Hinrich J Peters v. Minister of National Revenue, [1981] CTC 2451, 81 DTC 454

Guy Tremblay:—This case was heard in Montreal, Quebec, on November 7, 1980.

1. The Point at Issue

The point is whether the appellant, a systems analyst and fulltime employee of the Royal Bank of Canada, is correct in claiming the amount of $1,133.66 as farming loss for his 1977 taxation year. The respondent disallowed the said amount on the basis that the loss was personal or living expenses.

2. The Burden of Proof

2.01 The burden 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 assumptions of facts on which the respondent based the assessment also are deemed to be correct. In the present case, in paragraph 6 of the reply to notice of appeal, the respondent described the facts on which he based his assessment:

6. (a) The Appellant is a systems analyst and during his 1977 taxation year, he was a fulltime employee of the Royal Bank of Canada, in Montréal;

(b) in April, 1973, the Appellant purchased a farm in Clarenceville, Quebec, and has been living on it since;

(c) during his 1977 taxation year, the Appellant’s farming activities were limited to taking care of a few sheep and two (2) beehives;

(d) from the time of purchase of his farm to the end of his 1977 taxation year, the Appellant has rented his arable land to a farmer;

(e) the Appellant had no previous farming experience or knowledge prior to the purchase of his farm:

(f) from 1973 to 1977, the Appellant has not derived any profit from his farm, and he has no reasonable expectation of profits in the future;

(g) during the taxation year at issue, the appellant’s farming activities were in the nature of a hobby, pastime or way of life, and losses therefrom are personal or living expenses.

3. The Facts

3.01 In his testimony, the appellant said, concerning the assumed facts, in the alleged paragraph 6 of the reply to notice of appeal quoted above and subparagraph (a) that from January to May 1977, he worked fulltime at the farm. He started to work for the Royal Bank of Canada only in June 1977.

3.02 Concerning subparagraph (b) of paragraph 6 of the reply to notice of appeal quoted above, he admitted that he bought a farm in 1973. He added that he paid $30,000 for it. It has an area of 100 acres: 35 of woods and 65 acres of good arable land.

3.03 Concerning subparagraph (c) of paragraph 6 of the reply to notice of appeal quoted above, he affirmed that his farming activities were not limited to taking care of a few sheep and two beehives. He testified he made improvements: “these included widening and improving of access roads to the fields for bigger machinery, constructing a driveway to the barn to be able to load hay during the winter, and repairing the barn to be able to store the hay”. He also produced maple syrup and sold hay.

3.04 Concerning subparagraph (d) of paragraph 6 of the reply to notice of appeal quoted above, the appellant admitted that from the time of purchase of his farm, he rented his 65 acres of arable land to a farmer, according to a crop sharing arrangement. According to him, his farm has a potential of producing 120 to 150 tons of good alfalfa hay, representing a crop value of more than $7,500 at the average hay price over the last years of $50 perton.

3.05 Concerning subparagraph (e) of paragraph 6 of the reply to notice of appeal quoted above, the appellant admitted that prior to the purchase of his farm, he had no previous farming experience or knowledge. Since 1973, however, he has taken several evening courses at McDonald Agricultural College to broaden his knowledge of agriculture. He is recognized as a farmer by the provincial government and is a member of UPA (I’Union provincial des agriculteurs), the Quebec farmers’ organization.

3.06 Concerning subparagraph (f) of paragraph 6 of the reply to notice of appeal quoted above, the appellant admitted that since 1973 he has not derived any profit from his farm and not even in 1978. However he denied that he has no reasonable expectation of profits in the future.

Concerning the crop sharing arrangement, the appellant’s contention is that, due to the sharp increase of production costs in the last years, this gave him only a portion of the crop. At first the arrangement was only 10%-90%. His portion of the crop, however, has increased as he was able to take over more work himself and provide more machinery. In 1978, the crop sharing arrangement was 50%-50%.

3.07 Concerning subparagraph (g) of paragraph 6 of the reply to notice of appeal quoted above, the appellant denied that his farming activities were in the nature of a hobby, a pastime or a way of life, and that losses therefrom are personal and living expenses.

However, in filing his 1977 tax return, the appellant in describing the nature of his business, wrote “hobby farming”.

3.08 In filing his 1977 tax return, the appellant declared a gross income of $1,391.20 and a net loss of $1,133.66. No financial statement concerning his “hobby farming” was filed before the Board. However, in his return, he claimed allowance cost for $349.50 on machinery.

As Exhibit A-1, the appellant filed a statement of gross income and net losses from 1973 to 1979. These figures read as follows:

3.09 The two purposes of the appellant in purchasing the farm in 1973 were to use the farmhouse as a residence and to improve the land and outbuildings to a state that he could draw an additional income from the operation “which, at a later stage, could become the only income” (paragraph 2 of Notice of Appeal).

3.10 His salary at the Royal Bank of Canada in 1980 was $29,000. He said: “I have no illusion that I will ever draw a similar salary from the farm”.

3.11 The farm, and hence the residence, is located 50 miles from Montreal where the appellant and his wife work. It takes one hour and fifteen minutes to go to work in the morning and the same time to come back after a day’s work.

4. Law — Case Law — Analysis

4.01 Law

The provisions of the Income Tax Act involved in the present case are paragraphs 18(1)(a), (h), subsections 31(1) and 248(1) — definitions of “farming” and “personal or living expenses”. They 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

(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;

(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:

31. Loss 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 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 deduction under section 37 or 37.1, 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 deduction under section 37 or 37.1” 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. 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 Case Law

The case law to which the parties referred are:

Donald J Gillis v HMQ, [1978] CTC 44; 78 DTC 6103;

Ernest Radies v MNR, [1978] CTC 2601; 78 DTC 1448;

William Moldown v HMQ, [1977] CTC 310; 77 DTC 5213;

CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282;

Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417.

4.03 Analysis

4.03.1 In the Moldowan case, Mr Justice Dickson of the Supreme Court of Canada, said:

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, 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.

In considering the nature of the operation of alfalfa hay crops, sheep and beehives, it is not an operation which suffers “the same start-up losses as the man who begins a tree farm on raw land”;

In considering the main operation, the sharing crop arrangement with the neighbour is not, in itself, a farming operation;

In considering that, despite the fact that in 1978 the sharing arrangement was 50-50%, the gross income was only $1,019 which is less than in 1977;

In considering that, despite the fact that in 1979 the gross income was $4,196, the operation continued to suffer a loss of $1,042 which means $5,238 in expenses;

In considering that, even when the appellant keeps the entire crop of alfalfa hay, it is far from clear that the 120 to 150 tons of alfalfa hay (paragraph 3.04) shall give enough income to cover the expenses, after paying a worker and charging capital cost allowance;

In considering that the criterium of profit and loss experience for the years 1973 to 1976 is not in favour of the appellant;

In considering that no evidence was given of the capability of making profit concerning sheep and beehives:

In considering that the burden of proof is on the appellant’s shoulders;

The Board must conclude that the appellant, in 1977, had no reasonable expectation of profits and therefore that the expenses were personal or living expenses.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.