Allan Floyd v. Minister of National Revenue, [1984] CTC 2999, 84 DTC 1830

Taylor, TCJ:—This is an appeal heard in Regina Saskatchewan, on August 20, 1984 against income tax assessments for the years 1978, 1979, 1980 and 1981 in which the Minister of National Revenue disallowed as deductions from other income, the full farming losses claimed by the appellant, in the amounts of $2,138.18, $9,751.08, $16,471.61 and $15,096.82 respectively. The respondent relied, inter alia, upon sections 3 and 9, subsections 31(1) and 248(1) and paragraphs 18(l)(a), and 18(l)(h) of the Income Tax Act, R.S.C. 1952, c 148 as amended by SC 1970-71-72, c 63, s. 1 as amended thereafter for the years in issue. The position of the respondent as detailed in the reply to the notice of appeal was:

3. In reassessing the Appellant as he did, the respondent relied, inter alia, upon the following assumptions of fact:

(a) that the Appellant commenced his farming activities in 1978;

(b) that at all material times, the Appellant had other full time employments, leaving little time to devote to the farming operation;

(c) that the majority of the expenses claimed by the Appellant in relation to his farming activities constituted personal or living expenses and were not expenses incurred or outlays made in connection with a business carried on for profit or with a reasonable expectation of profit;

(d) that at all material times, the extent of the Appellant’s farming activities and the income generated by such activities were not significant enough to be considered a viable business;

(e) that at all material times, the Appellant carried on his farming activities without any expectation, or without any reasonable expectation, of profit;

(f) that at all material times, the Appellant was not carrying on a farming business.

At the commencement of the hearing counsel for the respondent notified the Court that the instructions from his client (Revenue Canada) were now to agree that the appellant should be accorded the “restricted farm loss” for the years 1978 and 1979, but that the Minister retained the position that for the years 1980 and 1981 no loss should be deductible, since there was no “reasonable expectation of profit”. Counsel conceded that allowing the “restricted farm loss” for the years 1978 and 1979 should and could be interpreted by the Court as the Minister agreeing that there was a “reasonable expectation of profit” for those years. Counsel noted as some rationale for the Minister’s concessions for the years 1978 and 1979 that the location of the farm was “market garden” oriented, and that there were certain indications that the subject property, at some time in the past, had been used for that purpose. That situation might have led Mr Floyd to conclude at the date of purchase that such a venture was again feasible. When given the option to accept the Minister’s offer for 1978 and 1979, counsel for the appellant noted that he retained the position that all four years remained in issue and that full farming losses were being claimed. The Court appreciates the Minister providing the above “rationale” for the concession regarding the 1978 and 1979 “restricted farming losses”, and whatever may be the result of the appellant’s efforts to substantiate a greater deductibility claim, that amount (restricted farm losses for 1978 and 1979) will be accorded in any event. I would also note, in the same context, that in this matter using the Court and the judgment which flows therefrom as a substitute for the normal reassessment procedures available to the Minister when he wished to adjust an assessment, must have been predicated on some consideration by the Minister, other than efficiency and effectiveness, although no such reason was provided to the Court. (See Girgis v MNR, [1984] CTC 3005; 84 DTC 1794.)

In late 1977 this appellant purchased an 80-acre farm about 20 miles from the city of Regina. There were other “market garden” farms in the area, and according to his testimony it was his intention to grow and sell potatoes as the major crop, with some minor income from grain, perhaps raising cattle, and boarding horses. He had made no substantive investigation of the prospects or possibilities of productive farming on the land, in fact he had made no investigation of any real description. He had a farming background in his youth, as did his wife. He sold his Regina home, and used the proceeds (some $40,000) as a down payment on the farm, also assuming a mortgage of about $39,000. He moved to the farm shortly after purchase and commenced to rehabilitate it — repair buildings, fences, etc, as well as prepare three acres of land for planting potatoes. He had the soil analyzed and found it to be very saline, suitable only for growing salt-resistant grasses such as alfalfa. His best guess was that about 20 acres could some day be cultivated for potatoes, about 15 acres in alfalfa, and the balance — because of the terrain had no “market gardening” potential, but perhaps could be used for grazing animals. He continued to earn income on a full-time basis outside the farming operation — some $7,500 in 1978, $22,400 in 1979, $15,000 in 1980 and $16,000 in 1981. For the record gross income for the farming operation during the years under appeal was respectively $620.38, $7,689.90, $2,157.07 and $2,497.27. The income tax return of the appellant for the year 1982 was submitted as evidence, on consent of both parties, and the essential elements therein were:

The appellant noted that as a result of the reassessments at issue he had lost considerable interest in the farm, and no longer put back into the farm virtually all his outside income.

Counsel for the appellant, in argument, attempted to support the “full farm loss” position of the appellant, but ultimately conceded that the Court should, in this situation, take into account that the appellant was a relatively unsophisticated businessman, and perhaps was overly optimistic. But according to counsel, he was entitled, as all farmers felt they were entitled, to deduct full farming losses even when outside income formed the main or only source of funds. At least the appellant should be accorded the “restricted farm loss” for all years, he stated. When faced with the question of why “farming” as an operation should automatically be accorded a “business” status for a tax purpose; and if so accorded (business) why it should be treated any differently than any other business, counsel provided no viable rationale. Counsel for the appellant relied substantially upon the case of Graham v The Queen, [1983] CTC 370; 83 DTC 5399, which he noted was under appeal by the Minister of National Revenue.

Counsel for the respondent noted the complete lack of information, testimony or evidence upon which the appellant could lay claim to any farming losses, since there was no support for his contention that there was a “reasonable expectation of profit”. He referenced three cases — Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340; Janosi v MNR, [1981] CTC 2258; 81 DTC 222; and Kerr and Forbes v MNR, [1984] CTC 2071; 84 DTC 1094.

I would first deal with the basic assertion of counsel for the appellant, that the lack of experience and sophistication in business affairs should warrant consideration for this taxpayer’s claim. I doubt that the appellant was quite as unsophisticated with regard to either business or farming as his counsel would assert. In fact his own testimony would lead to somewhat the opposite conclusion, and would support the general thrust of the basic argument of counsel for the respondent, — that the appellant was attempting to build up an equity in a farming property, largely for his later retirement years, but had no real hope, let alone expectation that he could do so without continuing to be gainfully employed outside of the farming operation. While the Minister of National Revenue may be permitted a more subjective and sympathetic view of the term “reasonable expectation of profit”, at the appeal stage of an income tax matter I am not aware that this Court has any such option and as far as I know that issue must be decided on an objective review of the facts. In the instant appeal the appellant cannot bring himself within the ambit required for deduction of the full farming losses claimed, and it is difficult to discern in the hearing evidence any rationale for even the Minister’s conclusion that there was a “reasonable expectation of profit” for the years 1978 and 1979, sufficient to warrant the “restricted farm loss”. There were no crops or products on the horizon, to which he could possibly look for a major increase in the income stream, and his continuing expenses either remained unabated or were on the increase. He continued to put back into the operation the funds available to him from outside income, but that was his choice to make, and would only demonstrate his dedication to a rural way of life, not prove that he had a reasonable expectation of profit. The Minister, in assessing cannot be expected to remain silent when a portion of the financial contribution to the farm operation is represented by income taxes otherwise payable on this taxpayer’s outside income.

The appellant has failed to demonstrate that for the years 1978 and 1979 he is entitled to more than the “restricted farm loss” accorded him by the Minister. He has also failed to demonstrate that he is entitled to the deduction of any farming losses for the years 1980 and 1981. I would make reference to the case of Leslie v MNR, [1982] CTC 2233; 82 DTC 1216, for judicial support in this matter.

The appeal is allowed in part in order that the appellant be permitted to deduct the restricted farm losses as determined by the provisions of section 31 of the Act for the taxation years 1978 and 1979. In all other respects, the appeal is dismissed. The entire matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed in part.