Dorothy R M Wild v. Minister of National Revenue, [1984] CTC 2154

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on December 6, 1983, against income tax assessments for the taxation years 1977, 1978 and 1979, in which the Minister of National Revenue disallowed, as deductible from other income, losses claimed from farming. The notice of appeal includes the following description of the matter as seen by the taxpayer:

The losses originally claimed and disallowed were $3,811, $4,405 and $4,843 claimed as deductions from income for 1977, 1978 and 1979 respectively. On our notice of objections we reduced these to $3,811.12, 3,563.90 and $3,885.62 for the years 1977, 1978 and 1979 respectively.

We reduced all of these years by the amount that was deemed personal, adjusted the amounts claimed on our notice of objection to eliminate balances previously carried forward and feel that our appeal is justified under the existing tax laws.

In contrast, the respondent relied, inter alia, on paragraphs 18(l)(a) and 18(l)(h), subsection 248(1) and sections 31 and 67 of the Income Tax Act, SC 1970-71-72, c 63 as amended, (“the Act”) and noted:

— The appellant, during the taxation years under appeal was a full time employee of Canada Manpower;

— the appellant, during the taxation years under appeal lived on the farm;

— the sole revenue produced by the farm arises from the production of maple syrup and the rental of approximately one-half of the farm acreage;

— during the taxation years under appeal, the appellant used less than one-fifth of the available maple trees to produce maple syrup;

— the expenses the asppellant incurred with respect to the farm were not made for the purpose of gaining or producing income;

— the farm property was not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

I would also note, as a matter of background, that the explanations for the disallowed amounts, provided on the assessment notices by the Minister, were:

Farm Losses Disallowed — Personal

In the circumstances of this case, I think it useful to portray the financial information upon which the claims were made. While each year differed somewhat, of course, the year 1977 is typical:

In making the “adjustments” referred to in the notice of appeal, (supra), the appellant did deduct certain items which she considered “personal”. Axiomati- cally, therefore, in her mind the balance of the “loss” was a business loss, because, again in her mind, the operation was a business. That perspective is sometimes generated by the kind of description given on the assessment notices — “personal” (see above), but it should be stressed that the responsibility on a taxpayer in such an appeal is not simply to assert that he or she did not receive any “personal benefit” from the expenditures, but to demonstrate that the expenditures were made for a valid business purpose — to earn a profit. It is perhaps an unfortunate choice of words “personal” as opposed to “business” which is forced on the Minister by the Act and it certainly dismays and disconcerts many taxpayers who firmly believe that there is nothing “personal” about the expenses, and in fact resist the implication that there is such a connotation. Nevertheless, subsection 248(1) of the Act leaves the Minister no choice but to so describe such expenses:

248. (1) In this Act

“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

I am quite sure it is difficult for a taxpayer to accept that an amount such as “Horse Ration & Sundry — $150.52” (above) has much to do with “personal or living expenses”, but the critical point is that if it does not have to do with “reasonable expectation of profit”, then there is no alternate description or definition available to the Minister.

À further point which could bear repeating is that the amount at issue, (supra), described as “Restricted Farm Loss — $3,811.12” is not the restricted farm loss at all. The “restricted farm loss” is the excess of a business farm loss over and above that portion of the total business farm loss permitted by the provisions of section 31 of the Act. In the instant case the “restricted farm loss” presuming that the amount of $3,811.12 for the year 1977 was correct and permitted, would be $5,122.25 - $3,811.12 = $1,311.13, which could then be carried forward under the provisions of section 111 of the Act.

The only point which must be determined therefore is that referenced in the quotation from the reply to notice of appeal (above):

— the farm property was not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

If such a “reasonable expectation of profit” was to be determined only on the results of a particular taxation year, then almost without question the results indicated above for each year would eliminate even any requirement for consideration. It has been said before in the jurisprudence that the fact a loss was incurred may be taken as “prima facie” evidence that there was no reasonable expectation of profit in a year. One must therefore rely upon various subjective, relative and theoretical arguments to support the proposition that there was indeed a reasonable expectation of profit, even though taxation of income is based upon “the taxable income for each taxation year” (subsection 2(1) of the Act). As I see it, such tangential arguments all come down to one point of thrust — that even if there was no profit during a certain year, there would be such a profit in the future. Applying that proposition to the instant case, the appellant must be saying that in years beyond 1979, there will be a profit, if the appellant is arguing (which she is) that the 1979 loss should be deductible from other income. The appellant did indicate in her testimony that there were expectations of increased gross revenue, and perhaps a better net operating result in the current year (1983), but that is insufficient, in my view, to offset the generally unchanged level of both gross revenue and operating losses for the years 1977, 1978 and 1979 (see above).

In the circumstances of this case, I would assert it to be a reasonable conclusion that almost all the expenses (using 1977 as an example) would have been incurred whether there had been any income reported at all. Those few small direct expenses entitled “Syrup Expenses” see statement above) might be the exceptions. The proposition made by the Minister that the revenue earned and reported merely served to reduce somewhat the cost of maintaining the property is more reasonable and viable than the “business” assertions put forward by the appellant. An attempt to reduce the total impact of otherwise personal expenses, by bringing in some funds, the origin of which is peripherally related to those ongoing expenses, does not in itself a business make.

Before arriving at this conclusion I have reviewed the case of J R Zavitz v MNR, [1978] CTC 3021; 78 DTC 1730, and a clear distinction can be made. In the judgments at both the Board and Court levels, it is clear that the purchase of cattle in 1973 (although a disastrous effort from a financial viewpoint) was regarded as a venture in the nature of trade — farming as a business — and that the appellant had continued at least during 1974 to actively pursue a course which held out a potential for profit. Neither judgment was required to express any opinion on the subsequent loss results for 1975, 1976 and 1977.

I would also make reference with approval to two recent decisisons from this Court in Victor Croutch v MNR, [1984] CTC 2113 and Walter W Lorenz v MNR, (not yet published) within which the same subject of farm losses is given a thorough and explicit review. It may be (as is often suggested by taxpayers) that the purpose of section 31 of the Act is to provide, to those engaged in farming activities, a loss write-off of a maximum of $5,000 per year during the early years of the operation when it is virtually impossible to give proof of “a reasonable expectation of profit”. However, that is an interpretation of section 31 which does not appear to me to be open to this Court under the existing legislation or jurisprudence.

The appeal is dismissed.

Appeal dismissed.