumstances that deserve an exemption from the DFO's transfer assessment on the sale of quota.

The Evidence of Dougal Lea

Mr. Paul McDougall and his late wife Maryanne were the only shareholders of Dougal Lea, a corporation set up on the advice of their accountant to manage their estate planning and succession planning for an eventual business transfer. Paul is a third generation dairy farmer and Maryanne's parents were also dairy farmers. Paul and Maryanne purchased Paul's father's farm in 1988, and made payments periodically towards retirement of a promissory note of $750,000, the original total purchase price for all assets. The purchase included the acquisition of the dairy herd and all quota rights (although these rights did not exist in an identical form at that time as they do today), as well as land, buildings and equipment.

From 1988 on, the McDougalls made equal efforts on the farm. Over time, though they both milked the cows twice a day, they tended to divide other tasks: Maryanne handled feeding and maintaining calves, cleaning milking equipment and keeping the books, while Paul managed growing and harvesting feed, managed cows and heifers, breeding and maintaining and repairing equipment.

The McDougalls also invested consistently in their farm operation. They acquired additional quota, improved the quality of their stock and became Master Breeders, upgraded their lane and buildings, and added a "coverall" building to store feed bales. Maryanne became involved in DFO committees and industry issues. Their daughter, Laura, was also fully engaged in farm life, helping in all aspects of work, joining 4H, showing cows and attending and helping with DFO booths at agricultural fairs, and attending the University of Guelph to take a degree in Rural and Agricultural Development. She hoped at one time to be the 4th generation of dairy farmers on this acreage.

Unfortunately, Maryanne, in January of 2008, felt unwell and sought medical care. In February 2008 she was diagnosed with cancer, and was advised in March that the cancer was terminal and aggressive and that she had only a short time, at most months, to live. She died on November 30, 2008.

In the spring of that year, Dougal Lea offered its entire quota for sale. After exemptions and adjustments, the quota sales of 37.32 kg/day of production returned payments of $509,987.19 on April 4; $447,094.71 on June 3; and another payment of $254,996.41 on June 3, a total of $1,212,078.30. The value of the quota retained by DFO had it been sold on the quota exchange was $232,231.96.

During the period after the sale of his quota, Paul devoted himself to caring for Maryanne until she passed away. The quota having been disposed of, there has been no income from dairy production since June 2008. Paul recently acquired a dozen heifers, but has otherwise not operated the farm himself. He has arranged through contracts for some feed production and for harvesting of cash crops, since his own equipment was only for forage harvesting. The farm is not operating today in the manner that it has in the past, and suffered a net loss of about $16,000 last year.

On March 20, 2009, Paul McDougall requested relief from the transfer assessment policies, arguing that special circumstances, as contemplated by Section H of DFO policies, should apply in light of the death of Maryanne and the circumstances under which he had stopped dairy production. This request was denied by the DFO on May 11, 2009. Paul then requested a reconsideration of this denial on February 10, 2010. The DFO refused to reconsider on the basis that the request was out of time. Through his counsel, Mr. Good, Mr. McDougall on behalf of Dougal Lea appealed to the Tribunal to seek an exemption from the transfer assessment.

Ms. Laura McDougall gave evidence confirming that her parents had always worked as equal partners on the farm, and shared that the impact of Maryanne's death had been devastating for her father. Both of them indicated how trying the uncertainty and strain of the last few months of her life had been. Laura stated how devastated and unlike himself her father had been. Mr. McDougall stated repeatedly that at the time he had no idea "what their journey together would be"; he used this phrase to describe the last months of Maryanne's life, and indicated that his priority was to spend time with her. In effect, he could not contemplate operating the dairy farm without his partner, and in the time since has not felt that he could operate it without her. His daughter was not ready to take it on, and he and Maryanne had wanted Laura to make a free choice on whether to work on a dairy farm, not be forced by circumstances into the time-consuming daily work that a dairy operation entails before she had spent some time away from the farm and completed her studies.

In cross-examination, Mr. McDougall acknowledged that Dougal Lea had received the proceeds of the quota sale in the total of over 1 million dollars, and that he and his wife had held several hundred thousand dollars in RRSP's. He also acknowledged that he and his wife had insurance policies in place, though they were limited in value. He had considered further investment in RRSP's to be more prudent than continuing with disability insurance once he was somewhat older and his net worth was more stable. Dougal Lea's milk production income prior to the sale of the quota was about $22,000 per month. He stated that he did not know the value of his 175 acres of land in the Niagara Peninsula. He confirmed that the debt on his farm was limited to the approximately $250,000 still owing on his promissory note to his mother, who had taken the note over on the death of his father.

Mr. McDougall also acknowledged that he had been a member of the Ontario Quota Rights Organization, but stated that he had never been an active participant and saw the organization mainly as a way to generate a discussion and have questions brought to DFO about issues significant to producers.

The Evidence of Dairy Farmers of Ontario

The DFO through Mr. Spurr's submission acknowledged the difficult circumstances and the personal impact of Maryanne's death on Mr. McDougall.

The DFO through Mr. McNaughton and Mr. Murray explained the rationale for the quota assessment: to prevent excessive price escalation, to make quota available periodically to new entrants, and to manage the overall supply generally. They pointed out that the DFO position is that quota is not a property right or investment, but a license that allows the producer to earn a living from milk sales because others are excluded from producing and selling milk.

Mr. McNaughton provided information about the communications about policy changes that the DFO had sent to the industry, including the McDougalls. In particular, the McDougalls knew of the introduction of the transfer assessment, which predated Maryanne's illness.

They were also provided with information when the DFO, in response to a decision of the Tribunal, clarified that medical conditions would not be considered special circumstances or grounds for an exemption. This information was supplied at about the time that the quota transfers took place, but was published after the decision by the McDougalls to sell their quota. He did know of the DFO's position regarding medical conditions when he made his request for exemption.

The DFO also sought to ensure that producers understood that insurance or other income replacement mechanisms should be established since, in its view, quota was not a retirement fund or investment mechanism. In other words, producers should earn enough from producing and selling milk to be able to supply their retirement and long term financial needs, rather than using quota to supply these needs.

Mr. Murray, a producer and board member of DFO, explained how in light of the decisions of the Tribunal and the DFO's attempt to be consistent that, even in difficult cases, the underlying principle of the transfer assessment needs to be applied, and that arguments for exceptions are becoming broader and harder to manage. Each exception undermines the rationale and makes the DFO appear inconsistent and or arbitrary. He indicated that he has a number of insurance policies to deal with the unforeseen and is not counting on quota to fund his retirement.

Findings and Analysis

This case is different from others that have dealt with appeals for exemptions from the transfer assessment. In our view, this policy has a reasonable goal, but it suffers from a number of problems in its application. The DFO has a general "special circumstances" exception, which thus contemplates that there will be circumstances that would lead to an exemption, but until applications and appeals and thus Tribunal decisions tried to come to grips with various situations, there has been no guidance, criteria or consistency to guide the policy's application. Mr. Spurr points to two recent decisions of the Tribunal, Ferme Martel Inc., and Ferme Benoit Lachaine, as developing some factual criteria that when applied to this case would argue against an exemption. Mr. Good, on the other hand, points to the Haleyview decision to support the proposition that in the case of a terminal illness that leads to the cessation of operations, the assessment need not be applied.

Previous Tribunal decisions are not binding on this panel, although we may of course find reasoning in other cases to be persuasive. Also, without comprehensive criteria or clear policy direction we are required to consider each set of circumstances separately. The one piece of policy direction provided by the DFO excludes medical conditions as a special circumstance in considering whether to apply the transfer assessment. This approach, in our view, and as set out in Vandergeest, is too narrow. Such an absolute prohibition does not distinguish conditions such as a catastrophic injury suffered while farming from degenerative conditions or unrelated illnesses such as cancer. The Tribunal is thus required to consider each situation and to try to develop a set of expectations and criteria or at least to explain why an exemption should apply in a particular case for a reason that is not simply arbitrary.

The current situation is not like any of the others that have been submitted to us. Lachaine is helpful in summarizing the findings in other cases. In this situation, we find that:

1. Dougal Lea and Mr. McDougall did not plan to exit the industry prior to Maryanne's illness, and were not caught up in the transition to the new policies;
2. Mr. McDougall is still physically capable of active farming, and has not suffered any physical catastrophic injury that ended his career;
3. Dougal Lea, a corporation, has lost one of its principals as a result of a terminal illness, but has not lost the only operator. Dougal Lea has a remaining owner who is highly experienced and capable of operating a dairy farm, although he may require assistance to do so because of the volume of work and the scale of the operation;
4. Mr. McDougall is not in financial hardship, although he will be required to make a number of decisions about how to manage his affairs and deal with the farm, which is now being underutilized.
5. Mr. McDougall knew that the transfer assessment would be applicable when he and Maryanne decided to exit the industry;
6. Mr. McDougall knew that he would have to apply for an exemption to avoid the transfer assessment; he did not know that medical condition was not grounds for an exemption prior to applying to sell quota in April and May 2008, as that information was disseminated in June 2008.

The Tribunal has a great deal of sympathy for Mr. McDougall's circumstances. We are not about to second-guess his choice to manage his circumstances as he did, nor to assess or finely measure the impact of his wife's illness on his willingness to operate the farm. We can understand completely his decision to spend his time with her, and his decision to leave the operation if she was not going to be part of it.

At the same time, Mr. McDougall's decision to leave dairy production was a personal one, not one that was the only possible choice because of his physical circumstances or one in which he had no financial alternative if he had wanted to continue to run a dairy operation. It is clear that to continue dairy farming he would have had to run the operation at least for a time in a different way, perhaps with hired help, or by requesting a temporary cessation of production, having someone else buy into the operation, or by conducting business at a reduced scale until his daughter was in a position to either decide to carry on the farm or not. None of these choices would have been easy, and there may well have been a period of reduced income or difficult circumstances. Clearly, it would be a challenging task to try to find a person who could take on tasks when his model was someone as obviously capable and dedicated as his wife was, and perhaps the operation would never have been identical. However, many operations do have only one primary operator, and Mr. McDougall's physical health and experience are still intact. Mr. McDougall is only in his early 50's and his daughter is in her early 20's, so had they decided to carry on they would have recovered from the difficult transition period. This situation is distinguishable from all other cases presented to the Tribunal in which some relief was granted: in all of these other cases, there was only one primary operator, and there was no equal partner to carry on.

We agree with Mr. Good that the appeal should not be dismissed just because the sale resulted in a large payment despite the assessment: if in principle the exemption should be granted then the amounts are what they are. At the same time, when one of the criteria offered in a number of the cases is financial hardship, the volume of quota and thus the amount generated by a sale depending on the time it was held may be considered. That issue is dealt with by using a percentage for the assessment, and by considering the overall volume sold. In this case, the volume sold is significant, and Mr. McDougall did not argue that he was in a position of financial hardship.

In addition, the impact on other producers if an exemption is granted is not a bar to granting the appeal. The DFO's exercise of decision-making power carries with it the responsibility to deal with the consequences of an appeal.

These are difficult choices to make, but in deciding to give up the operation, Mr. McDougall was not choosing to exit the industry because of his own incapacity, or because the operation had lost its only primary operator. To grant relief in these circumstances would in our view expand the concept of special circumstances in such a way as to make a decision to exit the industry as a result of a significant operational change a ground for relief from the transfer assessment, and would negate the policy. We do not find that Mr. McDougall's decision was unreasonable, merely that this reason for exiting the industry is not one that should be exempt from the assessment policy.

On a final note, we find that Mr. McDougall's membership in the OQRO has no bearing on this appeal. His right to participate in organizations with different policy goals than the DFO and to engage in debate about quota issues is independent of the application of DFO policies to his situation.

Order of the Tribunal

The appeal is denied. The 15% transfer assessment was properly applied and Dougal Lea will not be exempted from its application.

 

Dated at Toronto, Ontario this 6th day of July, 2010.