Mario Gagnon, Monique Lapierre-Gauthier v. Minister of National Revenue, [1985] 2 CTC 2153, 85 DTC 493

Cardin, TCJ [TRANSLATION]:—The appeals of Monique-Lapierre-Gauth- ier and Mario Gagnon were heard on common evidence. The appeals are from assessments for the 1978, 1979 and 1980 taxation years. At issue is the deductibility of restricted farm losses provided for under subsection 31(1) of the Income Tax Act, RSC 1952, c 148.

During the taxation years in question, Monique Lapierre-Gauthier worked full-time as a teacher for the Lanaudière regional school board. Mario Gagnon was employed full-time as a community organizer in a CLSC. Both appellants worked between 35 and 40 hours per week at their jobs.

In October 1977, Monique Lapierre-Gauthier and Mario Gagnon purchased together an 80-acre farm at Sainte-Mélanie de Joliette. Each appellant accordingly became the owner of 40 acres of land. The purchase price of the farm was $37,500 and included, in addition to the outbuildings, a house which Monique Lapierre-Gauthier purchased for $16,500 and used as her residence. The remaining $21,000, the cost of the land, was split between the two appellants, each paying $10,500. Mario Gagnon and his wife separated and were later divorced in 1979. She kept the matrimonial home and the furniture. At the end of 1980 and beginning of 1981, Mario Gagnon built a house for himself on his 40 acres, acting as his own general contractor.

The property consisted of a 35-acre sugar bush, a 15-acre pine plantation, ten acres sown to pasture and 20 acres that had at one time been under cultivation and were later abandoned. There were two creeks and some paths through the woods which had been used by the former owner as bridle paths (photograph series, Exhibits A-6, and A-3).

For the purpose of these appeals, the Court must decide whether the appellants were carrying on a farming business during the years in question. To be successful, the appellants must demonstrate that in 1978, 1979 and 1980 they had a reasonable expectation of earning a profit from the operation of their farm. If their farming activities, viewed objectively, did not allow of or justify a reasonable expectation of profit, no expenses may be allowed.

At the beginning of the hearing of this case, counsel for the respondent told the Court that despite the assessment of the appellants for the 1978 taxation year, the Minister of National Revenue had decided to allow them to deduct the farming losses they had claimed in 1978. In the circumstances, the Court has no alternative but to allow the appeals of these two taxpayers in respect of the 1978 taxation year. Counsel for the respondent, however, vigorously argued that the Minister did not consider that the appellants were carrying on a farming business in 1978 and stated that it was on altogether different grounds that the losses claimed by the appellants in 1978 were now being allowed. The Court does not need to comment on the respondent's reasons for quashing the assessment for the 1978 taxation year.

With respect to the 1979 and 1980 taxation years, I have a great deal of difficulty in seeing how the appellants could have had a reasonable expectation of profit from the kind of farming activities which they carried on in 1978. The appellants failed to present any evidence showing that they had examined the farm's profitability before purchasing it. There was no planning of farm activities and no projections made with regard to any profits they might have hoped to realise from the purchase of this farm. Their investment in the farm and the farming activities which they chose to carry on do not seem to me to have been conducted in a manner that would result in a profit.

According to a list of the appellant's investments in the farm, which their representative presented to me (Exhibit A-1), they purchased chickens, rabbits, calves, sheep and goats in 1978 at a total cost of $848. From an objective point of view, the inappropriate choice and insufficient numbers of livestock chosen were not consistent with the expectation of making a profit. Mario Gagnon's testimony concerning a possible market for the rabbits and goats was quite vague. The appellants apparently hoped to make a profit on the chickens by selling their eggs by the roadside.

Sale of such limited numbers of calves and sheep had no potential for profit, especially since there seemed to be no market for these animals where they could be sold at a profit. According to the list of investments (Exhibit A-1), the appellants bought no livestock in 1979 and 1980. In 1981, they purchased two beehives.

In 1978, the appellants bought four saddle horses for $2,650. There is no evidence that the appellants viewed the rental of saddle horses to visitors at a camp ground located not far from the farm as a major source of income for their farming operation. They also planned to board horses for area residents and published advertisements to this effect (Exhibit A-2), but with no particular success.

In 1978 a sugar shack was built at a cost of $3,000. Equipment and supplies amounting to approximately $2,100 were purchased for the sugar shack in 1980 and 1981. In the same years, $450 was spent on farming equipment, including the two beehives. Farm implements, including a tractor, were also purchased at a cost of $5,000. There is evidence that the appellants had cultivated parts of their property which had been neglected.

There is no doubt that the appellants were involved in farming activities. It is less certain that their activities amounted to carrying on a farming business from which, objectively viewed, they could have a reasonable expectation of earning a profit. It should be noted that the appellants did not disclose any plans for expanding or making major changes in their farming operations in the years following the taxation years.

The Court took note of the fact that Mario Gagnon had had matrimonial and health problems (Exhibit A-4) during the time in question, that this period involved the starting up of operations on a neglected property and that the rabbits had contracted a disease necessitating their destruction. These circumstances undoubtedly had an adverse effect on their farming income. Nonetheless, the appellants’ choice of farming activities and their intended mode of operation could not, in my opinion, ever have resulted in a profit.

The evidence showed that the farming business was, for the most part, dependent on the renting out of four saddle horses — usually a seasonal activity, the sale of maple sugar products, the sale of wood in 20 years’ time, the sale of honey, the sale of a small amount of livestock for butchering. Each of these sources of income was so restricted that even taken together they could not generate a net operating profit in 1978, 1979 and 1980, and there was no indication that the operations would be significantly expanded in coming years.

Although no projections were made of the profits which the various operations could be expected to show at the time the farm was purchased, the appellants' representative presented a series of charts, marked Exhibit A-5, indicating the estimated income or the farm's potential earnings between 1978 and 1981. These charts, which are annotated, are clearly the result of much work on the part of the representative. In brief, he tried to compare the estimated farm income and expenses during the years in question with gross income and actual farm losses. The probative value of this evidence is not great. Not only were the charts prepared in 1984 and thus provide a retrospective evaluation of the operations, but the figures shown for estimated income and expenses are purely hypothetical and do not correspond to the facts put forth in evidence. Even if we were to accept the figures in these pro forma statements (Exhibit A-5), they represent the sale of products and services whose existence was not established in evidence and for which a market was not shown to exist.

For these reasons, I find that the appellants were not carrying on a farming business and are not entitled to any deduction for farm losses for the 1979 and 1980 taxation years.

The appeals are allowed with respect to the 1978 taxation year and the matter referred back to the Minister for consideration and reassessment on the basis that the assessments of the appellants for the said taxation year have been quashed. For the 1979 and 1980 taxation years, the appeals are dismissed.

Appeals dismissed.