Donald B. Dodds v. Minister of National Revenue, [1987] 1 CTC 2265, 87 DTC 205

Couture, C.J.T.C.:—This appeal deals with the appellant’s 1978, 1979, 1980 and 1981 taxation years. In computing his taxable income for those taxation years the appellant claimed the limited farm losses as a deduction from income and the respondent disallowed them on the ground that the farming operations he carried on did not constitute the carrying on of a business as no expectation of profit could be anticipated from them.

At the opening of the hearing Counsel for the respondent informed the Court that she was instructed to consent to judgment in favour of the appellant in respect of the appeals for the taxation years 1978 and 1979 without, however, admitting that the farming operations carried on by the appellant in those years were carried on with an expectation of profit. Counsel further explained to the Court that this consent stemmed from a policy decision adopted by the respondent.

The Court is not concerned with the respondent's assessing or administrative policies, unless they are challenged by a taxpayer and only then is it its duty to ascertain that their implementation is in conformity with the provisions of the legislation. The appellant obviously did not object to the respondent's consent and, therefore, the appeals for the taxation years 1978 and 1979 were allowed leaving only the appeals for the taxation years 1980 and 1981 to be dealt with.

The appellant acted on his own behalf and his evidence disclosed the following facts:

He has been a school teacher for some 23 years, employed by the Lanark County Board of Education of Ontario. In 1977, he inherited 100 acres of farm land under his mother’s will on which there was a house, a barn and obsolete machinery. It also included a maple grove. Originally, this prop erty was part of a larger parcel of land comprising 200 acres which had been farmed by his father until his death in 1970. The remaining 100 acres were bequeathed to his brother.

Since the father's death very minor operations had been carried on by the mother on the farm. According to the appellant’s evidence when title to his share of the farm was transferred to him in 1978 it was in a complete state of neglect. The roof of the barn was rotten, the fences delapidated, the land had not been cultivated for a number of years and the maple grove with fully grown trees had not been operated since the early sixties and needed much attention.

He explained that the land was covered with stones, but when his father was engaged in farming he tilled with horses and could easily work around them. However, as he intended to use mechanized equipment one of his priorities was to remove them to facilitate the operation of this equipment, a project that was somewhat expensive and time consuming.

At the time that he inherited the farm he and his wife and their children lived approximately 25 miles away. In 1983 they moved into the house on the property. At the time he occupied the farm the appellant had not received any formal training in the business of farming, but having been brought up on the farm for many years and having helped his father in his business he acquired some practical knowledge and experience. He and his wife had formulated a plan for the restoration of his farm with the object of restoring it to a productive and profitable operation. He had decided that upon his retirement he would live on the farm and be a full-time farmer.

According to their projections and taking into account their cash flow they had estimated that it would take roughly six years to reach a level of production that would yield some profit. They missed their objective by one year as their first profit was realized in 1985. The appellant intended to raise lambs for marketing, but before he could bring livestock on the property he had to condition the land. This included removing the stones, tilling and seeding operations that required roughly four years of labour.

The first year was spent cleaning the property. This included repairing the barn and the fences. Cleaning, tilling and seeding into hay, grass and forage crops occupied the second year and in the third year the forage crop had to get well established and rooted because otherwise, according to his evidence, the livestock would have destroyed it. During those years most of his crops were sold or used for feed.

By the end of 1981 he had removed the stones on 28 acres and the land was then ready for tilling and seeding. Much more detailed evidence was adduced in examination and cross-examination, but the brief description above of the appellant’s activities is sufficient to account for the time spent bringing his property into a production.

While this work was going on between 1978 and 1981, he bought cattle in the spring for fattening and sold them in the fall realizing a small profit on the operation. He also rented a portion of his field for pasture receiving a nominal rent. The appellant purchased his first sheep in 1984. Thirteen lambs were born from that flock in that year and were kept for the purpose of building his inventory. By the end of 1985, it comprised 38 animals, that is 1 ram, 3 purebred ewes and 21 ewes in addition to the 13 ewe lambs born in 1984. The appellant expected to acquire a minimum of 50 lambs from his ewes in 1986 and realize some $4,500 to $5,000 from their sale. In 1985 a few sales were made to people calling at the farm, but the bulk of the sales were made at what the appellant referred to as a sales barn in Smith Falls, a type of public auction. His barn could accommodate between 60 and 70 sheep.

Both the appellant and his wife belong to the Ontario Sheep Agency, an organization which holds monthly information meetings at which various aspects of the business of raising sheep are discussed, such as flock health, genetics, etc.

In 1983-1984, the appellant’s wife attended a seminar in Arnprior on sheep raising sponsored by the Kemptville Agricultural College. He attended a similar seminar during the period November 1984 to March 1985. It was sponsored by the same organization and held at the Almonte High School.

In 1984 the appellant reactivated the maple grove which had been inoperative since the sixties. Before doing this the appellant had between 1979 and 1984 travelled around the district visiting and studying sugar bush operations. In addition he and his wife were members of the Ontario Maple Syrup Producers Association, an organization which provides information on quality control and marketing. It offers seminars to its members which the appellant and his wife attended.

In November 1983, about the time the appellant decided to occupy the house on the farm, he purchased some $21,000 of equipment for the production of maple syrup and related products. The first tapping of the trees was in the spring of 1984 and according to a statement of income and expenses for that taxation year prepared by the respondent and filed as an exhibit this year’s operation yielded gross income of $7,554. Approximately 50 per cent of his production was sold at the farm and the remainder to retail stores.

In a preliminary unaudited statement prepared by the appellant for the period ended on December 10, 1985 and also filed as an exhibit the gross income from the maple syrup production is shown at $10,365 while the gross income from the sales of lamb is shown at $874. It also shows a profit to that date of $6,041.64, which amount is obviously not an exact figure. This statement was prepared by the appellant who is not an accountant and it would require certain adjustments to reflect the true financial picture of these operations for the year. It would still show a profit, but most likely of a much lesser amount. What is of interest, however, is the increase in revenue from the maple syrup production after only two years of operation, and the fact that his lamb raising venture was also producing revenues after only a couple of years.

During the summer months all of the appellant’s time was taken up with farming operations. Throughout the balance of the year he would spend some 20 to 25 hours a week on these operations. During certain periods in the year these hours would increase substantially e.g. during the lambing season or the season for tapping the maple trees. He said that when they moved to the farm his wife spent just as much time on these farming operations as he did.

A schedule of gross income and expenses prepared and filed by the respondent shows:

The increase in expenses in 1984 over 1983 is accounted for mainly by an expense of $3,483.82 in respect of oil which was used as fuel for the production of maple syrup and additional capital cost allowance on what appears to be machinery and equipment purchased for the same purpose.

The issue on this appeal is easy to identify and just as easy to determine. Did the appellant carry on farming operations in 1980 and 1981 with a reasonable expectation of profit?

Dickson, J. (as he then was) in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 said at 313 (D.T.C. 5215):

There is a vast case literature on what a reasonable expectation of profit means and it is by no means consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts.

What are the facts which emanate from the evidence in this appeal that considered objectively, as suggested by Dickson, J., are conducive to a determination of the issue before the Court?

We have the situation of an individual who is a teacher, therefore, a full- time employee for at least ten months during the year, who is also engaged in farming operations.

In 1978, he became the owner of a 100-acre farm, an acreage which is not negligible in terms of a farming asset. Some of this land is tillable, some may be used for pasture and there is a mature maple grove. The land is not incumbered by a mortgage, and represents a substantial capital asset to its owner. Admittedly the farm was in a complete state of neglect. Its owner who was born, lived and worked on the farm for a number of years decided to restore this property to an income-producing asset. He admitted candidly that he never expected that he could bring it back to a productive level for at least six years considering the work that had to be accomplished, but he and his wife had formulated a plan for this purpose and sincerely believed that they could attain this aim. Under these circumstances, I do not regard seven years to be an unduly long period of time.

The evidence adduced in respect of the taxation years subsequent to the years under appeal has only an incidental relevance in the determination as to the validity of these assessments, in that it adds credence to the appellant's contention that he developed his acquired farming asset in accordance with a well defined plan and to his claim that he was carrying on his farming operations with a purpose of profit.

Given these facts I cannot subscribe to the respondent's position that a 100-acre parcel of farm land, as the one described above, acquired without cost, free of all carrying charges, is not by itself a potential income-earning asset. Properly managed in the process of restoring it to a productive level, such an undertaking must at least evidence that it is carried on with a reasonable expectation of profit. According to the respondent's attitude vis-à-vis the appellant’s attempt to revitalize his dormant asset, his efforts were doomed before they were even begun, a determination that in my opinion was premature and not reached after an objective appreciation of all the facts.

My findings are, therefore, that the appellant had a reasonable expectation of profit from his farming operations in 1980 and 1981 and was accordingly carrying on a business for the purpose of the Income Tax Act.

The appeals for the taxation years 1980 and 1981 are allowed and the assessments referred back to the respondent for reconsideration and reassessment in accordance with these reasons.

Because of the consent to judgment agreed to at the hearing by counsel for the respondent for the taxation years 1978 and 1979 the assessments for these taxation years are also referred back to the respondent for reassessment.

The appellant is entitled to his costs on a party-party basis.

Appeals allowed.