Ambrose J Lewis v. Minister of National Revenue, [1984] CTC 2306, 84 DTC 1267

Tremblay, TCJ:—This case was heard on August 3, 1983, at the City of Sydney, Nova Scotia.

1. The Point at Issue

The point at issue is whether the appellant, a welder working for different employers, is correct in deducting net losses of $1,348 (1977), $2,625.50 (1978) and $3,924 (1979) from a brood mare operation in the computation of his net income for the 1977, 1978 and 1979 taxation years.

The respondent contends that the activities carried on by the appellant were not farming, but a hobby for the appellant who had no expectation of profit, so the expenses incurred are personal and not deductible.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

3. In so reassessing the Appellant’s income tax liability the Respondent made, inter alia the following assumptions of fact:

(a) At all material times the Appellant was employed as a welder and his total annual earnings from that source was as follows:

1977	Atomic Energy of Canada Ltd	$	354.40
	Union Construction Ltd		324.80
	Consolidated Maintenance Services Limited	11,001.18
	TOTAL	$11,680.38
1978	Flanders Installations Ltd	$ 4,878.58
	Atomic Energy of Canada Ltd	21,293.89
	TOTAL	$26,172.47
1979	Pullman Kellogg Canada Ltd	$ 2,237.60
	Flanders Installations Ltd	28,122.63
	TOTAL	$30,360.23
(b) The Appellant owns six acres of land;

(c) In 1977, 1978 and 1979 the Appellant reported gross income, expenses, and losses and claimed from a brood mare operation as follows:

				Deduction
	Gross Income	Expenses	Losses	Claimed
1977	Nil	$1,348.00	$1,348.00	$1,348.00
1978	Nil	2,751.00	2,751.00	2,625.00
1979	Nil	3,924.00	3,924.00	3,924.00

(d) The Appellant did not conduct his farming operation in a businesslike manner and had no reasonable expectation of profit;

(e) The activities carried on by the Appellant were not farming, but a hobby of the

Appellant’s and the expenses incurred by him were personal or living expenses.

3. The Facts

Admission

3.01 At the beginning of the trial, counsel for the appellant informed the Court that the appeal for the 1977 and 1978 taxation years was withdrawn.

Counsel for the respondent admitted that the quantum of the expenses claimed by the appellant for the 1979 taxation year was not in dispute.

3.02 The appellant testified that in 1975, he received from his mother a six acre piece of land located next door to a 120 acre family farm where he was raised. He then built a house on it.

3.03 In 1977, he had two racing horses and in 1978 one. In 1979, he purchased a nine-year old mare. A mare can become pregnant, according to the appellant, until it is twenty years of age. He hoped to have a foal and to sell it six months to one year later. Sometimes a foal can be sold for up to $20,000. The marketing of colts was then very good. The mare he purchased had an important pedigree despite the fact that he paid only $300 for it. The reason is that he bought it from the widow of the former owner.

In 1979 and 1980, the mare met a high sire and twice she became pregnant. However, twice she lost the foal. They were even obliged to kill the mare in 1981. In 1982, he bought a new mare.

3.04 The appellant testified that in 1979, he worked four to five hours every day. He built a stable and bought a tractor.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the instant case are 18(l)(h), 31(1) and 248(1) the definition of “personal or living expenses”. They relate as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

31. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) ‘/z of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deductions in respect of expenditures described in section 37’’ were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss’’ for the year.

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,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

4.02 Cases at Law

Counsel for both parties referred the Court to the following cases:

1. Helen Kasper v The Queen, [1982] CTC 178; 82 DTC 6148;

2. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213;

4.03 Analysis

4.03.1 Dickson, J of the Supreme Court of Canada said in the Moldowan case at 5216 of 77 DTC that in his opinion the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s 13(1) in respect of farming loss.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of incone, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

Subsection 13(1) to which Dickson, J refers is the present subsection 31(1):

The reference in s 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and theeby limit the deductibility of any loss which may be suffered to $5,000.

4.03.2 Pursuant to the adduced evidence, it is obvious that the appellant is not a farmer as provided in class 1. This class “contemplates a man whose major preoccupation is farming”. The appellant is first a welder who earned $30,360.23 in 1979 from this, his major preoccupation.

4.03.3 Now the point is whether the appellant contemplates his farming activities as a sideline (class 2) or as a hobby (class 3). The respondent contends that he carried on farming as a hobby and that he is not entitled to the deductions. The main basis of this contention is that the appellant has no “reasonable expectation of profit”:

Dickson, J again in the Moldowan case said at 5215 of 77 DTC:

There is a vast case 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 of the facts. The

following criteria should be considered: the profit and loss experience in past years, the taxpayers’ 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 intended to be exhaustive.

It has been many times underlined by the tribunals that the good faith, the general intention or the genuine belief of a person to be a farmer and to make a profit, is not sufficient to justify a reasonable expectation of profit. It must be “an objective determination from all of the facts”, and the appellant had no specified preparation except he was raised on a farm. Moreover, the appellant had only one mare. It is part of the risk that a mare lose its foal, it is even common. Therefore one must not even contend to anticipate a reasonable expectation of profit with only one mare; it is a hobby.

It is true what Mahoney, J said in Matthews v MNR, 74 DTC 6193 that the word “reasonable” applies to “expectation” and not to “profit”. However, with only one mare, the Court thinks with the inherent risk of losing the foal, the expectation of profit is not reasonable.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.