John Ryan, Nora Ryan v. Minister of National Revenue, [1987] 1 CTC 2111, 87 DTC 69

Goetz, T.C.J.:—This is an appeal by the appellant with respect to his 1980, 1981 and 1982 taxation years. At the beginning of the hearing it was agreed that the evidence heard in this appeal shall apply to the appeal of Mrs. Nora Ryan (84-2383(IT) ).

The appellant sought to deduct full farming losses in the operation of a macadamia nut farm during the said taxation years. The farm was operated as a partnership by the appellant and his wife Mrs. Nora Ryan. The Minister disallowed his claim and assessed the appellant restricting his farm losses in accordance with the provisions of subsection 31(1) of the Income Tax Act. Paragraphs 5 and 6 of the reply to notice of appeal read as follows:

5. In his returns of income for the 1980, 1981 and 1982 taxation years the Appellant reported employment and investment income and income (losses) from his macadamia nut farming operations as follows:

	1980	1981	1982
Employment
Gross	$34,184.76	$36,145.12	$44,381.00
Net	33,684.76	35,645.12	43,881.00
Investment
Gross	971.00	341.34	494.00
Net	971.00	341.34	494.00
Farming
Gross	Nil	Nil	Nil
Net (Loss)	($11,400.80)	($9,251.00)	($22,768.00)

6. In his return of income for the 1980, 1981 and 1982 taxation years the appellant claimed deductions from income for farm losses of $11,400.80, $9,251.00 and $22,768.00, respectively.

Facts

The appellant was born and lived in Australia until he emigrated to Canada 20 years ago. He married the appellant Nora Ryan in 1973 and built a house with his own labour in Squamish, British Columbia, which he sold in 1978. He later bought a four-plex as an investment property. In 1980 he purchased 40 acres of land in Australia for the purpose of establishing the macadamia nut plantation. The property had previously been a dairy farm and a great amount of work was involved in preparing the land for the planting of tree seedlings. Before purchasing the property, he obtained the expert advice of professional horticultural consultants and was apprised of all the facets of operating a macadamia nut farm. He retained the services of Macadamia Plantations Of Australia Pty. Ltd. to manage the farm and their services were used up until 1983. The company provided the expertise, labour and advice to the appellant. This company owned 800 acres of land producing macadamia nuts and managed over 1,000 acres.

The purchase price for the land was $67,000. This amount of money was obtained from the sale of the house in Squamish and from the appellant’s savings. He sold his four-plex for $45,000 and this money was injected into the farm operation. In 1983 he acquired a tractor and constructed a shed for $25,000. His total investment was in the neighbourhood of $300,000 and this amount included the purchase of the land and the construction of buildings, purchase of a tractor, setting-up of an irrigation system and an electrical system. To do this the appellant and his wife cashed in their registered retirement savings plans and the appellant John Ryan withdrew his pension fund. This totalled approximately $75,000. The appellant and his wife obtained a line of credit in 1980 for $10,000 which was raised to $60,000 in 1983. From this line of credit they drew $45,000 by the end of 1983, retaining their $60,000 line of credit. Plans, specifications and permits were obtained for the construction of a home on the land.

On July 6, 1983, the appellant and his wife went to Australia and returned in 1984. During this time they rented a house near the farm and worked the land. They had no other employment but in August 1984, as a result of being advised of tax problems with Revenue Canada, the appellant returned to Canada and is now working for the Department of Highways in British Columbia and Mrs. Ryan is back to teaching whereby she earns $15,000 and John Ryan earns in excess of $40,000 a year. On their return to Canada they rented a house and hired a workman to operate the macadamia nut farm in their absence from Australia.

The macadamia nut market is growing rapidly but it takes eight to ten years for the macadamia trees to reach full growth and production. The appellant admits farm losses continued subsequent to the taxation years in question but that by 1988 there will be a profit of approximately $8,000 and in 1989 approximately $30,000 and by 1992 $115,000. In addition to the macadamia nut operation, the appellant planted watermelons, passion fruits and pines. In 1986 the appellant returned to Australia for approximately one month during harvest time. Throughout the years, other than when he was personally on the farm, he conferred and consulted with the macadamia nut company with respect to the farm activity. To date the farm has not contributed to the livelihood of the appellant and he and his wife have maintained themselves through their employment in British Columbia.

Nora Ryan gave evidence confirming the evidence given by her husband, stating that she had returned to full-time employment at $15,000 a year.

It would appear that it takes approximately ten years from the time of planting of macadamia seedlings to viable commercial production. The trees are now bearing fruit and in just a few years will be in full production. The prospect of obtaining a profit, and a good one, is not notional but is realistic. The appellant has made a substantial investment in the farm; he retained the services of Macadamia Plantations of Australia Pty. Ltd. to do all the work necessary to bring the trees into production in the taxation years. The appellant’s expectation of profit to a point where it will provide the bulk of his income by 1992 has been clearly established. Obviously, the start-up costs are heavy and this type of farming operation requires a period of time before which it becomes a commercially profitable operation. The occupational direction of the appellants shifted at the time of making these continued investments in the taxation years. One cannot conclude that it was a sideline business in that it takes time for the macadamia trees to mature, nor could the farming operation be considered an immediate source of income. Nevertheless, this macadamia nut farm operation was a business with a reasonable expectation of profit and where the realization of profit is postponed, that fact does not preclude me from finding that the appellant’s chief source of income during the taxation years 1980, 1981 and 1982 was farming or a combination af farming and some other source of income. See The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193, a decision of Mahoney, J. of the Federal Court-Trial Division.

When the farm comes into full commercial production in a few years, the profit accruing from the operation will exceed the combination of Mr. and Mrs. Ryan's income as their chief source of income for a taxation year. See Poirier Estate v. The Queen, [1986] 1 C.T.C. 308; 86 D.T.C. 6124.

In the case of Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058, a very successful chartered accountant invested a large amount of money in a cow/calf operation and deducted full farm losses from his other business income. Joyal, J. of the Federal Court-Trial Division found that the taxpayer was entitled to deduct the full amount of the farm losses in that he had made a substantial investment of capital and even though he did not perform physical labour, and though he received a substantial income from his other business operation, his expectations were that the farm would some day provide the bulk of his income.

The fact that commercial production and profit are delayed by the very nature of the macadamia nut operation does not prevent the appellants from claiming start-up costs and losses incurred until a profit is obtained.

Counsel have agreed that for the 1980 taxation year, the sum of $3,100 should not be included on account of expenses but rather on account of Capital.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant John Ryan shall be entitled to party and party costs. No costs are awarded to Nora Ryan.

Appeal allowed.