Date: 20011123
Docket: 2000-4465-IT-I
BETWEEN:
DONALD V. MYLES,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Edited from the transcript of Reasons
delivered orally from
the Bench at Ottawa, Ontario on June 29,
2001.)
Hershfield, J.T.C.C.
[1] This is an appeal of the
Appellant's 1996, 1997 and 1998 taxation years which were
assessed and, in respect of his 1997 and 1998 years, reassessed
by the Minister of National Revenue. Such assessment in respect
of 1996 and such reassessments in respect of 1997 and 1998,
denied losses claimed in those years from certain activities of
the Appellant filed as two distinct businesses, namely, a
professional consulting forestry engineering business and a
farming business that included a woodlot operation. The losses
were denied on the basis of there being no reasonable expectation
of profit from the subject activities. The Appellant also puts in
issue the quantum of depletion allowed in respect of the
woodlot.
[2] The losses claimed were as
follows:
Net income (loss)
1996
1997
1998
Professional
($ 5,432)
($ 4,067)
($ 3,944)
Farming
($ 7,016)
($ 8,005)
($ 5,649)
[3] With respect to the professional
consulting business, the Appellant claimed losses from 1991
through 1998 as follows:
Professional
Gross
Net income
Income
Revenue
Expenses (loss)
1991
$
3,104
$ 10,543
($ 7,439)
1992
-
1,849
($ 1,849)
1993
2,600
4,915
($ 2,315)
1994
1,900
6,860
($ 4,960)
1995
140
10,893
($10,753)
1996
-
5,432
($ 5,432)
1997
-
4,057
($ 4,057)
1998
-
3,944
($ 3,944)
Total
$
7,744
$ 48,493
($40,749)
[4] The business was started when the
Appellant retired in 1991 as a forestry engineer. He was on
pension and was looking for something to do. He thought he could
do consulting. He had an unfinished project at that time and
thought he could turn it into consulting work. He said he
knew the industry and did not have to do any market studies. He
admitted though that after trying in the earlier years to get
some business in the Vancouver area, he did not actively pursue
work. In the subject years he did no marketing and had no plan of
action to derive revenue, let alone profit. Indeed, he testified
that in the later years he figured that the best thing to do was
to get out of the forestry business. The testimony of the
Appellant on the issue of whether there was a business here, a
source of income, has led me to conclude that there was no
commercial activity being carried on. That he was an expert in
his field with commercial potential, if pursued in a commercial
manner, is not sufficient. There must be a genuine commercial
activity with some motivation to profit - to generate
revenues. Such motivation did not exist in the subject years.
[5] Therefore, in accordance with an
abundance of jurisprudence in this area, I find there is no
source of income against which losses can be claimed in this
case. As such, the appeal is denied in respect of the
professional consulting activity.
[6] Turning to the next activity,
which was the farming woodlot activity, the Appellant has
asserted that he carried on a genuine farming business together
with a woodlot operation. He relies on Interpretation
Bulletin IT-373R to support the deductions taken,
particularly deductions in respect of depletion on the woodlot
which the Appellant believes should be higher (according to his
understanding of conversations with someone at Revenue Canada
when he prepared his return for 1997) than the allowance
permitted under the assessment and reassessments. While the
Bulletin has no bearing on the proper application of the
Act, it is hard to see how the Bulletin assists the
Appellant in any event. It clearly sets out an administrative
practice for farming operations that include a woodlot where
income from the woodlot is minor in relation to income from other
farming activities. In this case, as I will elaborate on shortly,
there is no farming or other farming business. Further, the
depletion that the Bulletin purports to allow is in fact the
depletion allowed by the Minister.[1] In any event, the
Appellant, having combined the farming and woodlot activities,
has made segregating the expenses from each such activity
difficult and his evidence was not helpful in this regard.
Isolating incomes from each activity is easier.
[7] In respect of the farming
activity, the income is nominal. The 1996 return showed pasture
rental income of $1,100 (with no revenues from the woodlot).
Expenses claimed were $12,633.96. For 1997, hay revenue was
$300[2]
(woodlot revenues were $17,172). Expenses claimed were $30,982.93
including depletion of $17,172.00.[3] In 1998, hay and pasture
revenues were $300 (woodlot revenues were $14,575.55). Expenses
claimed were $23,675.47 including depletion of $14,558.40.
[8] In question here is a total of 300
acres of which some 100 acres is a woodlot. The balance is
grazing pasture (125 acres) and land under cultivation for the
production of hay (75). The pasture land and the land cultivated
for hay are what the Appellant asserts to be the farming
operation which it seems he feels compelled to argue in order to
bring his woodlot into the administrative practices set out in
the Bulletin. Such linkage is not helpful in this case. The
woodlot stands alone as a distinct business activity in my view
and is entitled to normal business expenses if shown by the
Appellant to have been incurred for the purpose of earning
income. That the Appellant has claimed expenses from a
"farming" business to which he has attached his woodlot
operation should not result in a denial of proper expenses
relating to the woodlot as a separate business.[4] The difficulty
with the Appellant's approach is that he was unwilling or
was unable to provide evidence as to which expenses related to
the farm, i.e. the activity that is not a business and that does
not give rise to expenses deductions, and which expenses related
to the woodlot, i.e. the activity that is a business and does
give rise to expenses deductions. He did not satisfy the burden
of proof, expense by expense, in the matter and seemed to insist
that being a farmer he did not have to allocate expenses between
the "farm" and the "woodlot". This position
was to his detriment and he would not be deterred from it in
spite of being offered an adjournment to afford him time to
properly document appropriate expense claims. His refusal to
accept the need to allocate expenses to the woodlot could have
led to no expenses being allowed. Fortunately for the Appellant,
Respondent's counsel conceded that the Respondent would
accept that certain amounts claimed related to the woodlot.[5] I have
allowed the appeals to that extent.
[9] The history of these operations is
relevant to consider. The subject lands have been in the
Appellant's family for five generations. The Appellant and
his brother inherited the land at a time when it had a nominal
value (in the late 1930s) and more recently (in 1998) he bought
his brother out at a declared value of $20,000.[6] The Appellant said he
wanted to feed his own cattle on the pasture lands and thought he
could do it profitably. He started farm operations in 1987 (at a
loss every year since) and there is no evidence that he ever
raised cattle on these lands.[7] He rents the lands to his neighbour
for his neighbour's cattle for modest amounts. When the
cattle purchases commence, likely the farming business will
commence as well.[8]
[10] I also note that the Appellant lives in
Ottawa. The "farm" is in Quebec. Although he does not
live on the farm he acknowledged his son did during the subject
years. The Appellant also acknowledged that the property was to
be passed on in the family and had to be maintained for that
reason. These are material personal elements that warrant the
application of the reasonable expectation of profit test.
[11] While I accept that the woodlot is a
commercial operation, it is clearly distinct from the farm which
I find not to be a commercial operation in the years in question.
As to any rental business in respect of the pasture lands I am
not satisfied that any expectation of profit in the subject years
would be anything but fanciful. The Crown argued reasonable
expectation of profit in relation to the separate acreage that
did not constitute the woodlot and I agree. The test is the same
as applied in respect of the professional consulting business and
that is: Was there a genuine commercial enterprise being carried
on in the subject years? The activity might be to maintain
property for the future purpose of farming, but there is no
activity here that constitutes a business by the Appellant with
any expectation of profit in the subject years.
[12] What we have left, the woodlot, is the
only actual operation that can be isolated as a commercial
activity and that isolated activity has generated significant
income in two of the subject years. Isolating and proving
expenses in respect of that business is the onus of the
Appellant. His testimony was inconsistent. On the one hand he
maintained he needed roads, fences and improvements to select-cut
the woodlot and on the other hand he maintained he could not
start the cattle operation until these were done. He is
responsible for defending the allocation of expenses. In this
case, the allocations were never made and the Respondent has
properly disallowed them all, except as consented to by the
Respondent during the course of trial.
[13] As to depletion, the reassessments
allowed depletion under Schedule VI of the Regulations for 1997
and 1998. I am satisfied that Schedule VI is the appropriate
schedule to apply and that the depletion allowance allowed has
been correctly calculated by Revenue Canada in accordance with
the Income Tax Act, its Regulations and that Schedule.[9]
[14] Exhibit R-5, showing the calculation of
the Schedule VI allowance, was reviewed in light of the specific
provisions of Schedule VI during the course of the hearing. The
auditor gave evidence for the Respondent as to the source of the
data needed to run the depletion allowance calculations and I am
satisfied with his evidence. The Appellant gave no evidence
contradicting the data used by Revenue Canada (most if not all of
which had been supplied by the Appellant in the first place). The
Appellant simply wanted more "cost" recognition than he
was entitled to under the Act for depletion purposes and
wanted it all up front against the first cords of wood cut and
sold.[10]
[15] I accept that it has taken years of
well managed woodlot operations to yield the revenues achieved in
1997 and 1998 and that there may well be unaccounted for expenses
along the way that have not been recognized. The Appellant argues
he has 40 years of unexpensed property taxes and costs relating
to his selective cutting procedures that he has practiced at
considerable cost without credit in the tax system. He expects
that credit in a depletion allowance that on its own terms gives
no recognition of any such unclaimed expenses (which he has only
talked about but not proven).[11] Perhaps there is room for a broader
definition of "capital cost" used in Schedule VI in
calculating the allowance in these cases but it is for Parliament
to provide same. This Court has no jurisdiction to expand the
Act and its Regulations.
[16] Based on the Respondent's consent
to permit certain expenses claimed in relation to the woodlot
operation, the appeals are allowed as follows: In respect of the
1997 taxation year an additional deduction of $6,319 is allowed
and in 1998 an additional deduction of $2,893 is allowed.
[17] While deductions (other than depletion)
may have been appropriate for 1996 as there was a woodlot
business in that year, even without revenue, none were isolated
or proven by the Appellant so the appeal in respect of 1996 is
dismissed.
Signed at Toronto, Ontario, this 23rd day of November
2001.
J.T.C.C.
[1]
The Bulletin speaks of "depletion" as does the
Appellant as do these Reasons. However, the Schedule VI
allowance referred to in the Bulletin is one permitted under
Regulation 1100 and is, strictly speaking, a capital cost
allowance. However, the Schedule clearly affords a depletion
type allowance in that it allows a deduction of the capital
cost of a timber limit, as timber is removed, on the basis that
each cord in the limit has a pro-rata cost. This
allowance has been given to the Appellant even though he was
not considered to be a farmer in the subject years. This is an
administrative concession, it seems, as the alternative
allowance that might be available, Class 15 of Regulation 1100,
would give less than that afforded under Schedule VI in this
case.
[2]
The Appellant testified that he had pasture lands rental income
in 1997 as well but he apparently failed to report it. This
speaks to the Appellant's record keeping and
credibility.
[3]
It seems the Appellant's idea of depletion was to shelter
woodlot revenues against historical costs. The "capital
cost" is relevant for depletion calculations in Schedule
VI but the Appellant's notion of cost was argumentative.
He offered no documented records of costs to be included for
depletion allowance purposes and was unfamiliar and
unappreciative of the Regulations to the Act which
dictated the amount of the allowance.
[4]Some expenses claimed by the
Appellant, such as a vehicle, were allocated by him as between
personal and business use. Excepting expenses relating to the
woodlot, all such expenses were personal in my view.
5
The Appellant and Respondent's counsel were afforded two
recesses to try to work through which expenses related to which
activity and to sort out any personal expenses. While no
consensus was reached, the Respondent conceded certain expense
deductions relating to the woodlot operation. That no consensus
was reached seemed to reflect the Appellant's
dissatisfaction with the process (i.e. the process of being
asked to allocate expenses and admit that any claimed expenses
were personal) and, more particularly, his dissatisfaction with
the low depletion being recognized. Regardless, evidence
pertaining to a proper allocation of expenses was never brought
before me.
[6]
That is, in respect of 1996 and 1997, there was a nominal cost
associated with the woodlot. There was an addition to cost in
1998. The Appellant, on coming to understand the relevance of
cost, argued that the value of the land at the time of the
acquisition from his brother was higher than declared earlier
to Revenue Canada. He backtracked when advised of the adverse
consequences this could have on the transaction with his
brother. The Appellant's position on this, and on other
matters, puts his credibility at issue.
[7]
His farming loss for 12 consecutive years ranged from $3,400 to
$13,500 and totalled $94,947 over that period. It seems
possible if not likely that some woodlot expenses were claimed
in those years although there is no evidence of that except in
the subject years where clearly expenses like property taxes on
the woodlot were claimed as farming expenses and allowed in the
reassessments.
[8]
Until 1996, Revenue Canada allowed restricted farm losses and
carryovers of prior year's restricted farm losses were
apparently allowed in the subject years as well.
[9]
In determining the correct allowance for a woodlot, if any is
going to be recognized at all, the exercise starts with
determining whether it is a "timber resource
property" as defined in subsection 13(21) of the
Act since the subject schedule does not apply to a
timber resource property. While an expert in forestry, the
Appellant provided no assistance to the Court in categorizing
his woodlot. No evidence necessary to categorize the subject
woodlot was tendered. To be a timber resource property, issues
as to time of acquisition of timber limits and times of
renewals of original rights or licenses must be addressed. In
this case we likely have no timely acquired rights in the sense
used in the definition of timber resource property. The timber
limit in this case seems to arise from the administrative
practice of Revenue Canada to allow "farmers"
Schedule VI treatment. That practice has not been denied the
Appellant even though Revenue Canada has denied that he is a
"farmer". In any event, the Respondent in its Reply
relied on the application of Schedule VI and in doing so
denied that the woodlot in question was a "timber resource
property". Indeed in referring to the Bulletin the
Appellant himself seemed to accept the application of Schedule
VI (incorporated by reference in
Regulation 1100(1)(e)). Alternatively, the
woodlot might fall into Class 15 under
Regulation 1100(1)(f). The auditor, as a witness
for the Respondent, pointed out that this allowance calculated
under Schedule IVwould yield a smaller deduction than
allowed under Schedule VI.
[10] While I do not think it is necessary to
set out the operative provisions of Schedule VI, I do note that
section 1 allows the deduction of the lesser of the amounts set
out in paragraphs (a) and (b). Paragraph
(b) is the UCC of the timber limit. The UCC is the
undepreciated capital cost which was nominal until 1998, so in
1996 and 1997 the allowance would be nominal in both those
years. In fact, the Appellant made no claim in 1996 and was
given $100 as an allowance in 1997 under section 4 of the
Schedule. Section 4 provides for a $100 deduction in lieu of
the section 1 deduction. The $100 deduction would not be
available in 1996 under section 4 as the Appellant had no
woodlot revenues in that year. The formula in respect of 1998
is somewhat more complicated. The theory is straightforward
though. There has been a $20,000 addition to the heretofore nil
UCC. It is therefore necessary to calculate the section
1(a) amount which will define the lower limit of the
allowance for 1998. The 1(a) amount is the aggregate of
the amounts described in (a)(i) and (ii). The latter
(ii) amount refers to specific expenses not incurred in this
case and is "nil". The limit of the allowance is
therefore the amount described in (a)(i) which is that
fraction of the capital cost of the timber limit that exists in
1998 (i.e. in the year acquired in this case) that equals the
fraction of that limit that is sold in the year. The cost of
the limit is $15,000 (cost of woodlot less $5,000 residual
value of land as estimated by the Appellant). The Appellant has
estimated 1,280 cords were on the woodlot at the beginning of
1998, so the cost of the cords sold in 1998 (540.58) relative
to the cost of the cords there at the beginning of the year can
be determined and that is how the allowance for the year under
paragraph (1)(a) of $6,330.92 was calculated. The
allowance has been correctly calculated according to the
information provided by the Appellant.
11 As noted, at least in the subject years,
property taxes were allowed as an expense against the woodlot
operation and prior to 1996 expenses were allowed on a
restricted farm loss basis. The Appellant treated the woodlot
as part of the farm during those years and presumably took into
account his woodlot expenses in calculating his losses in those
years. If he did not or if they were not allowed, it is too
late to seek accommodation through a depletion regulation that
on its terms makes no such accommodation.
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