Frank H Lobsinger, Executor of the Estate of the Late Hannah M Lobsinger v. Minister of National Revenue, [1982] CTC 2804, 82 DTC 1810

M J Bonner:—This is an appeal from an assessment of income tax for the 1978 taxation year. The Minister, on assessment, included in the computa- tion of income a taxable capital gain which he found was realized as a consequence of a disposition deemed by subsection 70(5) of the Income Tax Act to have been made immediately before the death of Hannah M Lobsinger, on August 30, 1978. The property found to have been so disposed of is a section of land near Glidden, Saskatchewan.

Two issues were raised by the pleadings. The first was the fair market value of the land at the relevant time. The respondent found, on assessment, that it was $246,000. The appellant contended that it was $218,000. This issue was settled. The parties agreed that the fair market value of the land immediately before the death of the deceased was $218,000.

The second issue was the applicability of subsection 70(9) of the Act. It was the appellant’s position that the land was, immediately before the death of Mrs Lobsinger, “used by (her) in the business of farming” within the meaning of subsection 70(9) of the Act with the result that paragraph 70(5)(a) of the Act is inapplicable to the property. The appellant contended that the farming operation for which the land was used at the relevant time was carried on by the deceased and one John Hebert under a joint venture. The appellant’s counsel argued that the deceased was “like a silent partner”.

The only witness called at the hearing was Frank Hugh Lobsinger, son of the deceased. He testified that Mrs Lobsinger and her husband farmed as homesteaders at Kyle, Saskatchewan, following their marriage. During that period Mr Lobsinger bought the land near Glidden. Around 1920 they moved to Regina. Mrs Lobsinger inherited the land upon the death of her husband in 1948. A year later, Mrs Lobsinger made an arrangement with a Mr Bitz whereunder he was to break the land and seed it with flax. Under that arrangement, she was to receive a share of the crop. Mr Bitz absconded with the entire proceeds from the sale of the crop. He was traced, with some difficulty, and forced to disgorge Mrs Lobsinger’s share. Mrs Lobsinger then set out to find a reliable and competent farmer to carry out farming operations on her land. She succeeded. For the next thirty years or so, farming operations on the land were carried on by John Hebert. The arrangements between Mrs Lobsinger and Mr Hebert varied frequently over the years as to matters of detail, but, in substance, he farmed and Mrs Lobsinger received a share of the crop. The variations appear to have related to such matters as who was to pay what share of the taxes, what crop was to be planted and what area was to be summer fallowed and what planted. Mr Hebert and Mrs Lobsinger met a few times each year and worked out the necessary details.

In January of 1975 Mrs Lobsinger, who by then lived in Vancouver, and Mr Hebert entered into a lease in writing for a term of three years to commence April 1, 1975. It called for payment of “the clear yearly rental of a one-third share or portion of the whole crop”. Mr Hebert covenanted to pay two-thirds of the land taxes and to seed, exterminate weeds and harvest the crop.

Mr Lobsinger testified that the lease did not, even during its term, govern the relationship between his mother and Mr Hebert. Variations were agreed on orally with relation to such matters as the area to be fallowed.

Following expiry of the term, the lease was not renewed. Mr Lobsinger, on his mother’s behalf, had discussions with Mr Hebert which resulted in Mr Hebert continuing farming operations on the land under an oral arrangement. Mr Lobsinger had held discussions with officials of the Department of National Revenue in February of 1976, prior to the preparation of his mother’s will, and was conscious of the requirements for a rollover. It may well have been for that reason that the lease was not renewed. The arrangement made was not clearly described in evidence. The oral arrangement was, without doubt, founded on mutual trust and confidence built up over thirty years. In any event, it appears to have called for payment to Mrs Lobsinger of one-third of grain hauled (or proceeds from the sale thereof) and for Mr Hebert to supply and plant seed, to supply and apply fertilizer and to pay a share of the municipal taxes.

In my view, it is not necessary to reach any conclusion on the exact nature of the relationship which flowed from the agreement, that is to say, whether it was a lease or a licence. I do find that it was not shown that there was a partnership or joint venture in effect between Mrs Lobsinger and Mr Hebert immediately before her death. There is no proof of an agreement to share profits or losses. The sharing of gross revenues is not a sharing of profits.* [1] Mrs Lobsinger’s share of the crop was in no way dependent upon the cost to Mr Hebert of the labor, machinery, fuel, seed and fertilizer which he decided to employ in order to produce the crop. It was not shown that Mr Hebert carried on the farming enterprise as agent for a firm composed of himself and Mrs Lobsinger. There is no evidence of any attempt by Mr Lobsinger to participate on his mother’s behalf or at all in the management of the farming enterprise. The simple granting of permission to use the land for farming in exchange for a share of the crop produced is not sufficient for a finding of partnership.

I have concluded that the land was, at the relevant time, used by Mr Hebert alone. It was not used by Mrs Lobsinger in the business of farming within the meaning of subsection 70(9) of the Income Tax Act. The appeal therefore succeeds only to the extent of the settlement on the value issue.

The appeal will therefore be allowed and the assessment referred back to the respondent for reconsideration and reassessment on the basis that the fair market value of the land in question immediately before the death of the deceased was $218,000.

Appeal allowed in part.