Date: 20000327
Docket:
98-2393-IT-I
BETWEEN:
GEORGE J.
TKACH,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Rowe,
D.J.T.C.C.
[1]
The appellant
appealed from assessments of income tax for his 1994 and 1995
taxation years in which the Minister of National Revenue (the
"Minister") disallowed the deduction of farm losses in
the amounts of $5,463.23 and $1,746.56, respectively. The
Minister took the position the appellant did not have a
reasonable expectation of profit from any farming activity
undertaken by the appellant during those taxation
years.
[2]
John Melnychuk
testified he is presently retired but grew up on a mixed farm
where he lived until 1941. He served in the Canadian Army between
1941 and 1946 and following his discharge began farming in the
area near Kelvington, Saskatchewan. Later, he moved to Regina and
began working for Inland Cement and remained there until he
retired in 1988. While working for the cement company, he
purchased farm land. During the winter of 1989-90, he saw an
advertisement in the paper placed by George Tkach - the appellant
- requiring an interested person to contact him in connection
with helping work a market garden/farm. Melnychuk responded to
the advertisement and in the spring of 1990 began working on the
land owned by the appellant near Craven, Saskatchewan. The
arrangement they made was that Melnychuk could grow his own
garden on the property and also pick the berries located on the
property. There was to be no payment for his services until the
activity showed a profit. He and the appellant worked on weekends
and during their spare time. He was aware the appellant had sold
his law practice but was still working for his former firm. In
1990, the appellant went to the United States to attend
university and Melnychuk worked the land in order to keep down
the weeds. The appellant owned two tractors - a John Deere
and a Ford - as well as a tractor used by walking behind it. The
tractors were old and required a lot of repair and maintenance.
In 1990, the equipment was stored at another site - owned by the
appellant - near Fairy Hill which was about 12 miles from
Craven. At the Fairy Hill site, there were some buildings and
irrigation equipment, pumps and a 1000-gallon tank. The land at
Craven was flat and had 10 acres suitable for cultivation,
divided into two parcels, one higher than the other. In 1990, a
crop of alfalfa and another of brome grass were planted which
produced hay on an annual basis to be cut and baled. In 1991,
plans were made for the spring and Melnychuk agreed to help out
the appellant as previously agreed. In June, the appellant
suffered a heart attack and was not able to help out on the farm
for the rest of the year. Melnychuk looked after his own garden
on the property and cultivated, as needed, to control the weeds.
In 1992, the garden-farm project was continued but the appellant
underwent open-heart surgery and was not able to help out until
late fall when the tractors were moved back to Fairy Hill for
storage. In 1993, the appellant discussed building a structure to
store the tractors on the Craven property and they attempted to
improve the machinery during that year. In 1994, a contractor was
hired to build a storage shed with a second floor to be used for
storing files, boxes and office furniture previously used in the
appellant's law office. The tractors were housed on the main
floor. In 1994, there was a good crop of berries and the
appellant and Melnychuk discussed growing other crops such as
potatoes and garlic using organic methods which avoided the use
of chemicals. The appellant came out to the farm on Saturdays and
Sundays and sometimes during the evenings but there was no fixed
work schedule. In 1995, a flood covered about 75% of the bottom
part of the farm. As a result, the garden had to be moved to
higher ground. The flooding affected the raspberries,
strawberries and potatoes. The garlic did not grow well. A new
roadway had to be built to create a new entrance to the property.
After the water receded, the weeds grew tall and a mower had to
be used to cut them down. By this time, it was fall. In 1996,
Melnychuk explained there was still some flooding and it was
evident the flooding of the previous year had removed some
topsoil and in its place there was a layer of pebbles and weeds.
The appellant had purchased a new Diesel garden tractor with
several attachments and began to build dykes around the buildings
as a flood protection measure since the water had actually
entered the storage building in 1995. The alfalfa and brome grass
crops had been rotted out by the water. The plan was to plow it
under the following year. In 1997, the grass was plowed under by
someone hired by the appellant on a custom basis because it
required special equipment. Even after the land had been plowed,
it required re-working during that year. In the fall, some garlic
was planted. In 1998, the garlic grew quite well and while there
were problems associated with the harvest - overall - the crop
was satisfactory. The portion of land previously damaged by the
floods was flooded again. The planting activity on the small
parcel that year involved blueberries, raspberries and
strawberries together with 6 or 7 varieties of fall garlic
planted on the lower portions. In 1999, 10 or 12 varieties of
potatoes were planted together with garlic and berries. The
garlic produced some good results but some was not satisfactory
as the summer was cool and the garlic did not mature properly.
Some of the crop was retained for seed purposes and the rest was
handed out as samples to interested purchasers. Some types of
potatoes proved to be better than others and samples were
provided to potential buyers. Overall, Melnychuk stated that he
still had hope he would be able to share in profits from the
farming operation some day.
[3]
In
cross-examination, Melnychuk stated he had grown up on a
quarter-section of land owned by his father. He enjoyed
helping out the appellant with his project and liked farming,
picking berries and growing his own garden. Being retired, he is
able to devote time to the activity and while he conceded the
progress appeared to be slow, the flooding affected the land for
four out of five years. Once the appellant's health improved
after having surgery in 1992, he stated they worked equally on
the land, putting in 10 hours a week in 1994 and 1995. The farm
at Craven is located 41 kilometres from Regina.
[4]
George Tkach
testified he is a Barrister and Solicitor looking forward to
retirement. He was raised on a small farm of 160 acres - with
good soil - adjoining a tree nursery. His family grew fruits and
vegetables and also ran a small dairy operation. In 1944 - after
completing school at age 17 - he joined the RCAF. After his
discharge from the service, he attended the University of
Saskatchewan and graduated from law school. He began practising
at Carlisle, Saskatchewan and became a partner in a small grain
farm which he later sold. He moved to Regina and began taking
pre-medical school classes while practising law part time
including returning to Carlisle one day a week. In 1963, he began
a full-time law practise. In 1970, he started looking for land in
the Qu'appelle Valley, an area known for market gardening
located along 40 - 50 miles of river. He purchased some land -
about 14 acres - located in the centre of the market gardening
area. The land flooded in 1971 and again in 1972 so he sold it -
at a loss - later that year. He continued to look for property
and found some land located east of Craven where the
Qu'appelle River meanders through the area. In 1973, he owned
a total of 139 acres at Fairy Hill - divided into three
parcels - of 60, 70 and 9 acres. The property featured ravines
and some flat areas on which there was gravel and trees. Some of
the flat land was suitable for cultivation and he bought a small
tractor and some implements. He was able to reclaim two or three
acres in three or four different places. He built a two-storey
shed to store equipment. In 1975, he purchased the subject
property - Parcel C - at Craven. In 1977, he decided to build his
own office building in Regina and, in order to finance this
project, sold the 60-acre parcel forming part of the Fairy
Hill property. He retained the other two parcels and planted
tomatoes as a test crop. However, these properties were difficult
to cultivate and he found it was not worth the effort. The land
at Craven - totalling 10 acres - had flat areas suitable for
cultivation. At the same time, he also purchased two other
adjoining parcels of 130 and 90 acres, each on a separate title.
In the mid-1980's he began considering use of the land which
was located just off a paved road. He hired someone to work the
land with the tractor and machinery. He planted five or six acres
of alfalfa and brome on the 10-acre parcel by entering into a
crop-sharing arrangement with a local farmer on the basis the
farmer was entitled to the entire first three crops, following
which they would split remaining crops on a 1/3 - 2/3 basis, with
the larger portion going to the farmer. Tkach stated his share of
the crop brought in between $200 and $300 per year. He started
summerfallowing five acres leading down to the river. In 1981 or
1982, he decided to add on to his office building in Regina. The
interest rates rose to 22% and, in order to raise money for his
building project, he sold the 90 and 130-acre parcels adjoining
Parcel C, the river lot. In 1985-86, he planted long rows of
raspberries. In 1989, with a view to beginning his retirement, he
sold his three-person law firm but stayed on as an employee. In
1990, he went to the University of Arkansas - at the Fayetteville
campus - to take post-graduate instruction in Agricultural Law.
Prior to attending there, he was informed he had to take a
pre-requisite course at Georgetown, Washington DC and it was at
this time he placed an advertisement in the Regina newspaper.
John Melnychuk responded and met with the appellant indicating he
was interested in helping out on the property. Tkach stated he
left Regina in June, 1990 for six weeks and returned home for
only one week before going back to Arkansas. He remained at
university until mid-May, completing two semesters of the
three-semester course. He had retained his membership in the Law
Society of Saskatchewan and worked on some files until June when
he suffered a heart attack which put him in the hospital. In
mid-August he returned to Arkansas to complete the third semester
and left Melnychuk in charge of the farm. In 1992, he had to
attend again at the University of Arkansas in order to complete a
paper and it was during this time he attended upon a cardiologist
who found four blockages in the arteries requiring surgery which
was performed the next day. Tkach did not return to Regina until
March of 1992 when he rented a small office and began taking on
some clients. In 1993-94, he felt some headway had been made on
the Craven farm so he decided to build an equipment shed. The
Fairy Hill property had been used to store old files and office
equipment since 1975. After the shed was built, the Craven parcel
was planted to potatoes in the course of experimenting with
various test crops. He also grew berries and thought he could
grow seed for certain crops on an organic basis which was
becoming increasingly popular. They had never used chemicals on
the land at Craven and were able to satisfy requirements for
chemical-free produce. The raspberries were not sold on a
commercial basis even after a development period of three years.
In 1995, flooding destroyed the raspberries and the alfalfa and
brome grass. He attempted to plant garlic which had been avoided
by market gardeners in the area due to the problem of late
maturation which took it beyond the season for selling in
roadside stands. However, he discovered that by planting garlic
in the late fall, it matured the following August during the
market-garden season. He believed this crop had commercial
potential and tried planting it in different areas within the
small plots. An organic farm - four acres in size - had been
established about three miles away. In 1997-98, Tkach began
inquiring into the certification program for organic farmers. He
discovered there is a period during which a farm has to be
inspected and then certified. In 1999, he had completed one year
of the three-year program. Flood-protection measures had been
carried out in order to protect the equipment shed and the fall
garlic was planted. In 1999, 13 varieties of potatoes were
planted. His research revealed that only 20% of the Regina market
was supplied by local farmers and 80% was imported. The 1999 crop
was not large enough to be sold commercially but he packaged up
some samples and provided them to restaurants and other potential
buyers including those who would buy them for use as seed. It was
difficult to locate seed garlic in Saskatchewan and he also saw a
potential market for that crop. As a result, he and Melnychuk
monitored production on the various small plots of land. Once the
alfalfa and brome crops were destroyed by flooding, the Craven
farm never generated any income. All the farm income reported
came from the property at Fairy Hill which was only useful to be
rented out as pasture land. In 1997, he sold the 70-acre parcel
and the 9-acre parcel was sold the following year. He used the
funds from the sale in order to purchase 100 acres of
adjoining land to be used for natural hay crops. This was the
same piece of property he had owned 15 years earlier. In the
appellant's view, it was not possible to forecast results and
the flooding problem was unusual in that the Craven area - over
the long term - was not prone to flooding. The average organic
farm is only four acres and production costs are about $4,000 per
acre which leads to a net profit of $1,000 per acre, all other
factors being equal. He deliberately chose to develop the
infrastructure at Craven on a slower, methodical basis,
especially when purchasing machinery. He stated he cannot
demonstrate that a profit is possible by 2004 but he is willing
to devote additional time and money to the project. It appeared -
to him - to be feasible when one considers garlic is imported
from China or British Columbia. In addition, he thought there is
potential in the potato market but diversification requires time
and capital to bring a project to fruition.
[5]
In
cross-examination, Tkach agreed that - in 1994-95 - his law
practice occupied much of his time and that he was putting in
12-hour days. The work on the farm was intensive and he had to
hire part-time help to assist John Melnychuk, who was then 76.
Tkach stated he wanted the project to pay for itself and to be
able to re-pay Melnychuk for all his efforts over the past 9
years.
[6]
The appellant
submitted the evidence demonstrated there was potential for
producing income once the proper infrastructure was in place in
the sense of having the proper machinery, storage sheds, tools
and a process for planting test crops. The varieties of potatoes
and garlic had been reduced to eliminate all but the better
producers and the necessary capital investment had already been
made. Several marketing strategies had been attempted and, while
he may have been too cautious in developing the project, he did
not want to be over-extended. In the appellant's submission,
"farming is farming" and not some activity carried out
under strict laboratory conditions and it must be regarded in a
different light and not merely in strict, statistical, economic
terms but with a view to recognizing the potential inherent in
the project which cannot simply be abandoned.
[7]
Counsel for the
respondent submitted there was an unduly long start-up period
during which there were steady losses - totalling $71,606 -
reported by the appellant for the majority of the years between
1981 and 1997. The farming income reported from the Fairy Hill
property was not actually farm income - for the most part - and
once that land was sold there was no income produced at Craven.
The efforts of the appellant - in Counsel's view - were in
the experimental stage and no firm plan was in place during the
years in question notwithstanding the appellant and John
Melnychuk were both well qualified to carry out the undertaking.
Overall, there was no basis to find there was any reasonable
expectation of profit during the years under appeal.
[8]
In Tonn et al.
v. The Queen, 96 DTC 6001, the Federal Court of Appeal
examined the concept of reasonable expectation of profit as it
has evolved over the years since the judgment of the Supreme
Court of Canada in Moldowan v. Q., [1978] 1 S.C.R. 480.
Linden, J.A., writing for the Court, undertook the analysis and
at p. 6009 of the reasons for judgment, His Lordship
stated:
"A closer
look at this jurisprudence will illustrate that this is the
approach now taken in most of the cases. The cases in which the
"reasonable expectation of profit" test is employed can
be placed into two groups. One group is comprised of the cases
where the impugned activity has a strong personal element. These
are the personal benefit and hobby type cases where a taxpayer
has invested money into an activity from which that taxpayer
derives personal satisfaction or psychological benefit. Such
activities have included horse farms, Hawaï and Florida
condominium rentals, ski chalet rentals, yacht operations, dog kennel operations, and so forth. Though these
activities may in some ways be operated as businesses, the cases
have generally found the main goal to be personal. Any desire for
profit in such contexts is no more than a "pious wish"
or "fanciful dream". It is only a secondary
motive for having set out on the venture. What is really going on
here is that the taxpayer is seeking a tax subsidy by deducting
the cost of what, in reality, is a personal
expenditure."
[9]
Linden, J.A. went
on to discuss a number of cases involving hobbies or where the
activity was driven by the element of personal enjoyment. When an
appellant has demonstrated a long-standing pursuit of a goal,
there is a tendency for the Minister to regard the dedication as
being akin to that of a hobbyist. However, that must be examined
carefully in the context of the particular circumstances. As I
noted in Gordon Dick v. Her Majesty the Queen, unreported,
95-3189(IT)I :
"One would
expect a fledgling entrepreneur to have some knowledge of a
product, process or service that is about to be launched as a
commercial venture. The nub of it, in my view, is to look at the
extent to which the purported business is intertwined with the
leisure or recreational pursuits of the taxpayer having regard to
the passion and devotion attributable to a hobbyist or, in the
true sense of the word, an amateur, as opposed to an activity
that is undertaken outside the constraints of full-time
employment in which a taxpayer can utilize previously acquired
skills, tools, equipment or knowledge of a
process."
[10]
For the purposes
of examining the evidence in the within appeal, in my view, the
appellant is not someone falling into the category of hobbyist or
a person carrying on an activity in which there is a strong
personal element. As a result, the standard to be applied is as
stated by Linden, J.A. in Tonn, supra, as he
continued at pages 6012-6013:
"The primary
use of Moldowan as anobjective test, therefore, is
the prevention of inappropriate reductions in tax; it is not
intended as a vehicle for the wholesale judicial second-guessing
of business judgments. A note of caution must be sounded for
instances where the test is applied to commercial operations.
Errors in business judgment, unless the Act stipulates otherwise,
do not prohibit one from claiming deductions for losses arising
from those errors. This point was stated strongly by Sheldon
Silver:
It is submitted
that it should not be the role of Revenue Canada to determine
what businesses taxpayers should attempt to pursue. In fact,
governments in Canada have often stated that new businesses and
risk-taking should be encouraged and have, from time to time,
enacted legislation to encourage such activity. Canadian
chartered banks have recently been seriously criticised by the
press and government officials for not providing adequate lending
facilities to small and new businesses. Clearly, Revenue
Canada's attempt to penalize taxpayers who are unsuccessful
after taking these risks is inconsistent with the
government's promotion of private entrepreneurs.
This criticism was
echoed by Bowman, T.C.C.J. in Bélec v. Q. where he
stated:
It must be noted
that these losses were incurred solely in a business context.
There was no personal element either in his purchase nor in his
use of the building. The appellant is an experienced businessman.
He took his decision in good faith on his best judgment and on
the facts available to him at the time. It is not up to the
Minister (or this Court) to substitute his business acumen for
that of the taxpayer, with the benefit of hindsight. The question
to be asked is not, "Knowing what I know now, would I have
embarked upon this enterprise?" The answer is no doubt
"No", because the question only comes up when there are
losses.
And finally, the
same caution was reiterated in Nichol v. Q.:
[Mr. Nichol] made
what might, in retrospect, be seen as an error in judgment but it
was a matter of business judgment and it was not one so patently
unreasonable as to entitle this Court or the Minister of National
Revenue to substitute its or his judgment for it, or penalize him
for having made a judgment call that, with the benefit of 20-20
hindsight, that Monday morning quarterbacks always have, I or the
Minister of National Revenue might not make today. We were, after
all, not there in 1986.
Though I do not
support the use in the Nichol case of the word
"patently", I otherwise agree that the Moldowan
test should be applied sparingly where a taxpayer's
"business judgment" is involved, where no personal
element is in evidence, and where the extent of the deductions
claimed are not on their face questionable. However, where
circumstances suggest that a personal or
other-than-business motivation existed, or where the
expectation of profit was so unreasonable as to raise a
suspicion, the taxpayer will be called upon to justify
objectively that the operation was in fact a business. Suspicious
circumstances, therefore, will more often lead to closer scrutiny
than those that are in no way suspect."
[11]
Following the
decision in Tonn, supra, the Federal Court of
Appeal in Mastri v. The Queen, 97 DTC 5420 was urged by
Counsel for the Minister to reconsider the decision in
Tonn which - to the Minister - seemed to make application
of the principles in Moldowan, supra, applicable
only where the evidence established the taxpayer had engaged in
activity giving rise to "an inappropriate reduction in
tax", the presence of a "personal benefit" or
under circumstances where the expectation of profit was so
unreasonable so as to "raise a suspicion". The argument
by the taxpayers in Mastri was that where the
taxpayer's motives were purely commercial there was no need -
according to the reasons in Tonn - to apply the reasonable
expectation of profit test in its usual form. At
pages 5422-5423 of his judgment, Robertson, J.A.
stated:
"I do not
propose to deal with the Minister's argument in detail for
the reason that it is devoid of merit. There is no basis for
postulating that the Court in Tonn confused the concept of
deductibility of an expense with the concept of deductibility of
rental losses from income derived from other sources. Admittedly,
there are oblique references to the reasonable expectation of
profit test established in Moldowan being used to disallow
the deduction of personal expenses rather than business or
property losses: see Tonn, supra at 6007 and 6009.
These references arose in the context of an analysis seeking to
show the origin of the reasonable expectation of profit test
which can be traced to the prohibition against deduction of
"personal living expenses" under
subsection 18(1)(h), which term is defined in
subsection 248(1). I cannot help but acknowledge that even
tax commentators have succumbed to the same slip of the pen: see
S. Silver, "Great Expectations: Are They Reasonable?"
in Corporate Management Tax Conference - 1995, Real
Estate Transactions: Tax Planning for the Second half of the
1990s (Toronto: Canadian Tax Foundation, 1996) 6:1 at
6:15-16, quoted in Tonn at 6008. In the end, however, it
is readily apparent that the Court in Tonn recognized that
the issue before it was whether the rental losses could be
deducted from other sources of income: see Tonn,
supra at 6002 and 6004.
For the sake of
doctrinal purity, I should also point out that a distinction must
be drawn between the determination of whether a taxpayer's
source of income is from a business as opposed to a property. I
may own a rental property but whether I carry on a business in
regard thereto is a distinct legal issue giving rise to other tax
consequences not relevant to the cases under review. Thus,
strictly speaking it is inappropriate to speak of business
expenses incurred in relation to a rental property unless, of
course, the taxpayer's endeavours are regarded in law as a
business. In any event, it is helpful at this point to set out
the specific findings of law articulated in
Moldowan.
First, it was
decided in Moldowan that in order to have a source of
income a taxpayer must have a reasonable expectation of profit.
Second, "whether a taxpayer has a reasonable expectation of
profit is an objective determination to be made from all of the
facts" (supra at 485-86). If as a matter of fact a
taxpayer is found not to have a reasonable expectation of profit
then there is no source of income and, therefore, no basis upon
which the taxpayer is able to calculate a rental loss. There is
no doubt that, post-Moldowan, this Court has followed and
applied that decision: see Landry v. Canada, 94 DTC 6624;
Poetker v. Canada, 95 DTC 5614; and Hugill v.
Canada, 95 DTC 5311. The only remaining issue is whether
Tonn departs from that jurisprudence by postulating that
the reasonable expectation of profit test remains irrelevant to
the question of deductibility of losses until such time as it can
be established that the case involves an inappropriate deduction
of tax, the presence of a strong personal element or suspicious
circumstances. There are two passages in Tonn which are
cited in support of that proposition of law and are worthy of
reproduction (supra at 6009 and 6013):
The Moldowan test, therefore is a
useful tool by which the tax-inappropriateness of an activity may
be reasonably inferred when other, more direct forms of evidence
are lacking. Consequently, when the circumstances do not admit of
any suspicion that a business loss was made for a personal or
non-business motive, the test should be applied sparingly
and with a latitude favouring the taxpayer, whose business
judgment may have been less than competent.
...I otherwise agree that the Moldowan
test should be applied sparingly where a taxpayer's
"business judgment" is involved, where no personal
element is in evidence, and where the extent of the deductions
claimed are not on their face questionable. However, where
circumstances suggest that a personal or other-than-business
motivation existed, or where the expectation of profit was so
unreasonable as to raise a suspicion, the taxpayer will be called
upon to justify objectively that the operation was in fact a
business. Suspicions circumstances, therefore, will more often
lead to closer scrutiny than those that are in no way
suspect.
In my respectful view, neither of the above
passages support the legal proposition espoused by both the
Minister and the taxpayers. It is simply unreasonable to posit
that the Court intended to establish a rule of law to the effect
that, even though there was no reasonable expectation of profit,
losses are deductible from other income sources unless, for
example, the income earning activity involved a personal element.
The reference to the Moldowan test being applied
"sparingly" is not intended as a rule of law, but as a
common-sense guideline for the judges of the Tax Court. In other
words, the term "sparingly" was meant to convey the
understanding that in cases, for example, where there is no
personal element the judge should apply the reasonable
expectation of profit test less assiduously than he or she might
do if such a factor were present. It is in this sense that the
Court in Tonn cautioned against
"second-guessing" the business decisions of
taxpayers. Lest there be any doubt on this point, one need go no
further than the analysis pursued by the Court in
Tonn.
In Tonn, the Court clearly held that no
personal advantage had accrued to the taxpayer who was seeking to
deduct rental losses from his other sources of income.
Nonetheless, the Court continued to pursue the deductibility of
losses issue by applying the factors set out in Moldowan
when assessing whether there was a reasonable expectation of
profit. The Court's summary, provided at 6015, lays to rest
any doubt as to what was decided in Tonn:
My disposition of this case is therefore as
follows. The Tax Court Judge erred in principle as well as in his
application of the reasonable expectation of profit test, as it
is now understood. He did not consider all of the factors he
should have considered, nor did he assess the context fully. The
evidence clearly showed that the taxpayers engaged themselves in
a business enterprise and their expectations of profit were not
unreasonable in the circumstances. A small rental business was
launched without the aid of sophisticated market analysis at a
time when the rental market looked promising. Soon after, as a
result of unforeseen circumstances, it became precarious. No
personal benefit accrued to the taxpayers by the rental
arrangements. The property was not a vacation site. The house was
not used to give free or subsidized housing to relatives or
friends. They made an honest error in judgment and lost money
instead of earning it. It is not for the Department (or the
Court) to penalize them for this, using the reasonable
expectation of the profit test, without giving the enterprise a
reasonable length of time to prove itself capable of yielding
profits.
In summary, the
decision of this Court in Tonn does not purport to alter
the law as stated in Moldowan. Tonn simply affirms
the common-sense understanding that it is not the place of the
courts to second-guess the business acumen of a taxpayer whose
commercial venture turns out to be less profitable than
anticipated."
[12]
It is worthwhile
to examine the quotation from the judgment of Dickson, J. (as he
then was) in Moldowan v. The Queen, [1978] 1 S.C.R. at p.
485 where he stated:
"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. 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."
[13]
In applying the
facts in the within appeal to the criteria set forth in
Moldowan, it is clear the profit and loss experience in
past years was unimpressive. The location for the intended market
garden activity was changed three times within 10 years and the
revenue reported in the 1994 and 1995 taxation years was derived
from the following sources:
1994: Sale of
hay
$261.32
Rental for road use to gravel
pit
$250.00
Rental of
pasture
$1,000.00
Total gross
income
$1,511.32
1995: Sale of
hay
$261.30
Insurance
refund
$12.00
Rental for road use to gravel
pit
$250.00
Rental of
pasture
$1,000.00
CCA recapture (tractor
sale)
$502.41
Total gross
income
$2,025.71
There were losses in the
amounts of $5,463.23 in 1994 and $1,746.56 in 1995.
[14]
All of the farm
income reported in these taxation years came from the land at
Fairy Hill. It was useful only to rent out for pasture land or
access to a gravel pit. Those parcels of land were sold in 1997
and 1998. The appellant combined the operations at Fairy Hill and
Craven into one business for purposes of reporting income. Losses
were recorded each year from 1989 to 1997, inclusive. A profit in
the sum of $946.00 was reported in 1981. There was a loss of
$1,629.00 in 1992 and the 1993 taxation year indicated zero
income and zero loss. The 1984 taxation year showed a profit of
$38.00 and there were profits of $130.00 in 1985, $85.00 in 1987
and $287.00 in 1988. The profits produced were the result of
having entered into a hay crop-sharing arrangement with a local
farmer. As soon as the appellant began purchasing machinery,
building sheds and hiring some custom work, the losses began to
accumulate. The hay crop flooded and there was no longer any
revenue produced from that previously reliable source. There was
never any attempt to produce revenue from other crops such as
berries, potatoes or garlic. The berries were picked by John
Melnychuk and others and the remainder of the produce was given
away in the course of some elementary marketing plan. The
appellant and his hard-working unpaid assistant - Melnychuk -
were experimenting with different types of potatoes and garlic
and were moving their planting locations around in order to
determine the most efficient areas of production. It was an
experimental farm. Counsel for the respondent conceded the
appellant and Melnychuk were capable of carrying out the intended
activity. I agree. However, the production of income from the
land owned - at various times - by the appellant was subservient
to his other commercial activities such as acting as his own
general contractor while building an office building in Regina.
In order to finance the project, he sold one parcel of land at
Fairy Hill. Later, in 1981-82, when funds were needed to complete
an addition to his commercial rental building, two parcels of
land at Craven were sold. Throughout the years, the land
purchased was generally not suited to cultivation. Of the 10
acres at Craven, only five or six were arable and there were
problems caused by flooding four out of five years at one point.
Land located on a riverbank tends - from time to time - to flood.
The appellant's desire to have the Craven parcel certified as
an organic farm was subject to a three-year process, commencing
in 1998. There was no evidence of a definable market for the
produce either by way of consumption or sale for seed purposes.
The appellant had not yet settled on a particular type of potato
or garlic bulb to be produced and sold. The appellant stated his
research indicated one could make a net profit of $1,000 per acre
from an organic farm but there were no data or comparisons from
other operations in the area to support that supposition. The
venture was adequately capitalized in terms of need - considering
the pace at which the activity was being carried out - and the
appellant was fortunate to have struck a bargain with Melnychuk
so as to obtain nine years of free labour and allow him to attend
university, recover from health problems, build his office
building in Regina and carry on a law practice. For most of the
period between 1990 and 1995, the appellant devoted minimal time
to the market garden activity. In 1993, Melnychuk devoted his
time to repairing the machinery. In 1994, a contractor built a
storage shed on the Craven parcel for the purpose of storing a
tractor and some equipment but also to house boxes of files and
discarded office furniture from the appellant's previous law
offices. Again, the berry crop was not sold and no revenue was
produced from any farming activity. It is apparent on the
evidence the activity, as structured - setting aside the issue of
profit - had no capacity to produce revenue during the years
under appeal. Further, there was no foundation in place which
would lead onwards and upwards to an income stream sufficient to
produce a profit in later years. This was demonstrated by the
appellant continuing to carry out further experiments without any
definite plan to be followed. In so stating, this is not the
application of hindsight or second-guessing the business
practices of the appellant. Rather, it is a recognition - on an
objective analysis of the facts - that there was not any
reasonable expectation of profit during the years under appeal.
The activity carried out by the appellant was in an immature,
experimental and evolving state and, despite the passage of more
than ten years, had not developed to the point where it was
reasonable to project a flow of revenue capable of meeting costs
of operation, apart from producing a positive cash flow. In
disallowing the deductions for farming losses, the Minister was
correct.
[15]
The appeal is
dismissed.
Signed at Sidney, British Columbia, this 27th
day of March 2000.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE
NO.:
98-2393(IT)I
STYLE OF
CAUSE:
George Tkach and H.M.Q.
PLACE OF
HEARING:
Regina, Saskatchewan
DATE OF
HEARING:
January 26, 2000
REASONS FOR JUDGMENT
BY: Honourable Deputy Judge D.W.
Rowe
DATE OF
JUDGMENT:
March 27, 2000
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Carol Fleischhaker
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
98-2393(IT)I
BETWEEN:
GEORGE J. TKACH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 26, 2000 at Regina,
Saskatchewan by
the Honourable Deputy Judge D.W.
Rowe
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Carol
Fleischhaker
JUDGMENT
The appeal from the assessments made under the Income Tax
Act for the 1994 and 1995 taxation years is dismissed in
accordance with the attached Reasons for Judgment.
Signed at Sidney, British
Columbia, this 27th day of March 2000.
D.J.T.C.C.
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