Ferme Benoit Lachaine 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 Ferme Benoit Lachaine (Benoit Lachaine) of Chute à Blondeau, 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.

Before:
John O'Kane, Vice Chair; Ron Gelderland, Member; Tim Mousseau, Member

Appearances:
Benoit Lachaine, appellant
Robert Tolhurst, counsel for the appellant
George MacNaughton, representative for the respondent
Geoffrey Spurr, counsel for the respondent
David Murray, witness for the respondent
Claude Bordeleau, English-French and French-English interpreter

Decision of the Tribunal

Background

Ferme Benoit Lachaine Inc. (FBL) is a family farming corporation owned by shareholders Benoit and Isabelle Lachaine. The farm is a 400 acre parcel in Chute-a-Blondeau, Ontario. FBL cash crops about 300 acres while the remainder of the land is bush.

Since incorporation in 1999 FBL operated as a dairy farm. In six separate transactions between September 2007 and February 2009, FBL sold its entire milk production quota on the milk quota exchange at the prevailing market price.

Dairy farming in Ontario is regulated by the Dairy Farmers of Ontario (DFO). DFO is a dairy producer organization granted regulatory authority, subject to government oversight through the Ontario Farm Products Marketing Commission.

In November 2006 DFO implemented a quota transfer assessment policy that imposed a minimum 15 percent quota assessment on transactions on the milk quota exchange. As a result of that policy, FBL did not receive $367,055.21 from those six quota transactions.

In July 2008 FBL, through its lawyer, asked DFO to grant it an exemption from that quota transfer assessment policy on two previous quota transactions and on its intended future transactions. The basis for the exemption request was FBL experienced financial hardship and Benoit Lachaine had unexpected medical problems related to arthritic pains in his foot which prevented him from operating the dairy farm.

The DFO denied FBL's exemption request at first instance on September 17, 2008. FBL sought a reconsideration of the DFO decision. On December 1, 2008, DFO denied FBL's reconsideration request.

FBL appealed from the DFO decision to this Tribunal under section 16 of the Ministry of Agriculture, Food and Rural Affairs Act. The Tribunal conducts a hearing de novo and "stands in the shoes" of the DFO and can make any decision the DFO could have made. FBL asks that the Tribunal grant it an exemption and order DFO to pay it $367,055.21.

The Issues

The issue for determination is whether FBL should receive an exemption from the DFO's assessment on quota transfer.

The Evidence

Benoit Lachaine is the fifth generation of his family farming on this 400 acre parcel and he testified he hopes one of his three daughters will eventually continue the family farming legacy.

Benoit Lachaine is forty-four years old and he has worked for over twenty years on the family farm after obtaining a diploma in agriculture. His wife Isabelle is a working nurse and has never worked in the farm business. They have three daughters, two are presently in university and the third will be enrolled in university in September 2010.

Benoit Lachaine purchased the family farm from his father Edmond in 1999. Since then he has been the primary dairy operator on the farm. The 1999 purchase included the land, equipment, the dairy herd and the milk quota of 66.59 kgs. The purchase price of $1,730,000 was paid by the assumption of $466,261 in debt, a promissory note for $509,839 and issuing preference shares of $753,880. Over a period of twenty years, the note is paid down $2,000 monthly and the preference shares are redeemed at $1,000 monthly.

At the time of that transaction Edmond was about 55 years old, having owned the farming operation for about fifteen years. Edmond's father Gaston did not want to sell the farm until Edmond issued an ultimatum at age forty that if his father would not sell, he would leave. Benoit Lachaine explained how it was challenging for his father to deal with the debt when he purchased from Gaston and that was why Benoit and Edmond structured their transaction to avoid Benoit facing those same challenges.

After Benoit Lachaine purchased the farm, his plan was to expand the operation to be larger and more productive and to work at the farm until retirement at age 55-60. In 2000 he bought another 19 kgs. of quota. By the end of his quota acquisitions he owned a total of 88.5 kgs. His herd was producing about 10,000 kgs. per cow each year. By 2003, his buildings were at full capacity and he lacked silage space. To maintain high milk productivity, uniform feed is important so he purchased a new sealed silo to deliver more uniform silage all year round.

However, the new sealed silo had a defect that led to toxins developing in the feed which led to what he described as "disastrous effects" on FBL. They sustained production losses of fifteen percent and had to replace twenty-five percent of the herd. A lawsuit ensued against the silo manufacturer seeking compensation for production losses and herd losses. Around that time FBL had to sell off some quota to pay off a line of credit. Eventually, FBL received financial compensation for the silo defect in a confidential settlement.

In the spring of 2007 Benoit Lachaine began experiencing pain in his right foot. After two or three months he consulted his doctor who diagnosed an arthritic problem and prescribed anti-inflammatory medication. By November 2007 Benoit Lachaine was back at his doctor's for further investigation with X-rays and cortisone treatment. Again, in March 2008 Benoit Lachaine was back to his doctor for additional similar treatments. His doctor recommended he change his work because the problem would only get worse. The eventual diagnosis was "hallux rigidis" which is a degenerative condition of the big toe. In addition to medication, he was prescribed orthotics for his shoes and physiotherapy. An operation is possible but his doctor recommended delaying that until later in life.

Benoit Lachaine explained that FBL operates a tie stall barn where over seventy cows are each tied in a stall about four and half feet wide. Twice each day, for about ninety minutes, Benoit Lachaine must pass between two cows and then squat three times per cow to clean the udder, attach the milking machine and then remove the milking machine. The foot problem prevents Benoit Lachaine from milking without experiencing pain since the big toe is involved each time he squats down.

With Benoit Lachaine unable to do the milking, FBL then hired employees to do the daily milking. However, FBL began to experience herd health issues and milk production issues. During 2008, FBL lost thirteen of its herd. Benoit Lachaine testified that these issues developed with him "missing" from the milking operation. He described the solution to the issues was for him to do the milking; however, to do that he had to take anti-inflammatory medication for three days to dull the pain in his foot.

Faced with these issues, Benoit Lachaine together with his wife and his father decided to quit the dairy production industry. The milk quota was then sold in a series of transactions between 2007 and 2008.

FBL received $2,145,878.82 from the sale of its quota. It also disposed of its dairy herd for $140,000.00 for a total of almost $2.3 million.

FBL then invested $150,000 into tile drainage, levelling and adding minerals to the soil to make the 300 acres of crop land more viable for a cash crop farming operation. FBL also invested about $320,000 in grain storage bins, drying equipment and other equipment modifications suited for cash cropping.

In addition to paying the income tax liability on the quota sale transaction, with part of the quota sale proceeds, FBL paid off its quota debt, mortgage and line of credit. Benoit Lachaine confirmed he still owed his father Edmond about $320,000 at the time of the hearing.

Benoit Lachaine made it very clear there was never any question about selling the family farm. He still considers himself a farmer, despite no longer being a dairy farmer. He estimated his land value at $2,500-$4,000 an acre.

Benoit Lachaine testified that the cash crop operation was manageable with his foot problem because the nature of the work was different.

Benoit Lachaine testified the 15 percent transfer assessment created a major affect on his family. Despite his efforts to transition from dairy to cash cropping, his income level is not the same and, as a result, he must now re-train himself in order to find work off the farm. He has been taking some computer and accounting courses and plans to register full-time in a two-year computer science program this fall. However, at that time he will have three daughters in full-time university studies and himself in college. He testified that if granted an exemption from the 15 percent transfer assessment, the money would be well utilized by his family.

David Murray is one of twelve elected board members of DFO and he was recently elected a Vice Chair. He represents Region 10 (Huron-Perth) which comprises 570 of the 4,213 Ontario dairy producers. While not originally from a farming background, he and his wife purchased her family's dairy herd and milk quota in 1989 and the farmland in 1996.

He testified that as an "outsider" coming into the dairy industry he understood that he had to purchase a share of the market (quota). He considered the acquisition of quota as part of the cost of doing business and in his view quota allows a fair return on investment, labour, management and capital.

David Murray explained that DFO has the authority and responsibility to make policy, subject to oversight from the Farm Products Marketing Commission. He explained how DFO policy is shaped by input from the producers across the province through county based dairy producer committees, regional meetings, annual policy conferences and annual meetings.

David Murray explained that in November 2006, DFO re-introduced a minimum 15 percent quota transfer assessment for transactions taking place on the quota exchange. He explained the quota assessment is in kilograms not dollars. The assessments are maintained in a quota bank that DFO uses to make general pro-rata quota increases to all producers.

He also explained that, as part of a new policy introduced in August 2009, the quota transfer assessment policy has been replaced and the exchange price for quota has now been capped at $25,000 per kg., as of January 2010.

We note that under the capped quota structure, had FBL held on to its quota and exited the industry today, it would have received $2,058,500 for their quota (82.34 kgs. @ 25,000), rather than the $2,145,878.82 they did receive, after application of the transfer assessment.

David Murray testified that since the introduction of the November 2006 quota transfer assessment policy, DFO received eighty requests from dairy producers for an exemption from the transfer assessment. The exemption requests arise under Section H, 2. of the DFO policy book. Producers requiring "special consideration" of reasons for inability to comply with policies are invited to advise DFO in writing.

David Murray explained that of the eighty exemption requests, DFO granted five. He reviewed the relevant facts of each of the five exemption requests and the reasons why DFO granted exemptions in those cases. In most of those cases, DFO granted the exemption because it was satisfied on the evidence that the producer had an intention and plans to depart the dairy industry that were interrupted by the November 2006 transfer assessment policy. His words were they had been "caught" by the policy change.

David Murray explained that as a result of many exemption requests citing medical reasons, and partly in response to comments from a panel of this Tribunal in a decision called Cayer #1, DFO amended Section H. 2 of the policy book in May 2008 to include a long standing, but unwritten DFO policy that medical conditions would not qualify for exemptions. Dairy producers were then advised of that policy around June 2008 via industry publications.
He explained that each time DFO receives a new medical exemption request, it re-evaluates the medical condition exception to the special consideration policy. He also explained that after each Tribunal transfer assessment exemption decision, the DFO re-evaluates its policy. He testified the DFO has remained resolved not to accept medical conditions as a basis for an exemption. He explained the DFO considers that dairy farming is physically difficult and that every producer will, during their career, develop some medical condition. However, he explained DFO does not want to be in a position where it has to weigh medical evidence to decide how much a toe is worth compared to a back or a leg.

Findings and Analysis

Both counsel referred to previous Tribunal exemption decisions in Cayer #2, VanderGeest and Shaw. Both counsel confirmed those decisions, while possibly persuasive, are not binding on the Tribunal.

We conclude those decisions do not create a set of established legal principles. Each of those previous cases is governed by a unique set of facts.

In argument counsel for FBL pointed to the DFO exemption decisions as hard to reconcile. He asked the question: Why is a death extra-ordinary and deserving an exemption while a medical condition is not? He suggested there is no logical reason to allow an exemption in the one and not the other.

In our view, that submission directly engages the point from David Murray's evidence about why DFO has staunchly refused to alter its policy that medical conditions will not qualify for special consideration (exemption) under their policies.

This Tribunal panel does not question that Benoit Lachaine has a legitimate medical condition that caused him pain when he milked his cows.

The evidence of Benoit Lachaine satisfies us that he decided he could no longer milk and tend his dairy herd due to his foot pain. Mr. Lachaine noted herd health suffered, cow mortality skyrocketed and milk production dropped once he was not directly involved in the dairy operation. He blamed these events on employees who did not have his skills. He did however concede that it was his obligation to train and monitor his employees until they did the job right.

Benoit Lachaine continues to this day as an active farmer, albeit in cash cropping rather than dairy. We accept that cash cropping is less strenuous on his foot than dairy farming. We also find that FBL would not have invested approximately $500,000 into the cash cropping operation without knowing it would continue to receive a reasonable return on investment through the income derived from cash cropping. We also find it somewhat incongruous that Benoit Lachaine says cash cropping will not provide him a reasonable income and yet he is resolved to hold onto the farm for one his daughters. Surely he would not saddle one of his daughters with a farming operation destined to produce an unreasonable income.

FBL made its decision to exit the dairy industry knowing that it would face a 15 percent assessment on its quota transfer.

We find there is nothing special, unique or extraordinary about Benoit Lachaine's circumstances or medical condition to warrant an exemption from the transfer assessment.

While we are not bound by the several previous Tribunal exemption decisions, we feel it appropriate to list the factual differences between the FBL circumstances and those previous cases:

• Benoit Lachaine continues as an active farmer
• Benoit Lachaine was not killed in an accidente
• Benoit Lachaine did not suffer a catastrophic injury that ended his farming career
• Benoit Lachaine does not have a terminal disease
• Benoit Lachaine did not have a plan to exit the industry interrupted by the November 2006 policy

A significant part of FBL's case was based on financial hardship. Without deciding that financial hardship could be the basis for an exemption, we find no evidence of financial hardship.

Based on all the evidence we find that FBL has not satisfied us that there is anything sufficiently "special" about Benoit Lachaine's foot condition to warrant an exemption from the 15 percent quota transfer assessment.

Order of the Tribunal

Therefore, the Tribunal orders that the appeal of Ferme Benoit Lachaine Inc. is dismissed.

Dated at Brampton, Ontario this 5th day of March, 2010.