Collin Craddock, Philip Giffen v. Minister of National Revenue, [1986] 1 CTC 2006, 86 DTC 1014

Rip, T.C.J.:—Messrs. Philip Giffen and Collin Craddock appeal from notices of reassessment of income tax for 1980 and 1981 in which the Minister of National Revenue, Taxation, the respondent, disallowed their claims for losses pursuant to subsection 31(1) of the Income Tax Act (“Act”) in the amounts of $4,073.82 and $4,999.75 respectively. The appeals were heard on common evidence.

For some years prior to the years under appeal, and during the years in appeal, Mr. Giffen was employed as a full-time lecturer in history and social science at Seneca College in Toronto. Mr. Craddock was employed as a teacher on a full-time basis by the Scarborough Board of Education.

Neither Mr. Giffen nor Mr. Craddock had been involved in any agricultural activity on an active basis before 1979, although Mr. Giffen said he had been interested in agriculture for a number of years and had some farming experience in Nova Scotia and Massachusetts. Mr. Craddock testified his grandparents were farmers and at college he bred livestock; he stated he had a knowledge of genetics and studied biology at university and also took courses in agriculture at the University of Guelph.

In 1979 Messrs. Giffen and Craddock purchased 71 acres of land in the Township of Scugog (“property”), east of Toronto, near Whitby, for $128,500. Fifty-five acres of the property were arable. Messrs. Giffen and Craddock viewed a large number of properties in the same area before deciding to purchase this particular land.

Prior to 1979 the property had been rented out by the previous owners and had been allowed to deteriorate substantially. Mr. Giffen testified the land was eroded and the buildings on the land were in very poor condition at time of purchase. He stated that this was one reason he and Mr. Craddock were able to purchase the property at so low a price.

Mr. Giffen stated that when he and Mr. Craddock acquired the property their intention was to proceed to a long-term goal over stages to organize the property into a cattle-breeding operation. At the time of trial they had built up the farm property so that they were now living on it; the barn has been reconstructed with steel high-beams and a new floor had been installed; the barn has a capacity of 6,000 bales of hay upstairs and 40 to 50 head of cattle downstairs. Electricity has been installed in the barn. The shed has also been substantially improved.

The land was reconditioned and by 1983 was growing barley for feed and sale. Hay is also being cut for sale at the present time.

Mr. Giffen testified that by 1984 the farm property had turned from poor land to excellent land which could be used for breeding operations.

The losses of Messrs. Giffen and Craddock from the farm were as follows:

Messrs. Giffen and Craddock earned $200 from crop sharing in 1979 and $740 from the sale of grain in 1980. In 1981 income was $3,560, of which $2,000 was from inventory valuation pursuant to paragraph 28(1 )(b) of the Act and the balance from crop sharing and poultry sales.

In 1980 mortgage interest on the property totalled $8,424.14; in 1981 mortgage interest was $8,406.49. Land taxes in 1980 were $814.41 and in 1981, $962.45. Other expenses for 1980 included fence, well and lane repairs, feed, hay and straw, telephone, hydro, insurance, accounting fees, hardware and poultry. In 1981 expenses included building repairs, fences, wells and lanes, gas, oil and grease, machinery and truck, hardware and small tools, cattle and poultry, feed, hay and straw, fertilizer, spray and chemicals, telephone, hydro, insurance and custom work.

In 1981 Messrs. Giffen and Craddock purchased two registered Hereford cows and two registered Hereford calves for $1,745 for the purpose of breeding. In 1983 they began acquiring Simmentals, after deciding to breed Simmentals rather than Herefords.

Mr. Giffen stated that by design the early years of the farm were devoted to getting the property into shape for the breeding operation; these years, he said, were “years in which we were reconditioning the land so we could use it”.

By letter to Revenue Canada in 1983 the appellants’ representative projected a profit from the farm in 1984. At trial Mr. Giffen stated he now projects a profit by 1987.

Mr. Craddock corroborated much of Mr. Giffen's testimony. He testified that he and Mr. Giffen wanted to set up on a gradual basis a pure-blood cattle herd. They were intent on having a breeding operation on the farm, he said.

Because there was no feed and housing on the farm property they had to wait until 1981 to acquire any livestock. A bull was acquired to mature as a bull calf and the remainder was to be used as breeding calves. Their plan was whenever possible to increase their herd with breeding stock.

Mr. Craddock testified that at time of trial "we (have) the finest Simmentals you can buy” and with the hay now growing on the property they could support 30 cows. In 1983 and 1984 the farm held seven head of full- blooded Simmentals; four more are due this coming March. Twenty-five head are anticipated in the fall of 1986 and 30 head in the spring of 1987.

The appellants’ agent argued that all of the expenses laid out in the years under appeal were start-up costs of the breeding operation and should be allowed as a restricted farm loss in accordance with section 31 of the Act. The intent of Messrs. Giffen and Craddock was to engage in the business of breeding a high-class herd of cattle, and not personal enjoyment. The activities in the years under appeal, he submits, constitute a sideline business, as described in William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213. A reasonable expectation of profit was present at all times since the appellants had invested sufficient capital in that 71 acres of land was sufficient to carry-on their intended activities and they improved their capital assets in the property to enable these activities to be carried out in later years. Their intention was in accordance with a well-orchestrated plan and only because of unfortunate circumstances such as high interest rates and Revenue Canada reassessments were these plans not fulfilled until recently.

Counsel for the Minister argues that there were constant losses throughout the years the appellants farmed the property. The profit projections made on behalf of the appellants were not made in 1979, 1980 or 1981 but in 1983 when Revenue Canada was proposing reassessments. Income earned during the years under appeal was almost totally from crop sharing which constitutes income from a property and not income from business. In 1980 and 1981, concluded counsel, Messrs. Giffen and Craddock were getting ready to go into business, but were not yet in the business of farming.

In my view Messrs. Giffen and Craddock were not in the business of carrying on farming in 1980 and 1981. What they were doing during these years was preparing the property for use as a farm at some time in the future. These were not "start-up" costs of a business because in the years of the appeal the property could not support a business enterprise. In appeals of this type an appellant frequently explains that he is putting his property into shape so that it will be capable in the future of earning income and having a profit; it is argued costs of a current nature expended during this time are start-up costs. Because he is cautious, the taxpayer says, it may take years for the business to start actual operations and even years longer until a profit is earned. What the taxpayer is really saying is that his business operations cannot start until such time as there is sufficient capital available to support the business. In 1980 and 1981 Messrs. Giffen and Craddock were working to get the property to a condition which would support what they wanted to do with it. But they were not yet carrying on a business.

In these appeals Messrs. Giffen and Craddock are in effect saying that the business they wished to carry on could not start until the barn was rebuilt, the shed repaired, the house was in a proper state of repair and the arable land was susceptible of giving proper crops. In other words capital assets must first be improved to bring the farm property to a point where a business may be carried on. There was no evidence adduced to show that with the amount of capital invested in the farm property in 1980 and 1981 by Messrs. Giffen and Craddock, the property could reasonably be expected to yield a profit from farming.

In the years under appeal no business was being carried on by Messrs. Giffen and Craddock; the appeals are therefore dismissed.

Appeals dismissed.