Francois Gagnon v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2638

Tremblay, T.C.C.J.:—This appeal was heard under the informal procedure on April 5, 1993, at Québec City, Québec.

1. The point at issue

According to the notice of appeal and the reply to the notice of appeal, the issue is whether the appellant, who received the farm as a gift from his parents in 1951, is justified in claiming the following amounts as farm losses:

$25,253.68 for the year 1987;

$30,236.45 for the year 1988;

$33,210 for the year 1989.

The appellant argues that overall he has invested about $125,000 since 1973, the year when he started to devote 100 per cent of his time to farming activities.

In 1991, he showed an operating profit, and when he filed his notice of appeal he predicted that 1992 would also result in an operating profit. He therefore argued that during the years in issue, 1987, 1988 and 1989, there was a reasonable expectation of profit.

According to the respondent, on the other hand, the appellant had sustained farm operating losses every year from 1970 to 1991. Gross income was always very low. During the years in. issue, it never reached $5,000 per year. There was no reasonable expectation of profit. The respondent therefore considered the expenses to be personal expenses within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), and accordingly not deductible.

2. The burden of proof

2.01 The appellant has the burden of establishing that the respondent's assessments are wrong. This burden of proof derives from several judicial decisions, including a judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the case at bar, the facts assumed by the respondent are described in subparagraphs (a) to (f) of paragraph 8 of the reply to the notice of appeal, which read as follows:

8. In establishing and confirming these reassessments, the Minister of National Revenue assumed the following facts, inter alia:

(a) since 1970, and more specifically for the years 1987 to 1991, the appellant has always reported substantial farm losses; [admitted]

(b) for the years 1987 to 1991, gross income was always very low; [admitted]

(c) the appellant had no reasonable expectation of making a profit from farming during any of the 1987, 1988 and 1989 taxation years; [denied]

(d) financing expenses were disallowed because they were incurred in respect of personal farming activities which were not in respect of a business which had a reasonable expectation of profit; [denied]

(e) the refund of investment tax credit was disallowed because it related to a farming activity which was not considered to be a business having a reasonable expectation of profit; [denied]

(f) the expenses in question were personal expenses of the appellant. [denied]

[Translation.]

3. The facts

3.01 The appellant was born and reared on a piece of land in Cap-Chat, in the Gaspé region of Quebec. He is 71 years old today. Since 1973, when he was 51 years old, he has devoted 100 per cent of his time to farming. Prior to that, his public responsibilities took up all his time. He has held office as, inter alia, member of the provincial legislature for his constituency for eight or nine years, municipal secretary, manager of a branch of the Banque Canadienne Nationale, and so on.

3.02 From 1951 to 1973, he was considered by the provincial and federal departments of revenue to be a gentleman farmer. Starting in 1974, in view of the $125,000 he had invested, largely in machinery (two tractors, seed spreader, harvesters, thresher, plough, and so on), he was considered to be a commercial farmer whose principal business was raising beef.

3.03 The farming business comprises 170 acres, including 85 acres of woodlot for pulpwood cutting (wood used in making pulp and then paper). This farm is one mile long and has a fence two and a half miles which the appellant completely rebuilt himself, starting in 1973. Income from the farm is derived from selling beef, grain, hay and wood pulp.

The grain and hay were sold locally. In fact, there were then many small farmers who could not grow their own hay and grain. However, starting in 1979-1980, these farmers, whose children were not taking over from them, stopped their farming activities. The appellant could therefore no longer dispose of the hay and grains.

The wood pulp was bought by the company Consolidated Bathurst Ltée when that company needed it. As well, the appellant was under a quota (1/2 cord per acre of land).

3.04 During the 1980 years, the appellant met several times with agronomists and heads of departments in the Department of Agriculture in order to do the wisest possible thing to improve the production of his farm. The appellant admits that the solutions were not easy. While there is only one harvest in Cap- Chat, there are two and sometimes three in the Montreal region. Ultimately, in response to the advice received, he sold his animals in 1990. If he was no longer using electricity in the stable, the farm expenses would be reduced.

3.05 Since 1970, the appellant's farming activities have shown nothing but losses. Specifically, from 1977 to 1990 the appellant's farm gross income and losses break down as follows:

3.06 During the three years in issue, the details of the appellant's gross income were as follows:

3.07 Although the appellant argued in his notice of appeal that in the 1991 taxation year he showed a profit [he argued that he received refunds from Revenu Québec and Revenue Canada], it appears from the statement of income and expenses filed with his income tax return that gross income amounted to $6,526 and expenses to $14,086, including $6,508 in operating expenses and $7,578 in capital depreciation.

In disallowing the losses, the respondent simply treated the farming income as nil. Out of the appellant’s income of $57,970 considered by the respondent, $40,791 came from his pension as a former member of the legislature and other retirement pensions.

3.08 The appellant argued that starting in 1992 he made profits because of an agreement made with a Marcel Pelletier (Exhibit 1-1). According to that agreement, dated March 10, 1992, Mr. Pelletier looks after the farming activities and has even undertaken to supply and pay for the seeds and fertilizer needed for planting. In addition, he will maintain the fences. The appellant will pay him $3,300 per year for this work. Moreover, Mr. Pelletier has also promised to purchase the farm's production for $3,950. This agreement is to last until December 31,1995.

3.09 For the year 1992, the statement of farming income and expenses (appended to his return, Exhibit A-2) shows that he had income of $8,039.42:

On the other hand, expenses amounted to $10,957.79, comprised of $4,602 for capital depreciation and $3,300 for farming activities.

4, Case law and analysis

4.01 Case law

The main case cited by the parties is Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213.

In that case, at page 487 (C.T.C. 315), the Supreme Court of Canada described the three classes of farmers envisaged by the Act:

1. A taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

2. The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carries on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

3. The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

Until 1973, the respondent had treated the appellant's losses as restricted losses, since the appellant was classified as a farmer in the second category, in that the activity had a reasonable expectation of profit. Starting in 1974, as a result of the investment and the appellant's personal 100 per cent involvement in the farming activities, he was considered to be a farmer in the first category until 1986 (paragraph 3.02). Starting in 1987, he was considered to be a farmer in the third category, that is, one whose farming activities did not have a reasonable hope or expectation of profit.

4.02 Analysis

With respect to the reasonable hope or expectation of profit, Dickson, J. (as he then was) stated the following, at pages 485-86 (C.T.C. 313-14) of his decision:

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 (F.C.T.D.). 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.

4.03 In this case, we may say that the criterion of the taxpayer's training in farming and all the information sought out from skilled people operate in the appellant's favour. However, this is not the only test. The statement of profits and losses for the earlier years do not operate in his favour: from 1974 to 1987 there was never anything but losses (paragraph 3.05).

The appellant argues that during the 1991 and 1992 taxation years there were profits, and accordingly that in 1987, 1988 and 1989 there was a reasonable expectation of profit.

In fact, we have here the nub of the fundamental criterion of the capability of the business to show a profit.

4.04 To analyze this criterion, we must first consider one fundamental factor: income tax is an annual affair, and so it is the source of income which existed in the year (here, in the years) in issue that must be considered in seeking to determine the effects in the previous years.

Apparently, the sale of the cattle in 1990 and the reduction of expenses relating to the cost of electricity had a great influence on the profitability of the farm.

While the change in approach was the real cause of the profit in 1991, the change did not exist during the years in issue. Moreover, the evidence that the farming activity resulted in a profit in 1991 is not by any means convincing (paragraph 3.07).

4.05 With respect to 1992, the appellant contended that the contract (Exhibit 1-1) signed with Mr. Pelletier for the period from 1992 to 1995 is also an important decision which was to result in profits from the farming activity. Here again, this contract did not exist during the years in issue, and here again, the evidence did not by any means establish the anticipated profit (paragraph 3.09).

4.06 The Court therefore finds that during the years in issue there was no reasonable expectation of profit, and accordingly that the farm losses cannot be allowed, not even as restricted losses.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.