John E Plewes, John D L Plewes v. Minister of National Revenue, [1984] CTC 2585, 84 DTC 1582

Tremblay, TCJ:—These appeals were heard on common evidence in Toronto, Ontario, on February 17, 1984.

1. The Point at Issue

The point is whether the two appellants, a father and son, who operated as equal partners, a market garden under the name of Nottawa Fruit Market, are correct in the computation of their income for the taxation year 1976 to consider as capital gain the profit arising from the sum of $25,000 received from the sale of the said fruit-market business.The said $25,000 was allocated to the purchase price of $158,000 for asparagus plants, then growing on the land being farmed by the appellants.

The appellants contend that the asparagus plant is like a tree which each year produces fruit, and therefore must be considered as an integral part of the land and could not be sold separately.

The respondent considered the asparagus plant as part of the inventory of the business and the profit arising from the $25,000 must be considered as business income.

2. The Burden of Proof

2.01 The burden 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:

In so reassessing the Appellant, the Respondent found or assumed:

(a) the facts hereinbefore pleaded;

2. John E. Plewes and John D.L. Plewes, father and son respectively, carried on at all material times as equal partners a market garden type of business under the style or cause of Nottawa Fruit Market in the Township of Nottawasaga, in the County of Simcoe, in the Province of Ontario.

3. By Indenture dated March 9, 1976, John Edward Plewes and Jessie Lenah Plewes, his wife, agreed to sell the business known as Nottawa Fruit Market for a total consideration of $158,000.00 to Gerald Winston Wylie and Ruth Anne Wylie. The parties to the said Indenture, agreed to allocate $25,000.00 of the purchase price of the said business to asparagus plants then growing on the land being farmed by the Appellant.

4. In reporting his income for the 1976 taxation year, the Appellant treated his share of the proceeds allocated to the asparagus plants as a capital disposition.

5. By Notice of Reassessment dated December 10, 1980, the Respondent reassessed the Appellant by inter alia adding as business income the Appellant’s share of the $25,000.00 allocated by the Appellant and his partner to the asparagus plants and treated by him as a capital gain.

(b) that the $25,000.00 allocated to the sale of the asparagus plants was an item of income to the Appellant and his partner;

(c) that the asparagus plants were inventory of the business at all material times. 3. The Facts

3.01 The appellant admitted the facts alleged in subparagraph (a) of paragraph 6 of the reply to notice of appeal as quoted above.

3.02 Because the subject matter of the case was “asparagus”, counsel for both parties gave in common evidence a brief statement concerning asparagus. It reads as follows:

Asparagus . . . which is the subject matter of this hearing as Your Honour is undoubtedly aware from having reviewed the pleadings, . . . is a perennial root. Commercial plants are often harvested for many years, which the Respondent says appears to be nine years and the Appellant states is twenty to twenty-five years.

The asparagus is grown for its stems, which are commonly known as spears, which are cut for approximately six weeks . . . “you will see that has been altered”, . . . each spring. As of the date of the agreement, there would not have been produce available for consumption from the asparagus. As mature asparagus plants, the plant could not be removed from the ground for resale and replanting elsewhere.

3.03 The appellant in his examination in chief testified that:

(a) the farm they bought in 1971 was 58 acres, 40 acres of which were for asparagus;

(b) then in 1971 the asparagus plants had been already in the ground for four years;

(c) when they sold the farm in 1976, there were only 30 acres of asparagus;

(d) the purchaser Mr. and Mrs. Gerald and Ruth Wylie had made a tender in October 9, 1975 (Exhibit A-6); the deed was completed and signed on March 9, 1976; it was registered on March 31, 1976 (Exhibit A-1);

(e) the total price was $158,000 detailed as follows in the deed (Exhibit A-l):

Home:	$15,000	Equipment:	$45,000
Barn & Shed:	$22,500	Land:	$35,000
Cold Room:	$15,000	Asparagus:	$25,000

(f) it takes three years, after asparagus has been seeded to become of any value for the farmer; the sprout that grows on top of the ground is cut when it is six inches high; the plant, the root itself is not edible; the spear grows during six weeks per year, from the middle of May to the end of June; in fact during the 6 weeks it takes between 3 to 5 days for the spear to grow 6 inches high; thereafter, it is cut about 10 times;

(g) many steps have to be taken every year; at the beginning of May, the farmer discs the field; after that, the fertiliser is put on the ground; at the beginning of July, after the last cutting, the field is disced again; immediately after, it is fertilised a second time;

(h) after that last step, “the little spears will come up and the little pieces open up and a little piece of fern will start growing out as it grows”, then the field becomes all green; during the fall, the fern freezes and dies;

(i) few pictures were filed as Exhibit A-3: two photographs of an asparagus field in winter; Exhibit A-4: photograph of asparagus being cut; Exhibit A-5: photograph of an asparagus field in August;

(j) the gross revenue for the 30 acres was between $13,000 to $15,000; the yearly expenses incurred for asparagus were around $6,000 ($2,000 for fertiliser, $2,000 for cutting, $1,500 for spraying against black bugs, $5,000 for baskets and $100 for fuel). [sic]

3.04 In cross-examination, the appellant said that if a farmer looks after his asparagus, he can grow it for twenty-five (25) years.

4. Law — Cases At Law — Analysis

4.01 Law

The provisions of the Income Tax Act involved in the instant case are 23(1) which concerns the sale of stocks and 40(l)(a) which is the general rule for the computation of the capital gain provision. 23(1) reads as follows:

Sec. 23. Sale of Inventory

(1) Where, upon or after disposing or ceasing to carry on a business or a part of a business, a taxpayer has sold all or any part of the property that was included in the inventory of the business, the property so sold shall, for the purposes of this Part, be deemed to have been sold by him in the course of carrying on the business

Sec 40. General rules.

(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making a disposition,

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the propeity,

exceeds

(iii) subject to subsection (1.1), such amount as he may claim as a deduction, not exceeding the lesser of

(A) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

(B) an amount equal to the product obtained when 1/5 of the amount determined under subparagraph (i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property; and

4.02 Cases at law and Jurisprudence

The cases at law to which counsel referred are as follows:

1. CIR v Pilcher, [1949] 2 All ER 1097;

2. J O Shybert et al v MNR, 69 DTC 817;

3. Bram Vandervalk v MNR (1965), 38 Tax ABC 399; 65 DTC 464.

4.03 Analysis

4.03.1 The crux of the matter is whether the asparagus plants are part of the inventory or part of an income-producing asset.

4.03.2 The evidence is to the effect that asparagus is a perennial plant which lasts around 20 years (para 3.02). Moreover, the crop is not the plant but the spears which grow off the plant for six weeks every year, from the middle of May to the end of June (para 3.031).

At the time of the transaction, there was no crop on the plants available for sale or consumption because it was in March 1976, during the winter (para 3.03d). Finally the plant, the roots themselves are not edible (3.03b), they have no value for resale or transplanting to other farmers’ fields as nursery stock (para 3.02).

At first glance, it seems to the Court that the plants cannot be part of inventory but rather they are part of the land, they are capital, they are an incomeproducing asset.

403.3 Counsel referred to cases at law — in fact, they are all of same nature — a farm was sold for a fixed price for the whole without determining a price for the standing crop. The decisions, therefore, were in the sense that the purchasers were unable to claim an expense for the standing crop. In the Shubert case, (supra), at 820, “The standing crop was more than half-way through the growing season when he (the purchaser) saw it. They had begun to harvest immediately upon taking possession of the farms of August 15, 1965.” It must be said that the testimonies of the purchasers did not help the appellant’s thesis. The appeal was dismissed.

4.03.4 The Court does not retain the distinction between “‘fructus naturales" and “fructus industriales" which is found in the Pilcher case referred to by the counsel for the respondent. There is no application in a case of nature. The Court shares the opinion of Mr Fordham after the study of the said case he did in Frank Jojart (1953), 8 Tax ABC 172; 53 DTC 148 at 174 [144-145] which reads as follows:

In the Pilcher case much was said about fructus naturales and fructus industriales. While the distinction may be important as between an executor and an heir-at-law, or tenant for life and remainderman, it seems purely academic in the present instance. In the Court of Appeal, Jenkins, L.J., held that the distinction was immaterial as between a vendor and purchaser when there was an out and out sale of a farm and the crops passed with the land in the ordinary way. If it were necessary to deal with the point, I should hold that a tobacco crop represented fructus industriales, as it requires much care and cultivation.

4.03.5 The Interpretation Bulletin (IT-425) concerning “Miscellaneous farm income” summarized in fact the cases at law on that point of view in paragraphs 2 and 3. They read as follows:

2. Where an agreement for the sale of farm land on which there is a standing crop specifies the amount payable for the crop, the amount so specified is income to the vendor and an allowable deduction to the purchaser. Where the agreement does not specify an amount payable for the crop, no portion of the sale price may be attributed to the crop insofar as either the vendor or the purchaser is concerned.

Sales of Rights to Harvest Crops

3. Where a taxpayer in the business of farming retains the title to his farm and merely sells the right to harvest the crop therefrom, the consideration so paid for that right is income to the vendor and an allowable deduction to the purchaser for tax purposes.

4.03.6 In the instant case, the agreement provides a fixed price for asparagus plants. However, are they a crop?

Counsel for the respondent contends the affirmative because in the sale agreement (Exhibit R-1) it is provided that an amount of $45,000 is paid for “goods, chattels and effects” pursuant to the Schedule “A” attached to the Indenture R-l. In this schedule one can read among others “tile drained approx. 30 acres asparagus.’’ Moreover, referring to the word “good’’ in Black*s Law Dictionary (fifth edition), he cited: “also includes the unborn of animals and growing crops and other identified things attached to realty as fixtures.” He also cited the word “good” in Stroud’s Judicial Dictionary'. “Growing crops are ‘goods’ as well as personal chattels within the meaning of the Bills of Sales Act 1878”. He contended that despite the fact that asparagus plants are dormant during the winter, as it was at the time of the sale in March 1976, they are growing crops because they are perennials, and being dormant is one of its normal cycles.

First, “tile drained” for approximately 30 acres of asparagus is something completely different from asparagus plants. It is so true that the parties have provided this latter item of an amount of $25,000 which is not included in the $45,500.

Finally, it seems obvious to the Court concerning asparagus, that the “crops” or “growing crops”, is something completely different from the asparagus plant which has no food value, no consumption value, no market value. They cannot be part of an opening inventory nor closing inventory in a financial statement.

In my humble opinion, I must consider them as capital, as an income producing asset and not as inventory.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the attached reasons for judgment.

Appeal allowed.