Lawrence W. Sobczak v. Her Majesty the Queen, [1993] 2 CTC 2399, 93 DTC 963

Bell, T.C.C.J. (orally):—The appeal herein relates to the appellant's 1986 and 1987 taxation years.

There are three issues:

1. Should the CARLETON PLACE FARM losses be restricted pursuant to section 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act")?

2. Did the C.I.M.A. FARM operations constitute a legitimate tree farming business carried on with a reasonable expectation of profit?

3. Could the sum of $16,557 paid by the appellant as legal expenses be regarded as an advance to L.E.R. Construction Co. and was it a debt owing by that company to the appellant which had become bad in his 1987 taxation year?

As the case was heard on Monday of this week, only a brief statement of facts is necessary for the purposes of these reasons for judgment.

Carleton Place operation

The appellant and his wife purchased property at Carleton Place in the early 1970s with the view of farming same. After removing overgrowth and bushes the appellant started farming in the early 19805. He explained that there were high start-up costs and that a period of eight to ten years must pass after planting before trees could be sold, the appellant's contention being that he was operating a tree farm. The clearing work included eliminating thorn trees, burning old trees, spraying new thorn trees and spraying around newly planted trees to suppress other growth. The appellant stated that they grew scotch pines for sale as Christmas trees. He said they must be pruned in June and July as they needed to be cut and shaped. He further stated that they started marketing in the last two years in the face of great competition from a competitor who brought in trees and was selling them for less than the appellant's proposed sale price. He stated that they now have 25,000 trees on this land from one-year-old to mature trees.

The appellant further testified that he had lived and worked on a farm since he was a child, having done farm work all his school life including weekends and summers from university. He is a research scientist who, in the 1986 and 1987 taxation years, worked with the Department of Energy, Mines and Resources. He also gave evidence to the effect that he received an Ontario government subsidy for his farming operation, that farming was part of him, that he grew up with it and that he had now returned to it.

In respect of this operation the appellant claimed a loss of $11,404 in his 1986 taxation year and a loss of $17,003 in his 1987 taxation year. The Minister of National Revenue reassessed him in respect of those two taxation years restricting the amount of the loss in each case pursuant to the provisions of section 31 of the Income Tax Act.

C.I.M.A. operation

With respect to C.I.M.A. the appellant, with a group of other people, which he described as a partnership, purchased 175 acres with 700 feet of lake frontage. The stated purpose of same was to subdivide this land and sell lots. A cost analysis showed that all lots were back lots, there being a swamp between those lots and the waterfront with the chance of filling same in being slim. An analysis of a subdivision near them indicated that they would lose money and the idea was abandoned.

At the appellant’s suggestion the group decided to plant Christmas trees. They bought equipment, built a barn and planted 10,000 such trees. The appellant testified that even if these trees were sold to a wholesaler there would be $100,000 per year in revenue. However, they discovered, after three years that the trees, planted among deciduous trees, were not growing. After five years the bulk of them had died. Also, the group encountered great problems with beaver dams which flooded the tree-planted area. In all, about 30,000 trees had been planted before it was realized that they were not thriving. The appellant explained steps that had been taken to fence part of the land so that the beaver problem would be solved. He stated that if this plan works it will be repeated on another portion of the land.

The appellant, in his 1986 taxation return claimed a loss deduction in the amount of $5,615 from the C.I.M.A. operation and in 1987 taxation year claimed a loss deduction of $4,519. The Minister of National Revenue disallowed these losses in total.

Legal expenses

The appellant explained at length the difficulties he had with respect to the Whitby farm. In brief, in order to preserve the family farm, which his mother wished to sell, he and his brother and a third party formed a company called L.E.R. Construction Co. This company obtained a ten-year option from his mother to buy same. The option was subsequently exercised and a lawsuit with his mother ensued. Although this matter was finally settled, the appellant paid $16,557 in legal fees for the purpose, as he stated, to save the farm.

On cross-examination, the appellant stated that he had taken no formal agriculture courses but that he had done lots of reading and, being a research scientist, he caught up fast. In response to the question as to why anyone would want to get into farming he stated that he had the potential at Carleton Place of $100,000 a year, that he has not achieved financial success yet but the potential is there and that he is going to try to make it work.

Mrs. Sobczak gave evidence and in so doing stated that she always helped her husband and that she, among other things, planted trees and helped with the spraying.

I found the appellant to be articulate, knowledgeable and credible. There is no doubt in my mind that his farming endeavours were not a hobby but were intended to be and were a business. He is now retired from his full-time employment and devotes his energies solely to his farming operations. Although, in the years in question, the appellant was gainfully employed elsewhere, his uncontradicted evidence regarding the effort he made in his farming enterprise at Carleton Place in the years preceding, during and after the two taxation years in question, was impressive. Although he did not enjoy the profits as anticipated in the years under appeal his explanation was clear — namely a matter of competition which he had not anticipated. The appellant was close to retirement from his employment and it was clear to me that he saw this activity, in which he was already heavily involved, as a very productive venture economically. By virtue of the aforesaid reassessment, the Minister of National Revenue had acknowledged that the appellant had a reasonable expectation of profit therefrom.

I have concluded, with respect to the Carleton Place operation, that having regard to the appellant's clear evidence, covering the time and effort devoted thereto and the potential thereof, farming, combined with his employment, was his chief source of income in the 1986 and 1987 taxation years.

With respect to the C.I.M.A. operation, although the appellant's efforts together with the other owners were part of his farming operation, a review of the circumstances does not enable me to conclude that he had, for the taxation years in question, a reasonable expectation of profit from same. That may well change because of his resolve to solve the problems described by him.

Finally, with respect to the legal fees paid by the appellant, it seems clear that it was the company, L.E.R. Construction Co., that had the option to acquire his mother's land and that the option could, technically, only be exercised by the company in the absence of having been assigned to the appellant personally. I find, therefore, that in effect the appellant advanced the sum of $16,557 to the company for payment of legal fees, that same clearly became bad in 1987 and that that amount qualified as a“ business investment loss" within the meaning of paragraph 39(1)(c) of the Income Tax Act. The appropriate percentage of that sum will, therefore, be deductible in the appellant's 1987 taxation year as an allowable business investment loss within the meaning of section 38 of the Income Tax Act.

Accordingly, the appeal is allowed, with costs, with respect to the Carleton Place farm operation and with respect to the payment of legal fees in the sum of $16,557.

Appeal allowed in part.