Marcel De Montigny v. Minister of National Revenue, [1982] CTC 2012, 82 DTC 1034

The Chairman [TRANSLATION]:—This is an appeal by Mr Marcel de Montigny from an income tax assessment for the taxation years 1976 and 1977. In his returns, the taxpayer claimed as farm expenses an amount of $1,411.69 for 1976 and $1,368.59 for 1977. The respondent refused to allow his farming losses and added the said amounts to the appellant’s income for each of the years in question.

Summary of facts

The appellant finished his accounting course in 1975, and during the taxation years at issue he was employed with the firm of Thorne, Riddell and Co in Montreal, as an accounting trainee. The appellant lived in Brossard, Quebec and also had a teaching position in a CEGEP.

In 1964 the appellant bought half of his father’s land located at St-Angèle de Laval, 95 miles from the appellant’s residence. In 1972 he bought the second half of the land and became its sole owner. However, the appellant’s father, who was now 82 years old, retained the usufruct of the house and the land, on which he operated a commercial dairy products business.

The appellant’s father had no farm machinery on the farm; for over ten years, a neighbouring farmer had cut the hay which he needed for his animals and spread manure on his land. In 1976 his neighbour sold his farm machinery at auction, and the appellant bought from him, inter alia, a mower, a side delivery rake, a hay baler, a bale elevator, a fertilizer spreader and tractors, as appears in the schedule of depreciation, and continued cutting hay and spreading fertilizer for his father’s business.

In 1976 the appellant cut 125,000 lbs of hay and spread 160,000 lbs of fertilizer. In 1977 he cut 105,000 lbs of hay and spread 145,000 lbs of fertilizer on his land, the usufruct of which was held by his father.

In his tax return in 1976 the appellant reported income of $1,060 received from his father for the services rendered, which was comparable to the rate paid to his father’s neighbour previously for the same services. The income for 1977, which amounted to approximately $1,000 was received by the appellant with the 1978 income, and the total for both years came to $2,200.

The hay cutting was done by the appellant in July and might last from 25 to 30 days; the spreading of the fertilizer was generally done after the hay had been cut and lasted from two to three days.

In part “B” of his reply; the respondent indicated the statutory provisions and reasons in support of his assessment:

7. The respondent, the Minister of National Revenue, relies inter alia on ss 3, 18(1)(a), 18(1)(h), 31(1) and 248(1) of the Income Tax Act, (RSC 1970-71-72, c 63), as amended;

8. The respondent submits that during the taxation years in question, the appellant was not carrying on a farming business;

9. Alternatively, if the appellant was carrying on a farming business, which is denied by the respondent, the latter submits that the appellant had no reasonable expectation of realizing a profit, and that the operation of his farm was a hobby as far as he was concerned;

10. The respondent submits that the amount of the farming losses claimed by the appellant for his 1976 and 1977 taxation years constitutes non-deductible personal living expenses;

11. The respondent submits that the Minister of National Revenue has duly rejected the farming losses, in the amounts of $1,411.69 and $1,368.59, claimed by the appellant in computing his income for the 1976 and 1977 taxation years;

The first question that arises is as to whether the appellant was carrying on a farming business. The appellant was an accountant by profession, and he owned a farm in which his father had a usufruct and had the use of all the land, including cutting the hay. The appellant did not live on the farm, and he did not have the use of any animals, buildings, or farm products. His activity was limited to cutting hay and spreading fertilizer once a year.

None the less, the appellant invested a respectable sum in machinery used exclusively for farming, and the use of which by the appellant was closely related to farm products. Is this sufficient for the Board to conclude that the appellant was carrying on a farming business within the meaning of subsection 248(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended? I think not!

Subsection 248(1) of the Act defines farming as follows:

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.

The evidence is that it was the appellant’s father who was engaged in the business of farming. The appellant, like his father’s neighbour who had done it before him, was responsible for cutting the hay and spreading the fertilizer for his father each year, in return for payment. In my opinion, in the circumstances of this appeal cutting hay and spreading fertilizer do not in themselves constitute carrying on the business of farming.

If these were not farming activities, section 31 of the Income Tax Act, SC 1970-71-72, c 63 as amended, is not relevant and the decision in William Moldowan v The Queen, [1977] CTC 310, 77 DTC 5213 is not applicable.

Can there be any question of a business other than farming for which the expenses and/or the operating losses would be deductible, in accordance with the provisions of paragraph 18(1 )(a) of the Income Tax Act, SC 1970- 71-72 c 63, as amended, on which the respondent also relied in his reply?

The respondent appeared to argue that the appellant’s activities cannot be regarded as a farming or any other kind of business, since for the appellant they were a hobby carried on for the appellant’s enjoyment, the personal expenses of which are not deductible.

I have great difficulty in understanding how “hay-making” in July or August and the spreading of fertilizer in the fall can reasonably be regarded as a “hobby” in the ordinary sense of the word.

I must therefore conclude that the appellant’s activities on the farm are not a “hobby” in the tax sense.

Counsel for the respondent further submitted that the appellant’s activities in connection with haymaking and the spreading of fertilizer, particularly in the conditions under which they were carried on, could not offer him any reasonable expectation of making a profit.

It is clear and well-settled law that no activity can be regarded as a business, within the meaning of paragraph 18(1 )(a) of the Act, if there is no reasonable expectation of realizing a profit from it. In my view, this principle necessarily assumes that the primary intention of the businessman is to realize a monetary return from carrying on his business. It also goes without saying that there cannot be a business within the meaning of paragraph 18(1 )(a) of the Act if the maximum possible profit that can be expected from a business does not cover the necessary expenses of operating it.

In this regard, the appellant in 1976 invested a capital sum of nearly $5,000 in farm machinery. It is difficult to understand how the appellant’s primary intention was to derive an adequate monetary return from his activities when, according to the testimony of the appellant, he limited himself between 1976 and 1980 to cutting hay and spreading fertilizer for his 82- year-old father. There was no suggestion that the appellant rendered, or even intended to render, the same services to other farmers, which might perhaps have justified his capital investment in machinery, and which might have entitled him to expect to derive an income from the business which was greater than the operating expenses.

For the taxation years in question, the appellant’s income appears to have been on the order of $1,000 to $1,200 a year, and he incurred a loss after depreciation of $1,411.69 in 1976 and $1,368.59 in 1977. The evidence showed that no net profit was obtained from the appellant’s activities between 1976 and 1979.

The limitations on the appellant’s activities and the absence of any likelihood of deriving a profit to justify the expenditure lead me to conclude that the appellant’s primary intention was not to make a profit. He really could not expect to derive any monetary return from these activities.

It is much more plausible that appellant wished to render a service to his father by cutting his hay while the latter was still alive. It is possible that the appellant spread fertilizer to maintain the soil, which he owned, in good condition. It may be that the farm machinery was purchased by the appellant for his own use on the farm at some future time, or to enhance the value of his land. However, I cannot agree on the basis of the evidence that the appellant’s activities were carried on to earn a profit. As valid as these reasons may be, they do not constitute a “business” within the meaning of paragraph 18(1 )(a) of the Act, and the losses incurred in 1976 and 1977, which in my opinion are of a capital or personal nature, cannot be deducted.

For these reasons the appeal must be dismissed.

Appeal dismissed.