Date: 20000110
Docket: 97-2955(IT)I
BETWEEN:
RUSSELL ZALINKO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
97-2956(IT)I
BETWEEN:
BARBARA ZALINKO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(delivered orally from the bench
at Saskatoon, Saskatchewan on
December 3, 1999)
Beaubier, J.T.C.C.
[1] These appeals were heard together
on common evidence on December 2, 1999 in Saskatoon,
Saskatchewan by consent of the parties. Mr. Zalinko testified for
the Appellants. The Respondent called the auditor on the files,
Katherine Willis.
[2] The Appellants are husband and
wife. They were reassessed and allowed restricted farm losses for
1993 and 1994. They appealed on the basis they were entitled to
all of their farm losses in those years.
[3] Paragraphs 8 to 12 inclusive in
the Reply to Russell's Notice of Appeal read:
8. In
computing income for the 1993 and 1994 Taxation years, the
Appellant deducted the amounts of $37,076.23 and $36,225.00
respectively as farming losses.
9. In
reassessing the Appellant, the Minister of National Revenue (the
"Minister") restricted the Appellant's farming
losses in accordance with subsection 31(1) of the Income Tax
Act (the "Act").
10. In so reassessing the
Appellant for the 1993 and 1994 Taxation Years, the Minister made
the following assumptions of fact:
(a) the facts
admitted supra;
(b) the Appellant
commenced farming in 1972;
(c) the Appellant
purchased one quarter section of land from his father in
1972;
(d) the Appellant
purchased additional land in 1976 and 1978;
(e) the Appellant
farmed fifteen quarter sections of land until 1988;
(f) a portion
of the fifteen quarter sections of land farmed until 1988 were
rented;
(g) the Appellant
stopped renting land in 1988;
(h) the Appellant
does not maintain his residence at the farm;
(i) the
Appellant lives in Regina, Saskatchewan and commutes to the
farm;
(j) the
Appellant was previously employed as a school teacher;
(k) the Appellant
retired from teaching school in the 1988 Taxation Year;
(l) the
Appellant farmed in a partnership with his spouse;
(m) the partnership split
profits and/or losses on the basis of 60% to the Appellant and
40% to his spouse;
(n) the Appellant
reported farming income (losses) during the 1990 to 1994 taxation
years as follows:
|
|
1990
|
1991
|
1992
|
1993
|
1994
|
|
|
|
|
|
|
|
|
Sales
|
107,292
|
63,631
|
66,552
|
80,527
|
82,666
|
|
less
|
|
|
|
|
|
|
Cash expenses
|
112,343
|
66,293
|
78,029
|
142,320
|
106,019
|
|
|
(5,051)
|
(2,662)
|
(11,477)
|
(61,793)
|
(23,353)
|
|
less
|
|
|
|
|
|
|
Capital Cost Allowance
|
37,495
|
29,310
|
30,097
|
0
|
38,623
|
|
|
(42,546)
|
(31,972)
|
(41,574)
|
(61,793)
|
(61,976)
|
|
plus change in inventory
|
|
|
|
|
|
|
|
0
|
0
|
0
|
0
|
1,600
|
|
Net Loss
|
(42,546)
|
(31,972)
|
(41,574)
|
(61,793)
|
(60,376)
|
|
|
|
|
|
|
|
|
Appellant share 60%
|
(25,528)
|
(19,183)
|
(24,944)
|
(37,076)
|
(36,226)
|
(o) the Appellant
reported non-farm income of $39,697 and $44,000 in the 1993 and
1994 Taxation Years respectively;
(p) the appellant
disposed of seven quarter sections of land in the 1993 Taxation
Year;
(q) six quarter
sections were foreclosed on by the bank and one quarter section
was sold to the Appellant's son;
(r) in the 1993 and
1994 Taxation Years the Appellant rented the six quarter sections
which the bank foreclosed on to continue his farming
operation;
(s) the Appellant
reported a taxable capital gain in the amount of $153,106 in
respect of the disposition of farm land as a result of the bank
foreclosure and the sale to his son in the 1993 Taxation
Year;
(t) the
Appellant claimed a capital gain deduction of $152,960 to offset
the inclusion of the gain in his income in the 1993 Taxation
Year;
(u) the Appellant
operated a grain farm during the 1993 and 1994 Taxation
Years;
(v) the
Appellant's chief source of income during the 1993 and 1994
Taxation Years was neither farming nor a combination of farming
and some other source of income.
B. ISSUES
TO BE DECIDED
12. The issue is whether
the Appellant's chief source of income was farming or a
combination of farming and some other source of income during the
1993 and 1994 Taxation Years.
[4] Subparagraphs 10(b) to (u)
inclusive of the assumptions were accepted by Russell. He
accepted similar assumptions in the Reply to Barbara's Notice
of Appeal. However, the history of this matter is more
complicated than that.
[5] Russell grew up on a farm and
obtained his Bachelor of Agriculture from the University of
Saskatchewan in 1956. He worked a year on the farm. He then
returned to the University of Saskatchewan for one year and
obtained his teaching certificate and eventually his Bachelor of
Education. He then taught from 1958 to 1988 when he retired from
teaching.
[6] Barbara graduated from the
University of Saskatchewan in Home Economics and became employed
by the Saskatchewan Department of Parks and Renewable Resources
until she retired in 1997. They have at least one son.
[7] Russell always wanted to farm. In
1972 they purchased one quarter section of land from his father
for $10,000 with borrowed money. In 1976 they purchased three
quarter sections near Viceroy, Saskatchewan, east of Assiniboia
with financing from the Bank of Montreal and then the Bank of
Nova Scotia. All of the money was borrowed. That was sold to
Russell's brother in 1976. In 1976 they purchased three
quarter sections near Rouleau, Saskatchewan, and in 1978 they
purchased four more quarters near Rouleau. Rouleau is near
Regina. A down payment on the 1976 Rouleau purchase came from the
1976 sale to Russell's brother. All of the rest was financed.
In 1980 they consolidated all of their loans with the Royal Bank
of Canada. They farmed all of this land through these years.
[8] In addition, in 1982 they rented
seven quarter sections of farmland near Regina, and they rented
an additional quarter section there in 1986. They gave these
leases up in 1986.
[9] In 1988 Russell retired as a
teacher with a pension of over $30,000 per year. He then devoted
himself full time to farming. Barbara helped out and spent about
30 hours per week of work time farming in season while working
full time at her civil service job in Regina. Russell also worked
selling farm lighting during the years in appeal. This was
clearly a sideline which required less than 10 hours per week
during farming season in 1993 and 1994.
[10] Russell admitted that their other
incomes subsidized the farm and gave them their living during all
of these farming years.
[11] In 1992 they suffered an early frost
and the grade was low, so the price was poor. They had been
suffering falling grain prices for years. The Royal Bank then
began foreclosure proceedings. On February 15, 1993 the
Appellants transferred all except one quarter of land to the
Royal Bank of Canada. They transferred the remaining one quarter
to their son. They then leased the other six quarters back from
the Royal Bank (R-1, Tab 2). As a result of this they reported
the capital gain in 1993 which brought this audit about. At the
time of the deal with the Royal Bank of Canada, they owed
$1,175,942.19 including over $484,000 of accrued interest. They
also owed $22,000 in taxes on the farmland.
[12] The Appellants reported their income on
a cash basis, so the unpaid interest and taxes would not have to
be deducted by them in the years immediately prior to 1993.
Despite this, as shown in Russell's assumptions, their joint
farming losses were:
1990
$42,546
1991
$31,972
1992
$41,574
1993
$61,793
1994
$61,976
Had the taxes and interest been paid, they would have added
substantially to the losses before 1993.
[13] As against these figures they reported
joint gross farm income in 1993 and 1994 of $80,527 and $82,666
including crop insurance. In 1995 their grain sales were
$109,362.91. Actual grain sales in 1993 appear to be $37,076.23,
and in 1994, $48,051.49 respectively. However, there are no
records by which the Court can compare the grain sales in 1990,
1991 and 1992. It should be noted that grain sales from a 1992
crop would normally occur in the following calendar year,
1993.
[14] In Regina v. Donnelly, [1992] 1
CTC 23 at paragraph 12 and 13, Robertson J.A. stated:
12 Any doubt as to
whether the taxpayer's chief source of income is farming is
resolved once consideration is given to the element of
profitability. There is a difference between the type of evidence
that taxpayer must adduce concerning profitability under section
31 of the Act, as opposed to that relevant to the reasonable
expectation of profit test. In the latter case the taxpayer need
only show that there is or was an expectation of profit, be it $1
or $1 million. It is well recognized in tax law that a
'reasonable expectation of profit' is not synonymous with
an 'expectation of reasonable profits'. With respect to
the section 31 profitability factor, however, quantum is relevant
because it provides a basis on which to compare potential farm
income with that actually received by the taxpayer from the
competing occupation. In other words, we are looking for evidence
to support a finding of reasonable expectation of
'substantial' profits from farming.
In the present case, it was incumbent on the taxpayer to
establish what he might reasonably have earned but for two
setbacks which gave rise to the loss: namely the death of Mr.
Rankin and the decline in horse prices. I say this because the
Tax Court Judge concluded that but for these setbacks the
taxpayer would have earned the bulk of his income from farming in
the three taxation years in question. While there is no doubt
that the loss of Mr. Rankin, and the changes in the American
tax law had a negative and unexpected impact on the business, no
evidence was presented to show what profit the taxpayer might
have earned had these events not occurred and whether the amount
would have been considered substantial when compared to his
professional income. It was not enough for the taxpayer to claim
that he might have earned a profit. He should have provided
sufficient evidence to enable the Tax Court Judge to estimate
quantitatively what that profit might have been.
[15] The Appellants did not establish what
they might have reasonably earned but for the frost of 1992. They
did indicate that as yet grain commodity prices have not
risen.
[16] Thus, the question before the Court is
whether the Appellants, who bear the onus of proof, have
established that had the 1992 frost and the declining grain
prices not occurred, the farm would have yielded them a
substantial profit compared to their other incomes. Russell's
pension income was over $34,000 in 1993 and in 1994.
Barbara's employment income was over $45,000 in 1993 and in
1994. Their farm operation was past any possible start-up period.
They had suffered losses from 1990 on despite the fact that they
did not pay interest on their loans to the Royal Bank of Canada
until 1993, when they only paid some interest and some property
taxes, and in 1994 when they did not pay any property taxes.
[17] On the evidence, the $109,000 grain
sales in 1995 is an aberration. But even with this income, the
farm lost money in 1995 when, as Moldowan v. The Queen,
[1978] 1 S.C.R. 480 required, capital cost allowance was
calculated. Thus the 1990 - 1992 years appear to be the norm on
the evidence. In those years they lost money despite the fact
that they did not deduct unpaid interest and property taxes.
[18] The Appellants have failed to meet
their onus to establish evidence that they had a reasonable
expectation of substantial profit from farming in 1993 and
1994.
[19] For this reason their appeals are
dismissed.
Let the above Reasons for Judgment, delivered orally from the
Bench at the Tax Court of Canada, Court of Queen's Bench, 520
Spadina Crescent East, Saskatoon, Saskatchewan, on December 3,
1999, be filed.
J.T.C.C.
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