Date: 19990819
Docket: 97-2609(IT)I
BETWEEN:
EMIL SEBULSKI,
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 4, 1999 under the Informal Procedure.
[2] In computing his income for the
1993, 1994 and 1995 taxation years, the Appellant deducted the
amounts of $4,769.14, $5,966.22 and $6,044.43 respectively in
these taxation years as farming losses and increased the amount
carried forward as farm losses by $2,269.11, $3,466.22 and
$3,544.42 in these years. He calculated his net losses as
follows:
1993
Income
crop
income
1,916.44
rebates &
other
income
1,091.40
total
income
3,007.84
Expenses
property
taxes
1,279.53
machinery
& truck
expense
3,834.70
motor vehicle
expense (farm
share)
618.50
building
repairs
276.26
small
tools
142.31
insurance -
crops, building,
livestock
90.50
accounting,
office,
etc.
287.80
telephone
(farm
share)
421.44
electricity
(farm
share)
232.50
heating fuel
(farm
share)
329.01
custom work
& machine
rental
48.15
clearing or
improving land &
gravel
431.81
capital cost
allowance
2,053.61
total
expenses
10,046.12
Net
Loss
(7,038.28)
Less Increase to Loss Carry
Forward
2,269.14
Loss Claimed on 1993
Return
(4,769.14)
1994
Income
crop
income
2,048.84
rebates &
other
income
888.48
total
income
2,937.32
Expenses
property
taxes
1,549.52
fuel and oil
for machinery &
truck
3,364.12
motor vehicle
expense (farm
share)
963.99
building
& fence
repairs
1,700.00
insurance
-crops, building,
livestock
367.00
accounting,
office,
etc.
145.00
telephone
(farm
share)
706.85
electricity
(farm
share)
634.07
heating fuel
(farm
share)
165.10
custom work
& machine
rental
20.00
other
expenses
531.25
capital cost
allowance
2,222.86
total
expenses
12,369.76
Net
Loss
(9,432.44)
Less increase to Loss Carry
Forward
3,466.22
Loss Claimed on 1994
Return
(5,966.22)
1995
Income
crop
income
647.55
rebates
580.65
other
income
280.84
total
income
1,509.04
Expenses
property
taxes
1,398.69
fuel and oil
for machinery &
truck
2,973.06
motor vehicle
expense (farm
share)
955.97
small
tools
162.00
insurance -
crops, building,
livestock 372.00
accounting,
office,
etc.
167.61
telephone
(farm
share)
677.59
electricity
(farm
share)
742.33
heating fuel
(farm
share)
149.91
clearing or
improving
land
85.00
house repair
(farm
share)
413.52
capital cost
allowance
3,000.21
total
expenses
11,097.89
Net
Loss
(9,588.85)
Less Increase to Loss Carry
Forward
3,544.42
Loss Claimed on 1995
Return
(6,044.43)
[3] The Respondent in his Reply to the
Notice of Appeal made the following admissions:
"(a) the Deputy
Attorney General admits that the Appellant is a retired school
teacher;
(b) the Deputy
Attorney General admits that the Appellant built a small
greenhouse and that it is not in commercial production;
(c) the Deputy
Attorney General admits that the Appellant's nephew farms
approximately 320 acres of land owned by the Appellant;
(d) the Deputy
Attorney General has no knowledge of the Appellant providing
labour and puts this in issue; and
(e) the Deputy
Attorney General denies the remaining allegations of fact in the
Notice of Objection."
[4] By Notices of Reassessment dated
December 2, 1996 and Notification of Confirmation dated June 6,
1997, the Minister of National Revenue (the "Minister")
disallowed the losses deducted by the Appellant on his income tax
returns for the 1993, 1994 and 1995 taxation years.
[5] In so reassessing the Appellant,
the Minister relied on the following assumptions of fact:
"(a) the facts
admitted or stated above;
(b) the Appellant
has owned farmland legally described as the east half of
20-29-9 W2M (the "Farmland") for at least
30 to 40 years;
(c) at all material
times the Appellant's nephew farmed the Farmland together
with his land as one farming operation;
(d) until the
Appellant's retirement in 1989 the Appellant's nephew did
not pay any rent to the Appellant for the use of the Farmland and
paid all expenses, including property taxes, that were
incurred;
(e) since the
Appellant's retirement, and throughout the 1993, 1994 and
1995 taxation years, the Appellant received no more than
1/3 of the net income from the crops his nephew produced on
the Farmland, and the Appellant was responsible for payment of
the property taxes assessed on the Farmland;
(f) the
Appellant and his nephew have no intention of changing their
arrangement;
(g) in 1986 the
Appellant acquired an additional 10 acres of land located in the
NW quarter of 10-30-9 W2M (the
"Homestead");
(h) the Appellant
moved to the Homestead in 1989 when he retired;
(i) 2 to 3
acres of the Homestead are used as the Appellant's residence,
which only leaves 7 to 8 acres of land for growing crops;
(j) at all
material times the Appellant has owned minimal farming
equipment;
(k) during the 1993,
1994 and 1995 taxation years the only machinery acquired by the
Appellant was a chop saw, 2 grain bins, a wheel barrow, a plow, a
cultivator and a front end loader;
(l) the
Appellant's nephew uses his equipment to plant and harvest
any crops grown on the Homestead;
(m) the greenhouse the
Appellant built on the Homestead has only been used to grow
produce for the Appellant's own consumption or use;
(n) at all material
times the Appellant has had no intention of expanding his farming
activities;
(o) the amounts the
Appellant earned from employment and pensions during the 1993,
1994 and 1995 taxation years were as follows:
Taxation
employment pension interest
Year
income
income
income Total
1993
5,127.34
30,384.06
35,511.40
1994
3,558.24
58,258.65
61,816.89
1995
4,248.74
31,217.82
64.69 35,531.25
Total
12,934.32
119,860.53
64.69 132,859.54
(p) the
Appellant's capital is limited;
(q) for the 1987 to
1996 taxation years the Appellant calculated that his losses from
his farming activities were:
Taxation
Gross
Net Income
Year
Income
(Losses)
1989
486.00
(2,587.00)
1990
965.00
(4,409.00)
1991
1,712.00
(3,637.00)
1992
530.00
(8,822.00)*
1993
3,007.00
(4,769.00)*
1994
2,937.00
(9,432.00)*
1995
1,509.00
(9,588.00)*
1996
3,763.57
(12,010.80)
Total
14,909.57
(55,254.80)
* the Appellant claimed restricted farm losses in each of
these years and a portion of the losses were carried forward
(r) at least
$928.27, $3,397.42 and $1,677.76 of the expenses deducted in the
1993, 1994 and 1995 taxation years, respectively, related to
utilities, insurance and repairs and maintenance for the
Appellant's house;
(s) the amounts
deducted as telephone expenses in the 1993, 1994 and 1995
taxation years were only comprised of the monthly line rental
fees and personal long distance telephone calls and were personal
or living expenses of the Appellant;
(t) at least
$1,874.17, $2,437.48 and $1,443.84 of the amounts deducted as
fuel and oil for machinery and truck expense and as motor vehicle
expense in the 1993, 1994 and 1995 taxation years, respectively,
were personal or living expenses of the Appellant;
(u) the Appellant
used his vehicles no more than 50% in farming activities;
(v) the expenses
deducted by the Appellant when calculating his farming income
(loss) for the 1993, 1994 and 1995 taxation years were personal
or living expenses of the Appellant and were not incurred for the
purpose of gaining or producing income from a business or
property;
(w) the Appellant did not
have documentation to support that he incurred all of the amounts
deducted as expenses on his 1993, 1994 and 1995 income tax
returns;
(x) the Appellant
did not operate a farm with a reasonable expectation of profit
during the 1993, 1994 and 1995 taxation years;
(y) during the 1993,
1994 and 1995 taxation years the Appellant did not depend upon
farming as a source of income or as his livelihood; and
(z) the
Appellant's chief source of income during the 1993, 1994 and
1995 taxation years was neither farming nor a combination of
farming and some other source of income."
[6] At the hearing, counsel for the
Appellant admitted paragraphs (b) to (d), (g) to (m), (o), (q),
(r), (t), (u), (y) and (z) and denied paragraphs (e), (f), (n),
(p), (s) and (v) to (x).
[7] The issues before the Court are
whether the Appellant had a reasonable expectation of profit from
farming in the 1993, 1994 and 1995 taxation years and, if so,
whether the Appellant is entitled to deduct the expenses set out
above when determining his farm losses and restricted farm losses
for these years.
[8] The Appellant has the burden of
establishing on a balance of probabilities that the
Minister's reassessment disallowing the expenses claimed in
these years was ill-founded in fact and in law.
[9] The two witnesses at the hearing
were the Appellant and his nephew Rick Sebulski.
[10] The Appellant had a very loose
arrangement with his nephew for the cultivation of his 200 acres
of usable land since 1989. His nephew farmed the Appellant's
land, paid all expenses including seeding, spraying, harvesting,
equipment and sold the grain in his own name; the balance of the
net amount received after deduction of his expenses, if any, was
paid to the Appellant. In turn, the Appellant provided full-time
labour to help his nephew on all the land his nephew farmed of
approximately 13 quarters that his nephew leased from other
relatives.
[11] From the very modest net revenue
received from the farming operation, the Appellant deducted
additional expenses such as taxes on the land, machinery and
truck owned by the Appellant, building repair, insurance, fuel
and utilities including telephone, heating and electricity.
[12] As set out in the Reply to the Notice
of Appeal, over the period from 1989 to 1996, the Appellant
claimed farming income of approximately $14,909, expenses of
approximately $70,000 for net losses totalling approximately
$55,000.
[13] During the three years in issue, the
Appellant claimed farming income of approximately $7,450,
expenses of approximately $30,000 for a net loss of approximately
$23,000. Many of the expenses claimed were in relation to his
personal expenses such as the greenhouse, farm house used as his
family residence and fuel for his own vehicle and not related to
his nephew's farming operation. The Appellant did not carry
on his own farming activities, but provided his personal services
to his nephew in return for his nephew's farming the
Appellant's 200 acres using equipment not owned by the
Appellant.
[14] 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 in 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.
[15] In the case of Moldowan v. R.
[1978] 1 S.C.R. 480, Mr. Justice Dickson stated as follows:
"11. 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
D.T.C. 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.
12. 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 D.T.C. 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."
[16] In the case of Landry v. The
Queen, 94 D.T.C. 6624, Décary, J. stated as
follows:
"It is possible for someone, with the best will in the
world, to practise an activity that takes all his or her time and
that activity may still not be a business for the purposes of the
Income Tax Act ("the Act"). For the
purposes of determining whether there is a source of income, only
an activity that is profitable or that is carried on with a
reasonable expectation of profit is a business..."
[17] Further on he states 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
([1979] 1 S.C.R. 833 at 839):
... 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
three relevant periods, 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."
[18] Having regard to all the circumstances
of this appeal including the testimony of the witnesses, the
admissions and the documentary evidence in the light of the
well-established case law, I am satisfied that the Appellant has
not succeeded 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.J.T.C.C.
Email this Content