Louis Mannella v. Minister of National Revenue, [1984] CTC 3046, 85 DTC 19

Tremblay, TCJ:—This appeal was heard on May 16, 1984, in the city of Sudbury, Ontario.

1. The Point at Issue

The point is whether the appellant, an employee working on maintenance for the North Bay Civic Hospital, is correct in the computation of his income for the taxation years 1978, 1979 and 1980 to deduct farming losses of $2,900, $4,500 and $4,977, respectively.

The respondent disallowed the said losses on the basis that the farming operation had no reasonable expectation of profit and that the expenses were personal and therefore not deductible.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is 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 assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

6. The Minister of National Revenue when making his reassessments for the appellant’s 1978, 1979 and 1980 taxation years, based himself, inter alia, on the following facts:

(a) during his 1978, 1979 and 1980 taxation years, the appellant was employed on a full time basis at the North Bay Civic Hospital; (admitted)

(b) in or around 1968, the appellant bought a forty-four (44) acre farm, out of which ten (10) acres are now cleared; (admitted, subject to the fact that there are now twenty (20) acres cleared.)

(c) there are six (6) rundown and leaning small barns of varying sizes from 8' X 10’ to 28' X 46’ on the farm; (denied, they are fairly new, all tin roofs and chipboard walls, insulated.)

(d) the appellant does not have any farming equipment at all on the farm; (denied, he had a tractor, a cub scout and disc, harrows and ploughs.)

(e) as of July 26, 1982, the appellant had on hand the following:

Pigs	11
Roosters	60
Geese	10
Goats	3
Layer Hens	75
Cows	3
Horses	3
Turkeys	60
(admitted)

(f) the appellant never had any more than three (3) goats, cows and horses than he now has and in fact, is the largest inventory he ever had; (denied, he had more than that in the said years.)

(g) the appellant’s wife works as a nurses’ aid but also operates Rought City Phelps Feeds; (admitted)

(h) the appellant buys his feed from his wife’s business; (admitted)

(i) for all practical purposes, the appellant does not grow any of his own feed; (admitted)

(j) the appellant does not have any reasonable expectation of profit, considering the acreage of his farm and the number of animals he owns; (denied)

(k) during the appellant’s 1978, 1979 and 1980 taxation years, the gross income of the farm was respectively $975, $960, $710; (admitted)

(1) for his 1978, 1979 and 1980 taxation years, the appellant claimed farming losses

to the amounts of $2,906.50, $4,509.61 and $4,967.33 respectively; (admitted)

(m) the appellant’s personal consumption of farm goods is not incidental to the production for income during the concerned years, (admitted in part)

7. He says that the basic fact of the reassessment dated May 17, 1982 was that the nature of the appellant’s farming operation is such that it cannot be considered to be a business because there is no reasonable expectation of profit.

3. The Facts

A. Examination in Chief

3.01 The appellant testified that after receiving the reassessments issued by the respondent he sold everything.

When he came there and charged me, I got mad and sold all my stuff. (TS pp 4, 5) ie animals and machinery.

3.02 Concerning the Rought City Hardware and Food Store, alleged by the respondent in subparagraph (g) quoted above, the appellant said:

I built another 44 feet on my house and I opened up a hardware and feed store. I bought my feed there and paid the same price anybody else paid.

3.03 The appellant bought the farm in the spring of 1968 for $2,500. He took two and a half years to construct the house (40' X 28'). He started to operate the farm in 1970. He thinks he started to claim farm losses around 1972 (SN p 10, lines 7 to 20)

3.04 The appellant’s 1976 and 1977 income tax returns (Exhibit R-l and R-2) show farming losses of $3,663.35 and $3,234.50. They show gross income of $950 (1976) and $550 (1977). The income was from the sale of swine and eggs. The main expense was feed and straw — $3,244.22 (1976) and $2,520 (1977).

3.05 In 1972,

I had a sow and a boar and she had about 9 or 10 little ones; that is how I started. I kept just one for myself and I would sell the rest. (TS p 10)

3.06 When the assessor came in 1982, the appellant had gone to the Department of Agriculture to borrow money in view of constructing a 100-foot barn, “to raise my stuff and sell it to the restaurant.” (TS p 12)

After the visit of the assessor, he had to pay back about $6,000 in taxes, therefore he cancelled the request for the loan filed with the Department of Agriculture.

3.07 Concerning the feed business, he said it cost him over $40,000 to create his own market.

B. Cross Examination

3.08 He started to construct the addition for the feed business in 1978. He built it by himself. It was open in 1981. He took out a mortgage for about $25,000. Eggs and meat sold by the business came from the farming operation.

3.09 He said before buying the farm in 1968, that he had sold his previous house for $18,500. After paying the mortgage, there remained $7,000 to $8,000 clear. When he purchased the farm, there were no buildings and no machinery. Only some fences were up. This farm is located in Redbridge, 14 miles from North Bay.

3.10 He has been working at the North Bay Civic Hospital for 30 years. He does three different jobs at the hospital: gardener, maintenance man and licensed stationary engineer. His shift is seven and a half hours. He has no regular hours. He can go and come when he likes, provided the work is done and the shift completed.

Very often, he is at the hospital at 06:00 and punches out at 13:30. It was the same during 1978 to 1980.

3.11 For the years on appeal, the farming income was from swine, poultry and eggs. The main expenses were feed and straw: $2,760 (1978), $3,992 (1979), $4,891 (1980); machinery expenses: gas and oil: nil (1978), $2,046 (1979), $1,316 (1980). There was no capital cost allowance taken.

3.12 For the taxation years 1981 and 1982, the figures concerning farming operation were as follows: (Exhibits R-3 and R-4)

3.13 The appellant sold the animals in the fall of 1982:

. . . and I got rid of them because the barns were too close to the restaurant and I applied for a loan to construct a big barn 100 feet by 50 from the Department of Agriculture and I was going to move it down away from the restaurant and sell the stuff to the restaurant. (TS pp 37, 38)

When the respondent required him to pay $6,000 in tax, he sold all the animals and machinery. (TS pp 4, 5, 38)

3.14 A series of 6 Polaroid colour photographs of the pumphouse and the barns were filed as Exhibit R-8.

3.15 The income from employment was:

4. Law — Cases at Law — Analysis

4.01 Law

The provisions of the Income Tax Act involved in the instant case are 18(1)(h) which forbids deductions of “personal or living expenses” and 248 which defines the said expression “personal or living expenses”. It includes

the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

Sec. 31. Loss from farming where chief source of income not farming:

(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming business carried on by him shall be deemed to be the aggregate of:

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500 and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deductions in respect of expenditures described in section 37” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(1);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

4.02 Cases at Law

Counsel for the respondent referred the Court to the following cases:

1. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213.

2. Donald J Gillis v The Queen, [1978] CTC 44; 78 DTC 6103.

3. Joseph Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340.

4.03 Analysis

4.03.1 Three classes of farmers

In the Moldowan case at pages CTC 315 and DTC 5216, Mr Justice Dickson on behalf of the other judges of the Supreme Court of Canada said:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre or work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

4.03.2 The appellant contends that he is a gentleman farmer being part of the second class of farmers and subject to restricted losses provided in 31(1) quoted above.

The respondent’s contention however is that the appellant is part of the third class of farmers and that no loss is deductible, expenses being considered a personal or living expense pursuant to 18( l)(h) and 248 quoted above.

In sum, the crux of the matter is whether the appellant’s farming activities in the taxation years 1978, 1979 and 1980 have reasonable expectation of profit.

Concerning the meaning of reasonable expectation of profit, in the Moldowan case, Mr Justice Dickson says at pages CTC 313, DTC 5215:

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: The Queen v. Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

4.03.3 In his submission, the appellant reproached the respondent for not having given him 10 years to improve his farming activities. Indeed this was promised by a respondent employee in 1977.

The Court however has all the figures from 1976 to 1982. Moreover, concerning the years 1972 to 1976, the appellant gave a general statement that he started his farming activities in 1970 and that he started claiming losses in 1972. (Paragraph 303) No evidence was given to the effect that the appellant made a profit from 1970 to 1975 inclusively.

From 1976 to 1982, the evidence is clear (Paragraph 2.02, quotation 6, subparagraph (1), paragaphs 3.04, 3.12), no profit was made either. Not even in 1982, when all the “stuff’ (animals, machinery) was sold.

4.03.4 Moreover, the evidence is to the effect that the appellant never claimed capital cost allowance. Pursuant to the Act he was not obliged. However it is one of the items that must be taken into consideration as underlined by the Supreme Court in the Moldowan case quoted above (Paragraph 4.03.2) in the computation of the profit. This means that the losses should have been greater.

4.03.4 In many cases, the courts pointed out the necessity for the farmer to have a plan on a short, medium and long term basis in order to arrive at a certain success. No evidence was given to this effect. May it be said that the intention in 1982 to build a barn (100’ X 50'), in replacement of five or six small ones, is really such a plan? The Court has a great doubt especially when it was one of the objections of the Department of Agriculture to lend money, because they said small barns were too close to the restaurant and that they had to be moved or rebuilt farther away.

In the Schiewitz case, Mr Justice Bonner says at pages CTC 2293, DTC 341:

The unbroken string of losses in all years prior to 1976, and the absence of any evidence indicating the formation and implementation of a plan to bring about a change leads me to the conclusion that in the balance of probabilities, the appellant had no reasonable expectation of profit during any of the years in issue.

The same thing can be said mutatis mutandis for the case at bar and the reassessments must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.