Rolland Roy v. Minister of National Revenue, [1984] CTC 2982, 84 DTC 1901

Cardin, TCJ [TRANSLATION]:—The appeal of Rolland Roy is against income tax assessments for the 1977-1980 taxation years. The issue is the deductibility of farm losses incurred by the appellant in the years at issue.

Summary of Facts

Before 1976, the appellant was the owner and manager of a transportation business operating about thirty passenger and school buses. In 1975, at age sixty- two, the appellant considered that the management of his business had become too much for him and put it up for sale. In 1975, the appellant purchased a farm of 125 arpents, 110 of which could be cultivated, for the sum of $30,000 (sale contract attached to the notice of appeal). However, it was alleged that the farm had been neglected for some years and was in bad condition at the time of purchase.

In 1976, the appellant sold his transportation business and in the years at issue the appellant’s principal source of income was interest on investments made following the sale of his business.

The deductibility of farm losses, either entirely or on a restricted basis within the meaning of the section of the Income Tax Act, SC 1970-71-72, c 63, as amended, is allowed only when the farming operations of the taxpayer meet the requirements of a business. One of the chief characteristics of a business is that it must be carried on with a reasonable expectation of profit. If the appellant’s activities do not have a reasonable expectation of profit, then no deduction can be allowed. If there is an expectation of profit, farm losses are allowed either wholly or partly, depending on whether the farm activities represent, in the first case, the taxpayer’s principal source of income for the taxpayer.

In his assessment, the respondent submitted that the appellant’s activities do not constitute a business and there is no reasonable expectation of obtaining a profit from his farming operations. All the farm losses claimed by the appellant were accordingly disallowed by the respondent.

The appellant, for his part, submitted that the farming operations constitute a business which has a reasonable expectation of producing a profit from its operations, and claimed to deduct all the farm expenses.

The issue is one of fact which must be considered objectively. The financial statements, forecasts, comparison tables and tax returns submitted by counsel are important factors in determining whether the appellant’s farming activities have a reasonable expectation of producing a profit.

The appellant’s farm losses for 1977-1982, which are not in dispute, are indicated in the following table (Appendix A).

Appendix A

		ROLLAND ROY
		Farm losses — 1977-1982
	1977	1978	1979	1980		1981	1982
Income:
— Sale of hay and
oats	$ 4,609	$ 2,931	$ 3,522	$ 3,640		$ 5,335	$ 3,682
— Other income	—	—	—		—	—	392
Total income	$ 4,609	$ 2,931	$ 3,522	$ 3,640		$ 5,335	$ 4,074
Expenses:
— Salaries and
benefits	$ 5,592	$ 4,297	$ 4,312	$	905	$ 3,855	$ 4,657
— Interest on
mortgage	2,574	2,649	2,517		1,903	2,510	1,639
— Maintenance and
repairs	982	3,129	3,571		7,615	3,291	3,165
— Electricity and
telephone	194	1,100	918		1,259	1,424	1,650
— Insurance	68	343	577		820	687	698
— Oil and gas	—	525	416		445	1,079	281
— CCA—residence
and paving	1,458	1,445	1,303		1,175	1,060	956
— Other expenses	4,560	4,758	7, 648		3, 420	7, 981	5,722
Total expenses	$15,428	$18,246	$21,262	$17,542		$20,513	$18,768
Profit (or loss)	($10,819)	($15,315)	($17,740)	($13,902)		($15,178)	($14,694)

The evidence was that the 110 arpents of the appellant’s farm were in bad condition, and the appellant had to remove rocks and plough the land, for which he received government grants. In the years at issue and in the following years, the only products grown by the appellant were hay and oats. To establish that the farm could be profitable, the appellant alleged that one of the original owners of the said farm Mr Trahan, had been able to support his entire family on income from the land. However, it was established that Mr Trahan’s farming activities also included raising animals and keeping a herd of cows. The appellant never had any animals on the farm except a pony, which he kept for only a few months.

The appellant stated that he had bought the farming implements required to grow wheat. However, the purchase and cost of his implements were not identified in the list of farm expenses. The farm expenses were shown as maintenance and repair, electricity, telephone and paving, part of which was attributable to the residence.

According to the foregoing table, income from the farm did not increase appreciably during the years 1977-1982. However, farm expenses for 1978-1982 were all higher than in 1977. The losses recorded for each of the years 1978, 1979, 1980, 1981 and 1982 were also higher than the loss recorded for 1977. Additionally, the appellant had no plans for producing a higher income, either by enlarging the area of land under cultivation or by diversifying the agricultural products.

As appears in the following table, the appellant’s farm income represented only a small part of his total income (Appendix B).

Exhibit A-1 is a forecast of potential income and expenditure for the farm for the period ending December 31, 1977-1986, prepared by Mr Robert Fortier (of the firm Raymond, Chabot, Martin, Paré et Associés, chartered accountants).

In his forecast, it appears that the farm should produce a profit of $6,650, $7,200, $7,250 and $8,700 for 1983, 1984, 1985 and 1986 respectively. However, in this presentation the amounts of income and expenditure for each year from 1977-1982 do not correspond to the income and expenditure statements contained in the appellant’s tax returns for 1977 and [sic] 1982, contained in Exhibit I-1. The expenses reported are accurately reflected in the table of farm losses for 1977-1982 above (Appendix B).

The forecast of income and expenditure for the appellant’s farm is as follows (Exhibit A-l):

ROLLAND ROY

POTENTIAL FARM INCOME AND EXPENDITURE

OF FISCAL YEARS ENDED AND ENDING DECEMBER 31, 1977-1986

Income	1977 97	1978	1979	1980	1981	1982	1983	1984	1985	1986
Hay — 7,000
bales	$ 7,000	7,000	8,750	8,750	10,500	11,500	12,500	14,000	14,000	15,750
Oats and barley	1,000	1,000	1,200	1,200	1,400	2,700	3,000	3,000	3,200	3,200
Straw	300	300	400	400	500	600	700	800	800	800
Wood	300	300	500	500	700	1,200	1,400	400	400	400
Sugar		250	250	300	300	350	350	350	350	350
Miscellaneous
(grants)			2,900	400		400
	8,600	8,850	14,000	11,550	13,400	16,750	17,950	18,550	18,450	20,500

Expenditure	1977	1978	1979	1980	1981	1982	1983	1984	1985	1986
Salaries and
fringe benefits	5,600	4,100	4,100		3,900	4,650	3,400	3,200	3,200	3,000
Insurance	100	400	550	800	700	700	700	700	700	700
Accounting and
fees	1,000	1,300	900	1,600	850	950	400	400	400	400
Electricity	100	750	950	1,000	1,000	1,300	700	700	700	750
Maintenance—
land and
building	700	2,100	2,400	5,500	2,350	2,750	450	500	500	600
Maintenance and
repairs—
machinery	300	1,000	1,200	2,150	900	400	500	500	500	700
Fertilizer and
lime	800	800	1,450	300	2,600	1,200	250	400	400	500
Seed	400	350	200	100	750	1,450	2,000	1,700	1,700	1,900
Containers and
twine	200	200	150				250	300	300	400
Oil and gas		500	400	450	1,100	300	250	400	400	400
Interest on
mortgage	2,600	2,600	2,500	1,900	2,500	1,600
Taxes, licences
and permits		350	200	400	850	950	350	600	600	700
Telephone	100	200		200	400	350	200	300	350	350
Mechanized work
on land			2,250
	11,900	14,650	17,250	14.400	17,900	16,600	. 9,450	9,700 _ 9,750		10,400
PROFIT (LOSS)
before capital
cost allowance	(3,300)	(5,800)	(3,250)	(2,850)	(4,500)	150	8,500	8,850	8,700	10,100
Capital cost
allowance	3,600	3,600	4,000	3,200	2,600	2,250	1,850	1,650	1,450	1,400
	$(6,900)	(9,400)	(7,250)	(6,050)	(7,100)	(2,100)	6,650	7,200	7,250	8,700

Notes:

Income was established by Mr Rolland Roy assuming his farm attains its maximum production. Expenses were established by Mr Rolland Roy in terms of maximum production.

RAYMOND, CHABOT, MARTIN, PARE,

& ASSOCIES

Chartered accountants

April 10, 1984

Mr Rolland Roy

St-Gervais

Comté Bellechasse

Dear Sir:

At your request, we have compiled a statement of potential income and expenditure for your farm from the fiscal years ended and ending on December 31, 1977-1986 inclusive. This potential [sic] statement of income and expenditure is based on information which you supplied to us. As our work consisted solely of compiling this financial data from information provided to us by you, we are not in a position to express an opinion on the accuracy or completeness of this statement.

(Signed)

R Fortier/dr

It was also stated on the table that “Income was established by Mr Rolland Roy assuming his farm attains its maximum production. Expenses were established by Mr Rolland Roy in terms of maximum production”.

According to the appellant, for the years at issue the 110 arpents of the farm which can be cultivated were used exclusively to grow oats and hay. Without a substantial increase in the number of arpents cultivated or a diversification in farm products, it is hard to see how it would be possible for the appellant to attain maximum production which would produce the income forecasted for 1983-1986. Furthermore, in the appellant’s forecast, Exhibit A-1, he projected a profit of $6,650 for 1983, while [in] Exhibit A-2 the accountants projected a loss of $1,181 in the income and expenditure statements for the farm for the fiscal year ending December 31, 1983.

In support of his submission that the agricultural activities of his farm constituted a business, and that all the farm expenses incurred by the appellant during the years at issue should have been allowed, counsel for the respondent [sic] maintained that, once he had sold his transportation business, the appellant devoted all his time to managing his farm.

Even if the appellant had no activities other than his farm and spent all his. time on it, which in some circumstances might be an indication of the existence of a business, it does not thereby follow that the appellant’s farm operations should be regarded as a business solely on that account.

How much time per day, week, month and year would the appellant spend sowing and reaping hay and oats, especially when the financial statements show expenses for salaries paid to a farm employee?

The weight of the evidence is that the appellant was retired in the years at issue and no longer relied on the farm for an income, but used the farm losses to provide better protection for his income from other sources, while living in surroundings which he undoubtedly enjoyed.

A review of the financial statements does not show that the appellant invested much capital in the farm itself. The capitalization was made and expenses claimed were incurred both for the farm and for the residence, and it is very difficult to separate them with the aid of the financial statements.

Counsel for the appellant at the start of the hearing alleged a formal defect, in that the assessment and the Minister’s confirmation are based primarily on the personal nature of the expenses claimed by the appellant. He submitted that as there was no evidence that the appellant had claimed personal expenses, the burden of proof as to his secondary allegations rested with the Minister.

The respondent called Mr Côté, an employee in the Department of National Revenue, as an assessor who was responsible for the appellant’s file during the period of the notice of objection, the notice of appeal and the Minister’s confirmation. Mr Côté stated, after checking the file, [that] the farm losses were disallowed since the appellant was not carrying on a farm business.

In cross-examination, Mr Côté stated that the assessment was based on the following facts: first, the appellant farmed only 80 per cent of his land, which represented an area which was physically inadequate to produce a profit. There was no change during the years at issue and no change in the farm’s operations was planned. He concluded that the appellant could not have had a reasonable expectation of obtaining a profit from working the land. Mr Côté stated that these were the reasons alleged by the Minister in his reply to the notice of objection and the confirmation.

I find it hard to see the formal defect alleged by the appellant. The Minister’s confirmation alleged, first, that the appellant’s farm losses could not be allowed as they had not been produced by a business. The fact that the Minister alleged these were personal expenses is only a logical conclusion from his principal reason, which he did not have to establish.

Counsel for the appellant stated that if all the farm expenses could not be allowed in the circumstances, at least the restricted farm losses under subsection 31(1) of the Income Tax Act should be allowed. In this connection, counsel alleged that at the negotiating stage a departmental employee had suggested to the appellant’s representative that the restricted expenses might be allowed.

Whether or not such a compromise was made between the Department and the appellant’s representative at the negotiating stage could have no relevance to or effect on the outcome of the case.

I must conclude that there was no formal defect on the respondent’s part and that the burden of proof clearly rested with the appellant.

The taxpayer did not succeed in establishing either by figures or by argument that his farming operations were a business which had a reasonable expectation of profit. In the circumstances, no expenses can be allowed.

The appeal is accordingly dismissed.

Appeal dismissed.