Donald Plested and Linda Plested v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2985

Teskey, T.C.C.J.:—Both Linda Plested ("Linda") and her husband Donald Plested (‘ Donald"), elected to have their appeals of assessments for the years 1989, 1990 and 1991 heard pursuant to the informal rules and on common evidence.

Issue

The only issue before me is whether they had a reasonable expectation of profit from a farming activity in those three years.

Facts

The only oral evidence was given by Linda. Her evidence in no way challenged or disputed the facts assumed by the Minister of National Revenue (the “ Minister”), when he made Donald's assessment, which were reproduced in paragraph 5 of the reply to his notice of appeal. They read as follows:

(a) At all material times the appellant was employed on a full time basis with Alberta Power;

(b) At all material times, the appellant operated his farm on 23 acres of land;

(c) The 23 acre parcel was made up of the following:

cultivated	3 acres
bush	3 acres
yard	2 acres
under water	1 acre
pasture	14 acres

(d) the appellant reported farming income (losses) during the taxation years as follows:

TAXATION	CROSS	NET	NET
YEAR	INCOME	EXPENSES	INCOME (LOSS)
1987	$4,662.26	$17,708.33	($8,046.07)
1988	$1,015.18	$15,281.40	($14,266.22)
1989	$1,940.49	$19,967.27	($18,026.78)
1990	$3,573.19	$20,369.36	($16,796.17)
1991	$1,025.00	$23,309.84	($22,284.84)

(e) The appellant's sources of income during the years under appeal are set out in Schedule A, attached hereto and forming part of this reply;

(f) The appellant had no reasonable expectation of profit from the farming activity in any of the 1989, 1990 and 1991 taxation years.

Schedule A thereto reads:

Her evidence also in no way challenged or disputed the facts assumed by the Minister when he made her assessment, which were reproduced in paragraph 5 of the Minister’s reply to her notice of appeal.

They read as follows:

(a) At all material times, the appellant operated her farm on 23 acres of land;

(b) The 23 acre parcel was made up of the following:

cultivated	3 acres
bush	3 acres
yard	2 acres
underwater	1 acre
pasture	14 acres

(c) The appellant reported farming income (losses) during the taxation years as follows:

TAXATION	CROSS		NET	NET
YEAR	INCOME	EXPENSES	INCOME (LOSS)
1989	$1,940.49	$19,967.27		($18,026.78)
1990	$3,573.19	$20,369.36		($16,796.17)
1991	$1,025.00	$23,309.84		($22,284.84)

(d) The appellant did not report any farming income in prior years;

(e) The appellant's sources of income during the years under appeal are set out in Schedule A, attached hereto and forming part of this reply;

(f) The appellant had no reasonable expectation of profit from the farming activity in any of the 1989, 1990 and 1991 taxation years.

Schedule A thereto reads:

When Linda was asked the question: “What was your 1992 loss?” She answered: “I do not know, you will have to ask our accountant.”

It is obvious from the assumptions of fact by the Minister and the two exhibits filed by the appellant, that their accountant was playing fast and loose with their T1 tax returns. Notwithstanding that the property was in both names and both Linda and Donald were in the farming activity together, he had Donald declare solely all the losses in 1987 and 1988 and he split the losses in 1989, 1990 and 1991, two-third to Donald and one-third to Linda. In Exhibit A-1, which is a schedule of revised expenses for 1989,1990 and 1991, he still split the losses two-third to Donald and one-third to Linda. There is absolutely no basis whatsoever for either reporting. All incurred losses must be split on a 50/50 basis, unless concrete evidence is presented to show that all the mon invested into the operation comes from only one of the parties, and that title was taken jointly only as a matter of convenience in the event of death, so that the survivor would automatically be the sole owner, then that party is the sole proprietor.

Both appellants were represented by counsel. Therefore, I must assume that counsel knew that it was open to me to draw an inference that Donald's testimony would be in conflict with Linda's when he was not called to give evidence. Donald was present in the courtroom and was obviously available to give evidence. I so draw the inference that his testimony would have conflicted with his wife's.

The Court accepted as Exhibit A-2 a typed four page document entitled Future Plans for Farm". This document was prepared by Linda in the spring of 1992 and typed by her accountant. Although Exhibit A-2 predicted a small profit for 1993, cross-examination of Linda showed that there will be another loss in 1993. When you compare the projected statement of income and expenses (Ex. A-2) for 1993 to 1997 with the T1 tax returns actually filed and with the revised expense statement (Ex. A-1), it is obvious that not all the claimed expenses in the years in question were carried forward into Exhibit A-2. Exhibit A-2 is not accurate and cannot be accepted as a valid projection of either income or expense.

The appellant purchased the property in 1985 for $100,000, borrowing $99,900 of the money. Since then, they have continuously put their earned wages into the operation as they attempted to build a capital base from which to operate a farming operation.

I must determine if the losses before me are legitimate start-up losses in an operation with a reasonable expectation of profit in the future or whether we are dealing with costs associated with holding, upkeeping or establishing the capital and asset base from which to begin operations.

Bearing in mind what Dickson, J. said, as he then was, in Moldowan v. The Queen, [1978] 1 1S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5218, wherein he said at pages 485-86 (C.T.C. 313-14, D.T.C. 5215):

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 diner 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.

Cardin, Q.C., chairman of the Tax Review Board, in McLachlen v. M.N.R., [1974] C.T.C. 2003, 74 D.T.C. 1035 (T.R.B.), said at page 2005 (D.T.C. 1036-37):

There is no doubt whatsoever in my mind that the appellant is now engaged in the business of farming and can entertain a reasonable expectation of making a profit from his operation, but that of course is not the issue of this appeal. The present issue is whether the appellant was involved in a farming operation in 1970 and whether his activities in that year can be considered as having a reasonable expectation of profit.

I am satisfied from the facts of this case that the appellant's intention in purchasing the 400-acre farm was to operate with a sizeable herd of cattle. The appellant's competence in agriculture, the availability, as a professor, of many hours free time during the week, the long summer holidays which could be devoted to farming, the fact that the appellant will retire from the teaching profession within a few years, are plausible and credible reasons which support his declared intentions of operating a cattle farm.

However, the important point to consider in this appeal is the period of time at which the preparatory and planning stage of the appellant's project terminated and the actual farming operations began. I do not believe that farming operations can be considered as having started at the time the idea or the intention of farming was conceived, nor at any stage prior to the actual operations of the farm.

From the evidence given by the appellant, I can imagine that if the appellant had had the necessary capital he would perhaps have been able to commence his farming operations sooner than he actually did without the necessary finances, but in either case the only criteria to be applied in defining farming or farm operations would necessarily be the same and that is the actual tillage of the soil, the raising of livestock, etc. as defined in section 139(1)(p) [now subsection 248(1)] of the Income Tax Act.

And what my colleague Taylor, T.C.C.J., said in McClure v. M.N.R., [1988] 2 C.T.C. 2140, 88 D.T.C. 1504 (T.C.C.), at page 2155 (D.T.C. 1514):

A“ business” is an economically viable operation from which it can be determined at that point in time that there is a "reasonable expectation of profit”. "Reasonable" is a term encompassing both objective and subjective considerations; "expectation" means something more than mere "hope" — perhaps it is closer to “anticipation”; and "profit" is a calculation taking into account the Act and G.A.A.P., with little need for subjectivity in my view.

In these appeals, the case has not been made that there was an operation from which there could be a "reasonable expectation of profit” during the years under appeal. Equally, the losses, termed by the appellants as "start-up costs", are not costs associated with such an operation, but rather costs associated with holding, improving, or establishing the capital and asset base from which to begin opera* tions, or they might be termed personal or living expenses".

Both appellants herein are obviously hard working individuals who are putting all available capital and energy into the proposed farm operation. The farming operation in the years before me were substantially under capitalized and could not possibly ever produce a profit as the operation existed in the years before me.

The appellants have failed to demonstrate to me that the operations as operated in the years before, could ever produce a profit. The losses before me and the losses claimed by Donald in the years 1987 and 1988 cannot be classified as start-up losses. They must be categorized as costs associated with establishing the capital and asset base from where to begin farming operations.

There is no legitimate reason the taxpayers of Canada should subsidize the appellants' operations, while they garner the necessary capital to expand the operations as it existed in these years, until they have an operation that they can demonstrate has a reasonable expectation of profit.

For these reasons, the appeals are dismissed.

Appeals dismissed.