Bouchard Estate v. MNR, 93 DTC 1511, [1993] 2 CTC 3003 (TCC)

Garon, T.C.C.J.:— This is an appeal from a reassessment for the 1984 taxation year, the year in which Mr. Napoléon Bouchard ("Mr. Bouchard”) died. In that assessment, the Minister of National Revenue included a taxable capital gain of $76,905 in computing Mr. Bouchard's income for that same taxation year in respect of the transfer of certain lands located in Beauport, in the suburbs of Québec City, to his children at the time of his death.

The appellant claims that no taxable capital gain was realized by Mr. Bouchard under subsection 70(9) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in respect of the transfer of farm property to a child at the time of the death of a taxpayer. The respondent, for his part, argues in his reply to the notice of appeal that of the total area of these lands of 951,631 square feet, only a maximum area of 95,163 square feet, that is to say approximately 10 per cent of those lands, could reasonably be considered as property that was used immediately before Mr. Bouchard's death in the business of farming.

In assessing the appellant, the respondent relied on the following assumptions of fact stated at subparagraphs (a) to (n) of paragraph 10 of the reply to the notice of appeal:

(a) Mr. Napoléon Bouchard died on December 23, 1984 at the age of 66;

(b) among the property which he held, Mr. Bouchard had lands located in Beau- port which formed part of lots 384, 385 and 387 of the Beauport cadastre. The area of the lands in question is 951,631 square feet;

(c) Mr. Bouchard purchased these lands from his father in 1945 and operated a farm there until 1965;

(d) in 1965, the barn located on these lands burned down and was never rebuilt. Mr. Bouchard did not keep animals after that time;

(e) in the last years before his death, Mr. Bouchard did some market gardening on a small parcel of land and sold his products at market;

(f) the parcel of land on which Mr. Bouchard did the market gardening represented at most 10 per cent of the area of the lands which the latter held and thus did not exceed 95,193 square feet. The rest of the lands lay fallow and were not exploited;

(g) of all the lands held by Mr. Bouchard, only a 10 per cent area was therefore used immediately before Mr. Bouchard’s death in the business of farming;

(h) the zoning of the area where the lands in question are located has permitted all uses since at least 1971. Furthermore, residential development appears to represent the optimum use of the lands in the area;

(i) market gardening and the sale of products at market was mainly a hobby for Mr. Bouchard, whose wife died in 1977. In this way, Mr. Bouchard went to meet the people he knew at the St. Roch market in Québec City. He went there only on Thursdays and Fridays;

(j) the equipment which Mr. Bouchard used dated from the 1960s and earlier and was of virtually no value, except for a tractor which Mr. Bouchard’s brothers had kept in order to maintain the road in winter;

(k) Mr. Bouchard is deemed to have disposed of all the property belonging to him immediately before his death;

(l) the fair market value at December 23, 1984 of all the lands forming part of lots 384, 385 and 387 of the Beauport cadastre was not greater than $228,000;

(m) the fair market value at December 31, 1971 of all the lands forming part of lots 384, 385 and 387 of the Beauport cadastre was not greater than $57,100;

(n) in 1984, Mr. Napoléon Bouchard realized a capital gain of $153,810, hence a taxable capital gain of $76,905:

Proceeds of disposition
Fair market value at date of death (23/12/84)		$228 ,000
Less:
Median adjusted cost base:
Cost	—
Fair market value	$57,100
Disposition	$228,000	$57,100
Capital gain		$170,900
Portion exempted as a result of a rollover (10 per cent)		$17,090
Capital gain		$153,810
Revised taxable capital gain (50 per cent)		$76,905
	[Translation.]

Summary of facts

The lands mentioned above, property of Mr. Bouchard at the time of his death, as well as an adjacent land of the same dimensions belonged to a certain Arthur Bouchard from 1920 until 1954. In 1954, the latter sold the east half of all this land to his son, Mr. Napoléon Bouchard, whose estate is the appellant in the instant case, and the west half to another son, Mr. Edgar Bouchard. Mr. Bouchard thus lived on this land throughout his life. With his wife, he raised his five children there. Following Mr. Bouchard's death, which occurred after that of his wife, the lands were, in the absence of a will, transferred in equal parts to his five children.

During her testimony, Mrs. Louise Duguay-Bouchard described the activities of her father, Mr. Bouchard, with respect to these lands.

Prior to 1960, the lands in question were used mainly by Mr. Bouchard for dairy and agricultural production. Around 1960, Mr. Bouchard abandoned dairy operations to devote himself exclusively to market gardening, which was diversified. The evidence clearly shows that Mr. Bouchard engaged in cultivation on these lands until his death. Cultivation of the soil was his main activity. He worked on the land eight hours a day, six days a week. His family home during all these years was located near his farm.

This land included two wooded sections which were estimated by Mrs. Louise Duguay-Bouchard at two-fifths of the total area of approximately 22 arpents, and the rest represented the arable portion of that property. Included in the two-fifths wooded section is a smaller part that is a bog. She also testified that the area of the portion farmed by her father in the year of his death was 11 arpents, that is 50 per cent of the area. She acknowledged, however, that a small part of the 11 arpents might have been located on the land of her uncle, Mr. Edgar Bouchard.

It is also in evidence that, before fire destroyed the barn located on this land, Mr. Bouchard owned all the farming implements necessary to the exploitation of that land. Some of his implements were damaged in the fire so that, after that event, he had to make arrangements with his neighbours to use some of their implements. Mr. Bouchard was also careful to maintain his implements and machinery properly. Although they were old, these implements were in working condition at the time of his death.

Mr. Bouchard could rely on the assistance of his children and relatives at planting time and harvest time. He had employees only very occasionally. Mr. Bouchard rented a stand at the market where his name was posted. He sold his products himself two or three times a week. Mr. Bouchard's activities with respect to the sale of his products at the market were confirmed by an independent witness, Mr. Raymond Alain, a market gardener. He testified that the rental price of a space at the market at the relevant time was $6 a day. Mr. Bouchard sold, gave away or exchanged products with his neighbours. Over the years until his death, Mr. Bouchard also did work for his own personal purposes in the wooded area located on these lands. He rejuvenated the forest, but his activities in this area were not part of the operation of a business. He was also a member in good standing of the Union des Producteurs Agricoles. At the time of his death, he held a registration card for his farm issued by the ministère de ['Agriculture, des Pêcheries et de I'Alimentation of the Government of Quebec. This card gave him access to the various technical services and agricultural programs of that department.

Mr. Yvon Ouellet, a property assessor employed by the Department of National Revenue, provided certain information for the respondent on the subject of the property in question as part of the mandate under which he was required to determine the fair market value of that property at December 31, 1971 and on the day of Mr. Bouchard's death, December 23, 1984. This witness visited the property only in 1991, that is six and a half years after Mr. Bouchard's death. In particular, he consulted the zoning by-laws in effect at the relevant times. He mentioned that a portion of the lands purchased by Mr. Bouchard from his father were expropriated in 1969 for the purposes of the construction of a highway. With the aid of photographs, he estimated that the portion of this property under cultivation was not more than 16 per cent in 1984. He allowed himself a margin of error of two percentage points. In cross-examination, Mr. Ouellet acknowledged that it was possible that certain other parts of the land had been farmed in the year or two years preceding Mr. Bouchard's death and that the total area of all the parts under cultivation might therefore have been as much as 25 per cent to 30 per cent of all of Mr. Bouchard's lands which are in issue in the instant case. Furthermore, according to this witness, the use of this property as a farm was only marginally profitable in both 1971 and 1984. He also provided information on the applicable zoning by-laws. He put forward his conclusion that the optimum use of this property was not farming. He did not know what type of farming Mr. Bouchard had done on these lands. A statement prepared by Mr. Ouellet of Mr. Bouchard's farming income was filed for the years 1975 to 1984. This statement shows very small net incomes for each of those years.

Mrs. Lafleur, an auditor with Revenue Canada, also testified. She had not visited the land or seen the farming equipment. Nor had she communicated with the neighbours to obtain information on this property or on the type of use that might have been made of it at the time concerning us.

Appellant's claims

Counsel for the appellant argues that all the necessary conditions set by subsection 70(9) of the Act applied to all of this property and, in particular, that these lands belonging to Mr. Bouchard at the time of his death had been used immediately before his death by the latter in the business of farming.

Respondent's claims

Counsel for the respondent acknowledged that Mr. Bouchard operated a farming business, but she argued that the provisions of subsection 70(9) of the Act apply only to an area representing approximately 16 per cent of that property as a whole, that is to say to that part that was actually used for the purposes of his farming business. The other part was used, in the terminology of counsel for the respondent, for "development" [translation] purposes.

Analysis

The case therefore turns on the question whether the lands that form the subject of the instant case may be considered as land used, in accordance with subsection 70(9) of the Act, immediately before the death of Mr. Bouchard by the latter in the business of farming or whether the portion effectively farmed at the time of his death is the only portion concerned by this subsection.

As I have already indicated, it was admitted by the respondent in the reply to the notice of appeal that Mr. Bouchard operated a farming business immediately before his death. This conclusion is drawn, in particular, from subparagraph 10(g) of the reply to the notice of appeal, which I reproduce again for reasons of convenience:

(g) of all the lands held by Mr. Bouchard, only a 10 per cent area was therefore used immediately before Mr. Bouchard's death in the business of farming;

[Translation.]

Notwithstanding certain doubts expressed from time to time by counsel for the respondent on the question whether the operations carried out by Mr. Bouchard on these lands indeed constituted a business within the meaning of the Income Tax Act, and the additional fact that the farming business did not represent the optimum use of the property in question, as Mr. Yvon Ouellet, the assessor, underscored in his report of June 7, 1991, it appears to me undeniable that it must be accepted at the outset as a premise that Mr. Bouchard operated a farming business on these lands or on a part thereof immediately before his death.

Furthermore, it should be noted that the Minister of National Revenue's assumption, appearing at subparagraph 10(f) of the reply to the notice of appeal, that "the parcel of land on which Mr. Bouchard did the market gardening represented at most 10 per cent of the area of the lands which the latter held and thus did not exceed 95,163 square feet" is not supported by the evidence. The respondent's main witness estimated the percentage of these lands used for agricultural purposes at approximately 16 per cent. His assessment of the usable portion was based on aerial photographs taken a number of years after Mr. Bouchard's death. He has not seen this land at the relevant time. I have some doubts about this estimate of the portion of these lands under cultivation. At all events, I prefer the testimony of Mrs. Louise Bouchard- Duguay, who was raised on this land and who had the opportunity, after she left her parents’ home, to return there many times. She was, without any doubt, familiar with the various characteristics of this property. However, she had some difficulty saying exactly what part of this land was farmed, in particular because her father’s lands and those of her uncle, Mr. Edgar Bouchard, were not separated by a fence or any other kind of partition. It was determined that a part of these two properties was used for market gardening in the years preceding Mr. Bouchard's death. From the evidence as a whole, I find that the part of this land cultivated by Mr. Bouchard in the year of his death for the purposes of his farming business was not less than 40 per cent of its total area and did not exceed 50 per cent. In reaching this conclusion, I obviously include the part of this land which, let us say in the year 1984, was in a period of fallow because the evidence is clear that, in this type of farming, there must be a rotation among the arable portions.

It should be noted, in analyzing subsection 70(9) of the Act, that the legislator is not here concerned with the part of the land that was used immediately before the taxpayer's death for tillage of the soil or other operations considered as farming under the definition of that term at section 248 of the Act, but rather with lands that were used in the business of farming immediately before the taxpayer's death. The English version of this provision is also drafted in general terms. Subsection 73(3), which is the counterpart of subsection 70(9), in that it also provides, in certain circumstances, for the transfer of farming property without tax incidence to a taxpayer's children, but in the case of inter vivos transfer, also contains terminology entirely similar to that of subsection 70(9). The legislator acted differently, for example, when it defined the concept of "principal residence" at paragraph 54(g) of the Act. The legislator there stated that it was referring to such portion of any immediately contiguous land as may reasonably be regarded as contributing to the taxpayer's use and enjoyment of the housing unit as a residence". A restrictive interpretation of subsection 70(9) [and indeed of subsection 73(3)] would lead in many instances to the parcellation or splitting of agricultural lands. Consequently, I do not believe that in interpreting subsection 70(9) one must consider only the part of the land that was effectively used for tillage of the soil or other agricultural operations immediately before the taxpayer's death. In my view, agricultural land must not be segmented so that the wooded portions, groundwater and non-arable or arid parts, for example, would necessarily have be excluded in advance in order to determine the part of the land concerned by subsection 70(9). Subsection 70(9) shall be given, in my opinion, a large and liberal construction and interpretation, as the legislator orders at section 12 of the Interpretation Act, R.S.C. 1985, c. 1-23. In particular, the use of this property as a whole must be considered. However, it must also be noted that, in subsection 70(9) of the Act, the legislator is not concerned with agricultural land transferred or distributed to a child, but with land that "was, immediately before his [the taxpayer's] death, used by him, his spouse or any of his children in the business of farming”. The use of the word "used" places a considerable restriction on the otherwise general scope of this provision.

In applying these analytical factors to the situation before us, I am of the view that it is not important for the purposes of subsection 70(9) of the Act that, at the time of the death and probably for several years previous, farming did not represent the best possible use of this land. Having regard also to this analysis of subsection 70(9), I believe that the wooded portions of the property under study are too large to be considered as secondary to the part that was farmed. A large portion of these lands was therefore actually used for personal purposes rather than for purposes related to farming. All things considered, I set the portion of the lands in issue that was used by Mr. Bouchard immediately before his death in the business of farming at 50 per cent.

I was not referred to any judicial decision that might have dealt with a case concerning the splitting of land for the purposes of subsection 70(9) of the Act.

For the respondent, reference was first made to Roy v. M.N.R., [1984] C.T.C. 2982, 84 D.T.C. 1901 (T.C.C.). In that case, the issue was the deductibility of certain losses incurred by the taxpayer, who had purchased a farm of 125 arpents, the cultivated portion of which was approximately 80 per cent during the years in issue. Judge Cardin disallowed the deduction of those losses on the ground that the taxpayer's farming operations did not constitute a business, particularly since he had no reasonable expectation of profit. This judgment is of no interest for the purposes of the instant case since quite another matter is here at issue, the respondent having acknowledged that Mr. Bouchard operated a farming business.

Counsel for the respondent also brought Gale Estate v. M.N.R., [1984] C.T.C. 3043, 85 D.T.C. 28 (T.C.C.), to my attention. In that case, Mrs. Gale bequeathed her farming property to her grandson who lived on the farm with his mother and his mother's husband. The point for determination was whether the land in question was used immediately before Mrs. Gale’s death by her or one of her children in the business of farming. Judge Kempo of this Court dismissed the appeal on the ground that the farming business had not been operated immediately before the death of Mrs. Gale either by the latter or by one of her children or grandchildren, but by the husband of Mrs. Gale’s daughter. The point at issue is different from the one concerning us in the instant case. This judgment was cited because it contained interesting observations on the scope of the word used" which qualifies the land in the context of subsection 70(9) of the Act. The following passage from that judgment, at page 29, was relied on:

Further, with reference to the meaning of the word "used" when read in its ordinary and grammatical sense within the context of subsection 70(9) of the Act, I would accept the submission of Counsel for the respondent in this respect that used" means the physical employment of the farmland and that such use must be “by” at least one of the qualifying individuals “in the business of" farming. Put another way, the physical employment (use) of the farmland is to be in farming and that the farming must also be such that it is a business.

Relying on this passage, counsel for the respondent argued that there had been no physical employment of a substantial part of this land for market gardening. This was not, however, a case in which the Court limited application of subsection 70(9) of the Act to the part of the land that was cultivated at the time of death.

For the respondent, two other judgments were also briefly cited: Finless v. M.N.R. (1970), Tax A.B.C. 1263, 71 D.T.C. 16 (T.A.B.) and Wong v. M.N.R., [1990] 2 C.T.C. 2123, 90 D.T.C. 1710 (T.C.C.). These latter judgments were of no assistance in resolving the instant dispute.

I therefore find that 50 per cent of the lands in question was used by Mr. Bouchard immediately before his death in the business of farming for the purposes of subsection 70(9) of the Income Tax Act. The assessment must thus be amended accordingly. The appeal is therefore allowed. There is no award of costs.

Appeal allowed.