Robillard v. The Queen, docket 2000-3861-IT-I (Informal Procedure)

Date: 20010525

Docket: 2000-3861-IT-I

BETWEEN:

PIERRE ROBILLARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Tardif, J.T.C.C.

[1]            These are appeals for the 1995, 1996, 1997 and 1998 taxation years. After being sworn in, the appellant admitted a number of facts assumed in the Reply to the Notice of Appeal (the "Reply") in making the reassessments.

[2]            Given that the admissions provide a fairly clear idea of the nature of the appeals, they should be reproduced:

[TRANSLATION]

(a)            the appellant has been a full-time professor in the physical education department at Collège de Sherbrooke for nearly 25 years;

(b)            the appellant owns a completely wooded piece of land of approximately 23.8 acres on which he built his residence in the late 1970s;

(c)            the sugar maple is the main species of tree on the woodlot;

(d)            in 1986, the appellant began to set up sugar bush facilities, and requested a review of his income return for the 1991 taxation year in order to claim a farm loss for the first time;

...

(l)             the appellant having no record of sales, the Minister therefore estimated notional income:

(i)             the number of taps may have varied from the start of his operation and are estimated to be approximately 1,000;

...

(m)           during the years in issue, the appellant did not hire employees;

(n)            from 1995 to 1997 inclusive, the appellant acquired a truck and a used backhoe for a total of $31,832;

...

[3]            In his testimony, the appellant regularly and constantly referred to the years 1999, 2000 and 2001. On a number of occasions, I told him that the appeals concerned 1995, 1996, 1997 and 1998, not 1999, 2000 and 2001.

[4]            For and during the years in issue, the appellant explained that he had attended seminars and various training and information sessions on maple production. He also mentioned that each year he had sent a circular to various schools offering to go to those schools with his material to introduce students to maple products thus, developing a new market and outlet for his production of maple syrup and by-products.

[5]            Lastly, he said that he had made a number of trials and attempts to develop a new product, which consisted in coating an apple in maple sauce.

[6]            The evidence showed that the appellant had previously been audited. At that first audit, it was found that the potential for realizing a profit in the future was very slim but theoretically realistic, if the appellant carried out his various plans.

[7]            Since the initiative was brand new and the appellant appeared optimistic and enthusiastic, even though this was not his main activity, the auditors believed that he should be given a chance, and rightly so.

[8]            In 1991 and 1992, there were genuine opportunities for expansion through increased production given the potential access to a larger quantity of raw materials.

[9]            The appellant's sugar bush was not being operated at full capacity at the time. In addition, his immediate neighbour owned several thousands of maple trees that were not tapped thus, creating sizable potential for expansion and significantly greater income.

[10]          These were very relevant factors since the appellant had therefore told the auditors that he could eventually double the number of taps on his own land and operate the many maple trees on his neighbour's land adjacent to his own.

[11]          Both cases involved a situation, which, once set up, had direct, rapid and significant effects on potential income and, consequently, on enhanced profit opportunities.

[12]          However, nothing was done in that respect. The appellant never improved or developed his plan so as to gain access to larger quantities of raw material (maple sap). He never implemented his plan in whole or in part; he always operated with the same number of taps.

[13]          Instead he chose to get involved in searching for new markets and products, to the detriment of production, since production capacity never increased.

[14]          For the periods in issue, the appellant could not hope to earn greater than $5,000 in income, even in ideal conditions. Generating that income implied having a good season, with sales at an excellent price of approximately $35 a gallon of syrup. In other words, to earn approximately $5,000 in total income, all conditions had to be met to the best possible degree.

[15]          If such conditions were in fact met, the income was not even sufficient to cover overhead, which was significantly higher. The evidence showed that the ideal conditions never materialized, since revenue for the years in question was $600 in 1995, $2,560 in 1996 and $3,500 in 1997.

[16]          Thus, for 1995, 1996, 1997 and 1998, the appellant never enjoyed ideal conditions. In fact, actual income did not even reach half of potential income. For that same period, expenses were $17,950, $11,809 and $11,486. It therefore appears from the evidence that, even in the best conditions, income could not have covered expenses.

[17]          Thus, maximum production sold at a price considered very good was not sufficient to meet overhead, as a result of which there clearly could be no reasonable expectation of profit.

[18]          Furthermore, the revenue and expenditure figures hereunder for 1991 to 1997 speak for themselves:

[TRANSLATION]

                Evaluation - Reasonable Expectation of Profit

                The gross revenue and farm losses reported by the appellant from the sugar bush operation were as follows during the 1991 to 1997 taxation years:

                                Year                                         Revenue                                 Expenditure

                (i)               1991                                            $ 900                                 $ 15,000

                (ii)              1992                                           $ 3,518                                 $ 15,000

                (iii)             1993                                           $ 1,250                                 $ 12,506

                (iv)             1994                                           $ 1,200                                 $ 17,738

                (v)              1995                                            $    600                                 $ 17,950

                (vi)             1996                                           $ 2,560                                 $ 11,809

                (vii)            1997                                           $ 3,500                                 $ 11,486

                                                                                 $13,528                                 $ 101,489

[19]          During the period of 1995, 1996, 1997 and 1998, the main purpose of the business was to produce maple syrup and sell by-products or processed products made from maple sap, the raw material that was obtained. During that same period, the number of taps never increased, the market conditions were relatively stable with regard to the price obtained for maple products and the only unknown was that production could vary from one year to the next.

[20]          Maximum production capacity and resulting revenue were determined on the basis of data published by the Association des acériculteurs, which data the appellant wholly subscribed to as being realistic, reasonable and valid. This admission by the appellant amounts to an express recognition of the limits and constraints of his maple sap production capacity.

[21]          Thus, until the end of 1998, the appellant could not hope to make profits since it was mathematically impossible to meet overhead, having regard to production limits and constraints. The evidence showed that no initiative was taken to reach an agreement with his neighbour enabling him to gain access to more maple trees and thus, to more raw material. Furthermore, the appellant stated that he did not want to overexploit his sugar bush.

[22]          In summary, for the years in issue, not only was there no reasonable expectation of profit, there was simply no chance, no matter how small, of any profit whatever.

[23]          Furthermore, the appellant in a way admitted this fact and acknowledged failure. He in fact admitted that he had stopped tapping his maple trees and ceased all operations relating to the processing of maple sap, to the point where the place commonly referred to as the "sugarhouse" is now used for purposes wholly unrelated to the operations required to process maple sap.

[24]          As a result of his retirement as a CEGEP teacher and having much more time available, the appellant admitted that he had realized a number of things, in particular, that his maple sap production would never be profitable, having regard to the prices of products, marketing conditions and uncertain weather conditions directly affecting the quality and quantity of the raw material. He thus realized that it was simply impossible to hope for any surplus whatever in light of the limits and his maximum production capacity. He therefore made a drastic change by focusing all his energy on the processing of maple products resulting from the production of other maple growers. He thus completely and utterly abandoned maple sap production and its immediate processing and got involved in value-added products.

[25]          He understood that there was much more opportunity in the processing of maple syrup than in its production. He described his new undertaking at length, with enthusiasm and conviction, and explained that based on his initial efforts, there were very significant and realistically encouraging opportunities.

[26]          The figures provided with respect to progress or development also satisfied the Court that the appellant henceforth had good reasons to expect profitability in the near future. However, the point at issue does not concern the situation prevailing since 1999 at all but essentially the years 1995, 1996, 1997 and 1998.

[27]          The activities during those periods were in no way similar or connected to those which are now promising. They were essentially activities limited to maple sap collection and processing, making the appellant an agricultural producer. The Honourable Judge Tremblay of this Court has previously ruled on the matter of a business which alters its purpose or type of economic activity. In A. Gagné Construction Ltée v. Minister of National Revenue, [1992] T.C.J. No. 278, (Q.L., paras. 4.03.9(4) et seq.), he writes:

Are we to consider profitability in the years in issue only, i.e. from 1979 to 1983, or must we also consider the subsequent years?

I am of the opinion that we must consider the source of income that existed in the years in issue and find its effects in the subsequent years.

Income tax is a yearly matter, and so we must first consider the facts as they existed in each of the years in issue. We must then ask whether the organization or structure of the source of income which existed at that time produced profits in the subsequent years. Was there a potential source of income which was reflected in later years? Or do we find profitability in subsequent years arising from an organized source of income which already existed in the years in issue?

In the years in issue, the source of farm income was cattle raising. We know that during that period, from 1979 to 1983, except for a small profit in 1980, the other years showed losses, as had the preceding years since 1972 as well, except for 1974 (3.17).

We know that after the failure of the auction sale in 1982 and the contributing economic crisis, Ranch Lougami started to reduce its inventory and to look for another source, which was found and put into operation in 1984 and 1985: the testing station (3.12 to 3.15).

It is clear from the evidence that while the testing station, as it was organized, did not produce outrageous profits, it nonetheless provided an attractive and stable income (3.13, 3.14, 3.15). I would even say "significant profits" as that expression was used in Morrissey (4.03.8(5)) and Mohl (4.03.8(6)). With the evidence adduced concerning the intention to change the source and the evidence concerning investment, salaries and the distinctions made above (4.03.9(1), (2) and (3)), the Court would find it easy to allow all of the farming losses in 1985 and 1988 (3.14).

In 1985, the new source was already potentially present when it was first organized. Moreover, the start-up expenses would be fully justified.

In my opinion, because of the new case law by which this Court is bound, the losses in the years in issue must be considered as restricted losses.

[28]          To determine whether a taxpayer has put the main elements in place to achieve future profitability in any business, it is important to consider the matter at the time it occurred. It may be worth considering the subsequent years for guidance, but the evidence must focus mainly on the period at issue since, at that time, what the future holds is not known and cannot be determined. In other words, it is easy to draw conclusions for a given period based on results obtained in periods subsequent to the period being examined.

[29]          Determining whether a business had or must have had a chance of becoming profitable for a specific period calls for a consideration of a number of factors, in particular, whether capitalization and the amount of time devoted to the activity were sufficient, whether there was a business plan, a progress plan for activities, planning of all operations, and a rational and realistic assessment of estimated expenses and revenue.

[30]          These factors must be present, available and accessible from the inception of the business or as soon as possible thereafter. Certain aspects may compensate for others. For example, a very high degree of availability may mean that less capital is required. A very high degree of availability may also reduce the impact of a lack of thorough knowledge.

[31]          An undertaking based essentially on chance, hope, continuous ideal conditions, unrealistic growth, a lack of involvement and so on is much more a game or hobby than an actual business. There may of course be businesses that are essentially speculative in nature, but here again, certain rules must apply.

[32]          In the instant case, the appellant was involved in maple production. He had the time and talent to learn the secret of this highly specialized form of production. He acquired land on which there were several hundreds of sugar maples. He invested time and money to make the operation functional in terms of collecting maple sap and processing it in the form of syrup, taffy, maple sugar and various by-products.

[33]          He took certain initiatives, including offering various schools taffy tastings on snow directly in the school yards. He also tried to develop a maple sugar apple, that is to say, an apple dipped in a kind of maple sauce.

[34]          All these initiatives resulted in very modest, indeed even ludicrous revenue, compared to expenses, a fact that is very clear from the table reproduced above.

[35]          The appellant contends that this was a genuine business. What is in fact surprising is that, throughout this period, the appellant never kept any record of his revenue. His reason for this was that no one in the field keeps such records. Although this is not decisive, it is certainly an indicator confirming the secondary and marginal aspect of the activity. The appellant was involved in this area of activity and had certain honourable concerns such as not overexploiting the resource and promoting the product. He kept track of all expenses, to which expenses of a strictly personal nature were even added, but did not have any administrative discipline when it came to revenue, which moreover was very minimal.

[36]          According to the appellant, he was not required to keep such a record since, in his view, maple growers do not do so. Such excuses are clearly not admissible and show that the appellant's concern over expenses was significant and minimal over revenue. It was shown on the balance of evidence that the appellant invested a great deal of energy and interest in developing an expertise in maple growing. He did so with enthusiasm and passion and devoted himself to it much more as a hobby than as an actual business in which revenue must be as important a consideration as expenses, the objective being that it exceeds expenses as quickly as possible.

[37]          The appellant therefore did not show on the balance of evidence that he was or would be entitled to make profits based on the existing data for the years in issue.

[38]          Therefore, the appeals must be dismissed.

Signed at Ottawa, Canada, this 25th day of May 2001.

"Alain Tardif"

J.T.C.C

Translation certified true on this 3^rd day of January 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

2000-3861(IT)I

BETWEEN:

PIERRE ROBILLARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on March 12, 2001, at Sherbrooke, Quebec, by

the Honourable Judge Alain Tardif

Appearances

For the Appellant:                                                                 The Appellant himself

Counsel for the Respondent:                              Dany Leduc

Judgment

                The appeals from the assessments made under the Income Tax Act for the 1995, 1996, 1997, and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 25th day of May 2001.

"Alain Tardif"

J.T.C.C.

Translation certified true on this 3^rd day of January 2003.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]