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Citation: 2004TCC634
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Date: 20040920
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Docket: 2002-3097(IT)G
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BETWEEN:
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JOY O'NEILL SEVY,
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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
Miller, J.
[1] In 1993, Mr. Joy Sevy sold a
13.6-acre parcel of land near Penticton, British Columbia for
$600,000. The Minister of National Revenue (the Minister)
assessed Mr. Sevy on the basis that Mr. Sevy realized a $513,584
capital gain, three-quarters of which was taxable. Mr. Sevy
claims the gain arises from the disposition of "qualified
farm property" and is therefore subject to a deduction in
accordance with section 110.6 of the Income Tax Act (the
Act). I agree with Mr. Sevy.
[2] Mr. Sevy moved to British Columbia
from the United States in 1962. He had a desire to ranch. He
acquired 680 acres in the southern part of British Columbia,
specifically in the remote Kettle River Valley area. He leased an
additional 500 acres and coincidentally acquired 34 brood
cows. It was his intention to operate a cattle ranch. He faced
some onerous circumstances: no electricity, no running water,
four young children and poor road travel conditions to get cattle
to market. He claimed he needed 140 head to have a viable
operation. By 1965, he had worked the herd to 80 head.
[3] During the years 1962 to 1965, Mr.
Sevy fenced the property, harrowed part of it, seeded and
harvested a hay crop, acquired machinery which he maintained
himself and bred the cattle. Because he could not sell all the
calves, as he needed to retain them to develop the herd, he found
he was unable to make ends meet in these early stages.
[4] In 1965, Mr. Sevy moved to
Penticton to sell life insurance. He continued to ensure the
fields of the farm got ploughed and planted, fencing got done,
the machinery was repaired and the cattle cared for. Also, in
1965 Mr. Sevy met Mr. Atwood. Together they attended an
agricultural seminar in Kamloops, British Columbia, at which they
heard the British Columbia Government was encouraging the
promotion of the cattle industry hand-in-hand with what
Mr. Sevy called corn silage. With this knowledge, and
appreciating the difficulties Mr. Sevy had in transporting his
cattle over 100 miles to auction, and the devastating effect on
his cattle in doing so, Mr. Sevy struck on a plan. If he could
feed his stock in a milder climate to fatten them up, in an area
with accessible corn and feed, and in close proximity to the
auction market, his ranch could become a much more viable
operation. He also believed that developing such a feedlot close
to Penticton would attract other ranchers to feed their cattle
there. Everything would be cheaper for his ranching
operation.
[5] In 1965, in accordance with his
plan, Mr. Sevy and Mr. Atwood acquired 42 acres near
Penticton (the Penticton property) for the purpose of fulfilling
this plan. It is part of the Penticton property that is the
subject of this appeal.
[6] Mr. Sevy immediately added fencing
to the Penticton property. He also continued to search for nearby
corn land. He studied other feedlot operations and determined he
needed $150,000 to $200,000 to get a feedlot up and running. He
started looking for funding.
[7] In 1966, Mr. Sevy brought his
tractor to the Penticton property to harrow and clear rocks. He
planted grass. In the fall of 1966 and in 1967, he actually
rested some of his cattle on the Penticton property for a few
days. To assist with funding, Mr. Sevy sold one-third of the
Penticton property to a third party in 1966 for $3,000. He had no
luck with bankers, private investors or feed suppliers in his
ongoing search for investors.
[8] Mr. Sevy testified that he was
forever promoting his feedlot plan, as he believed that was the
only way his ranch would flourish. He maintained this intention
through to 1973, when he started selling real estate, a venture
he enjoyed and one in which he was successful.
[9] In 1967, Mr. Sevy entered an
arrangement with a riding club in Penticton that they would use
the Penticton property for maintaining the horses and trail
riding, in exchange for covering the taxes and helping with
mending fences. In the same year, Mr. Sevy moved back on to the
Kettle River Valley ranch and continued his farming activities,
though in 1967 and 1968 the price for beef meant the situation
was not "financially great", as Mr. Sevy put it.
[10] During the years 1965 to 1971, Mr. Sevy
continued to run his ranch in the Kettle River Valley, haying,
fencing and breeding cattle. He maintained that 50% of his time
went into the operation though three-quarters of his energy was
devoted to the farm. Any excess funds from his life insurance
business would be put into the farm.
[11] In 1968, Mr. Sevy moved to Osoyoos,
working on odd jobs to make ends meet. He leased the ranch
property out over the next couple of winters though he continued
to personally work the ranch. He was still attempting to
commercially run the ranch and did not want to lose any range
rights. About two-thirds of Mr. Sevy's time was in
Osoyoos and one-third at the ranch. In 1970, he briefly worked in
the United States. In 1971, Mr. Sevy indicated there was not as
much going on other than maintenance and getting the hay in,
though he clung to the feedlot plan, continuing to seek
financing.
[12] Mr. Sevy summarized his ranching
activity as being all-year round when he actually lived at the
ranch - thousands of hours. When not living at the ranch, he
would still spend 600 to 1,000 hours running the operation. The
activities on the ranch included:
- replacing roofs;
- levelling land;
- digging out
waterholes;
- breeding cattle;
- haying;
- building sheds;
- felling trees and
opening lands;
- fencing;
- repairing
machinery;
- getting in water;
and
- setting up septic
system.
[13] In 1981, Mr. Atwood had some financial
difficulties which led to his creditor taking over his one-third
interest in the Penticton property. This required a subdivision
of the 42 acres, resulting in Mr. Sevy holding just the 13.6
acres of the Penticton property in issue. In 1993, Mr. Sevy sold
the 13.6 acres for $600,000.
Analysis
[14] The legislation at issue in this appeal
is the definition of "qualified farm property" found in
subsection 110.6(1) of the Income Tax Act (the
Act), which states as follows:
110.6(1)
For the purposes of this section,
...
"qualified farm property" of an individual
(...) at any particular time means a property owned at that
time by the individual, ...that is
(a) real
property that was used by
(i) the
individual,
...
in the course of carrying on the business of farming in Canada
and, for the purpose of this paragraph, property will not be
considered to have been used in the course of carrying on the
business of farming in Canada unless
(vii) where the property is a
property last acquired by the individual or partnership before
June 18, 1987, or after June 17, 1987 ... the property
... was used by the individual ... principally in the
course of carrying on the business of farming in Canada
(A) in the year the
property was disposed of by the individual, or
(B) in at least 5 years
during which the property was owned by the individual
...
If the property qualifies, it is afforded the favourable
treatment found in subsection 110.6(2) of the Act.
[15] For the Penticton property to qualify
as "qualified farm property", it must have been used by
Mr. Sevy in the course of carrying on the business of farming,
which for purposes of the definition in the Act requires
that the Penticton property was used by him principally in the
course of carrying on the business of farming in at least five
years during which he owned the Penticton property.
Mr. Sevy's counsel argued that the Penticton property
was so used from 1966 to 1971, as it was integrally part of Mr.
Sevy's ranch operation, which he clearly carried on during
those five years. The Respondent argued: first, the Penticton
property was for a separate business, the feedlot business, a
business that was never carried on; second, if the Penticton
property was part of Mr. Sevy's ranch operation, the property
was not used principally in the course of carrying on that
farming operation but was used principally for the riding club;
and third, if it was used principally in the course of carrying
on the ranch operation, such use ended by 1968, so it did not
meet the five-year requirement.
[16] Mr. Sevy was a direct, credible
witness. In his testimony he relived the pain of some earlier
harsher years of his life. His years of ranching could not be
described as a complete success, but success is not the criteria
for determining whether Mr. Sevy was carrying on the business of
farming. He did carry on such a business for a number of years
from the early 1960s to the early 1970s. The Respondent does not
deny this. This is not a case of determining whether the
Appellant was carrying on the business of farming. The issue is
whether the Penticton property was used by Mr. Sevy principally
in the course of his carrying on the business of farming over a
five-year period.
[17] The first issue is which business is
involved. Appellant's counsel argues the Penticton property
is integrally part of Mr. Sevy's overall ranch operation,
notwithstanding its distance from the ranch; that is, there is
only one business of farming being carried on. The Respondent
views the Penticton property as a potential new business, a
feedlot operation, which never progressed to the point of
constituting the carrying on of a business. As such, there was no
carrying on of a business to which the use of the property could
be connected.
[18] Mr. Sevy had a plan, the only plan as
far as he was concerned that would turn a marginal ranching
operation into a successful ranching operation. That plan was to
acquire property closer to the cattle markets, property upon
which the cattle could be readied for market with accessible
feed, primarily corn. Mr. Sevy's greater plan was that
such a feedlot would ultimately attract other ranchers'
cattle. He in fact acquired the property (the Penticton
property), in 1965 and took some preliminary steps to fence the
property and ready it for the greater plan. He continued to look
for appropriate property for corn. He looked for further
financing. He rested some cattle on the property on a couple of
occasions. I am satisfied that the acquisition of the Penticton
property was a natural progression in the evolution of Mr.
Sevy's existing ranching business. I see it more in that
light, than as a whole new separate venture, as the Respondent
suggests.
[19] Having reached the conclusion there was
only one business of farming being carried on, I turn to the
second aspect of the Respondent's argument; that is, even if
the Penticton property is considered part of Mr. Sevy's
ranching operation, it was not used principally in the course of
carrying on that business. This is a very fine distinction of a
turn of words; "use" is required, indeed a
"principal use" is required, suggesting there may be
more than one use to which the property is put. Is raw land
acquired for the only purpose of an extension of an existing
farming operation only "principally used" in that
farming operation when fully operational? This places too strict
an interpretation on "use", and ignores the business
realities of startup or expansion growing pains. I was provided
with just one case which referred to the question of
"use" for the purpose of the definition of
"qualified farm property". In the case of Larsen v.
R.,[1] Justice Beaubier found that the sale of
timber rights was a sale of a capital asset, and further went on
to find that this capital asset was "qualified farm
property" on the basis that cattle "used the timber for
shelter when they pastured on the land". It appears some
minimal use can constitute use nonetheless.
[20] "Use" is defined in the
Canadian Oxford Dictionary as follows: "to employ something
for a particular purpose". This denotes two elements: an
actual employment of something and a purpose. How is real
property employed? As illustrated by the Larsen case, the
property was employed simply by existing, as the simple existence
of the timber provided shelter. Certainly, land that is worked by
harrowing, seeding and growing is employed. But land tendered as
collateral is likewise employed, not by any physical activity on
the land but by its very existence. In Mr. Sevy's situation
there was both the active and passive elements of use; the active
being the mending of fences and the pasturing of cattle. There
was also a passive element - Mr. Sevy's efforts to raise
funds. He was not just attempting to raise money on the strength
of a dream, but on the strength of actually owning this
appropriate piece of property. Though this "use" may
seem minimal, there was no other use, and consequently even a
modicum of use constitutes actual employment of the land.
[21] I turn to the second element of
"use" - purpose. What was the purpose of the Penticton
property? The Respondent suggests the answer is that it was to
operate a feedlot. There was a broader way of defining the
purpose, and certainly one which Mr. Sevy emphasized; that is, to
make the ranch financially viable. If that is what the property
is intended for, lack of success in achieving financial viability
does not negate that intention.
[22] Mr. Sevy required some considerable
funding to fully implement his plan for the Penticton property -
funding he was never able to obtain. But he did what he needed to
do to keep the prospects alive: he fenced the property, he
obtained assistance from a riding club to mend fences and to
defray certain costs, he continued to seek out financing, he
continued to look for property to grow corn and he sold a part of
the property in 1966 to obtain funds. These activities convince
me that the Penticton property was, for some period of time,
principally used in Mr. Sevy's carrying on of his farming
business, albeit in the developmental stage of this aspect of his
ranch. There was no other use: there was no speculative
objective. There was an intention that the Penticton property be
used in the ranching business, a plan that the Penticton property
be used in the ranching business, steps taken to implement that
plan and no other use for that property. I conclude that the
Penticton property's principal use could only have been in
the course of Mr. Sevy carrying on the ranching business.
[23] This leads to the last contention of
the Respondent, that Mr. Sevy has not proven this principal use
continued for the requisite five-year period. The activities
described of fencing, planting, clearing, resting cattle on the
property and raising funds through selling part of the property
all took place in 1966 and 1967. In 1968, Mr. Sevy lived off the
ranch; in 1970, he briefly worked in the United States. He
testified that even when he was not living on the ranch he
devoted considerable hours to it, though acknowledged that in
1971, there was not much going on other than maintenance and
getting hay in. His testimony for the years 1969 to 1971 appeared
to address more the activities on the main part of the ranch,
rather than on the Penticton property, though I find he did
continue to seek financing for his expansion plans into the early
1970s. I find the activity with respect to the Penticton property
lessened from 1967 to 1971, though I also find Mr. Sevy was still
carrying on the business of farming over that period of time.
[24] Having found that the Penticton
property was being used principally in the course of carrying on
the business of farming for some period of time, I must ask
whether the Penticton property stopped being used before 1971 for
that purpose. If so, it cannot be found to be qualified property.
On balance, I accept Mr. Sevy's evidence that some
activity, mending fences for example, continued throughout a
five-year period and that efforts to rely on the Penticton
property to obtain financing to implement his expansion as
planned likewise continued, likely until 1973, when Mr. Sevy
discovered his family fortunes could be better served in pursuing
an alternate career plan. I consider the Penticton property was
used, and it was used principally in the course of carrying on a
farming business and such principal use continued for the period
from 1966 to 1971.
[25] The appeal is allowed on the basis that
the Penticton property was "qualified farm property".
Costs to the Appellant.
Signed at Ottawa, Canada, this 20th day of September,
2004.
Miller J.
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