[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC493
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Date: 20040709
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Dockets: 2000-4205(IT)G
2000-4208(IT)G
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BETWEEN:
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LÉO PERRON,
JEANNETTE PERRON,
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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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REASONS FOR JUDGMENT
Lamarre Proulx, J.
[1] These appeals were heard on common
evidence. They concern farming losses related to the operation of
a racehorse breeding farm for 1995 and the lease of horseboxes
for 1996, 1997 and 1998.
[2] The issue is whether the
Appellants were class 1 or class 2 farmers. They were assessed as
belonging to class 2. They would like to belong to class 1.
[3] The concept of farmer classes in
application of the Income Tax Act (the "Act") was
formulated by Dickson, J. of the Supreme Court of Canada in
Moldowan v. Canada, [1978] 1 S.C.R. 480, at
pages 487 and 488, as follows:
16 In my opinion, the Income Tax
Act as a whole envisages three classes of farmers:
(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.
(2) the taxpayer who does not
look to farming, or to farming and some subordinate source of
income, for his livelihood but carries on farming as a sideline
business. Such a taxpayer is entitled to the deductions spelled
out in s. 13(1) in respect of farming losses.
(3) the taxpayer who does not look
to farming, or to farming and some subordinate source of income,
for his livelihood and who carries on some farming activities as
a hobby. The losses sustained by such a taxpayer on his
non-business farming are not deductible in any amount.
[4] The abovementioned s. 13(1) is now
s. 31(1) of the Act.
[5] The Appellants' witnesses were
Charles Perron, Johanne Perron and the Appellants. The Auditor,
Robert Larochelle, testified for the Respondent.
[6] Charles Perron stated that in
1968, his father, Léo Perron, partnered with another
person to operate a wholesale company selling equipment,
accessories and oil heating products under the name Chauffage
Premier Inc. At the time, Mr. Perron owned 50% of the shares
of the capital stock. In 1986, he bought out the shares of his
associate who wanted to retire.
[7] Charles Perron began working
for the company in 1984. He was 20 years old. After his father
acquired the shares of his associate in 1986, Charles explains
that it was he who was increasingly in charge of the company. He
is now the manager. The company has between 150 and 175 clients
and serves an area that extends from St-Jérôme
to Ste-Hyacinthe.
[8] The witness stated that in 1988,
his parents acquired horses and that his father began to come
into the company offices less often. His father is still the
majority shareholder. He holds 99% of the shares. He continued to
act as administrator of the company but participated less and
less in daily operations. On the administrative side, his father
sometimes verified the accounts receivable and it was he who
determined the salary amounts for 1995 and 1996 and the dividend
amounts for 1997 and 1998.
[9] However, the two people who could
sign the cheques were Charles and his sister Johanne.
[10] Charles Perron also stated that
from 1986 to 1989, his mother, Jeannette Perron, did the
bookkeeping up until it became necessary for the company to
convert to computerized systems. Johanne Perron, the Appellants'
daughter, who was very computer literate, then began to work for
the company. She took over her mother's duties and performed many
others. She worked for the company full time.
[11] In her testimony, the Appellant, Ms.
Perron, stated that she and her husband had owned horses since
1988. In 1990, they bought a farm in Ste-Rosalie: a farm
that had been unoccupied for five years but which had been a
horse breeding farm. The house and buildings were fixed up and
they moved there in 1991.
[12] Jeannette Perron confirmed that
she did not return to work for the company after 1989. She helped
her husband at the stable. They worked together. Their son Yves
and another employee helped with the breeding and training of the
horses until 1996.
[13] She stated that in the beginning, the
Appellant, Mr. Perron, went to the company offices once or twice
a week. Then, it was once or twice a month.
[14] The Appellants had a business plan.
They pictured two horses racing each week and winning on average
$1,000 in prize money per week. In 1988, one of their horses had
won a $15,000 purse. The races take place during eight months of
the year and there is an average of 25 races per year.
[15] However, things did not go as planned.
Ms. Perron stated that the couple's savings were swallowed up in
the operation of the farm including all of Mr. Perron's
RRSPs and most of hers. She said that they were unlucky with
their horses who suffered from diseases and lameness. They did
not sell well at auction.
[16] The facts related by Johanne Perron
were the same. She stated that when she took maternity leave in
1996 and 2000, the company hired someone to replace her. It was
not her mother who replaced her.
[17] Léo Perron confirmed that
Charles' role in the heating products venture had grown over the
years. He explained that his day at the farm begins at
6:00 a.m. He has to groom the horses, train them, run the
grader over the half-mile training track, repair the fences, etc.
It is a seven-day-a-week job, with long days and countless hours.
He could end up spending a night with a mare during delivery.
[18] In 1996, he began to take in boarders
for $8 a day and some haying.
[19] Mr. Perron mentioned that the farm
had just been sold to Yves St-Jacques, a former farm
employee.
[20] There was not really any
cross-examination on the Appellants' use of time. The
cross-examination mainly dealt with the company's profit
potential.
[21] Robert Larochelle, an Auditor,
stated that he spent 3 days at the Appellants' farm from
September 29, 1992. Mr. Perron allegedly told him that he was
going to the offices of Chauffage Premier Inc. two or three times
a week and that sometimes he made deliveries on the Rive-Sud.
[22] The witness said that he applied
section 31 of the Act because the farm was not Mr. Perron's only
use of time. He also considered the farm's lack of profitability,
although for the purposes of section 31, he deemed that the
company had a reasonable expectation of profit.
[23] Counsel for both parties referred to
the Supreme Court decision in Moldowan in addition to some
other decisions including the Federal Court of Appeal decision in
Canada v. Donnelly, (C.A.) [1998] 1 F.C. 513
(Q.L.).
[24] I will refer to that decision in which
parts of paragraphs 8, 9, 11, 12, 20 and 21 read as
follows:
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. ...
9 In
summary, the cumulative factors of capital committed, time spent
and profitability will determine whether farming will be regarded
as a "sideline business" to which the restricted farm loss
provisions apply. ...
...
11 With respect to
time spent, I am not persuaded that the taxpayer changed
occupational direction in 1980 such that medicine became a
sideline to his farming endeavour. ...
12 Any doubt as to
whether the taxpayer's chief source of income is farming is
resolved once consideration is given to the element of
profitability. There is a difference between the type of evidence
the taxpayer must adduce concerning profitability under section
31 of the Act, as opposed to that relevant to the reasonable
expectation of profit test. In the latter case the taxpayer need
only show that there is or was an expectation of profit, be it $1
or $1 million. It is well recognized in tax law that a
"reasonable expectation of profit" is not synonymous with an
"expectation of reasonable profits". With respect to the section
31 profitability factor, however, quantum is relevant because it
provides a basis on which to compare potential farm income with
that actually received by the taxpayer from the competing
occupation. In other words, we are looking for evidence to
support a finding of reasonable expectation of "substantial"
profits from farming.
...
20 As is well known,
section 31 of the Act is aimed at preventing "gentlemen" farmers
who enjoy substantial income from claiming full farming losses:
see Morrissey v. Canada, supra, at pages
420-423. More often than not it is invoked in circumstances where
farmers are prepared to carry on with a blatant indifference
toward the losses being incurred. The practical and legal reality
is that these farmers are hobby farmers but the Minister allows
them the limited deduction under section 31 of the Act. Such
cases almost always involve horse farmers who are engaged in
purchasing or breeding horses for racing. In truth, there is
rarely even a reasonable expectation of profit in such endeavours
much less the makings of a chief source of income.
21 It may well be
that in tax law a distinction is to be drawn between the country
person who goes to the city and the city person who goes to the
country. In future, those insisting on obtaining tax relief in
circumstances approaching those under consideration should do so
through legislative channels and not through the Tax Court of
Canada. The judicial system can no longer afford to encourage
taxpayers or their counsel to pursue such litigation in the
expectation that hope will triumph over experience.
[25] It is my opinion that the evidence has
not shown that the Appellants were farmers who were prepared to
carry on with an indifference toward the losses being incurred.
From that point of view, they were not the "gentlemen-farmers"
described in paragraph 20 of the above decision. Over the years,
the Appellants changed the operation of the farm to try to reduce
losses and achieve a certain degree of profitability.
[26] According to Donnelly,
supra, three factors make it possible to determine whether
a taxpayer's chief source of income is farming or a combination
of farming and some other source of income within the meaning of
subsection 31(1) of the Act. Those factors are the capital
committed, the time spent farming in relation to the time spent
on the other source of income and the actual or potential
profitability of the farming activity.
[27] The Respondent did not question the
importance of the capital committed. What the Respondent did
question was the company's profitability. I believe however that
this factor must be considered subsequently to the use of
time.
[28] Contrary to what the evidence showed in
Donnelly, supra, and described in paragraph 11 of
that decision, the Appellants changed their occupational
direction to the point where the breeding and horsebox leasing
venture became their chief activity. The Appellants told the
Auditor and stated at the hearing that almost all of their time
was spent on farming activities.
[29] With respect to the profitability
aspect over which counsel for the Respondent lingered, I refer to
Dickson, J.'s analysis in Moldowan, supra, at pages 486
and 488 :
13 ... The
distinguishing features "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 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 question of fact in the
circumstances.
...
17 ... On the other
hand, a man who changes occupational direction and commits his
energies and capital to farming as a main expectation of income
is not disentitled to deduct the full impact of start-up
costs.
[30] I believe that the Appellants found
themselves in that situation. They changed their occupational
direction and committed their energies and capital to farming in
expectation of significant income.
[31] I therefore find that the Appellants
belong to the first class as described in Moldowan.
Consequently, the appeals are allowed with costs.
Signed at Ottawa, Canada, this 9th day of July 2004.
Lamarre Proulx, J.
Certified true translation
Manon Boucher
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