Walter Koritni, Rita Doreen Koritni v. Minister of National Revenue, [1984] CTC 2811, 84 DTC 1716

Cardin, TCJ:—The appeals of Walter Koritni and Rita Doreen Koritni were heard on common evidence. The issue in both appeals is the deductibility of farm losses in the appellants* 1978 and 1979 taxation years.

In 1978 and 1979, Walter Koritni was employed as a full-time hairstylist and his wife, Rita Doreen Koritni, was employed as a full-time dressmaker. In September 1978, the appellants, in partnership, acquired a 300-acre farm in Carden Township, for $65,000. The appellants mortgaged their Toronto residence for $48,000 and the farm property for $22,000 to finance the purchase.

Walter Koritni had worked on his father’s cattle farm in Australia until he was eighteen years old and although he had never worked on a farm in Canada for the past 30 years, he stated that owning a cattle farm was a long cherished dream. The farm, which had previously been a cattle farm, was in a run-down condition when the appellants acquired it.

In the latter part of 1978, and in 1979, the appellants’ farm activities consisted mainly in repairing fences and restoring the barn. From September to December 31, 1978, there was no income from the farm and expenses totalled $8,954.92, of which $5,122.28 were spent on machinery and farm equipment (Exhibit R-l).

For the 1979 taxation year, the farm operations earned an amount of $560 from the sale of hay, wood and rental of pasture. The expenses for this period were $9,370.29, of which $7,539.08 were for interest on the loans (Exhibit R-2). At the hearing, Walter Koritni stated that forty acres of the farm were now used for growing hay and a little grain, but there was sufficient wood on the property to warrant the sale of it (wood) to a logger.

Counsel for the respondent filed, as Exhibit R-3, a letter signed by Walter Koritni, dated May 15, 1981, addressed to the Department of National Revenue, in which he states he had to sell his Toronto residence so as to pay back the loans and purchase the cattle, as originally planned.The evidence is that the appellants’ home was sold in 1981, the loans were repaid, cattle was purchased and both Walter and his wife left their jobs, moved to the farm and are now operating the farm on a full-time basis. Since 1981, the appellants* only source of income was from the operation of their farm.

In their 1978 and 1979 tax returns, the appellants each claimed farm losses in the amounts of $4,567.57 and $4,685.14 respectively. The Minister of National Revenue disallowed all the farm losses claimed on the basis that the expenses were not incurred to earn income from a business within the meaning of Paragraph 18( l)(a) of the Income Tax Act, RSC 1952, c 148, but were personal living expenses and the deductions prohibited by Paragraph 18(1)(h) of the Act. The respondent also submitted that the appellants are not entitled to any restricted farm loss deductions within the meaning of subsection 31(1) of the Act, in that the farming activities engaged in, by the appellants, do not constitute a business carried on for profit or with a reasonable expectation of profit.

The Minister’s alternative submission is, if the appellants were engaged in the farming business in 1977 and in 1978, then a restricted farm loss, equal to one half of the partnership losses of $4,978.63 and $8,374.45, incurred in the 1978 and 1979 taxation years respectively, may be deducted pursuant to subsection 31(1) of the Act.

The respondent pointed out that in 1978 and 1979, the appellants had no experience in farming; they did not have sufficient finances to acquire the farm; they could not afford to buy cattle in those years; they had followed no predetermined plan in developing the farm; they had made no projection of the farm’s earning potential and, finally, the farm incurred losses in the years under appeal and in subsequent years. The respondent concludes that, under the circumstances, the appellants could not possibly have had a reasonable expectation of profit from their farm operations in 1978 and 1979 and were, therefore, not in the business of farming and no farm losses could be deducted.

While it is true that the appellants had to mortgage their home and obtain loans to acquire the $65,000 farm, and that they had to continue working at their respective employment until the house was sold, it does not, in my opinion, preclude them from having in 1978 and 1979, the intention and the determination to acquire and operate a farm with a reasonable expectation of profit. An objective consideration of Walter Koritni’s testimony and the documentary evidence filed by the respondent, confirm that the appellants, albeit on a part-time basis in 1978 and 1979, were engaged in a farming operation and exclude any possibility that they were engaged in a hobby farm as “Gentlemen Farmers’’.

The evidence is that the appellants, in 1978 and 1979, and in subsequent years, were engaged in the rehabilitation of a farm that had been neglected for some ten years. The cost of the farm rehabilitation is very comparable to the start-up costs of a new farm and the losses incurred in 1978 and 1979 and in subsequent years, are not necessarily proof that the appellants had invested in a $65,000 farm without having a reasonable expectation of profit from the operation of the farm, within a reasonable period of time.

Some 28 months after purchasing the farm, and once they had sold their Toronto residence, the appellants paid off the mortgage, purchased cattle as planned and moved to the farm on a permanent basis. The appellants would not have left their respective jobs in 1981, nor counted exclusively on the farm operation for their livelihood, had they not had a very real expectation of profit from farming.

The “Record of Profit and Loss’’ of the appellants’ farm operations, filed by the respondent as Exhibit R-4, is as follows:

Although the record still shows a loss of $3,121.72 for the appellants’ 1983 taxation year, the farm income rose from “nil” in 1978 to $20,702.12 in 1983 and the losses decreased from $8,954.82 in 1978, to $3,121.72 in 1983.

From the above record, it is logical to expect that once the rehabilitation costs have stabilized and the farm has become fully operational with its inventory of cattle and the planned increase in livestock referred to by Walter Koritni in his testimony, the appellants’ farm operations will, in a reasonable period of time, have become a viable business. I conclude, therefore, that in the 1978 and 1979 taxation years, the appellants were engaged in bona fide farming activities, with a reasonable expectation of profit from their operations.

The appeals are, therefore, allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the appellants were engaged in a farming business in the 1978 and 1979 taxation years and that the restricted farm losses incurred by each of the appellants during the 1978 and 1979 taxation years be deducted pursuant to subsection 31(1) of the Act.

Appeal allowed.