Dieter Foessel v. Minister of National Revenue, [1986] 2 CTC 2129

Taylor, T.C.J.:—This is an appeal heard in Calgary, Alberta, on June 26, 1986, against income tax assessments for the years 1979 and 1980 in which the Minister of National Revenue disallowed losses in the amounts of $8,154.96 and $7,678.38 respectively, claimed by the appellant, allegedly arising out of the expenses incurred by him in renting out his farm property on a "share-cropping” basis. In a letter dated June 14, 1982, the Minister of National Revenue notified the appellant as follows:

The review of the above returns has now been completed and we propose to adjust your returns as follows:

7979	Claimed	Allowed	Disallowed
Rental Income
(Loss)	$(8,154.96)		$(8,154.96)
1980
Rental Income
(Loss)	(7,678.38)		(7,678.38)

Your rental income has been reduced to NIL as subsection 18(2) limits you from deducting certain expenses on land held for development, up to the net income from the land. The deductions which are limited are:

a. Interest on borrowed money used to acquire land or on an amount payable for lands, or,

b. Property taxes paid or payable to a province or Canadian municipality in respect of lands, including assessment for school taxes and local improvements but not including any income or profit taxes or land transfer taxes.

The non-deductible portion of the property taxes and interest expenses are added to the inventory cost of the land as provided for by subsection 10(1.1) of the Income Tax Act and accordingly are deductible only in the year during which the land is disposed.

As a result of the filing of a notice of objection, on confirmation of the assessments by the Minister, the following reasons were substituted:

the rental losses amounting to $8,155.00 in 1979 and $7,678.00 in 1980 claimed as a deduction from income was not an outlay or expense incurred by the taxpayer for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act, but was a personal or living expense within the meaning of paragraph 18(1 )(h) and subsection 248(1) of the Act.

In the reply to notice of appeal, the Minister asserted that

.. the Ap

pellant had no reasonable expectations of profit from his rental operation . . .’ and the Minister relied upon subsection 9(2), paragraphs 18(1)(a), 18(1 )(h) and section 248 of the Income Tax Act.

The general factual information was as follows:

— At all material times, the Appellant was employed full time as a technologist by “Reid Crowther & Partners";

— in April 1977, the Appellant and his wife purchased a 40-acre parcel of land;

— at the time of purchase, the property consisted of agricultural land with no building;

— in 1979, the Appellant began "share cropping" on the said land with a certain Robert Carr;

— the Appellant built a personal residence on the land in 1981;

The testimony and evidence showed that there had not been a profit from the operation during any year from 1977 through 1985, but that there had been a continued and consistent reduction in losses sustained, as a result of gradually improving revenue from the share-cropping operation, to the place where only an amount of $1,313.91 was indicated as a loss for the year 1985. From the year 1981 on, (when the appellant had built his home on the property) only a portion of the total expenses had been claimed, representing those which should be for the operation of the farm only.

It was the position of the appellant that he had acquired the 40 acres in 1977 with the express purpose of using it to produce income. If he had wanted only a site for his home he would have purchased a much smaller parcel of property. The years. 1979 to 1980 had been bad years — no cash income — because of crop failure, and the following several years have not yet shown the results he expected because of a period of drought — although there were positive signs his efforts were beginning to pay off. He has worked hard and constantly, utilizing to a great degree information and assistance provided from the "Alberta Agriculture Economic Services". The taxpayer's original estimates indicated to him that he should be making a profit within five years of starting the operation — although it was readily conceded that Mr. Foessel had not made an accurate and comprehensive "game plan” to reach this objective. He had obviously not met his "five- year" goal — but present indications are that he would soon reach a profitable level.

Counsel for the Minister pointed out that the mortgage interest and municipal taxes alone in most of the years 1977 through 1985 had been almost equal to the total revenue for even the best years, and that by taking on even this fixed asset cost burden, when acquiring the property, should have made it clear to the appellant that there was no reasonable expectation of profit. Counsel gave as reference for the Court's consideration the cases of Wesley H. Warden v. M.N.R., [1981] C.T.C. 2379; 81 D.T.C. 322 and Collin Craddock and Philip Giffen v. M.N.R., [1986] 1 C.T.C. 2006; 86 D.T.C. 1014.

Analysis

In my view counsel's reliance on "farm losses” cases (supra) is appropriate in view of the fine line which must divide "share-cropping" and regular "farming". The only real difference could be that the "restricted farm loss” privileges may not apply — although I am not called on to decide that point in this case. I would also think that there is little or no evidence in the instant appeal of costs and expenditures which could be termed "start-up costs" — the claimed expenses each year from 1977 through 1985, for the most part, consisted of "mortgage interest", “municipal taxes”, and "custom contracting". Further it does not appear to me that it can be said the expenses claimed exhibited characteristics which might identify them as more "capital" than "income" in nature. Both Warden (supra) and Craddock (supra) relied upon the signal case of William Moldowan, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.) for the dismissal of those appeals. However, I would make reference to the case of Bender v. M.N.R., [1986] 1 C.T.C. 2437; 86 D.T.C. 1291, which appeal dealt with a contemporary interpretation of Moldowan (supra) as perceived in the judgments of The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.), and H.S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058 (F.C.T.D.). It would appear to me that when cast against the guidance provided in the above judgments, that Mr. Foessel has shown an interest, effort, and investment, as well as results, in his "share-cropping" venture that deserve classification as a business — an operation with a reasonable expectation of profit.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to party and party costs.

Appeal allowed.