Richard Malone v. Minister of National Revenue, [1984] CTC 2994, 84 DTC 1798

Cardin, TCJ:—The appeal of Richard Malone from a reassessment of income tax dated May 10, 1983, was heard at the city of Toronto on October 5, 1984. The issue is the deductibility of alleged restricted farm losses claimed by the appellant as follows:

1978 — $2,863 1979 — $3,338 1980 — $3,683 1981 — $3,544

At the outset of the hearing, however, counsel for the respondent filed a consent to judgment allowing the appellant’s appeal for the 1978 and 1979 taxation years and referring the matter back to the Minister for reconsideration and reassessment on the basis that for the 1978 and 1979 taxation years, the appellant is entitled to deduct farming losses he incurred in accordance with the provisions of subsection 31(1) of the Income Tax Act, RSC 1952, c 148. (Consent to judgment attached herewith as Appendix “A”.)

The respondent was unable to determine conclusively, that the appellant’s farming activities had no reasonable expectation of profit in 1978 and 1979 and he therefore allowed restrictive farm losses claimed for these respective years. However, he also contended that the restrictive farm losses claimed by the appellant for the 1980 and 1981 taxation years were not outlays or expenses incurred by the taxpayer for the purpose of gaining or producing income within the meaning of paragraph 18(l)(a) of the Act but were personal or living expenses and non-deductible by virtue of paragraph 18(l)(h) of the Act.

The respondent contends that in 1980 and 1981, the appellant’s farming activities did not have a reasonable expectation of profit and submits that the appellant did not look to farming, or farming and some subordinate source of income for his livelihood but carried on farming as a hobby. There appears to have been some uncertainty in the Minister’s reassessments as to the true nature of the appellant’s farming activities in 1978 and 1979; however, the Court needs to determine the issue with respect to the 1980 and 1981 taxation years only.

The appellant, a professor at Durham College of Applied Arts and Technology situated in Oshawa, Ontario, purchased approximately 10 acres of land in the Township of Durham, Ontario, in 1974. The land consisted of eight acres of young and mature trees and two acres of cleared land. The appellant’s intention was to operate the land as a part-time tree farm with the help of his two sons.

The appellant alleges that the value of the forest inventory was conservatively estimated at $100,000. The existing trees in the forest were pruned and sales of firewood, cedar posts and young cedars were made as early as 1975. Seedlings were planted every year and the necessary equipment, axes, chain saws, vehicles, etc, were acquired. By 1983, the appellant’s operation included the cutting and sale of construction lumber but the labour was still provided by the appellant and his sons at little or no cost.

The appellant did not expect the operations to realize a profit before a period of ten years and estimated that, at that time, the operations would make a profit of $3,000 to $5,000 a year. However, the operations incurred losses from 1975 to 1983 and although there appears to be a trend toward the making of profit, particularly in 1982 and 1983, the facts and the figures do not establish that a profit could reasonably be expected even after a 10-year operation or indeed that the appellant’s farming activities would be viable at any time.

Exhibit R-1, a comparative statement of income of the appellant’s operation, filed by the respondent, the figures of which were not challenged by the appellant, is as follows:

COMPARATIVE STATEMENT OF INCOME

Lots 9 and 10, Parcel 4, Township of Darlington

	1978	1979	1980*	1981*
Income:	$ 265.00	$ 720.00	$ 510.00	$ 470.00
Less: Expenses	3,492.14	4,896.27	5,377.03	5,058.48
Total Loss:	$3,227.14	$4,176.27	$4,867.03	$4,588.48
	1982	1983
Income:	$1,495.00	$2,105.00
Less: Expenses	4,047.38	4,069.48
Total Loss:	$2,552.38	$1,964.48
* — Taxation year under appeal

It is the appellant’s contention that the property was acquired as an investment and every effort made to run the part-time tree farm as a business. There can be no doubt that in pruning the mature trees, planting seedlings every year, cutting and selling firewood, cedar posts, Christmas trees and even construction lumber, the appellant was engaged in a farming operation. The question as to whether the appellant was in the business of farming, however, depends entirely on whether he could be seen to have a reasonable expectation of making a profit from his operation. To consider the appellant as being in the business of farming, irrespective of the nature of his activities, he must meet several criteria established by the courts in describing, if not defining, the concept of “business” and “reasonable expectation of profit”.

In Mo Ido wan v The Queen, [1977] CTC 310; 77 DTC 5213, the leading case on point cited by counsel for the respondent, Mr Justice Dickson of the Supreme Court of Canada, states at 313 [5215] the following:

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 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.

In applying the above criteria to the facts of the case at bar, we find: 1) the appellant’s operation sustained losses for eight consecutive years; 2) the appellant had no experience whatever in the operation of a tree farm. Indeed, on several occasions, he attributed the cause of his consistent losses to his inexperience in tree farming; 3) with respect to the appellant’s intended course of action, the appellant’s evidence is that at the time of acquisition, the harvesting of timber was but one of three possible uses the appellant could make of the property, which was close to Durham College, as a possible site for the construction of his residence. He also stated that the property had been acquired speculatively with the view of a possible resale at a profit. The appellant’s attitude toward his tree farming operation at the time of acquisition, and subsequently, was not that which a prudent businessmen intent on making a profit from the operation would have shown. Indeed, the appellant sold the property in 1983; 4) the capability of the appellant’s operation to show a profit after charging capital cost allowance was not established. The purchase price of the property was $34,000, all of which was paid for with borrowed funds. The appellant’s operation would, therefore, have to meet interest charges and other fixed costs, as well as repairs and operational costs. Although it may be commendable that the appellant and his sons worked on the farm with little or no remuneration, and that more expenses than those that were charged had been incurred in relation to the tree operation, these facts greatly weaken the appellant’s contention that he could have had a reasonable expectation of profit from his farm operations. Before a determination can properly be made, as to whether or not a reasonable expectation of profit exists, all expenses including capital cost allowance necessary for the normal operation of an enterprise must be taken into account objectively.

The facts in the case at bar differ substantially from those of The Queen v Matthews, [1974] CTC 230; 74 DTC 6193, in which the Federal Court, Trial Division, dismissed the Crown’s appeal and allowed the taxpayer to deduct farm losses as restricted by subsection 13(1)(31(1)). In that case, the Court found that the appellant’s tree farm was operated with a reasonable expectation of profit after hearing expert evidence that Mathews was operating the farm in a business and economic sense, even though the source of income would take many years to be realized. in the case at bar, the appellant did not succeed in establishing that his tree farm was operated in an economic or business manner.

In Matthews, (supra), Mr Justice Mahoney, stated at 236 [6197]:

Each case where the realization of profit is so postponed will have to be examined on its own merits to ascertain that the profit is not merely notional and that the expectation of profit is indeed reasonable. I am, however, satisfied, in this instance, that the Defendant was, during his 1969 taxation year, carrying on the “tree farming” operations on both the Holland and North Gwillimbury properties as a business with a reasonable expectation of profit and that deduction of the losses claimed was normal.

In the case at bar, the evidence establishes that the appellant’s contention that a profit could be realized at some future time from his tree farm, is not supported by the facts but is “merely notional”. Indeed, the appellant when he estimated the forest inventory of his land at $100,000, sold the property, which he had acquired in 1974 for $34,000, at a price of $39,000 in 1983.

I hold, therefore, that the appellant’s tree farming activities did not have a reasonable expectation of profit; that the appellant did not plan for, nor did he look to farming and some subordinate source of income for his livelihood, but carried on farming as a hobby in 1980 and 1981. The Minister was correct in disallowing farm losses in the amounts of $3,683 and $3,544 in the 1980 and 1981 taxation years respectively.

The appeal is, therefore, allowed for the 1978 and 1979 taxation years respectively and the matter referred back to the Minister for reconsideration and reassessment on the basis that the farm losses claimed by the appellant in the said years be allowed in accordance with the consent to judgment. The appeals in respect of the 1980 and 1981 taxation years are dismissed.

Appeal allowed in part.

APPENDIX A

84-90(IT)

TAX COURT OF CANADA

IN RE The Income Tax Act

BETWEEN:

RICHARD MALONE

Appellant

— and —

THE MINISTER OF NATIONAL REVENUE

Respondent

CONSENT TO JUDGMENT

Whereas the Appellant herein in filing his income tax returns for 1978, 1979, 1980 and 1981 taxation years sought to deduct the amounts of $2,863.00, $3,338.00, $3,683.00 and $3,544.00, respectively as farm losses.

Whereas the Minister of National Revenue by Notices of Reassessment dated May 10, 1983 in respect of the 1978, 1979, 1980 and 1981 taxation years disallowed the deductions sought by the Appellant on the basis that in the 1978, 1979, 1980 and 1981 taxation years the Appellant had no reasonable expectation of profit and was not in the business of farming.

Whereas the Appellant, by Notice of Appeal filed with the Tax Court of Canada January 13, 1984, has appealed from such reassessments.

Whereas the Minister of National Revenue has satisfied himself that in the 1978 and 1979 taxation years it could not be conclusively determined that in the conduct of his farming activities the Appellant had no reasonable expectation of profit.

Whereas in the circumstances the Minister of National Revenue is prepared to concede that it could not be said, in respect of the 1978 and 1979 taxation years, that the Appellant was not carrying on a farming business.

Whereas the parties are desirous of settling the Appellant’s appeal as it relates to the 1978 and 1979 taxation years.

Whereas the officials of the Department of National Revenue have satisfied themselves that the present settlement is one designed to implement an agreement reached by the parties as to what the assessment should be when the law is applied to the facts.

Now Therefore, the Parties Consent to Judgment allowing the Appellant’s appeal for the 1978 and 1979 taxation years and referring the matter back to the Minister of National Revenue for reassessment and reconsideration on the basis that in the 1978 and 1979 years the Appellant is entitled to deduct the farming losses he incurred from farming in accordance with the provisions of subsection 31(1) of the Income Tax Act.

DATED at TORONTO, this 5th day of October, 1984.

R. Tassé

Deputy Attorney General of Canada

Solicitor for the Respondent

Per: —

M Judith Sheppard

DATED at TORONTO, this 5th day of October, 1984.

Appellant

Richard Malone