Citation: 2004TCC805
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Date: 20041209
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Docket: 2003-3326(GST)I
2003-3228(GST)I
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BETWEEN:
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JEAN-YVES COUILLARD,
CÉCILE BEAUCHEMIN,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
__________________________________________________________________
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] These appeals were heard on common
evidence. The assessments pertain to the period of
October 1, 1998, to June 2, 2002. The dispute
involves an input tax credit (ITC) claim in respect of the
restoration and operation of a sugarhouse. The appellants
submit that the operation is part of their farming business.
The Minister of National Revenue ("the Minister")
severed this operation from the appellants' farming business
and submits that it is not a commercial activity.
[2] Jean-Yves Couillard is
a farmer. He stated that the sugarhouse dates back to his
great-grandfather's time. He explained that he was the
president of the Union des Producteurs Agricoles (UPA) of
St-Hyacinthe from 1977 to 1985 (eight years). He was then
the general vice-president of the UPA from 1983 to 1994 (11
years). He was unable to look after the operation of the
sugarhouse during those years. Subsequently, he wanted to restore
the sugar bush and sugarhouse. He started to do so in 1996, but
did most of the work in 1999. The ice storm of 1998 damaged not
only the trees, but the shack and appurtenances as well. A great
deal of work was needed to clean the underbrush and make the
maple trees productive. The year 2002 was the first in which
Mr. Couillard was able to tap the trees. He tapped 550 trees
that year, and tapped 800 trees last year.
[3] The appellant has been farming
since the age of 16. He is now 72. He said he would be very sad
if maple products were no longer considered farm products. He
noted that there is a federation of maple producers within the
UPA. Whether it was in his great-grandfather's day, his
grandfather's day or his father's day, springtime always
began with work on the sugar bush.
[4] The appellant stated that his
sugar bush is considered small. He produced
Exhibit A-1, a confirmation of an insurance policy in
respect of the sugarhouse and its equipment and for general
agricultural civil liability.
[5] Counsel for the respondent
produced Exhibit I-2, the financial statement of the
two appellants' business. Page 15 shows that the sale of
products such as corn and soy generated revenues of $136,215 and
$100,817 respectively in 2002, that the crops generated $290,502
in 2001, and that maple products generated $1,237 in revenues in
2002 and no revenues in 2001.
[6] Auditor Danielle Fleury
audited the appellants' business. She stated that when she
visited the sugarhouse, she noticed that the maple syrup boiler
was installed in a small room adjacent to what she called a
cottage. The cottage has a foyer, a living room, a kitchen, a
washroom and a second-floor bedroom. In her opinion, it
constituted personal use property and the expenses were personal
as well. Upon examining the financial statements for 1998
through 2001, she saw that no maple syrup revenues were
reported.
[7] Mr. Couillard said that the
small room containing the boiler is actually a sizeable
24 feet by 30 feet. He agreed that the sugarhouse is
not open to the public but is designed for maple syrup
production. As for the adjacent room, Mr. Couillard said
that it was not a cottage, but rather, a rest area for the people
engaged in collecting maple sap and producing maple syrup.
[8] The reasons stated in the notice
of objection and notice of appeal for obtaining the credit are
the same as those given at the hearing.
[9] In his written submissions dated
July 30, 2004, counsel for the respondent states as
follows:
[TRANSLATION]
QUESTION 1
Are maple products zero-rated supplies within the meaning of
Part IX of the Excise Tax Act, R.S.C. 1985,
c. E-15 (hereinafter "ETA")?
In response to this question, we attach to these arguments a
table compiled by Germaine Banville of the Ministère
du Revenu du Québec. The table states that maple
products, with the exception of maple cream and maple taffy, are
zero-rated supplies.
QUESTION 2
What is the amount of the ITC claimed by the appellant?
For the period in question, namely January 1, 1999,
to June 30, 2002, the total ITC claimed by the
appellant is $2,433.59.
ARGUMENTS
- Audit
The appellant is entitled to his ITC because the supply is
zero-rated. However, as stated in the document produced as
Exhibit R-1 (page 2 of 4), the auditor disallowed the
ITC based on subsection 170(2) because
". . . the use of property or services of
such quality, nature or cost is not reasonable in the
circumstances, having regard to the nature of the commercial
activities."
- Objection
On the objection, the Ministère du Revenu du
Québec, on behalf of the respondent, maintained the
assessment based on the definition of "commercial
activity" in section 123 of the ETA and on
Stewart v. The Queen, [2002] 2 S.C.R. 645,
at paras. 50, 54 and 55 (copy attached). The Minister
determined that the appellant was carrying on the activity
recreationally, not commercially.
EVIDENCE
In our opinion, the evidence shows that the appellant is
carrying out the sugarhouse-related activity recreationally.
The appellant submits that he is entitled to the ITC
regardless of the nature of the activity because it is a farming
supply and is therefore zero-rated. This approach
disregards subsection 170(2) of the ETA. In our opinion, the
evidence shows that the sugar bush activity is not operated
commercially and that the auditor correctly applied
subsection 170(2) of the ETA.
Analysis and conclusion
[10] Subsection 170(2) of the Excise
Tax Act (the "ETA") provides:
170(2) Further restriction - In determining an
input tax credit of a registrant, no amount shall be included in
respect of the tax payable by the registrant in respect of
property or a service acquired, imported or brought into a
participating province by the registrant, except to the extent
that
a) the
consumption or use of property or services of such quality,
nature or cost is reasonable in the circumstances, having regard
to the nature of the commercial activities of the registrant;
and
b) the
amount is calculated on consideration for the property or service
or on a value of the property that is reasonable in the
circumstances.
[11] Section 123 of the ETA defines
"commercial activity" as follows:
"commercial activity" Commercial activity of
a person means
(a) a
business carried on by the person (other than a business carried
on without a reasonable expectation of profit by an individual, a
personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the business involves
the making of exempt supplies by the person,
(b) an
adventure or concern of the person in the nature of trade (other
than an adventure or concern engaged in without a reasonable
expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except
to the extent to which the adventure or concern involves the
making of exempt supplies by the person, and
(c) the
making of a supply (other than an exempt supply) by the person of
real property of the person, including anything done by the
person in the course of or in connection with the making of the
supply;
[12] Paragraphs 50, 54 and 55 of the
decision of the Supreme Court of Canada in
Stewart v. Canada,
[2002] 2 S.C.R. 645, read as follows:
50 It is clear that
in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As
has been pointed out, a commercial activity which falls short of
being a business, may nevertheless be a source of property
income. As well, it is clear that some taxpayer endeavours are
neither businesses, nor sources of property income, but are mere
personal activities. As such, the following two-stage approach
with respect to the source question can be employed:
(i) Is the
activity of the taxpayer undertaken in pursuit of profit, or is
it a personal endeavour?
(ii) If it is not a
personal endeavour, is the source of the income a business or
property?
The first stage of the test assesses the general question of
whether or not a source of income exists; the second stage
categorizes the source as either business or property.
. . .
54 It should also be
noted that the source of income assessment is not a purely
subjective inquiry. Although in order for an activity to be
classified as commercial in nature, the taxpayer must have the
subjective intention to profit, in addition, as stated in
Moldowan, this determination should be made by looking at
a variety of objective factors. Thus, in expanded form, the first
stage of the above test can be restated as follows: "Does
the taxpayer intend to carry on an activity for profit and is
there evidence to support that intention?" This requires the
taxpayer to establish that his or her predominant intention is to
make a profit from the activity and that the activity has been
carried out in accordance with objective standards of
businesslike behaviour.
55 The objective
factors listed by Dickson J. in Moldowan, at p. 486,
were: (1) the profit and loss experience in past years; (2) the
taxpayer's training; (3) the taxpayer's intended course
of action; and (4) the capability of the venture to show a
profit. As we conclude below, it is not necessary for the
purposes of this appeal to expand on this list of factors. As
such, we decline to do so; however, we would reiterate Dickson
J.'s caution that this list is not intended to be exhaustive,
and that the factors will differ with the nature and extent of
the undertaking. We would also emphasize that although the
reasonable expectation of profit is a factor to be considered at
this stage, it is not the only factor, nor is it conclusive. The
overall assessment to be made is whether or not the taxpayer is
carrying on the activity in a commercial manner. However, this
assessment should not be used to second-guess the business
judgment of the taxpayer. It is the commercial nature of the
taxpayer's activity which must be evaluated, not his or her
business acumen.
[13] According to this decision, the first
thing to determine is whether the business is a personal
endeavour of the taxpayer. If it is not, the reasonable
expectation test is set aside for the purposes of the Income
Tax Act. However, the definition of commercial activity in
the ETA specifically requires that the business of an individual
be operated with a reasonable expectation of profit. Based on the
case law (see Janitsch v. R., [2004] G.T.C. 326;
Mann v. R., 2003 DTC 1172; and
Nadoryk v. R., 2003 DTC 5744 (F.C.A.)), the
decision in Stewart, supra, does not apply to the ETA
― at least not entirely ― given the difference
between the enactments.
[14] The Minister has not placed the
commercial nature of the appellant's farming business in
doubt or in issue. The controversy is about whether the
sugarhouse activity was a personal endeavour or a business
endeavour. Is it a personal endeavour of the appellants? If so,
the Minister submits that it must be severed from the
appellants' farming activities.
[15] I must therefore analyse the evidence
adduced. I found the appellant to be a credible witness and
consider his account of the facts plausible. The appellant
explained that the building which the auditor considered a
personal cottage was not one, and that it was used by the
people who collected the maple sap and made maple products. He
also explained that the maple-related activity was the first to
follow the winter season. In addition, it should be borne in mind
that the appellant said he put a great deal of effort into
restoring the sugar bush itself. It is true that the proceeds
from the sale of the products were low, but the operation must be
considered in its historical context having regard to the
restoration of the building, equipment and trees.
[16] In my opinion, the evidence shows that
the sugar bush business was operated as part of the
appellants' farm, not as a personal endeavour of theirs.
[17] The appeal is accordingly allowed.
Signed at Ottawa, Canada, this 9th day of December 2004.
Lamarre Proulx J.
Translation certified true
on this 7th day of February 2005.
Jacques Deschênes, Translator