George R Madronich v. Minister of National Revenue, [1984] CTC 2319

Christie, CJTC:—The appellant sought to deduct the restricted farming losses provided for by subsection 31(1) of the Income Tax Act (“the Act”) in respect of his 1977 to 1980 taxation years inclusive. The issue is whether the appellant’s tree farming activities constituted a business during the years mentioned.

As was said in Kerr and Forbes v MNR, [1984] CTC 2071; 84 DTC 1094 at 2072 [1095]:

. . . This in turn raises the question whether the appellant has established, by a preponderance of evidence, the existence of profit or a reasonable expectation of profit. . . . The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep-felt they may be. The issue is to be decided by objective testing. In Moldowan this is said at page 5215:

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 shoud be considered: the profit and loss experience in past years, the taxpayer’s 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. The factors will differ with the nature and extent of the undertaking: The Queen v Mathews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In April 1973 the appellant purchased 20.11 acres of vacant land for $6,700. It is located about 9.65 kilometres from Orangeville (“the Orangeville property”). At the time of the purchase, and at all subsequent times relevant to this appeal, the appellant had a full-time employment unrelated to farming. During the taxation years under appeal he was employed by Zentil Plumbing & Heating Co as a plumbing supervisor. It is a substantial company, the activities of which include partaking in the construction of large apartment buildings. The appellant admitted that he worked long hours in the unrelated employment and that this sometimes included Saturdays.

At the time of the purchase of the Orangeville property, one of the motives and quite possibly the primary motive was the expectation of selling it later at a profit. The appellant went on, however, to testify that by 1975 he had abandoned the notion of resale and decided to convert the land into a tree farm. It was very marshy and drainage on a relatively considerable scale had to be undertaken in preparation for planting. The property was referred to by the appellant, somewhat in jest, as “the lake”. For this work the appellant purchased a backhoe on November 12, 1975 for $3,550. This is construction equipment suitable for digging drainage ditches. He laboured at tilling the land during the weekends and holidays and estimated that he spent about 16 hours a month, on average, doing this work. His home was in Mississauga and the distance to the Orangeville property was 77.2 kilometres. Travelling time by car or truck is approximately 45 minutes each way.

Cultivation continued until 1978, at which time the appellant commenced planting seedlings. What follows in chart form summarizes the evidence regarding what was planted during the taxation years in question — the number of trees planted, the estimated percentage of survival and the estimated time when what survived could be harvested for marketing:

In 1981 the appellant bought a second property in the Caledon area which is approximately 32 kilometres from the appellant’s home in Mississauga. This property (“the Caledon property’’) consisted of 26 acres of vacant land. Unlike the Orangeville property, the Caledon property was of attractive rolling configuration and otherwise desirable real estate. It has been yielding profitable crops of hay. The planting of trees continued after 1980 at both the Orangeville and Caledon properties. No estimated percentage survival rate was given regarding the additional planting, but otherwise the chart continues:

All 1983 planting was at the Caledon property except 100 Scotch Pine and 100 Black Walnut at the Orangeville property.

During the hearing there was fairly extensive probing of the appellant’s background in relation to tree farming. He testified that he was born and raised on a farm in Yugoslavia. It was mixed farming which included fruit trees which were the source of wine for marketing. There were also other trees which provided firewood. When the appellant migrated to Canada he lived on an uncle’s farm near Beamsville, Ontario. He said that while there he had some experience with trees although he admitted that this was not a tree farm. Later on he added that while in grade school in Yugoslavia he engaged in planting pine trees. What is of relatively more evidentiary significance is that when he decided to undertake the planting of trees at the Orangeville property he sought and received advice from the Ontario Ministry of Natural Resources and obtained assistance from such places as the Midhurst Nursery which is operated by the Government of Ontario near Barrie. He could have had much more direct assistance and involvement by the Ministry of Natural Resources but he chose not to which, of course, he was perfectly free to do. He tendered in evidence some of the literature he received from the Ministry concerning the planting of and caring for trees. Among other things, it describes the benefits which can flow from planting trees. These include improving the “aesthetic beauty’’ of land and otherwise upgrading its quality, eg as an aid against soil erosion. The appellant also testified that his work on large construction projects gave him opportunities to observe and study the landscaping involved in relation to the construction.

No profit has been realized by the appellant from his tree farming activities. The losses for the years under appeal were: 1977 — $2,911.75; 1978 — $3,478.80; 1979 — $2,950.06 and 1980 — $2,886.45.

I am not satisfied that the purpose of the appellant’s tree planting activities was directed at the ultimate harvesting of the trees for profit. I have reached the conclusion, on the whole of the evidence, that his true intention was to enhance the potential marketable value of the real estate by improving it aesthetically and otherwise. What was expended by the appellant for that purpose were outlays on account of capital and do not constitute a farming business within the meaning of subsection 31(1) of the Act. It follows that he is not entitled to the restricted farm losses under the subsection.

The judgment rendered by Mr Justice Mahoney in The Queen v Matthews, [1974] CTC 230; 74 DTC 6193 was cited in argument. In that case the appellant was successful in claiming restricted farm losses pursuant to subsection 13(1) of the Act (now subsection 31(1)) in respect of a tree farming operation. The evidence in Matthews was much different than that presented on this appeal; for example, it was established in Matthews that, in addition to planting thousands of seedlings, the property contained marketable timber which was felled and sold under the managerial supervision of the appellant. In the case at hand there is no evidence that the appellant has ever marketed trees or tree products from either the Orangeville or Caledon properties or that these properties even contain marketable trees.

Appeal dismissed.