Helmut Lein v. Minister of National Revenue, [1987] 1 CTC 2370, 87 DTC 276

Couture, C.J.T.C.:—This appeal deals with assessments issued by the respondent for the taxation years 1980 and 1981. The respondent disallowed the limited farm losses claimed by the appellant in computing his income for the years under appeal on the ground that his farming activities were not carried on with a reasonable expectation of profit.

The evidence disclosed that the appellant was born and brought up on a farm in Germany where he lived for 18 years until immigrating to Canada in 1953. Upon his arrival in Canada he worked in Heron, Ontario in research on farming. He was employed in construction and during 1959 to 1962 he took evening courses at McDonald College outside of Montreal on farm management and sheep raising.

In 1973 he bought a parcel of farm land in Grenville, Quebec, in fulfillment of a dream which he had cherished since his arrival in Canada of living on and operating a farm. His object was to have a sheep and goat farm. In 1974 he married a nurse from Australia who had also been brought up on a sheep farm there. In 1979 he acquired an adjoining parcel of land with the result that in 1979 he had 100 acres of arable land and 126 acres of bushland.

The farm had not been functional for over 20 years. The house, a huge barn, a tractor shed and a machine shed were in a dilapidated condition.

During the period 1974 to 1980 the appellant worked for two years in Hawkesbury, Ontario, which is just across the Outaouais River from Grenville, and for four years he was employed from September to April in Fort Chimo by the Department of Indian Affairs. He worked on the farm during the remaining months. In 1981 he was in Grenville for the entire year. During the following four years he worked for the Department of Health and Welfare in the Northwest Territories from the end of September to as late as April. This was an excellent arrangement for him. It enabled him to earn income from another source for his livelihood until he could be a full-time farmer. During the winter months work on the farm was at a minimum and done by the appellant's wife.

His first priorities after purchasing the second parcel of land in 1979 were to repair the barn so that it was usable and to fence the property. At the time of the hearing in May 1986 he had about 35 acres left to fence and had 60 acres under cultivation.

In 1980 he had a hydro line connected to the barn and he built a 1000- foot road on his property. Repairs to the other buildings were also made during those years. Beginning in 1974 and throughout the appellant and his wife produced income from the sale of pigs. They also raised chickens for their personal needs.

In addition to repairing and fencing the appellant reclaimed arable land. This was said to be a lengthy process because as previously mentioned, the soil had not been cultivated for over 20 years. He described what was required to restore the land to a productive level. This was done over a number of years. Details of what had to be done may be dispensed with for the purpose of these reasons, but I mention that the appellant struck me as knowledgeable regarding the requirements of his farming undertaking. As I mentioned before by 1986 he had 60 acres under cultivation, the crops were used for feed. In 1981 he bought 12 sheep on an experimental basis to ascertain whether his land was capable of supporting that kind of livestock.

He estimated that it would require a minimum of 200 to 250 ewes to produce sufficient earnings to allow him and his wife to live on the yield of the farm. He admitted that this would provide them with a very modest existence and that he might have to seek work in the winter months to meet his cost of living. He expected to have about 100 sheep by the summer of 1986, but was non-committal regarding when he would reach the 200 mark.

The respondent's position is that the appellant had no reasonable expectation of profit from his operations. He had not carried on his activities in accordance with a well-defined plan. Mr. Martin, an employee of Revenue Canada, gave evidence on behalf of the respondent and admitted that the appellant told him in June 1983 when he visited him at his farm that he intended to acquire 200 sheep and carry on a lambing operation.

From the above, the Court must determine whether in 1980 and 1981 the appellant had a reasonable expectation of profit from his farming operations or as contended by the respondent the expenses incurred in restoring his property to a productive level were personal and living expenses as defined by subsection 248(1) of the Income Tax Act.

The guidelines upon which reliance may be placed to arrive at a proper conclusion respecting whether an activity carried on by the taxpayer offers a reasonable expectation of profit were formulated by Dickson, J. (as he then was) in Moldowan v. The Queen, [1977] C.T.C. 310 at 313-12; 77 D.T.C. 5213 at 5215:

There is a vast case of 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 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 exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.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 begins a tree farm on raw land. [Emphasis added.]

Upon reflecting on this, it seems evident that His Lorship did not intend his remarks to be construed as strict and rigid rules regarding what consti- tûtes a reasonable expectation of profit in relation to an economic activity so that it may qualify as a business for the purposes of the Act. He was merely referring to certain factors that may be taken into account in arriving at a determination. He was cautious to add that his list was not exhaustive and that what is relevant will differ with the nature and the extent of the undertaking. The thrust of his message is that the determination must be arrived at objectively after having considered all the facts and relevant circumstances.

For instance the concept of a “reasonable expectation of profit” considered in relation to an undertaking which has been in existence for some years and has not demonstrated a capability of generating a profit must be interpreted differently from a situation where an undertaking has been recently launched and is still in its formative stages.

In the former situation the determination is made easier by the fact that some of the factors referred by Mr. Justice Dickson are capable of proof and provide fairly conclusive indications respecting the financial possibilities of the undertaking. On the other hand, where a new venture is under scrutiny, the factors that must be taken into account are not the same and of necessity the determination must rest to some degree on speculation with regard to its profitability in the future since there is no past experience to rely on.

The evidence adduced at the hearing supports the appellant’s contention that he was carrying on a business. He was realizing an ambition of becoming a full-time farmer that he had entertained for a number of years. In the process, he conducted himself as a prudent person would. With limited financial resources he acquired an abandoned farm. He went on to restore it over a number of years and by 1986 he reached the stage where significant operations were possible. There is no absolute guarantee that his endeavours will be profitable, but all the ingredients for success seem to be in place and when considered together and objectively they support the view that in the years under review it was reasonable to expect that he would realize a profit in the foreseeable future.

For the above reasons the appeal is allowed as the appellant was carrying on a farming business during the taxation years 1980 and 1981. He is entitled to costs on a party-party basis.

Appeal allowed.