Date: 20010130
Docket: 2000-173-IT-I
BETWEEN:
HENRY GRZYWNOWICZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the Bench at London, Ontario on
December 7, 2000)
Beaubier, J.T.C.C.
[1]
This appeal was heard in London, Ontario on December 7, 2000. The
Appellant was the only witness. Paragraphs 4 to 6 inclusive of
the reply to the Notice of Appeal read:
4.
In reassessing the Appellant for the 1995 and 1996 taxation
years, by concurrent Notices of Reassessment thereof dated March
4, 1999, the Minister disallowed farm losses in amount of
$3,543.00 and $3,205.00 respectively.
5.
In so reassessing the Appellant, the Minister made the following
assumptions of fact:
(a)
in November of 1992 taxation year, the Appellant purchased 57
acres of farm land located at 332 Donnybrook Drive, Dorchester of
Ontario;
(b)
of total 57 acres, about 45 acres renting out to a neighbour for
farming were workable, about 1.5 acres were used for principal
residence and the balance were being repaired and developed;
(c)
at all material times, the Appellant was employed full time by
Kellogg Canada Inc.;
(d)
the Appellant's main source of income was employment income
earned from his job at Kellogg Canada Inc.;
(e)
During the 1995 and 1996 taxation years, the Appellant reported
the gross farming income in amounts of $3,733.00 and $3,464.00
which consisted of rents from the land and tax rebates;
(f)
the Appellant's chief source of income during the 1995 and
1996 taxation years was neither farming nor a combination of
farming and some other source of income;
(g)
the Appellant reported gross farming income and net farming
losses in other years as follows:
YEAR GROSS INCOME NET FARMING
LOSSES
1993
$3,541.00
$2,712.00
1994
$3,679.00
$3,322.00
1997
$4,147.00
$4,456.00
1998
$4,520.00
$2,760.00
(h)
the farming losses were not incurred for the purpose of gaining
or producing income from farming;
(i)
The Appellant did not have a reasonable expectation of profit
from the farming activity in the 1995 and 1996 taxation
years.
6.
The issue is whether the Appellant is entitled to deduct farm
losses in the 1995 and 1996 taxation years.
[2]
Assumptions 5 (a), (c), (d), (e) and (g) were not refuted.
Assumption 5 (b) is correct but the one or two acres of the
balance were planted to a mixture of five varieties of around 250
trees. The remaining assumptions are in dispute.
[3]
The Appellant planted the 250 trees in 1994 and sold $520 worth
in 1998 and $170 worth in 1999. The remainder were not saleable
for a variety of reasons from deer eating them to their degree of
maturity to the fact that no reason was given with respect to the
spruce trees.
[4]
From 1993 to 1999 the Appellant received rent from the land. From
1993 to 1997 inclusive the rent and Ontario Property Tax Rebates
were the only income from the land. He was allowed rental losses
on the farm land but not the farm office as claimed. The auditor
treated the tree income as "incidental". Certainly the
arable acreage which the Appellant devoted to the trees planted
was less than five per cent of the amount rented. Moreover, the
small number and the great variety of planted trees indicates
that the Appellant did not intend to tree farm. Nor did he allege
such intentions at any time. Thus the evidence is that the trees
and any income from them was in fact incidental to both the land
itself and any income from it.
[5]
In William Moldowan v The Queen, DTC 5213, at paragraphs
11 and 12, Dickson J. said:
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
MNR...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]...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."
[6]
Using the headings in paragraph 12 as quoted, the court
finds:
1.
The Appellant's experience to date is entirely of losses.
2.
The Appellant did not describe any training that he had in
farming. He said that he had a little experience.
3.
The Appellant did not describe any plan or intended course of
action to realize a profit from farming, nor did he establish by
evidence what he might earn from farming the land. He testified
that he made a gross income of $3,900 from corn, plus $1,500 from
land rent in 1999 but reported a loss after CCA of $4,754.91, of
$5,273.33. He also testified that after deducting CCA in 2000 he
will suffer a loss. He did not establish when and how he might
reasonably earn a profit as he is required to do pursuant to
The Queen v Andrew Donnelly, 97 DTC 5499 (FCA) at
5501.
4.
There is no evidence that the alleged farming operation had a
reasonable expectation of profit during the years in question, or
that the Appellant had any plan of operation to enable that to
occur.
[7]
In fact, the evidence establishes that in both 1995 and 1996 the
land was rented and it was a rental property. Moreover, the
Appellant testified that half of the price of the land was
relating to the existing residence on the land, which is near
London, Ontario. The equipment that he bought - a tractor and a
small 50 inch cultivator - could readily be used to clear snow
and cultivate shelter for decorative trees. The "barn"
that he built could very well be a garage for the family vehicle
and the tractor.
[8]
On the evidence, during 1995 and 1996, the Appellant was not
farming. He was renting 45 acres of farm land.
[9]
The appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of January, 2001.
"D.W. Beaubier"
J.T.C.C.
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