Bédard v. R., [1999] 2 CTC 2671

Tardif T.C.J.:

These are appeals from assessments for the 1987, 1990, 1991 and 1992 taxation years with respect to Roger Bédard. In the case of the appellant Lorraine Trottier, the assessments are for the 1991 and 1992 taxation years.

The issues are the same for both appellants with respect to entitlement to the exemption provided for in paragraph 5 of Article XVIII of the Canada- U.S. Income Tax Convention since both appellants received amounts from American pension plans.

The same applies to the expenses incurred in setting up a joint venture, Maison d’Éditions Bélor.

The statutory provisions governing the issues are sections 3 and 9, subsections 13(7), 18(12), 45(2) and 248(1) and paragraphs 18( I )(a), 18( 1 )(/z), 20(1 )(a), 56(1 )(a) and 56(1)(h) of the Income Tax Act (the “Act”), paragraph 5 of Article XVIII of the Canada-U.S. Income Tax Convention and Schedule IT to the Income Tax Regulations, as amended and applicable to the 1991 and 1992 taxation years.

One final issue relates to the appellant Roger Bédard: whether there was a reasonable expectation of gaining a profit from the farming business he operated during the 1987, 1990 and 1991 taxation years.

The appellant claimed that he had acquired and developed a taste for farming from a young age. When he was 14 years old, his family moved to a farm in Abitibi; the appellant spent his teenage years on the farm. Later he worked in the mines before becoming a trade union professional. He had many experiences related to the lives, health and safety of his fellow miners. A major part of his working life was entirely devoted to the well-being of his fellow workers and his fellow citizens in general.

These experiences had an impact on him and he became an avid defender of the right of workers to a healthy and safe workplace. He was always very concerned about health and safety issues, and became a true ambassador and was involved in several projects aimed at improving the health of workers and of the population in general.

The appellant’s life was fertile and full of experiences related to the health and safety of the public.

When he retired, he wanted to expand his knowledge of farming by going to the United States; he lived there for a few years. In 1985, he returned to Canada and went back to Abitibi to live, with the intention of helping this remote community feed itself better and develop its self-sufficiency in terms of food.

Because of his keen interest in environmental issues, healthy nutrition and the well-being of his community, he was elected mayor of his municipality and joined a movement to fight the construction of a megaincinerator.

Although he describes himself as a farmer interested in building a profitable farming business, the evidence was more to the effect that he was passionate about organic farming; the profitability of his business appeared to be of very secondary concern. He did not have an investment plan or a structure that would enable him to manage the business effectively. His agent even described his work and initiatives as research projects. The appellant in fact admitted that he had had to experiment. He did not maintain any contact or relations with other producers involved in organic farming, who would have had experience and expertise. It appears that the appellant wanted to do his own experiments and experience the results for himself.

Plainly, this was a lifestyle choice driven by a somewhat unrealistic dream of creating a model farm in a region far from major urban centres.

In this regard, I noted a major contradiction in the appellant’s claims in that he wanted to have an influence on the Abitibi agri-food sector so that it could become more self-sufficient and at the same time more natural and organic. Unfortunately, the example or model he provided during his stay in the Abitibi region in fact demonstrated very low production at prohibitive costs. He therefore failed to teach by example.

I am absolutely convinced that there was no reasonable expectation of gaining any profit whatsoever from this farming business during the years at issue. Essentially, the appellant demonstrated exactly the opposite, since the farm for which he paid $52,000 on June 20, 1986 was resold in October 1991, more than five years later, for $45,000; this was after the appellant had restored the soil and prepared it and made the property, according to his own testimony, suitable and fertile for organic farming.

I believe that the appellant’s objective when he purchased this farm was basically to ensure his own self-sufficiency in high-quality food while having a great deal of time to devote to the causes in which he believed. In other words, the appellant was looking for an active, comfortable and healthy retirement; he did absolutely nothing to make his farming business profitable and if he did, the evidence did not show it.

In 1991, the appellants took a new occupational direction and together they set up Maison d’Éditions Bélor with each owning 50 per cent.

After the business was founded, Roger Bédard and Lorraine Trottier, the appellants, claimed expenses broken down as follows:

Are these allowable expenses? The answer is negative in the case of the rent, based on paragraph 18( 12)(/?), which reads as follows:

(12) Notwithstanding any other provision of this Act, in computing an individual’s income from a business for a taxation year,

(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual’s income from the business for a taxation year shall not exceed the individual’s income from the business for the year, computed without reference to the amount;

With respect to the expenses incurred for the newspaper, magazine and periodical subscriptions, the appellant simply stated that these expenses were necessary in order to carry on his profession as a writer; that is not sufficient justification, and moreover, no evidence was presented to show the connection between the applicability of these expenses and the profession of writer. Further, the evidence did not describe the appellant, Lorraine Trottier, as a writer and yet she claimed half of the expense. It is my view that these were essentially personal expenses.

Lastly, the expense of $15,000 was denied, correctly, because it was a totally arbitrary amount; the value of the books in question had been significantly overstated.

The burden of proof rested with the appellants who, under the circumstances, were required to show clearly the quality and quantity of the books so that their value could be accurately determined using the applicable rules in the field. The Court rejects outright the process the appellants used in classifying the books and, especially, the completely arbitrary manner in which the value was determined.

The final issue is whether the amounts they received from the United Steel Workers of America, their former employers, during 1991 and 1992 were eligible for the advantages provided for in paragraph 5 of Article XVIII of the Canada-U.S. Income Tax Convention (the “Convention”).

The following are the details of the amounts paid and received:

The appellants’ agent argued that his clients should have the benefit of this provision, essentially relying on an erroneous decision of the Department of National Revenue, confirmed by a Revenue Canada official in a telephone conversation on December 3, 1991.

Obviously, I do not accept this argument since the Income Tax Act contains a specific and very clear provision covering this matter. The provision is subsection 152(4), which reads as follows:

(4) Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, and may ... reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require,...

Pension income from the Pension Fund of the United Steels Workers of America could not benefit from the 50 per cent exemption because it came from a private pension fund. Only benefits paid under social security legislation are eligible for the tax exemption claimed by the appellants. The payments therefore must have come from the American government. The benefits received by the appellants, however, came from a private fund.

The provisions of the Canada-U.S. Income Tax Convention are very clear on this question. Article XVIII of the Convention reads as follows:

Article X VIII - Pensions and Annuities

1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State.

5. Benefits under the social security legislation in a Contracting State paid to a resident of the other Contracting State shall be taxable as follows:

(a) Such benefits shall be taxable only in that other State;

(b) Notwithstanding the provisions of subparagraph (a), one-half of the total amount of any such benefit paid in a taxable year shall be exempt from taxation in that other State.

(Emphasis added)

For all the foregoing reasons, the appeals are dismissed.

Appeals dismissed.