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Citation: 2004TCC471
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Date: 20040728
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Docket: 2004-41(IT)I
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BETWEEN:
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ROBERT D. PARTRIDGE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment
for the appellant's 1999 taxation year.
[2] In that year he claimed a loss of
$26,142 from farming. This claim was denied on the basis that the
appellant had no reasonable expectation of profit ("REOP").
[3] The appellant is 73 years of age.
He started farming in 1978 when he retired from the military and
farming has been his full-time occupation since that time.
By "full-time occupation" I do not mean that it is his chief
source of income. That point is not before me and I make no
finding on it. I mean merely that farming is the activity at
which he spends all of his working time. He initially farmed
110 acres in Quebec. In 1983, he moved to Delta, Ontario,
where he purchased 365 acres which he used in a mixed
farming operation where he raised, among other things, Hereford
cattle and Morgan horses. He sold the 365 acres in 1997 due to
ill health. In 1995, he bought an additional 67 acres. This
property has about 35 acres of pasture, 10 acres of pine forest,
15 acres of sugar bush, 5 acres of waterfront and 2 acres for the
house and barn.
[4] The appellant and his wife work as
a team and his wife has been very supportive of him in his
farming operation. Paragraphs (e), (f), (g), (k), (l), (m), (n),
(o) and (p) of the Reply to the Notice of Appeal read
(e) when purchase[d], the Second
Property had not been farmed for 10 years and required
"considerable" work to be used for farming. Land had to be
cleared for pasture, buildings had to be repaired and a fence had
to be installed. Also, a right of way permitting people access
divided the farm, thus reducing its use as a farm. Most of the
required work was still not done in 1999.
(f) The Appellant confirmed that
things he attempted to do, stated in paragraph "e" of this Reply,
that something went wrong each time.
(g) the Appellant and his spouse
reside on the Second Property;
. . .
(k) during the period under appeal, the
Appellant had 12 to 15 head of cattle, 20 sheep, 10 goats, 3
deer, 30 chickens, 2 horses, 2 donkeys, 6 ducks, 2 dogs and
cats.
(l) the Appellant bought a used
backhoe for $20,000 to clear more pastureland, he sold the
backhoe in January 2003;
(m) the Appellant produced a business plan
to make the farming operation profitable. The main idea in his
business plan was to establish a fence line and to tried to stop
right of ways so people would not be able to cross his property
freely and he would pasture more livestock and to be able to
increase the size of his land. The Appellant was unsuccessful in
court to remove the right of way;
(n) the Appellant produced a business
plan, but did not have any financial information and did not
include any income and expenses projections or an analysis of
cash flow;
(o) based on an audit of 1997 and 1998, the
Appellant admitted he didn't realize he had to operate with
profit in mind until the audit was done in 2000, The 1999 review
confirmed that no change in the Activity took place;
(p) the Appellant did not have a reasonable
expectation of profit from the Activity in the 1999 taxation
year.
[5] Many of the allegations pleaded as
assumptions are not so much assumptions of fact as they are
attempts to put forward in the guise of assumptions evidence that
is prejudicial to the appellant. This sort of unfair practice is
particularly deplorable when the appellant is
self-represented. To quote or paraphrase as assumptions
what the Crown conceives to be admissions against interest made
by the appellant is improper. If an appellant has made an
admission that the Crown wants to use against him or her it
should be put to the appellant in cross-examination. What
the respondent has done here is a misuse of the practice of
pleading assumptions. I appreciate that counsel for the
respondent did not draft the Reply to the Notice of Appeal. It
was drafted by an employee of the Canada Customs and Revenue
Agency.
[6] It was not pleaded as an
assumption or as a separate allegation that there was any
personal element in Mr. Partridge's carrying on of the
farming business. It is true, he has not made a profit from
farming. He nonetheless generates farming income each year. In
1999 his gross farming income was $12,634. A significant portion
of his expenses consists of capital cost allowance - in 1999,
$17,698.
[7] His claim to deduct losses in 1997
and 1998 was denied and his appeal to this court was dismissed by
Justice Rip ([2001] T.C.J. No. 579). An appeal from his
decision was dismissed by the Federal Court of Appeal.
[8] Paragraphs 11 to 21 of Justice
Rip's judgment read
[11] Mr. Partridge declared that
he operated the farm not to make a profit but to contribute to
the community. The farms, he said, were to provide him with a
"livelihood", a "living not a profit", permitting him to consume
the products he grew. And, during the years in appeal, he and his
wife did consume vegetables and meat produced on the farm.
[12] Unlike taxpayers in cases
cited by respondent's counsel [See Note 1 below],
Mr. Partridge noted that he does no other work except work
on the farm. He has no other income from business or employment.
Thus, he concluded these cases are irrelevant.
Note 1: For example, Moldowan v. The Queen, 77 D.T.C. 5213
(S.C.C.), Tonn et al. v. The Queen, 96 D.T.C. 6001,
A.G. of Canada v. Mastri et al., 97 D.T.C. 5420, R. v.
Donnelly, [1997] F.C.J. No. 1351, 1997 CarswellNat 1562, Spence
v. R., [2000] T.C.J. No. 203 2000 CarswellNat 612.
[13] Mr. Partridge took
great comfort in Dickson J.'s (as he then was) description
of a class (1) farmer in Moldowan, [See Note 2 below]:
Note 2: Supra, p.
5216.
(1) a taxpayer, for whom farming may
reasonably be expected to
provide the bulk of income or the centre of work routine. Such a
taxpayer, who looks to farming for his livelihood, is free of the
limitation
of s. 13(1) in those years in which he sustains a
farming
loss.
[14] It is Mr. Partridge's main
submission, if I understand him correctly, that farming was "the
centre of his work routine" and, therefore, he is a class (1)
farmer, notwithstanding farming provides him with no net
income.
[15] The words "the centre of
work routine" and "ordinary mode and habit of work" used by
Dickson J. in Moldowan must mean the centre of a person's
economic work routine or habit of work, where a person is working
for his livelihood. The word "livelihood" is defined in The
Canadian Oxford Dictionary as "a way of earning a living; an
occupation". It does not mean efforts to provide one's self with
subsistence only, as the appellant contemplates, or an activity
that creates some revenue, but not a profit, but at which the
taxpayer devotes all of his mental and physical energies.
[16] Indeed, in Tonn [See Note 3
below] and Mastri [See Note 4 below] the Federal Court of Appeal
considered the personal element of expenses in considering
whether the expenses were incurred to produce income from a
business or property. In the appeal at bar, as the appellant
stated on several occasions, the purpose of his farming activity
was not necessarily to earn a profit but to provide food for his
table. Profit was, I gather, a secondary intent.
Note
3:
Supra, pp. 6009-10.
Note
4:
Supra, p. 5424.
[17] Nevertheless, if a person
carries on the business of farming, expenses are deductible in
computing income. A business requires an element of commerce or
commercial activity. The activity, farming in the appeal at bar,
must have some commercial flavour, at least, to a business.
[18] To be successful, Mr.
Partridge must convince me that farming, or farming and some
other source of income, is his chief source of income, not his
income from pensions or investments. As Dickson J. stated in
Moldowan: [See Note 5 below]:
Whether a source of income is a taxpayer's "chief
source" of income is both a relative and objective test. It
is decidedly not a pure quantum measurement. A man who has farmed
all of his life does not cease to have his chief source of income
from farming because he unexpectedly wins a lottery. The
distinguishing features of "chief source" are the
taxpayer's reasonable expectation of income from his various
revenue sources and his ordinary mode and habit of work. These
may be tested by considering, inter alia in relation to a
source of income, the time spent, the capital committed, the
profitability both actual and potential. A change in the
taxpayer's mode and habit of work or reasonable expectations
may signify a change in the chief source, but that is a question
of fact in the circumstances.
[19] In R. v. Donnelly, [See
Note 6 below] Robertson J.A. explained that:
8 A
determination as to whether farming is a taxpayer's chief
source of income requires a favourable comparison of that
occupational endeavour with the taxpayer's other income
source in terms of capital committed, time spent and
profitability, actual or potential. The test is both a relative
and objective one. It is not a pure quantum measurement. All
three factors must be weighed with no one factor being decisive.
Yet there can be no doubt that the profitability factor poses the
greatest obstacle to taxpayers seeking to persuade the courts
that farming is their chief source of income. This is so because
the evidential burden is on taxpayers to establish that the net
income that could reasonably be expected to be earned from
farming is substantial in relation to their other income source:
invariably, employment or professional income. Were the law
otherwise there would be no basis on which the Tax Court could
make a comparison between the relative amounts expected to be
earned from farming and the other income source, as required by
section 31 of the Act. . . .
[20] Unfortunately, I cannot
agree with Mr. Partridge that he carried on the business of
farming. He was preoccupied with farming. Farming was his life.
However, at no time during the time he farmed in Portland did he
carry on the business of farming. He did not expect the farm to
provide the bulk of income although it was the centre of his
daily work routine.
[21] The appeals are dismissed
except for the deletion of penalties.
[9] His judgment was affirmed by the
Federal Court of Appeal, 2003 DTC 5175 which said
[5] As the Tax Court
Judge noted, the fact that farming is at the 'centre' of one's
'work routine' does not make it a business. The activity must go
beyond mere subsistence (Reasons, paragraph 15).
[6] In this respect,
the Tax Court Judge found that the applicant's activities lacked
commercial flavour and that he was not engaged in farming
activities to make a profit, but primarily to provide 'food for
his table' (Reasons, paragraph 16). As such his activities did
not amount to a business.
[7] I have not been
persuaded that the Tax Court Judge committed any reviewable error
in reaching this conclusion.
[10] No reference was made to the Supreme
Court of Canada judgment in Stewart v. The Queen, 2002 DTC
6969, and Walls et al. v. The Queen, 2002 DTC
6960.
[11] It would, no doubt, be easy to dismiss
the appeal of this tenacious and somewhat feisty senior citizen.
It would not be difficult to find an excuse to decide a case of
this sort in favour of the Crown. One could look at 1999 and say
that Mr. Partridge is still losing money and by 2002 he has
finally stopped trying to write off his farming losses. One could
follow the safer road and dismiss the appeal, secure in the
knowledge that Mr. Partridge would probably not appeal.
However, I have to decide this case in accordance with the facts
as they were presented to me, not on the facts as found by
another judge for another year, however great may be my respect
for that other judge. It would be unfair for me to use against
Mr. Partridge admissions he made in the earlier case based
upon his ill-conceived notion of what the case was
about.
[12] Mr. Partridge referred at some
length to Interpretation Bulletin IT 322-R, dated
October 25, 1978. That bulletin deals with the restriction
of farming losses under section 31 of the Income Tax Act.
Mr. Partridge represented himself before Rip J. and the
Federal Court of Appeal, as he did before me. I do not think he
understood the significance of some of the things he was saying.
It is obvious that he completely misconceived the issue and what
he had to establish. Interpretation Bulletin IT 322-R
reproduces largely what Dickson J. said about chief source of
income in Moldowan v. The Queen, 77 DTC 5213.
Section 31 was not applied in either the earlier years or in
1999. Mr. Partridge looked at the definition of a Category 1
farmer in paragraph 1(a) of the bulletin and argued that
that was what he was. He noted that farming was "the centre of
his work routine and his major preoccupation" and therefore he
did not focus on the making of profit in his evidence in the
earlier appeals.
[13] Neither in 1999 nor in the two years
that were before the court previously, 1997 and 1998, was
section 31 applied. Nonetheless, Mr. Partridge seemed
to argue his earlier case on the basis that farming was his chief
source of income. The question before me is not what his chief
source of income was or whether he was a
Category 1 or 2 farmer but whether he was carrying
on a farming business. It is a matter of conjecture what the
result might have been if the Minister had applied section 31 or
Mr. Partridge had been represented by a competent tax
counsel. Nonetheless the Minister chose to put all of his eggs in
the REOP basket. The case is somewhat reminiscent of the decision
in Kuhlmann et al. v. The Queen, 98 DTC 6652. In that case
two physicians raised riding horses and lost money year after
year. The Minister restricted their farming losses under section
31. At trial, however, the Crown abandoned the section 31
argument and argued that there was no reasonable expectation of
profit. Mogan J. of this court agreed. The Federal Court of
Appeal reversed his finding and held that for there to be no
reasonable expectation of profit an expectation of profit had to
be "irrational, absurd or ridiculous."
[14] There was certainly nothing irrational,
absurd or ridiculous in Mr. Partridge's expectation of
profit. The facts before me are not those that were before
Rip J. For one thing, Rip J. states
"... as the appellant stated on several occasions, the
purpose of his farming activity was not necessarily to earn a
profit but to provide food for his table. Profit was, I gather, a
secondary intent."
[15] Mr. Partridge was quite clear in
saying that providing food for his table was not his purpose and
I accept his evidence. He and his wife ate some eggs, a lamb and
some vegetables. Farmers often do eat some of the produce that
they grow. It does not turn a farming business into a mere quest
for subsistence. Mr. Partridge and his wife's food is paid
for from his pension and investment income.
[16] In 1999, Mr. Partridge produced a
detailed business plan for a five-year period in which he
anticipated a profit. It did not result in a profit but many
business plans do not. This does not invalidate the plan or
detract from the sincerity of the profit motive. One of the
events that prevented his realizing his goal in the years after
1999 was a disastrous lawsuit he was involved in. There was a
right-of-way across to his property that cottagers used. He tried
to move it so that it would not interfere with the grazing of his
cattle. The cottagers sued him. He testified that after a
one-half day trial, Cosgrove J. of the Superior Court
of Justice found against him and awarded $30,000 in costs plus
$16,000 in damages. This did not occur in 1999 but it clearly had
an adverse effect on his realizing his goal of earning a profit
in later years.
[17] Counsel argued that the Stewart
and Walls cases did not abolish REOP. REOP may continue to
exist for some limited purposes but to base the denial of losses
from what is obviously a commercial enterprise solely on REOP
would be to ignore the binding authority of the Supreme Court of
Canada. At page 6971 of the Stewart appeal, the Supreme
Court of Canada said
[4] In our view, the reasonable
expectation of profit analysis cannot be maintained as an
independent source test. To do so would run contrary to the
principle that courts should avoid judicial innovation and
rule-making in tax law. Although the phrase "reasonable
expectation of profit" is found in the Income Tax Act,
S.C. 1970-71-72, c. 63, (the "Act"), its
statutory use does not support the broad judicial application to
which the phrase has been subjected. In addition, the reasonable
expectation of profit test is imprecise, causing an unfortunate
degree of uncertainty for taxpayers. As well, the nature of the
test has encouraged a hindsight assessment of the business
judgment of taxpayers in order to deny losses incurred in bona
fide, albeit unsuccessful, commercial ventures.
[18] Nonetheless, REOP was the only
basis put forward in the assumptions or the reasons for the
disallowance and, as noted above, it was not pleaded as an
assumption or as an additional reason that there was any personal
element in his farming operation.
[19] I do not think that
Mr. Partridge's farming operation was a hobby or was engaged
in to satisfy purely personal as opposed to commercial goals. It
was a commercially unsuccessful farming operation but it was
unquestionably a farming business. I make no finding on whether
the losses could be restricted under section 31 because the
point is not before me.
[20] The appeal is allowed and the
assessment is referred back to the Minister of National Revenue
for reassessment and reconsideration to permit the deduction of
the farming loss of $26,142 claimed in 1999.
[21] The appellant is entitled to such
costs, if any, as may be provided by the tariff.
Signed at Ottawa, Canada, this 28th day of July
2004.
Bowman, A.C.J.
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