Edward Hibberd v. Minister of National Revenue, [1983] CTC 2017, 83 DTC 14

Guy Tremblay:—This case was heard on May 28, 1982, at the City of Toronto, Ontario.

1. The Point at Issue

The point is whether the appellant is correct in deducting for the 1976 and 1977 taxation years, business farming (boarding of horses) losses amounting to $18,202 and $10,506 respectively.

The respondent refused the deductions on the basis that these expenses were not incurred for producing income. During the said years, no revenues from the boarding of horses were reported as the boarding operation was not functional. The respondent considered that the expenses incurred in relation to the appellant’s farming activities were personal or living expenses.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are 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:

4. In assessing tax as aforesaid, the Respondent acted upon the following findings or assumptions of fact:

(a) The Appellant purchased 16.46 acres of farm property in Milton, Ontario in February, 1971 and converted it from a chicken farm to a farm for the boarding of horses;

(b) the property was purchased by the Ontario Government in June, 1976 and

thereafter the Appellant rented the property from the Ontario Government;

(c) in the 1976 and 1977 taxation years, no revenues from the boarding of horses were reported as the boarding operation was not functional;

(d) at all material times, the Appellant was not carrying on a farming business;

(e) the expenses incurred by the Appellant in relation to his farming activities constituted expenses of property maintained by the Appellant or any person connected 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;

(f) the expenses incurred by the Appellant in relation to his farming activities were personal or living expenses of the Appellant.

3. The Facts

Most of the facts are not in dispute. The counsel for the respondent admitted most of the facts alleged in the notice of appeal.

3.01 In February 1971, the appellant, then a construction supervisor, purchased 16.46 acres of farm property in Milton, Ontario. At the time of the purchase it was a chicken farm called Windfield Farm. The appellant’s intention was to go to horse boarding as a way of increasing his long term prospects for a financially secure future. In this effort he had the full support of his wife and teenage son Peter.

3.02 The same year, the appellant borrowed $26,500 from Industrial Development Bank to finance the conversion from the chicken farm to a horse boarding business. He reconstructed the buildings, improved the land, etc. At the end of 1971, he had 16 stalls rented out. At the end of 1975, he had all of the 32 stalls rented and he had a hunt course built. He also maintained school horses of his own for the purpose of providing equitation lessons.

3.03 The income and expenses for the years 1972 to 1977 were as follows:

3.05 On June 4, 1973, the Government of the Province of Ontario announced its “Parkway Belt” proposals, and the farm owned by the Hibberds was included in the Parkway Belt area. This designation severely restricted the future uses to which the land could be put.

3.06 On November 1, 1974, the Ministry of Government Services for the Province of Ontario wrote to the Hibberds explaining that Ontario Hydro proposed to acquire a right of way for transmission lines through part of Parkway Belt planning area and including across the lands owned by the Hibberds. (Exhibit A-1)

3.07 This proposal by the Government severely affected the profitability of the Hibberd’s farm. Within a few weeks, many of the boarders of horses at the farm realized that the Hibberds could no longer proceed with their expansion plan. As a result, the farm became less attractive to the horse boarders.

3.08 In addition, many horse boarders felt that their horses would suffer from the presence of the hydro transmission lines. By the spring of 1975, as a direct result of these events, the Hibberds were clearly losing a large portion of their clientele. This accounts for the remarkable reversal in the farm’s financial fortunes in 1975.

3.09 The appellant conceded that in 1976 and 1977, “the business was finished”.

In her testimony, the appellant’s wife agreed that the horse boarding operation could be characterized as being comprised of two components: the property and the clientele. She admitted that by the end of 1975 the components were both gone.

3.10 The appellant testified that they remained on the property even after expropriation for a number of reasons. First, they remained in order to improve the return on their capital investment in the property itself. After settlement with the Government of Ontario in 1976, they remained because the property was made available at the rate of $250 per month and because they still had not found another suitable property.

3.11 Finally, the appellant conceded that they preferred living in the country to living in the city. He described himself as a lover of horses and Mrs Hibberd acknowledged that their daughter and son did some riding and enjoyed it.

3.12 The items of expenses are virtually the same for 1972 to 1977. However, the main expenses claimed for the years under appeal were as follows:

3.13 Mr and Mrs Hibberd testified that after 1975, they still intended to operate a horse boarding venture somewhere else. Despite the effort described in the testimony to find another site, it was impossible. The appellant even made an offer (Exhibit A-2). However, due to the uncertainty of the proceedings the Hibberds could not accept the counter-offer.

1. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act, SC 1970-71-72, c 63, as amended, involved in the present case are paragraphs 18(1)(a), 18(1 )(h) and subsection 248(1) (definition of “farming” and “personal or living expenses”). They read as follows:

DEDUCTIONS

Sec 18 General limitations

(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

Subsec 18(1)(a)

(a) General limitation. — an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Subsec 18(1 ) (h)

(h) Personal or living expenses. — personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of Carrying on his business;

Ssec 248 Definitions

(1) In this Act,

“Farming” — “farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

“Personal or living expenses” — “personal or living expenses” includes

(a) 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,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

4.02 Cases at Law

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

1. Johnston v MNR, [1948] CTC 195; 3 DTC 1182;

2. Phil Wood Industries Limited v MNR, 40 Tax ABC 358; 66 DTC 231:

3. Walter G Lumbers v MNR, [1943] CTC 281; 2 DTC 631;

4. Wesley H Warden v MNR, [1981] CTC 2379; 81 DTC 322;

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

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

7. John E McLachlen v MNR, [1974] CTC 2003; 74 DTC 1035;

8. Garden Investments Ltd v MNR, [1974] CTC 2013; 74 DTC 1014;

9. Tantus Estates Ltd v MNR, [1973] CTC 2017; 73 DTC 24;

10. Ross Dobbin v MNR, [1968] Tax ABC 61; 68 DTC 153;

11. Joseph H Ricard v Raoul Lord, [1941] SCR 1;

12. George L Stringam v MNR, 9 Tax ABC 407; 54 DTC 45.

4.03 Analysis

4.03.1 There is a fundamental fact given in the evidence. In 1976 and 1977, “the business was finished”. In fact there was no gross income at all during those two years (paras 3.03, 3.09). In the circumstances, how can the deductions provided for by paragraph 18(1)(a) of the Act, quoted above, apply?

Indeed one of the sine qua non requirements for applying this provision is the existence of a business or a property: “In computing the income of a taxpayer from a business or property .. .”.

Moreover, the test of “reasonable expectation of profit” provided in subsection 248(1) of the Act (definition of “personal or living expenses”) quoted above, is a requirement to the existence of a business. How is it possible to have a reasonable expectation of profit in a taxation year when there is no gross income at all (para 3.03)?

4.03.2 Counsel for the appellant in his submission said that . . the real test is whether the expectation of profit was reasonable when the venture began”. For the years 1976 and 1977, the business was finished. The Board shares the opinion of the respondent’s counsel:

The fact that there may have been a reasonable expectation of profit at one time cannot justify endless deduction of losses if circumstances have changed so that there is now no expectation that a profit will ever be realized.

4.03.3 Counsel for the appellant contends that his client was not engaged in the business of farming and therefore that the restrictions on farm losses set out in section 31 of the Act cannot apply. The counsel for the respondent, on the contrary, contends that the appellant is engaged in farming business. The problem is in fact irrelevant because the expenses are not deductible in either case.

4.03.4 During the years involved, the Board must consider that the expenses were personal and living expenses. The evidence described in paragraphs 3.10, 3.11 and 3.12 above, also confirms this conclusion.

The reassessment issued by the respondent must be maintained.

5. Conclusion

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

Appeal dismissed.