Earl Harris v. Minister of National Revenue, [1989] 2 CTC 2270, 89 DTC 453

Lamarre Proulx, T.C.J.:—These are appeals from reassessments of income tax for the 1977,1978 and 1979 taxation years of the appellant.

There are two questions in issue in this case, the first one is whether the appellant was carrying on a farming business for the purpose of paragraph 18(1)(a) of the Income Tax Act and the second one is whether he is entitled for the 1978 and 1979 taxation years to the married status deduction under paragraph 109(1) (a) of the Act.

In reassessing the appellant, the respondent made the following assumptions of fact:

(a) that for the taxation years here in issue, the appellant was employed as an operator in a mine in the Town of Fort Saskatchewan on a full-time basis;

(b) that the appellant, in addition to other reported sources of income, reported income from a trucking business in his 1979 taxation year;

(c) that the alleged farming operations of the appellant were not carried on with a reasonable expectation of profit and as such did not constitute the carrying on of a business in the 1977, 1978 and 1979 taxation years of the appellant;

(d) that amounts deducted as expenses from income declared as farming income by the appellant in his 1977, 1978, and 1979 taxation years were in fact personal or living expenses of the appellant and not deductible from income;

(e) that, with respect to amounts deducted in his 1978 and 1979 taxation years under married status, the appellant did not support his spouse in the said taxation years.

At the hearing, the evidence showed that on or about 1977, the appellant purchased approximately 168 acres of land for the purpose of establishing a farm where he could retire when he reached the age of 45 which would be the year 1986. The price of that piece of land was about $36,000. The appellant installed a mobile home on the land and with the assistance of his wife and his children who in 1977 were 11 and 12 years old, he started to clear the land, removing the brush and piling the wood.

The appellant had a full-time job as a heavy equipment operator at a work site located 33 miles from the farm. His wife had a beauty salon business located 20 miles from the said farm. After their respective day's work, they worked on the farm four to six hours and during the weekends.

The trucking business mentioned in the respondent's reply to the notice of appeal did not apparently occupy much of the appellant's time. His involvement in this business was rather to help in the purchase of the trucks.

Much of the land was pasture land with 55 acres being cultivated for grain or hay. The cultivation and harvesting was done by a neighbouring farmer and the proceeds would be shared in half between that farmer and the appellant.

In the years under appeal, there were very few buildings on the land. There was the mobile home, a small shed for feed, some structure to cover the pump and a chicken coop of 15’ x 10'. There was a small corral for feeding purposes and for horse training. The appellant owned two cows and six or seven ponies. The ponies were for chuck wagon shows or fairs which the appellant enjoyed quite a lot. It was a hobby for the appellant. The plans as to the farming operations were and remained extremely vague. He wanted to raise cattle. For this he would gradually build up the herd to 30 heads. There is no evidence up to this day that he owns a large amount of cattle. Because of high payments he had to make on the purchase of the lands, he did not have the money in the years in question to finance his projects. One of his projects was to fence his land. This has been done. A storage shed has been purchased and a small barn constructed after the years under appeal. In all the years in question the gross income from the farming operations have been of a total of $1,400 and the expenses $20,000.

The appellant had some experience in farming. He was raised on a farm, he worked in a continuous manner throughout his life for farmers and enjoyed farmland. His 1988 income tax return shows a small profit.

Agent for the appellant has put forward that the expenses claimed as business expenses are true business expenses and not personal or living expenses. The appellant had always intended to develop his farming operations into a viable farming business, that a business takes time to establish itself, that the interest payments at that time had escalated and that explains the small scale of the farming operations. He quoted to me the following cases: Gorjup v. M.N.R., [1985] 2 C.T.C. 2194; 85 D.T.C. 530, Joseph Said v. M.N.R., [1986] 1 C.T.C. 2115; 86 D.T.C. 1009 and Parent v. M.N.R., [1985] 1 C.T.C. 2337; 85 D.T.C. 312, These cases which were all in favour of the taxpayers may all be distinguished from the case at bar on one major point. In all these cases the farmers had the material and the equipment to operate a farming operation, they held a large inventory of farm animals and had definite plans as to their farming operations. All these important elements of business operations are missing in the case at bar for the years in issue.

Counsel for the respondent quoted to me the following cases: Victor Croutch v. M.N.R., [1986] 2 C.T.C. 246; 86 D.T.C. 6453; Paul J. Taillefer v. M.N.R., [1987] 2 C.T.C. 2137; 87 D.T.C. 418; Paul Galloway Arnold v. M.N.R., [1965] Tax A.B.C. 268; 65 D.T.C. 653; Philias C. Castonguay v. M.N.R., [1970] Tax A.B.C. 35; 70 D.T.C. 1056; Morris I. Boddington v. M.N.R., [1988] 1 C.T.C. 2195; 88 D.T.C. 1146. In the Croutch case at page 250 (D.T.C. 6456), Mr. Justice Rouleau states as one element why the taxpayer was not carrying on a farming business:

. . .There is no evidence of a plan wherein the plaintiff indicated how he expected to ever make a profit from the farming operation in question; there is no evidence that such a plan had been formulated at the outset of the operation or at any point in time in the course of carrying on the farming operation.

In the Arnold case, the assistant chairman of the Tax Appeal Board says at pages 268-69 (D.T.C. 654):

. . .The keeping of four horses in the circumstances narrated by the appellant hardly could be termed a recognizable farming operation. In my view, such a small stable does not take its owner out of the hobby-farmer category, for want of a better description. One may own considerably more than four horses and still not be in a farming venture as a result. Here, the appellant made no profit from his stable. Instead, it was the cause of steady expense, albeit the appellant and his family derived enjoyment from having horses that could be ridden and exhibited at shows. I think that the outlays occasioned were no more than "personal or living expenses" . . . Appellant's activities in connection with his stable were far too limited and on too narrow a scale for this proceeding to succeed.

In the case at bar, there is no planning, no machinery, no adequate structures. There are two cows, six or seven ponies for chuck wagon fairs and a field that is cultivated by a neighbour. All this does not make a farming business. I therefore find that the appellant did not operate a farming business. To have the right to the restricted farm loss under section 31 of the Act, the appellant must first prove that his farming operations are a business for the purpose of paragraph 18(1)(a) of the Act. This he did not do.

The second question in issue for the 1978 and 1979 taxation years is the right to the marital status deduction provided for paragraph 109(1)(a) of the Act. The appellant says that he has been married to his wife for the past 25 years and that he has supported her and his family throughout this time. For the 1978 taxation year, the respondent disallowed the marital exemption that has been claimed in the amount of $846.60. In the 1979 taxation year, the amount disallowed was $2,320. The wife's assessments were not entered as evidence. What was entered as evidence was the income tax returns of the wife for those years.

In the final analysis it would have been better evidence if the wife had testified about her tax assessments for those years or if the respondent had provided the Court with a copy of these assessments. As this has not been done, as the returns are concordant with the claimed marital status deduction, as the husband and wife were living together during those years, and as there is evidence that the husband was providing for his family, I give the appellant the benefit of the doubt and find that he should be allowed the marital status deductions that he has claimed for the years in question.

For the foregoing reasons, the appeal for the 1977 taxation year is dismissed and for the 1978 and 1979 taxation years the appeals are allowed, without costs, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant did not carry on a farming business and that he is entitled to claim the married status deductions.

Appeal allowed in part.