Estate of Lewis Ira Smith v. Minister of National Revenue, [1988] 1 CTC 2140, 88 DTC 1099

Couture, C.J.T.C.: — These appeals are in respect of the appellant's 1980, 1981 and 1982 taxation years and raised two issues. First, the disallowance of $12,127.35 and $13,945.04 claimed as losses for the taxation years 1981 and 1982 arising from the operation of a farm vested in the personal representative of the late Lewis Ira Smith (hereinafter "the trustee"). Second, the disallowance as deductions of fees in the amounts of $742.45, $1,423.79 and $1,388.54 paid to the trustee for administrating the estate during the 1980, 1981 and 1982 taxation years.

At the hearing counsel for the respondent informed the Court that he was consenting to judgment in favour of the appellant with respect to the fees paid to the trustee.

The remaining issue is whether in operating the farm the trustee was carrying on a business within the meaning that this word has in relation to the relevant provisions of the Income Tax Act (the Act) as determined by judicial authority binding on this Court. If the answer to this first question is in the affirmative, then whether the estate's chief source of income was farming or a combination of farming and some other source of income as provided by subsection 31(1) of the Act.

The basic facts pertaining to these appeals were related by the trustee, Mr. Perrin Hammond. The late Lewis Ira Smith was the owner of approximately 190 acres in the Township of Nichol, County of Wellington, Ontario. He died on November 17,1979. Letters Probate of his Will were granted on March 11, 1980 certifying that the administration of the deceased's property was duly committed to Mr. Hammond, executor and trustee of the estate. At this time the trustee was 64 years old, and at the time of the hearing he was 71 years of age. He had retired from his employment with General Steelwares in Fergus in 1980. He had known the deceased for many years especially through their mutual involvement with the Presbyterian Church in Fergus. He had also assisted him with his farming operations. While the witness had been a good friend of the deceased and had helped him a great deal with his farming operations he was unaware that the deceased had appointed him executor and trustee of his estate until the Will was read.

In 1974 the deceased began the reforestation of some of his land, planting approximately 50,000 trees in that year and in 1975, mostly white pine and spruce. The farm is divided by a road and on one side lies about 20 acres of farming land. This had been rented by the deceased to one of his friends and was still rented to him at the time of the hearing. It provided the only income from the farm. It amounted to $300 a year.

The trustee's evidence is that ever since the letters probate were issued he has been constantly busy operating the farm. It has been a full-time job. He is on the farm four or five days a week. Work varies according to the season, but is always plentiful. There is a house on the farm that has been left vacant since the deceased's death. It has been used by the witness as working quarters in the discharge of his duties. There are other buildings used to store the equipment which consists of two tractors and a truck. As will be seen from the provisions of the Will, one tractor was considered by the deceased to be a special antique.

Mr. Norman Richard Aldfield was also called as a witness by counsel for the appellant and provided the following additional evidence. He graduated in forestry from the University of Toronto in 1963 and worked for the Ministry of Natural Resources for a couple of years. He has been with the Grand River Conservation Authority (hereinafter "the Authority") for 20 years in charge of the land owned by the Authority which comprised some 40,000 acres. He is familiar with the farm vested in the trustee and had dealt professionally with the deceased. He said that the deceased had started a systematic planting program in 1974. Approximately 20 acres were planted, three-quarters were white pine and one quarter white spruce. All the work was done by the Authority. In 1975, 140 acres were planted in the same way. In 1981, they proceeded with a replant. This consisted basically of replacing trees that had died. Thirty-six thousand trees were planted that year under this program. He visited the farm at least twice a year providing professional advice to Mr. Hammond. He explained that as part of this reforestation program the sale of Christmas trees had been contemplated, but the kind of trees planted in 1974 and 1975 required between ten and fourteen years to reach sufficient maturity for sale. Consequently, at the time of the hearing he expected that out of the 1974-1975 planting 700 trees were ready to be taken out in 1986 and that they should yield a net income of $9 each. In 1987 and 1988 another 350 trees could be harvested each year.

He had recommended to Mr. Hammond that the agricultural land (the parcel which is rented) be planted, but this was not done. He explained the planting and harvesting cycle of the various trees involved in the program and the potential financial yield that could be eventually realized from this program. He estimated that over a period of ten years the tree operation could yield approximately $150,000. This was based on 1986 prices. Also it was assumed that the 20 acres presently rented would be planted in 1987. The breakdown of the $150,000 is not material for the purpose of the appeal. I note, however, in cross-examination he agreed that his projections were high and he reduced them.

While the work performed by the trustee in the pursuance of his fiduciary obligations under the Will may have necessitated a full-time commitment on his part, I am not satisfied that this alone is sufficient to attach the characterization of a business to these activities. This is to say the carrying on of these activities was not, in my opinion, pursued with a profitable objective in mind, which is essential for the existence of a business. I am left with the belief that the objective was philanthropic in nature. This conclusion flows from and is in accordance with the wishes clearly expressed in the Will. It reads:

1. THIS IS THE LAST WILL of me, LEWIS IRA SMITH of the City of Guelph in the County of Wellington, Gentleman, made this 2nd day of August, A.D. 1979.

2. I REVOKE ALL FORMER WILLS made by me.

3. I APPOINT PERRIN HAMMOND to be Executor and Trustee of this my last Will, hereinafter referred to as my Trustee and I HEREBY GIVE, all my property whatever and wherever, to my Trustee upon the following trusts:

(a) To pay all my debts, funeral and testamentary expenses.

(b) To hold my farm properties consisting of parts of Lots 11 and 12 in the Fourth Concession of the Township of Nichol in the County of Wellington as a reforested area in perpetuity for so long as my Trustee deems it advisable. When my Trustee is no longer able or is unwilling to continue to manage the property then he shall convey the same to the Grand River Conservation Authority or to any successor authority carrying on similar purposes and objectives. The Grand River Conservation Authority shall maintain these lands in trees in perpetuity with the following conditions;

(i) That portions of the property can be disposed of to other public agencies

to accommodate utilities such as roads, hydro, gas lines etc.

(ii) That the area can be used by the public for open space recreational activities such as hiking, cross country skiing, nature interpretive programs etc.

(iii) That the trees can be harvested when mature in accordance with this provision of my Will my Trustee shall have no further responsibility with respect to the same.

(c) To hold my Antique farm machinery, in particular, the Rumley Oil Pull Tractor and Threshing Machine and to maintain the same for so long as my Trustee is willing. When he is no longer willing or able to maintain the same he shall transfer the ownership of the same to the Ontario Agricultural Museum at Milton, Ontario so that the items can be restored and placed on display. The transfer of the ownership of the same to the Ontario Agricultural Museum shall be on the understanding that the same will not be sold but kept as museum pieces for all time. If the Ontario Agricultural Museum can not accept the transfer of ownership on this basis then my Trustee shall be free to seek another museum which is prepared to accept a transfer on the basis set out.

(d) To pay to B. M. CUNNINGHAM the sum of ONE THOUSAND (1,000.00) If he predeceases me to pay the said sum to his estate.

(e) To pay, transfer and hold all the rest and residue of my estate as follows;

(i) ST. ANDREW'S PRESBYTERIAN CHURCH, Fergus, Ontario, Twelve per cent (12%) of the residue to be invested and the income therefrom used for the maintenance of the entrance doors, stained glass windows, tower and church carillons. If in the opinion of the Board of Managers the income is more than needed for these purposes the excess may be used by the Board of Managers for other church purposes.

(ii) SALVATION ARMY, Guelph, Ontario, Four per cent (4%) of the residue.

(iii) ONTARIO SOCIETY FOR CRIPPLED CHILDREN, Treatment Centre,

Toronto, Ontario, Two per cent (2%) of the residue.

(iv) SHRINERS’ HOSPITAL FOR CRIPPLED CHILDREN, Orthopaedic and Burn Unit, Montreal, Quebec, Two per cent (2%) of the residue.

(v) THE HOSPITAL FOR SICK CHILDREN, Toronto, Ontario, Two per cent (2%) —of the residue.

(vi) The CANADIAN BIBLE SOCIETY, One per cent (1%) of the residue.

(vii) MRS. SIMON (MARJORIE) BEATTIE, Four per cent (4%) of the residue. If she predeceases me then her share shall be divided equally among her children.

(viii) The balance of the residue shall be kept in trust by my Trustee and the income therefrom used to maintain the buildings, fences, reforested areas and my farm property generally and the farm equipment mentioned previously in this my will until such time as he conveys or transfers the same in accordance with clauses 3(b) and (c) of this my last Will. It is my wish that my Trustee keep all farm equipment, tools, artifacts and machinery for so long as he continues to maintain the farm property and farm machinery. When he has transferred and conveyed the farm property and the farm machinery in accordance with clause 3(b) and (c) the balance of the farm machinery, tools equipment shall be sold and the proceeds therefrom together with the remainder of the residue shall be paid and transferred as follows;

1. ST. ANDREWS PRESBYTERIAN CHURCH, Fergus, Ontario, Fifty per come therefrom used for the maintenance of the entrance doors, stained glass windows, tower and church carillons. If in the opinion of the Board of Managers the income is more than needed for these purposes the excess may be used by the Board of Managers for other church purposes.

cent

(50%)

-

of the remainder to be invested and the in-

2. THE SALVATION ARMY, Guelph, Ontario, Eighteen per

cent

(18%)

of the remainder.

3. ONTARIO SOCIETY FOR CRIPPLED CHILDREN Treatment Centre,

Toronto, Ontario, Nine per cent

(9%)

of the remainder.

4. SHRINERS' HOSPITAL FOR CRIPPLED CHILDREN, Orthopaedic and

Burn Unit, Montreal, Quebec, Nine percent	(9%)	of the
remainder.

5. THE HOSPITAL FOR SICK CHILDREN, Toronto, Ontario, Nine per

cent	(9%)	of the remainder.
6. THE CANADIEN BIBLE SOCIETY, Five per cent			(5%)	of
the remainder.

4. I DIRECT that my Trustee shall receive full compensation for all services rendered as Trustee of my estate.

5. In order to carry out the provisions of my Will, I GIVE my Trustee the following powers to be used in his sole discretion at any time:

(a) To sell, realize, or otherwise dispose of all or any assets, investments or reinvestments in my estate at any time and in any manner, and either for money or for other assets or investments, but this provision shall not apply to assets specifically devised or bequeathed.

(b) To hold any of my assets or investments in whole or in part in the form in which they may be at the time of my death for any length of time, notwithstanding that they may not be assets or investments in which trustees would otherwise be entitled by law to invest trust moneys, and those assets or investments so retained shall be deemed to be authorized investments for the purposes of my Will.

(c) To invest moneys in such securities and investments inside or outside Canada, as my Trustee sees fit, without being limited to those investments to which trustees are otherwise restricted by law.

(d) To make advances or payments out of my estate generally, or to do any other act for the insurance, protection, improvement, development, realization, repair or rebuilding of any assets thereof, and to set up depreciation reserves; it being my intention to provide the same powers in these respects as I would have had if I were alive for the administration of these assets but not to alter the benefits otherwise provided by this my Will.

(e) To make payment of any charitable gift provided in this my will, to the Treasurer of such Charitable Organization and the receipt of such officer shall be a sufficient discharge.

(f) If at the time of my death any of the foregoing charitable legatees have ceased to exist or have amalgamated with another charity or have changed their names, the legacy provided for them shall not fail but my Trustee shall pay the legacy to the charitable organization which he considers most closely fulfills the objects I intend to benefit.

IN WITNESS WHEREOF I have hereunto set my hand the day and year first above written.

There is nothing in this Will that reflects a commercially profitable intention on the part of the testator. To the contrary, his sole objective appears to be that his estate shall be distributed to charitable or non-profit organizations, but that this distribution be held in abeyance in respect of part of his estate until his friend Perrin Hammond cannot enjoy it any more.

Further Mr. Hammond did not, in my opinion, manage the assets under his control in a businesslike manner. The farm house remained vacant after Mr. Smith's death. There is no evidence that an attempt was ever made to rent it and earn income from that source. Mr. Aldfield in his evidence suggested that the parcel of land which was being rented for $300 a year comprising 20 acres could be planted and by 1993 could yield in excess of $100,000. This may be true, but as that parcel of land had been farmed by a friend of Mr. Smith prior to his death Mr. Hammond did not want to disturb this arrangement. As considerate as such an attitude may have been, I do not believe that it is consistent with sound business practices.

Counsel for the respondent argued that the sole intention of the late Mr. Smith was to accommodate and please a friend of long standing who he knew enjoyed working close to nature, by allowing him the use of the farm for as long as he wished. I agree with this submission. In my estimation it reflects the true intent of the testator.

The appeals are allowed and the matters are referred back to the respondent for reconsideration and reassessment on the basis that the fees paid to the trustee in respect of the 1980, 1981 and 1982 taxation years are deductible. The appellant is entitled to no other relief. I make no order respecting costs.

Appeals allowed in part.