Jean-René Clément v. Minister of National Revenue, [1989] 1 CTC 2010, 88 DTC 1751

Tremblay, T.C.J.:— This appeal was heard at the City of Quebec, Quebec on December 6, 1985 and December 16, 1986.

1. Issue

The issue is whether the appellant, an ophthalmologist, is justified in deducting the amounts of $5,000 and $3,721, respectively, as restricted farm losses when computing his income for the 1981 and 1982 taxation years. A further issue is whether he is justified in not including in his income the amounts of $1,007 (1981) and $7,425 (1982) resulting from the sale of sand.

The respondent disallowed the farm losses deduction on the grounds that the appellant's farming activities offered him no reasonable expectation of profit and that, accordingly, these expenses should be considered personal.

With regard to the $1,007 (1981) and $7,425 (1982) obtained from the sale of sand, the respondent submits that these were amounts received by the taxpayer that were dependent upon the use of or production from property, in accordance with paragraph 12(1)(g) of the Income Tax Act and that they are therefore taxable in their entirety.

The appellant submits, inter alia, that it is necessary to take into account the fair market value at the time when the property, the sand, became inventory, that is, in 1981, and that accordingly, since the fair market value was the sale price, there cannot have been any profit.

2. Burden of Proof

2.01 The appellant has the burden of demonstrating that the respondent's assessments are unfounded. This burden of proof is based on a number of judicial rulings, including the judgment of 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 The Court ruled in that case that the presumed facts underlying assessments or reassessments by the respondent are presumed to be true until proof to the contrary. In this case, the facts presumed by the respondent are described in subparagraphs (a) to (k) of paragraph 5 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

[Translation]

5. In assessing the appellant for the 1981 and 1982 taxation years, the respondent, the Minister of National Revenue, relied inter alia on the following facts:

(a) In April 1978, the appellant acquired a property of 66 acres at Grondines, Portneuf, for the sum of $22,000.00; [admitted]

(b) The appellant was working during the years in question as an ophthalmologist; [admitted]

(c) The appellant contends that he wishes to generate income from the sale of wood from his land, but:

(i) the sale of wood results from the fall clearing of trees within a small

maple grove by relatives of the appellant, as compensation; [denied]

(ii) The maples are so small and close-grained that it is difficult to envisage any possibility of profit; [denied]

(iii) There are no more than about twenty apple trees, which is clearly insufficient to generate a satisfactory income; [denied]

(d) The appellant says he wishes to raise Quarter Horses, but:

(i) He has only three (3) horses [admitted], a 16-year-old mare, a colt and a

filly, which is not enough to ensure an eventual income; [denied]

(ii) The appellant's horses are of ordinary quality; [denied]

(iii) The appellant has never entered his horses in competition and appears to have made no effort to publicize them; [denied]

(e) The appellant does not spend much time at horse-raising, and leaves them

in the care and maintenance of his neighbours or relatives; [denied]

(f) The appellant says that at the time he purchased the farm he had decided to go into planting Christmas trees, but: [admitted]

(i) No convincing plan indicating planning for the sale of Christmas trees has been presented to the respondent; [denied]

(ii) This desire to sell Christmas trees appeared to be the result of the sale of sand to Komo Construction Inc., which contracted to reforest his land by planting conifers; [denied]

(iii) The purpose of planting trees was to increase the value of the land, not to develop a Christmas tree farm as a business; [denied]

(iv) The appellant was not doing the necessary upkeep on the saplings, which might have indicated to some degree his desire to make a business out of them; [denied]

(g) The appellant's farm machinery is comprised of a tractor and a small trailer worth about $3,000.00;

(h) The gross income realized during the previous years does not suggest a

reasonable expectation of profit, as is shown by the following table:

1980	$ 810.00	[admitted]
1981	Nil	[denied]
1982	2,550.00	[admitted]

(i) The appellant is unable to provide any documentation that would verify the income and the taxpayer's agent has accordingly reconstituted the income for 1982 as follows:

Livery, stable	$	50.00
Apples		200.00
Wood		300.00
Sand	1,000.00
Other	1,000.00

(j) This income is clearly not enough to allow a reasonable expectation of profit; [denied]

(k) The sale of sand to Komo Construction Inc. during 1981 constitutes taxable income, since it is based on production or use, and this sale of sand does not come from an estate being used for farming; [denied]

3. Facts

3.01 The appellant, who was born in July 1944, is the son and grandson of farmers. He was raised on a farm until the age of 18.

3.02 When the time came to enter university, he applied to medicine and agronomy. Being accepted first by the faculty of medicine, he chose it. He then became an ophthalmologist.

3.03 After a few years of medical practice, the appellant decided to have other sources of income than medicine. Generally speaking, a doctor stops doing operations, which were the appellant's major activity, toward the age of 50. He therefore invested in real estate (unsuccessfully) and in a farm.

A. Farming activities

3.04 The farm is a 66-acre piece of land (22 in length by 3 in width) situated at Grondines, in the county of Portneuf, which was purchased in 1978 for $22,000 (T(1) [Transcript of December 6, 1985], pp. 77 and 162).

The appellant lives in the area of Sillery and practices at the hospital in Loretteville, so Grondines is not his region. There was no house or even a cottage on the land until 1986.

At the time the land was purchased, there was a stable. The vendor bred and sold horses (T(1), pp. 75 and 76). There was also an uninhabitable building with four walls and a sagging roof, which has since been solidified. It was an old house that had been destroyed by vandals.

At the time of purchase there was still a fenced off enclosure for the horses to run and be trained in (T(1), pp. 75 and 184). There was also a garage for storing machinery and an old, unusable sugaring-off cabin.

3.05 Before purchasing the land, the appellant had consulted his accountant, Mr. Jocelyn Thibault, for advice on how to make it into a going concern. Mr. Thibault, who was the author of a regular financial column in the Bulletin des Agriculteurs, advised him to associate with competent persons. He then entered into an association with the vendor, Mr. Gosselin, who had some experience in raising horses, and with Mr. Therrien, who was likewise a long-time amateur horse fancier.

Mr. Thibault also suggested that he purchase some registered horses worth a considerable amount, but not more than two or three horses to start with (T(1), pp. 33-4) and to lease the other empty stalls in the stable (there were a total of 10, which could each be divided into two), so as to share the costs, minimize the risks and increase profitability (T(1), pp. 34-6).

3.06 In addition, the appellant wrote to the federal and provincial agriculture departments to obtain documents on operating a maple grove (T(1), pp. 79, 82-3). He also received some documentation from the Quebec Department of Lands and Forests concerning the production of Christmas trees (T(1), pp. 73 and 118) (Exhibit A-5). In 1981, he obtained still more pbulications on the production of Christmas trees (T(1), pp. 119, 122) (Exhibit A-6). The appellant says he had ample documentation dealing with nurseries, maple groves and apple trees (T(1), p. 185).

3.07 The appellant produced as Exhibit A-3 profitability plan prepared in 1978 even before the purchase of the land. This detailed plan of six 8V2 x 11" pages covers an eight-year period.

He described the complete financing arrangement as finalized with the manager of the National Bank. It anticipated investments of up to $9,250 after the purchase of the farm. The major projected income sources were the cultivation of Christmas trees and the raising of horses for short races. As secondary income, it contemplated the sale of cordwood (1,000 cords), the sale of apples through the transplanting of 100 apple trees and the maple grove.

With regard to the Christmas trees, the appellant based his statements on documents prepared by the Faculty of Forestry and Geodesics and a publication of the Rural Forestry Branch of the Lands and Forests department, entitled "La culture des arbres de Noël" [Growing Christmas trees] (Exhibit A-5).

With regard to the horses, the appellant foresaw two options as a result of the advice of Mr. Gosselin and Mr. Therrien:

Option A: Purchase of a broodmare and billeting of three or four horses. He anticipated profits of $925 in 1984, $3,850 in 1985 and $16,300 in 1986. The excess of receipts over total expenditures would be $7,465 over the eightyear period.

Option B: Purchase of four broodmares in order to achieve nine horses in short order. Despite a profit of $17,500 anticipated for 1986, he anticipated net losses of $37,500 over the entire eight-year period.

3.08 The actual option chosen by the appellant was therefore option A. Acting on the advice of Mr. Gosselin and Mr. Therrien (T(1), p. 98), he purchased a young registered purebred mare (T(1), p. 169).

He leased the other stalls in his stables to other horse breeders, including Mr. Gosselin and Mr. Therrien.

He enrolled as a member of the American Quarter Horse Association, which requires that its members purchase purebred Horses. For a horse to be registered, its parents must have been purebreds. Finally, the appellant acquired a number of horses for prices varying from $1,500 to $5,000. Mr. Gosselin had some worth $10,000 (T(1), p. 168). The stable was even enlarged (Exhibit A-9:1 — photo) to make room for more horses.

3.09 The 1980-83 recession also affected horse breeders, including the appellant and his tenants. Since the latter gave up their horses, the appellant's revenues decreased. The appellant himself had to give up his own horses: the three-year-old filly, for $2,500; and the colt, for $1,500 (T(1), pp. 100-103, 205 and 212).

3.10 The appellant submits that he did not purchase any horses for his personal or family use; he is himself afraid of horses. Neither he nor any member of his family ever engaged in horsemanship. Nor were the horses used for this purpose (T(1), p. 172).

3.11 The appellant waited to find out where the superhighway would go before deciding on the location for his Christmas tree grove. He did not want to have his grove cut in two if he began before the highway alignment was known. The route was surveyed in 1980. Komo Construction Inc., one of the highway construction companies, used a sand pit located on the appellant's land in 19081. One of the appellant's requirements was that Komo Construction Inc. subsequently fill in the land and plant 5,000 conifers. In fact, some spruce trees were planted. As Christmas trees, they sell at the same price as firs on the U.S. market (T(1), pp. 110, 116) (Photo A-8).

3.12 Mr. Jean-Pierre Carpentier testified as a forestry engineering expert. He completed a masters degree in forest management in early 1987. He has worked for ten years in the production of seedlings. He has supervised the production of up to 50 million seedlings a year. At present, he is working in forestry research at the Energy and Resources department's Complexe scientifique. His job is to draw up forest productivity, or wood volume, forecasts

(T(2) [Transcript of December 16, 1986], pp. 52-4).

Mr. Carpentier has also published many articles in various magazines. His curriculum vitae (Exhibit A-15) refers to more than 15 publications, all of them associated with his area of specialization (T(2), p. 55).

3.13 During his first visit to the appellant’s land, Mr. Carpentier inspected his spruce grove. During his second visit, he inspected the apple trees and the maple grove. He says that the spruce trees planted in 1981 were already four years old at the time they were planted. In the summer of 1986, they were about three and a quarter feet high and of good quality. In 1987, the appellant had to trim the tops since they were growing at a rate of more than 12 inches a year (T(2), pp. 60-63).

A spruce tree takes from eight to ten years from the time it is planted to reach a height of eight feet, or up to 12 years if the trees are shorter, depending on the richness of the soil, the species, and the size. The optimum height for a Christmas tree is seven feet (T(2), pp. 65-67).

In the summer of 1986, there were about 5,400 spruce trees on the appellant's land. About ten per cent of these will be ready for cutting in 1988, another 30 per cent in 1989 and another 30 per cent in 1990. The appellant could begin replanting in 1988 and even prior to the final cutting because the spacing so too wide and after the planting the competition of neighbouring trees would not disturb the saplings.

3.14 According to Mr. Carpentier, the fir tree is the most popular indoor Christmas tree in Quebec. In the United States, it is the Sylvester pine (27 per cent of the market), and the second most popular is the spruce, with 11 per cent (the black spruce accounting for 7 per cent). In the American West, the Douglas fir takes 22 per cent of the market (T(2), pp. 82-87).

Several million Quebec Christmas trees are sold each year in the United States. In addition, a new market for wreathes made from branches is opening up (T(2), p. 89).

3.15 As for the maple grove, there is the sector of maples that can be tapped or have already been tapped. They are six to ten inches in diameter. There are 40 to 50 trees per acre, which means 400 to 500 trees in this sector, which encompasses about 10 to 12 acres. (T(2), pp. 90 and 91).

This sector of 400 to 500 maples that can be tapped constitutes about 20 per cent of the total territory that belongs to the appellant. Another 20 per cent is composed of early regrowth that will take about 30 years before it is ready for tapping (T(2), pp. 93-4).

Finally, a part of the maple grove that was pruned by the appellant would provide another 400 to 500 trees for tapping within a few years. If the appellant continues the pruning that he has begun, the number of tapping trees could increase by 200 per year. There could even be as many as 2,000 tapping trees within a dozen or so years (T(2), pp. 96-7).

One thousand tapping trees yield 125 gallons of maple syrup per year, since eight trees are needed to produce one gallon of syrup, according to figures published by the Department of Agriculture (T(2), p. 100).

3.16 In late September 1986 Mr. Carpentier also visited the appellant's apple trees. He has about 30 producing trees, the majority of which are four inches in diameter. They will reach full capacity when they are about 12 years old, around 1989. The witness says that in the Deschambault region, in which the appellant's land and the other villages are located, [translation] "it's the place for apples". There are many apple orchards. An apple tree normally produces two crates of apples. A crate weighs 40 pounds. Mr. Clément anticipated $2,000 in income, but in 1984 he stopped planting new apple trees because of the reassessments by the respondent (T(1), p. 92).

3.17 On cross-examination, Mr. Carpentier stated that the appellant's spruce trees were white spruce, and that they were more attractive than the black spruce that are primarily sold as Christmas trees in the United States, where few white spruces are grown. Black spruces grow faster. White spruces account for three per cent of the U.S. market.

With regard to the maple grove, Mr. Carpentier said that the appellant could have collected more than ten gallons of maple syrup per year if he had tapped more maples.

3.18 Mr. Damien Blais, a school teacher and Christmas tree producer, appeared as a witness on behalf of the respondent.

He has a farm at St-Pierre-de-Broughton, not far from Thetford Mines. On this farm he produces, among other things, firs, Sylvester pines and some spruce trees. Five hundred of his 100,000 trees are spruces. He is a producer, wholesaler and distributor of Christmas trees. He says spruces are fine for making wood when they are 40 years old, but not as Christmas trees.

In 1986, he sold 25 spruces as Christmas trees. They are used as outdoor trees. These 10- to 12-year-old trees measure 8 to 10 feet in height. The Baumier fir is most in demand in Quebec. He sold a total of 3,000 Christmas trees in 1986 (T(2), pp. 14-20).

3.19 Mr. Blais says that although he sells few spruces as Christmas trees, he has sold 50 truckloads of spruce branches, at $3.50 to $4.00 per 50-pound bundle, at the roadside. The branches are used to make wreathes and decorations. There is a good market on the U.S. side, in New York and Philadelphia.

According to him, anyone who has 4,000 spruces to sell as Christmas trees should find a market. But he will not sell them in Quebec. If he sells any, it will not be at $25 per tree.

3.20 In cross-examination, Mr. Blais said he had been producing Christmas trees since 1982. One of his conditions is to sell $3,000 worth. He stated he had little knowledge of the U.S. market. In Quebec, cultivated Christmas trees sell for $6 to $10 on the local market.

The witness began to turn a profit in 1983. He reinvests each year with new plantings. He continually increases the quantity because he wants to make a living from this business when he retires.

3.21 Mr. Larue, another witness for the respondent who has visited the appellant’s land, said there were 3,000 spruce trees, but was unable to explain how he had arrived at this number. He also said that spruce trees do not sell as Christmas trees, because they are not aesthetic (T(1), pp. 282, 283 and 284). He went on to say that the only difference between firs and spruces to the lay person is in the smell.

3.22 Mr. Denis Simard, a witness for the respondent, said it is impossible that there are 200 to 300 maple trees that could be tapped on the appellant's land. At most there were 100 "potable" maples, he said (T(1), p. 250). However, the record shows that he limited his visit to a place called “dos de cheval" [horse's back], a sandy, dry place, and did not go to the sugaring-off cabin, which is located in a lower area with moist soil. That was the place to which Mr. Clément had told him to go, since it was more representative of the maple grove.

3.23 A study by the forestry engineers Demers & Dumoulin on the cultivation of Christmas trees (Exhibit A-5) indicates at page 28 that spruces are sold as Christmas trees.

3.24 Finally, with respect to the 1,000 cords of wood, the appellant submits that he makes a profit of about $7 a cord.

3.25 Concerning the time Mr. Clément spends on his farm, he testified that during the spring, summer and fall, he went there every night, every Sunday afternoon, every Wednesday afternoon and during his vacations as well (T(1), pp. 159, 166 and 167). He argued that none of this was simply to pass the time, but that he was doing useful work there.

B. Sand pit

3.26 The appellant was unaware of the existence of a sand pit on his farm until the contractors discovered it. These were the people with a contract to build the road under construction that passed not far from the farm. Komo Construction Inc. and the appellant signed a contract (Exhibit A-4) concerning the use of this sand pit. The contract is dated April 28, 1981.

The main paragraphs state:

[Translation]

1. RIGHT AND AUTHORIZATION OF THE PURCHASER: "The VENDOR” hereby grants to "the PURCHASER” the exclusive right and authorization to take from his land or lands, as described in full in Schedule “A”, which is an integral part of this agreement, all derived materials (sand, gravel) that "the PURCHASER” deems it needs for the performance of the construction work to be carried out on its Autoroute 40 project;

2. FULL OWNERSHIP OF THE VENDOR: "The VENDOR" states that it has possession of the aforesaid properties as described in full in Schedule “A”, which is an integral part of this agreement, for the purpose of allowing it to proceed unilaterally to the sale of the said derived materials referred to in paragraph 1;

3. PRICE: "The PURCHASER" will pay to "the VENDOR" for its derived materials the contract price of $8,000.00 for the first 70,000T, upon receipt of the permits from Dézonage Agricole and Environnement [Agricultural Zoning and Environment]. The quantity in excess of 70,000T will be paid at the unit price of $0.12/T. as measured by the representatives of the Ministère des Transports [Transport Department].

4. OTHER CONDITIONS: See Schedule “B”.

SCHEDULE “B”

1. A motor vehicle road of about 12 feet in width will be left in the center of the bank throughout its length after mining. The road surface will be sand or natural gravel.

2. The lowest part of the "NORTH-EAST" side may be filled with rubbish.

3. The operation will follow and be limited to the "horse's back” axis.

4. The land must be drained and levelled property.

5. The mining of this bank is conditional on the purchaser obtaining all the required permits.

6. The contractor undertakes to reforest: Planting of conifers (preferably pines).

In addition, an agreement complementing Exhibit A-4 was reached on July 17, 1981 (Exhibit A-8). The major paragraphs read as follows:

[Translation]

This memo is to confirm our agreement concerning the mining of the sand pit located on your land, lot number 110 in Saint-Charles de Grondines:

1. A width of about 25 feet in addition to the width provided of 200 may be mined on the Moulin River side so as to remove the existing part of the embankment.

2. The sand pit may be mined to the limit of the autoroute and the property belonging to the Dame Laurent Therrien estate. The land will be levelled after mining.

3. An opening will be left in the south talus of the bank between the present route and the property belonging to the Dame Laurent Therrien estate such that small quantities of sand may be loaded into a car trailer.

3.27 According to the appellant's testimony, he in no way participated in the loading of the sand by any machinery whatever belonging to him. He did not even participate in supervising the computation of the number of yards of sand purchased by Komo Construction Inc.

3.28 Obligation No. 6 of Komo Construction Inc. contained in Schedule B of Contract A-4 was to level the premises of the sand pit at the end of the extraction (No. 4) and to transplant 5,000 conifers in that place (No. 6). As it turned out, these conifers were not pines, but spruces.

4. Law — Cases - Analysis

4.01 Law

The major provisions of the Income Tax Act that are involved in this case are paragraph 12(1)(g) and subsection 31(1). They read as follows:

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(g) any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph);

31. (1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) '/2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

4.02 Cases

The parties referred the Court to the following cases:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213;

2. Warden v. M.N.R., [1981] C.T.C. 2379 (T.R.B.); 81 D.T.C. 322;

3. Luchuck v. M.N.R., [1981] C.T.C. 2819 (T.R.B.); 81 D.T.C. 766;

4. April v. M.N.R., [1982] C.T.C. 2083 (T.R.B.); 82 D.T.C. 1092;

5. Croutch v. M.N.R., [1984] C.T.C. 2113 (T.C.C.); 84 D.T.C. 1112;

5. M.N.R. v. Morrison, [1967] 1 Ex. C.R. 370; [1966] C.T.C. 558; 66 D.T.C. 5368;

7. M.N.R. v. Lamon, [1963] Ex. C.R. 277; [1963] C.T.C. 68; 63 D.T.C. 1039;

8. Orlando v. M.N.R., [1962] S.C.R. 261; [1962] C.T.C. 108; 62 D.T.C. 1064;

9. Rinest v. M.N.R., [1985] 2 C.T.C. 2031 (T.C.C.); 85 D.T.C. 436;

10. Huckle v. M.N.R., [1985] 1 C.T.C. 2122 (T.C.C.); 85 D.T.C. 136;

11. Parent v. M.N.R., [1985] 1 C.T.C. 2337 (T.C.C.); 85 D.T.C. 312;

12. Zichy v. M.N.R., [1985] 2 C.T.C. 2340 (T.C.C.); 85 D.T.C. 639;

13. The Queen v. Matthews, [1974] C.T.C. 230 (F.C.T.D.); 74 D.T.C. 6193.

4.03 Analysis

A. Farming Activities

4.03.1 In subsection 248(1) of the Income Tax Act, Parliament has provided a broad definition of farming:

248. (1) In this Act,

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

4.03.2 In Moldowan (para. 4.02(1)), the Supreme Court of Canada, at pages 487-8 (C.T.C. 315), distinguishes three classes of farmers under the Income Tax Act:

In my opinion, the Income Tax Act as a whole envisages three cleasses of farmers:

(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 s. 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 s. 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.

4.03.3 In this appeal the appellant contends he comes not within the first class, but the second. He submits he is a gentleman farmer with a reasonable expectation of profit.

In Moldowan the Supreme Court of Canda had the following to say about sources of income and a reasonable expectation of profit, at pages 485-6 (C.T.C. 313-14):

Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., [1972] C.T.C. 151. See also s. 139(1)(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

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), 74 DT.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who beings a tree farm on raw land.

4.03.4 Let us go through the criteria listed by the Supreme Court of Canada in the light of the evidence submitted in this appeal.

4.03.4 (1) Profit and loss experience

From the evidence, the profit and loss experience from 1980 to 1984 indicates losses. Although this criterion is unfavourable to the appellant, the evidence also indicates that conifers used as Christmas trees take about eight years to reach maturity. Maple trees can only begin to produce a profit after 15 years. And as for the raising of horses, the international recession soon ended this activity, which had just begun (para. 3.09), but which likewise normally requires more than five years to become profitable.

Furthermore, it should be recalled that the Supreme Court of Canada, in Moldowan, commented at page 486 (C.T.C. 314):

One would not expect a farmer who purchasd a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

I therefore consider this criterion to be inconclusive in the circumstances of this case.

4.03.4 (2) Taxpayer's experience

Raised on a farm, he retained a taste for the land (para. 3.02). And he expects to carry on farming when he reaches the age of retirement (para. 3.03).

Even before purchasing the farm, he had consulted and surrounded himself with people who were competent horsemen (para. 3.05). Moreover, with regard to the cultivation of Christmas trees and maples, he had sought out publications issued by the departments of Agriculture and Lands and Forests (Exhibits A-5, A-6, and para. 3.06).

To my way of thinking, the appellant has satisfied this criterion. 4.03.4 (3) Existence of an organized plan

In 1978, before purchasing the land and in anticipation of its purchase, the appellant prepared a detailed eight-year profitability plan.

The components of this plan were contributed by an accountant, some horse-breeding advisers, and a banker, not to mention the publications issued by the Department of Agriculture (para. 3.05).

The appellant, judging from the evidence, supervised the plan gradually and in accordance with his means (paras. 3.08, 3.11).

4.03.4 (4) Capability of the venture as capitalized to show a profit

In the years in question, the land, buildings, maple grove, apple trees, conifers, firewood and horses were the constituent elements in the capability to show a profit.

The evidence does not indicate the fair market value of all these assets, with the exception of the land, which was purchased for $22,000 (para. 3.04) and the subsequent investment of about $10,000.

However, the preponderance of the evidence is that in 1981 and 1982, the maple grove, apple trees and conifers were of normal size. In 1986, in fact, there were 400 to 500 maples of six to ten inches in diameter, and thus capable of being tapped. By 1996 there will be about 2,000 trees capable of being tapped (para. 3.15).

The apple trees will reach full production by 1989. In this region of the province, "it's the place for apples". Thus, the soil promotes the cultivation of apple trees if they are given the ordinary care and attention.

The spruce trees were three and quarter feet high in 1986. Ten per cent of the 5,400 spruces will be ready for cutting in 1988, another 30 per cent in 1989 and another 30 per cent in 1990.

Is the spruce resellable as a Christmas tree? On the Quebec market, to some degree as an outdoors tree. In the United States, spruces generally account for 11 per cent of the U.S. market. White spruces, which are the ones planted by the appellant, account for only three per cent. However, white spruces are more attractive than the black spruces, which account for seven per cent of the U.S. market.

Black spruces sell better because they grow faster in the United States, but the market for white spruce is far from closed, since these trees are more attractive. Considering the several million Quebec Christmas trees that are sold to our neighbours in the south, and the new market for wreaths made with spruce branches (paras. 3.14, 3.17 and3.19), I can only conclude that the appellant's 5,400 spruce trees in 1981 and 1982 had a possibility of yielding profits. In my view, the appellant was not required as early as 1980 to have firm contracts with U.S. buyers for the sale of his spruce trees in 1988.

The Crown witnesses all agreed that spruce trees sell poorly in Quebec but well in the United States.

4.03.5 If I consider as well the $7,000 in profits that can be derived from the 1,000 cords of firewood and the time spent by the appellant on his land (para. 3.25), I conclude that the preponderance of evidence is that in 1981 and 1982, there was a reasonable expectation of profit.

This preponderance in support of a reasonable expectation of profit is confirmed by the appellant's testimony that he did not intend to purchase this farm for his personal use, since there was no cottage or house on the land (para. 3.04) and neither he nor his family engaged in horsemanship (para. 3.10).

B. Sand pit

4.03.6 The facts as listed are clear and undisputed.

In the cases referred to by the respondent, Lamon (para. 4.02(7)) and Orlando (para. 4.02(8) ), the ore had been sold by the cubic yard (Lamon) and the topsoil on 37 acres of land for $20,000 (Orlando). Since, in the latter case, the taxpayer had for some years been regularly selling topsoil, the Court held that he had been operating a business with a reasonable expectation of profit and thus the $20,000 was accordingly included in income.

4.03.7 In the case at hand, the appellant received a contract price of $8,000 for the first 70,000 tons of sand. The appellant had not previously sold sand. It was the contractors who had the contract for the construction of the road who discovered the sand pit on the appellant's land. The appellant did not even have to concern himself with the loading or auditing of the amounts that were taken.

The appellant is disputing the taxation of this $8,000, but does not dispute the additional $8,000 paid at $0.12 per ton, unless the argument set out in paragraph 4.03.10 is adopted.

Counsel for the respondent submits that even if a contract price of $8,000 was paid for a fixed amount of 70,000 tons of sand, it is necessary to consider that the amount received depends on the use of the property. She refers to Lamon, in which Cameron, J. of the former Exchequer Court, referring to the British case Smethurst v. Davy, says that digging and taking sand or gravel is using the land. However, in that case it was held that this was a business, that is, a profita prendre" (see the quotation in [1963] C.T.C. at 72; 63 D.T.C. at 1042).

4.03.8 As I understand the expression “amount received . . . that was dependent upon the use of . . . property" in paragraph 12(1)(g) of the Act, when the property is a sand pit, the use is characterized by the recovery of a specific quantity. Thus, the price is established accordingly by the square yard or ton.

Similarly with regard to the production from property: in the same paragraph, production is characterized by the recovery of the specific quantity produced by the property.

In this case, if Komo Construction Inc. had taken only 50,000 tons of sand instead of 70,000, it would still have been obliged to pay $8,000.

4.03.9 I think, moreover, that Interpretation Bulletin IT-462, dated October 27, 1980, issued by Revenue Canada, clearly delineates the problem in subparagraphs (a), (b) and (c) of paragraph 5:

. . . the following rules apply when calculating what is income and what is on account of capital:

(a) Where the payments under the agreement for sale are all based on production or use, all amounts received by the taxpayer are brought into income under paragraph 12(1)(g).

(b) Where the agreement for sale provides for payments based on production or use plus a fixed sum, the former are brought into income under paragraph 12(1)(g) and the latter is treated as proceeds of disposition.

(c) Where the agreement for sale provides for a fixed sum, with an additional amount being payable in the event that production or use exceeds a stipulated figure, the fixed sum is treated as proceeds of disposition and the additional amount, if any, is brought into income under paragraph 12(1)(g).

4.03.10 However, I think that even if it were necessary to bring the entire sale price into the appellant's income, because the use of the sand made it a part of the inventory, the fair market value of this inventory would have to be considered at the time when it became inventory, in 1981. But is there a better criterion for determining the fair market value than the price fixed for the sale in that year, 1981? Thus, the profit is still therefore nil, whatever the total amount sold.

Accordingly, in practice, no amount derived from the sale of sand is taxable.

4.03.11 I would therefore allow the appeal on the sale of the sand.

5. Conclusion

The appeal is allowed with costs and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the above reasons.

Appeal allowed.