Date: 19990819
Docket: 98-271-IT-I
BETWEEN:
WILLIAM JOSEPH FITZPATRICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Watson, D.J.T.C.C.
[1] This appeal was heard in Regina, Saskatchewan on August 5,
1999 under the Informal Procedure.
[2] In computing income for the 1993, 1994 and 1995 taxation
years, the appellant deducted the amounts of $16,316.63 and
$12,438.09 as farm losses for the 1993 and 1994 taxation years
respectively and $8,750.00 for 1995 as a farm loss pursuant to
subsection 31(1) of the Income Tax Act (the
"Act") as follows:
1993
1994
Income:
Canadian Wheat Board Payments: $
952.24 nil
Rebates 339.98
nil
Total Income $ 1,292.22
$ nil
Expenses:
Forage $ 401.25
$ nil
ContractWork/Seed
Cleaning
nil 348.50
Machinery 2,946.71
2,891.35
Motor Vehicle
1,127.44 434.85
Fence Repairs
nil 125.50
Containers/Twine/Bailing
Wire
nil 480.07
Small Tools
244.79 324.78
Insurance
412.00 nil
Accounting/Legal/Office
128.31 391.63
Telephone/Electricity/Heating
1,681.11 2,281.12
House
579.84 nil
Water
67.93 nil
Capital Cost Allowance (CCA) 9,434.82
3,366.33
Interest
191.92 1,050.78
Property Taxes 392.73
743.18
Total Expenses: $17,608.85
$12,438.09
Net Loss ($16,316.63)
($12,438.09)
1995
Income: ________
Rebates $ 476.12
Total Income $ 476.12
Expenses:
Pesticides $ 341.71
Machinery 4,396.20
Motor Vehicle 1,044.36
Building and Fence Repairs 1,626.13
Small Tools 32.47
Insurance/NISA ACS 559.00
Accounting/Legal/Office 333.75
Telephone/Electricity/Heating/ 1,782.42
Water 113.85
Capital Cost Allowance (CCA) 9,383.96
Interest 2,942.93
Property Taxes
195.88
Total Expenses: $22,752.66
Net Loss ($22,276.54)
Allowable Farm Loss ($ 8,750.00)
Restricted Farm Loss ($13,526.54)
[3] In reassessing the appellant for these three taxation
years, the Minister of National Revenue (the
"Minister") disallowed the deduction of these losses,
making the following assumptions of fact:
"(a) the facts admitted and stated supra:
(b) during the 1992, 1993, 1994, 1995 and 1996 taxation years
the Appellant was employed on a full-time basis and received
employment income for each year as follows:
Year Employment Income
1992 $27,480.00
1993 19,278.00
1994 24,519.00
1995 38,609.00
1996 31,813.00
(c) the Appellant carried on the business of farming on a
full-time basis up to 1988;
(d) in 1988, the Appellant sold a portion of the land on which
he was farming and commenced to be employed;
(e) the Appellant became bankrupt in 1991;
(f) subsequent to the bankruptcy, the Appellant reacquired,
for $20,000.0, 40 acres of land previously owned by him and which
contained his residence and some surrounding buildings;
(g) subsequent to the bankruptcy, the Appellant commenced the
activity of growing and baling alfalfa (the "Activity")
on that portion of the 40 acres of land that was not covered by
the yard site, including the surrounding buildings and
corrals;
(h) the Appellant reported the following losses from the
Activity in the 1991 and 1992 taxation years:
TAXATION GROSS NET
YEAR INCOME EXPENSES LOSS
1991 $ 687.00 $ 8,087.00 ($ 7,400.00)
1992 4,694.00 18,288.00 ( 13,594.00)
(i) the Appellant reported the following loss from the
Activity in the 1996 taxation year:
TAXATION GROSS NET
YEAR INCOME EXPENSES
LOSS
1996 $1,850.00 $5,851.00 ($4,001.00)
(j) during the years under appeal, the Appellant did not take
any steps or make any plans to develop or expand the Activity,
nor has he taken any steps to do so since that time;
(k) the amount of land used by the Appellant in the Activity
is not large enough in order to allow the Appellant to generate
sufficient gross income to cover the expenses incurred;
(l) the Appellant did not have a reasonable expectation of
profit from the Activity during the 1993, 1994 and 1995 taxation
years;
(m) the expenses claimed in relation to the Activity were
personal or living expenses of the Appellant."
[4] At the hearing, counsel for the appellant admitted
paragraphs (b), (c), (e) and (g) to (i); he denied paragraphs
(d), (f) and (j) to (m).
[5] The issue before the Court is whether the appellant had a
reasonable expectation of profit from the activity in the 1993,
1994 and 1995 taxation years.
[6] The appellant has the burden of establishing on a balance
of probabilities that the Minister's reassessment was
ill-founded in fact and in law.
[7] The appellant was the only witness at the hearing and he
clearly demonstrated that he had acted in good faith at all times
in relation to his farming activities in the years in issue
relying on the advice received from his accountant.
[8] The appellant has been farming since he was 12 years old
on land owned by his grandfather, father and finally which he
inherited in 1959. In 1985 and 1986, due to financial
difficulties he transferred all the land to the Farm Credit
Corporation ("FCC"); in 1998 he bought back
approximately 40 acres from the FCC for $20,000.00 and he leased
the remaining portions from 1988 to 1990. The financial
difficulties continued until they led him to bankruptcy in May of
1991. In 1988, the appellant started full-time employment at
Valley View Centre as a maintenance welder. After his discharge
from bankruptcy in 1992, he seeded the usable portion of his land
with alfalfa and performed custom work for other farmers in the
area. In 1991 he was diagnosed as having sleep apnea which sapped
much of his energy. With the combination of his full-time
employment, limited capital and medical problem, he was able to
devote relatively little time to the alfalfa crop. Because of bad
weather, weeds, germination problems, the farming operation was
pretty much of a disaster. He and his wife lived in the farm
house located on his 40 acres and quite a few of the expenses
claimed were admittedly personal expenses, such as taxes, fence
repairs, telephone, electricity, heating, house repairs, water,
etc.
[9] Available records for the six years from 1991 to 1996 show
the total revenue from alfalfa sales and the outside custom work
was approximately $8,000.00, expenses of approximately $80,000.00
resulting in net losses totalling approximately $70,000.00.
During the three years in issue, the total revenue was
approximately $1,500.00, with expenses of approximately
$52,000.00, resulting in a net loss totalling approximately
$50,000.00.
[10] There is extensive case law on this type of appeal. A
reasonable expectation of profit is an objective test and not
just a fanciful dream. The objective test includes an examination
of profit and loss in past years; the operational plan and the
background to the implementation of the plan including the course
of action; an examination of the time spent on the activity as
well as the background of the taxpayer, including his education
and experience; the time required to establish the intended
business; the presence or absence of ingredients leading to
profits; and the cause of the losses and flexibility to make
adjustments in the face of losses.
[11] In the case of Moldowan v. R., [1978] 1 S.C.R.
480, Mr. Justice Dickson stated as follows:
"Although originally disputed, it is now accepted that in
order to have a "source of income" the taxpayer must
have a profit or a reasonable expectation of profit. Source of
income, thus, is an equivalent term to business: Dorfman v.
M.N.R., [1972] C.T.C. 151; 72 DTC 6131. See also paragraph
139(1)(ae) of the Income Tax Act which includes as
"personal and living expenses" and therefore not
deductible for tax purposes, the expenses of properties
maintained by the taxpayer for his own use and benefit, and not
maintained in connection with a business carried on for profit or
with a reasonable expectation of profit. If the taxpayer in
operating his farm is merely indulging in a hobby, with no
reasonable expectation of profit, he is disentitled to claim any
deduction at all in respect of expenses incurred.
There is a vast case literature on what reasonable expectation
of profit means and it is by no means entirely consistent. In my
view, whether a taxpayer has a reasonable expectation of profit
is an objective determination to be made from all of the facts.
The following criteria should be considered: the profit and loss
experience in past years, the taxpayer's training, the
taxpayer's intended course of action, the capability of the
venture as capitalized to show a profit after charging capital
cost allowance. The list is not intended to be exhaustive. The
factors will differ with the nature and extent of the
undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74
DTC 6193. One would not expect a farmer who purchased a
productive going operation to suffer the same start-up losses as
the man who begins a tree farm on raw land."
[12] In the case of Landry v. The Queen, 94 DTC 6624,
Décary J. stated as follows:
"There comes a time in the life of any business operating
at a deficit when the Minister must be able to determine
objectively, after giving someone a head start for a number of
years, as the case may be, that a reasonable expectation of
profit has turned into an impossible dream. As Mr. Justice Pigeon
noted in Deputy Minister of Revenue (Que.) v. Lipson:[1]
... The only evidence submitted was as to the expectations
they had on signing the lease, but these expectations were not
realized, and the factors which caused the losses in the first
three years were still present when the lease was renewed. No one
could therefore imagine that a loss would not be incurred ...
Apart from the tests set out by Mr. Justice Dickson, the tests
that have been applied in the case law to date in order to
determine whether there was a reasonable expectation of profit
include the following: the time required to make an activity of
this nature profitable, the presence of the necessary ingredients
for profits ultimately to be earned, the profit and loss
situation for the years subsequent to the years in issue, the
number of consecutive years during which losses were incurred,
the increase in expenses and decrease in income in the course of
the relevant period, the persistence of the factors causing the
losses, the absence of planning, and failure to adjust. Moreover,
it is apparent from these decisions that the taxpayer's good
faith and reputation, the quality of the results obtained and the
time and energy devoted are not in themselves sufficient to turn
the activity carried on into a business."
[13] Having regard to all the circumstances of this appeal,
including the testimony of the witness and the admissions in the
light of the well-established case law, I am satisfied that the
appellant has failed in his onus of establishing on a balance of
probabilities that he had a reasonable expectation of profit in
the 1993, 1994 and 1995 taxation years in relation to the
operation of his farm. Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 19th day of August 1999.
"D.R. Watson"
D.J.T.C.
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