Marius Carrière v. Minister of National Revenue, [1983] CTC 2717, 83 DTC 665

Tremblay, TCJ:—This case was heard in Winnipeg, Manitoba on December 7, 1982.

1. The Point at Issue

The point at issue is whether the appellant, a farmer and a heavy equipment operator, is correct in deducting in the computation of income for each of his 1977 and 1978 taxation years the amount of $5,000 as a restricted farm loss within the meaning of section 31 of the Income Tax Act. The respondent disallowed the said expenses on the basis that there was no expectation of profit.

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 assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 5 and 7 of the reply to notice of appeal as follows:

9. In reassessing the Appellant, the Respondent made among others, the following assumptions of fact:

(a) The Appellant was a heavy equipment operator who worked on large construction projects.

(b) The Appellant owns a farm of about 40 acres located some 10 miles from Winnipeg and which was passed to him by his mother.

(c) The Appellant spent little time farming and was away in Inuvik during the entire summer of 1979.

(d) After sowing hay in 1977, the Appellant did no farming afterwards.

(e) The Appellant does not own any farming equipment with the exception of a pick-up truck and a lawnmower.

(f) All of the Appellant’s working capital came from wages.

(g) The Appellant had no plan to expand his operation or to go into it on a full-time basis.

(h) The Appellant could not expect to make a profit.

(i) With only 40 acres, it would be impossible for the Appellant to have a profitable farm unless he went into full-time gardening.

(j) The expense items claimed were personal.

7. In confirming the assessments, the Respondent relied on the following further facts:

(a) The farm equipment, except for the pick-up truck and the lawnmower, were owned by the Appellant’s mother.

(b) The farm is in an area where subdivision is being allowed.

(c) The Appellant submitted an application and plan for subdivision of his 40 acres into 2 Z> acre lots for development purposes on 7 July 1978.

(d) The Appellant received planning approval for his proposed subdivision.

3. The Facts

3.01 The appellant was born in 1942 and was brought up on the patriarchal farm in Vermette which is located about 10 miles from Winnipeg, Manitoba.

3.02 In or around 1962 or 1963, he commenced to look for a second occupation. He secured, in fact, a job as a heavy equipment operator.

3.03 Upon the death of his father, he inherited 40 of the 120 acres of the family farm. He also acquired from his mother 5 other acres on which the home and farm buildings were located. That was in 1976.

3.04 Pursuant to the appellant’s income tax returns for the 1977 and 1978 taxation years the employment income, the gross farming income and the farming expenses and losses were as follows:

The main farming expenses were interest on real estate mortgage: $3,609.14 in 1977 and $4,261.14 in 1978; seeds and plants: $773.30 in 1977 and nil in 1978; and capital cost allowance: $2,297.33 in 1977 and $2,213.69 in 1978.

3.05 During the years involved, he was not at home most of the time.

3.06 In 1977, he planted a combination of cereal grains, wheat and alfalfa. The farm produced 700 bushels. After the harvesting, the rains came and reduced the quality of the grain and as a result, his no 1 wheat sank to a very low grade. He sold it for the best price that he could.

3.07 In 1978, he then tried to improve his previous techniques. Believing it was a good idea, he brought some bees to cross-pollinate the alfalfa and use the alfalfa as seed. Because of this special crop, he hoped to produce a significant number of bushels. However, when he inquired about getting the bees he was too late to obtain them for that year. As a consequence of this, he sold the crop to Alfalfa Products Co on a tonnage basis. However, the purchaser instead of harvesting it twice or three times did it once.

3.08 Also in 1978, the appellant decided to try another option, he attempted to subdivide the acreage. He suceeded in 1981 only to get the approbation.

3.09 In 1977 and 1978, the appellant sought to deduct $5,000 of his losses against his employment income.

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), 31(1) and 248(1) — the definition of “personal and living expenses”. These provisions read as follows:

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

(h) 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;

31. (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 businesses 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)(i);

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.

248. (1) In this Act,

“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

The counsel for both parties referred the Court to the following cases at law:

1. Charles R McCambridge v MNR, [1981] CTC 2314; 81 DTC 251;

2. Hubert Plante et al v MNR, [1981] CTC 2052; 81 DTC 74;

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

4. Douglas B Cowx v MNR, [1982] CTC 2708; 82 DTC 1737;

5. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213. 4.03 Analysis

4.03.1 In the instant case, the crux of the matter is whether or not there was a reasonable expectation of profit in the taxpayer’s farming activities in 1977 and 1978. The respondent indeed reissued the reassessments for the said years on the basis that the expenses incurred by the appellant in his farming activities were personal and living expenses because there was no reasonable expectation of profit. The legislator stipulated in the definition quoted above that the absence of a reasonable expectation of profit in a business gives to the incurred expenses the nature of personal and living expenses.

4.03.2 Since the Supreme Court of Canada has decided the Moldowan case in 1977, it is a must for the taxpayers, the counsel and the Courts to refer to the comments and criteria given in the said judgment.

The Income Tax Act pursuant to that decision envisages three classes of farmers:

(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of 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.

4.03.3 Moreover, concerning the element of “reasonable expectation of profit” the Court said:

There is a vast 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.

If one looks at the actual financial result of the appellant’s farming activities in the years involved (para 3.04), one can see that even if the appellant had not deducted capital cost allowance, there would have been a loss of over $5,000.

He explained that the low gross income was mainly due to the weather in 1977 (para 3.06) or to the mistake of the purchaser in 1978 (para 3.07).

The Court also thinks that the lack of experience could be one of the reasons. The main reason, however, seems to be that with 45 acres there is no possibility of reasonable expectation of profit with those kinds of farming activities. There is no evidence before the Court that other farmers with 45 acres in the area made a profit.

Moreover, if the appellant would have had a larger piece of land, it seems to the Court that one of the requirements would have been that the appellant stay on the farm for an appropriate period of time.

The appellant did not reverse the burden; the Court must maintain the reassessments and dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.