Sarchuk T.C.J.:
These are appeals by Burkhard Michael Nowak (the Appellant) from assessments of tax with respect to his 1987 and 1988 taxation years.
A number of different but overlapping issues have been raised by the Appellant. To minimize repetition to the extent possible, I propose to set out those facts which I perceive to be undisputed, in more or less chronological order and then deal with each issue separately. The Appellant was the only witness to testify.
The Appellant has a farming background. His father, a horticulturist, operated greenhouses and kept cattle. At age 16, the Appellant acquired his first horse and was taught horsemanship by a former cavalry officer. He obtained a Bachelor of Science in Zoology from Western University, and then earned a Masters Degree in Science and Veterinarian medicine at Guelph. During those years, he worked for Scottsdale Farms, a breeder of horses and pure-bred cattle. On May 24, 1983, the Appellant purchased a 47-acre property for $159,000 (the Nowak farm), and commenced farming activities. He owned an Arabian stallion and in 1984 purchased a brood mare of the Hanoverian breed. In 1983, he planted winter wheat and in subsequent years, soy beans, oats and 10 acres of pumpkins. He kept some cattle and also attempted to raise pedigreed Suffolk sheep, apparently with little success. During this same period, the Appellant was employed by the Hermanns, owners of one of the largest Hanoverian breeding operations in North America located at Barcrest, a 200-acre property adjoining the Nowak farm. The Appellant was primarily involved in the breeding aspect of that operation and in addition, represented Barcrest at international and local shows, produced catalogues, and attended to other promotional requirements.
In or about 1985, the Hermanns found themselves in financial difficulty and amounts due to the Appellant remained unpaid. He sued, obtained judgment and in 1986 a writ of execution was issued. In May 1986, the Hermanns defaulted on their mortgage with the Bank of Montreal (the Bank) and, it would appear, were petitioned into bankruptcy at or about the same time. Efforts were made to sell Barcrest as a going concern until the spring of 1987 when, according to the Appellant, the Receiver divided the assets into three separate parcels, real property, equipment and livestock, for sale at auction. The Appellant, on the advice of Counsel, bypassed the Receiver and on March 9, 1987 made an offer to purchase the real property for $900,100 directly to the Bank. On March 10th, the Bank, acting under power of sale, agreed to sell the property and the closing date was April 15, 1987. On or about March 11, 1987, the Appellant presented separate offers to purchase the livestock and equipment to the Receiver. Neither offer was accepted and the assets were subsequently sold at public auction on March 27, 1987.
At some point of time in March, Ray Dodge, an agent representing a group of purchasers interested in developing a golf course (the Gasparetto group), approached the Appellant and communicated their interest in Barcrest to him. Discussions between the Gasparetto group and the Appellant’s solicitor culminated on March 30, 1987 with an offer to purchase Barcrest for $1,100,000. Concurrently, the Gasparetto group offered to acquire an option to purchase the Nowak farm at a price of $264,000. On April 4, 1987, the Appellant made a counteroffer in the amount of $1,320,000 if the sale of Barcrest was completed on April 15, 1987, or for $1,620,000 if the sale was not completed until June 1, 1987.7 The counteroffer was rejected but negotiations with the Gasparetto group continued until the end of May 1987.
On April 15, 1987, the sale of Barcrest to the Appellant was completed. To finance the purchase, he borrowed $950,000 by way of two short-term mortgages, with interest only payable in the amount of $12,000 per month. The first mortgage was for $825,000 at 16%, due October 15, 1987, while the second was for $125,000 at 9.6%, due July 15, 1987. The latter was extended to October 15, 1987 at the rate of 16% and further extensions were given the Appellant with respect to both to March 15, 1988, to June 15, 1988, and to October 18, 1988, the date on which both properties were ultimately sold. During this period, only one instalment of interest was paid by Nowak in the amount of $12,000 on or about June 25, 1987.
In the fall of 1987, the Appellant contacted M. Gasparetto with a view to reopening the negotiations and on December 14, 1987, agreements were reached whereby the Gasparetto group agreed to purchase a 90% interest in Barcrest and to acquire an option to purchase a similar interest in the Nowak farm for $1,600,000 and $400,000, respectively. These transactions were completed on October 19, 1988. The Appellant used part of the proceeds from the sale to pay off the short-term mortgages and all of the unpaid accrued interest. As well, on December 14, 1987, the Appellant entered into a partnership agreement with other members of the Gasparetto group, acquiring a 10% interest therein.
Although the Appellant sold the Barcrest and Nowak farms in October 1988, he continued to use both the land and buildings (free of charge) without objection from the Gasparetto group until the commencement of the construction of the golf course. The Appellant was quite vague as to when this occurred, but to the best of his recollection, development permits were sought in 1988, authorization to proceed was received in 1989 and shortly thereafter they commenced laying out the course and the bulldozers first came in. Seeding on some holes began in 1990.
In computing income for the 1987 taxation year, the Appellant claimed a farming loss in the amount of $119,540. In computing his income for the 1988 taxation year, the Appellant: (i) claimed a farming loss in the amount of $212,222; (ii) reported a taxable capital gain on the sale of properties (Nowak and Barcrest combined) in the amount of $112,533; and (iii) claimed a capital gains deduction for qualified farm property in the same amount. Furthermore, in his computation of the taxable capital gain of the two properties the Appellant deducted a principal residence allowance, claiming the residence and 100% of the balance of the Nowak farm property as well as the Barcrest residence and three acres of contiguous land.
The Minister of National Revenue (the Minister) reassessed the Appellant’s 1987 taxation year to disallow farming losses in the amount of $119,540 and assessed “nil” tax payable. The Minister also reassessed the Appellant’s 1988 taxation year: (i) to disallow farming losses in the amount of $212,222; (ii) to include in income the amount of $428,650 from the sale of 90% of the Appellant’s interest in Barcrest; (iii) to reduce the taxable capital gain as reported from $112,533 to $111,267 as being the taxable capital gain from the sale of 90% of the Appellant’s interest in the Nowak farm; and (iv) to reduce the capital gains deduction from $112,533 to $66,667.
The two main issues in this appeal are:
(a) Was the Appellant’s profit from the sale of 90% of his interest in Barcrest on capital or income account?
(b) Was the Appellant carrying on the business of farming in the 1987 and 1988 taxation years?
Before proceeding further, I propose to summarize the evidence adduced on behalf of the Appellant with respect to the acquisition and sale of Barcrest.
The Appellant testified that as a result of his employment at Barcrest, he was reasonably familiar with the facilities, stock and equipment. Subsequently, in the course of attempting to collect on his Judgment, he dealt with the Sheriff s officers and later the Receivers and at one stage assisted in identifying and assessing the approximately 80 horses which still remained at Barcrest. As a result, towards the end of 1986 or early in 1987, he concluded:
that you could buy the land, you could buy the horses and you could buy that equipment and that this was the chance to actually have a complete ready made operation where all you really needed to do is recondition and retrain these horses. And having some experience in that, I thought that it would be quite readily possible to do that. We would then resell the surplus stock and keep the good stock and operate the farm this way.
He believed these horses could be purchased for approximately $100,000 and that the stock surplus to his needs could be sold at a profit which would be used to pay down the amounts borrowed to acquire Barcrest.
At the beginning of 1987, negotiations with Ingle began with respect to “a bulk sale of the horses and machinery”. He alleges that subsequent discussions with Ingle and with Jeff Marsh led to an agreement setting the price at which he could purchase the Barcrest stock. He further asserts that since a firm arrangement with Ingle and Eurosport existed the offer to the Bank for Barcrest was made, and that following acceptance thereof, offers in writing to Eurosport for the purchase of the horses for $130,000 and the fixtures and equipment for $70,000, dated March 11, 1987, were delivered by the Appellant to Ingle’s office in Toronto. There was no response from Ingle.
The Appellant maintains he felt obliged to proceed to closing the Barcrest purchase and that he did so with no knowledge of the interest in the property by the Gasparetto group. He says it was not until he spoke to Ray Dodge that he became aware of their plans. The Gasparetto group was represented by Keyser Mason Ball & Lewis. This firm was contacted in March 1987 to discuss the preparation of agreements of purchase and sale for the acquisition of Barcrest and the Nowak farm. A series of telephone discussions with the solicitors for the Appellant led to the preparation of an agreement of purchase and sale which was forwarded to the Appellant’s solicitors on or about March 30, 1987.
According to the Appellant, the decision to buy Barcrest was solely for the purpose of carrying on a horse-breeding operation and was predicated on his ability to acquire the horses and equipment in addition to the land. When that fell through, the acquisition of Barcrest would not have been feasible had it not been for the Gasparetto group’s offer. He felt their plan to build a golf course coincided with his interest in an equestrian operation and “thought we might be in a position where I could continue on the farming aspect and the remaining access lands could be developed by that group into a golf course”. Negotiations continued culminating in the agreements to sell reached on December 14, 1987. In the interim, he says he proceeded with his plans to operate the Barcrest farm.
Barcrest - sale on capital or income account
The issue is whether the Appellant at the time of the acquisition of Barcrest had either a primary or secondary intention to resell. Generally speaking, such intent may be ascertained from the entire course of conduct of a
documents were signed in Furlong’s office on the 9th or 10th (although dated March 1 1th) and whether he delivered them to Ingle’s on the 9th or 10th as well.
taxpayer and the relevant circumstances and inferences flowing therefrom. In Racine v. Minister of National Revenue^ Noël J. observed:
To give to la transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the Purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind....
(Emphasis added.)
The Appellant maintains that the gain realized on the sale of Barcrest was on account of capital. That assertion having been made, the Appellant must adduce evidence which, on a balance of probabilities, establishes that the purchase of Barcrest was to hold it as a capital investment for the purpose of earning or producing income. It is the Appellant’s position that an exceptional series of circumstances culminating in the placing of Barcrest in receivership gave him the opportunity to purchase Barcrest and that the only reason he did so was to carry on a “horse-breeding farming operation”. He further says that no secondary intention to sell the property existed at that time and it was only the unanticipated offer to purchase by the Gas- paretto group, which he viewed as a means to continue with his plans for an equestrian centre, that led to the sale.
The Appellant bears the onus of establishing that his intention at the time of acquisition of Barcrest was investment. That onus has not been met. The evidence as a whole leaves me far from satisfied that there is a balance of probability that Barcrest was acquired for the purpose of farming to the exclusion of any purpose to dispose of it at a profit as an alternative.
The direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction is not determinative of the existence of the stated intention. That is particularly so in this case since the credibility of the Appellant is substantially in issue. The sine qua non of his position is that Barcrest would not have been purchased had he not been absolutely certain of an agreement with Ingle to acquire the Barcrest stock. On an examination of the evidence as a whole, the often repeated assertions that “I had a deal with Ingle for the horses” do not withstand close scrutiny. He said that at or about the end of February 1987:
...we arrived -- I think originally the figure was much higher, was about $250,000, I believe, for the horses. It came down to 130 with mutual agreement of what the the value at the present time under those conditions was for what’s there.
This “mutual agreement” was reached at a meeting which the Appellant believes took place at a restaurant and was attended by Ingle, Marsh, Marsh’s assistant, the Appellant and his solicitor, Richard Furlong. The Appellant was vague as to when it took place but said that as a result, the offers to purchase both the horses and the equipment were prepared, signed and presented to Ingle. According to the Appellant, they were not accepted because Ingle, for reasons of his own, “had decided not to go ahead with this, at least, he just totally ignored it and proceeded to have his own auction at the end of March”.
I have grave doubts with respect to the Appellant’s testimony regarding the existence of an agreement with Ingle and Eurosport. For example, the Appellant testified that the value of the horses for resale purposes was $1,500,000 and that the Bank valuation was close to $2,000,000. He also observed that “there was a lot of value to those horses” even if some of the “high-priced ones” had been moved to the USA. There is evidence as well that at auction, the horses in issue were sold for $725,500. Nonetheless, the Appellant claims that he had an “agreement” with Ingle and with Eurosport to acquire them for $130,000. Both of these parties had a responsibility to obtain the best prices possible and indeed, the offer itself was conditional upon approval of the Supreme Court of Ontario. To suggest that either Eurosport or Ingle or both had agreed to sell horses for less than onefifth of their actual value is most difficult to accept.
As the matter stands, the only testimony with respect to this alleged agreement is that of the Appellant. While it is not necessary for his evidence to be corroborated, where so many statements appear to be unreasonable, if not improbable and where improper conduct on the part of others is implied, the failure to call witnesses who, according to the Appellant, were privy to the “agreement” must be taken into account. In particular, the fail
ure to call his solicitor, Furlong, is inexplicable and can only lead to a negative inference.
Even if, for the sake of argument, one were to accept that the Appellant believed that he “had a deal” to purchase the horses, by March 12th it was absolutely apparent to him that there was no agreement to that effect. Nonetheless, he proceeded to closing with the full knowledge that a key element of his plan could no longer be carried out. He says no attempt to abandon his purchase of Barcrest was made for fear that he would be sued and took no steps to try to reach some accommodation with the Bank. This is so, notwithstanding his knowledge that the Bank had an offer in it hands for $900,000 as recently as March 9th, which, at the very least, suggested the existence of an interested purchaser.
The Appellant’s actions to this point of time and subsequently are difficult to reconcile with his statement that “the roof caved in because we were, in a disastrous state here” since his unconditional offer to the Bank had been accepted and he no longer had access to the horses. He also said that were it is not for the Gasparetto offer, the acquisition of Barcrest “was not feasible”. Added to this is the fact that the Appellant still owed some $70,000 on the Nowak farm mortgage and was facing very substantial interest payments on the monies borrowed to finance the Barcrest purchase. Notwithstanding his plight, he rejected the Gasparetto offer and counteroffered raising the price to $1,320,000 for an April 15th closing or $1,620,000 for a June 15th closing.
One other fact strongly suggests that the Appellant had a purpose other than farming in mind, being the sale of Barcrest at a profit if his “preferred intention” was not possible. Specifically, I refer to the almost complete absence of any form of analysis of the viability of an operation such as that proposed by him either as a stand-alone farm operation or as a equestrian centre in conjunction with a golf course.
One final comment with respect to the Appellant’s credibility. In the course of his testimony, he was in my view, deliberately vague and imprecise with respect to such matters as the time at which certain events occurred. Since often such evidence was most germane in terms of establishing the bona fides of his intentions with respect to Barcrest, his failure to call other readily available evidence also justifies an inference that the testimony of such party would have been unfavourable to him.
Despite some assertions by the Appellant of an intention to develop an equestrian farm operation, I am far from satisfied on the evidence that Barcrest was acquired for that purpose to the exclusion of any purpose to dispose of it at a profit as an alternative. For the foregoing reasons, his appeal with respect to this issue cannot succeed.
1987 and 1988 farm losses - Barcrest
The issue is whether the Appellant was carrying on the business of farming in the 1987 and 1988 taxation years. In these appeals, we are only concerned with the farming operation as conducted by the Appellant from April 15, 1987, the closing date of his purchase of Barcrest from the Bank, to December 31, 1988. It is the Appellant’s position that he was carrying on the business of farming in those taxation years and that it was his chief source of income. In particular, Counsel for the Appellant observed that the Appellant had no other source of income other than approximately $1,800 in rental income in 1987 and $5,100 in rental and interest income in 1988.
The Respondent’s position is that the Appellant was not carrying on the business of farming in those taxation years as the farming operation was not being carried on with a reasonable expectation of profit.
To succeed an Appellant must establish that his farming operation gave rise to a “reasonable expectation of profit” and if successful in that regard, to further establish that it was his chief source of income within the meaning of subsection 31(1) of the Act. The principles governing the application of subsection 31(1) of the Act were discussed by the Supreme Court of Canada in Moldovan v. R..23 Dickson J. (as he then was) observed that:
Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit....
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 proof necessary to establish the existence of a reasonable expectation of profit from an undertaking goes well beyond the declared intentions of a taxpayer, even given under oath. Such statements cannot be ignored, but all of the facts surrounding the acquisition and operation of the property, its earning potential, the carrying charges, the previous earning history and so forth, must be such as to satisfy an objective observer that a profit can reasonably be expected to flow from the venture. It is understood that in each case, the factors will differ depending on the mature and extent of the undertaking.
Turning to the factors referred to by Dickson J. in Moldowan^ It is evident that the Appellant had a substantial commitment to farming and that it was the centre of his work routine. That, however, is of little solace to the Appellant since on the evidence profitability was improbable notwithstanding all the time the Appellant was prepared to devote to farming.
I turn next to the Appellant’s course of action. I have already observed that his acquisition of Barcrest was motivated by an intention to resell the property at a profit. Even absent that conclusion, it is a fact that within days of the Bank’s acceptance of his offer, all of the Appellant’s actions with respect to his farming venture were undertaken with the full knowledge that the property would have to be sold since its acquisition was no longer financially possible. As well, by the time he moved to Barcrest on April 15, 1987 to commence “farming”, he had already received a firm offer from the Gas- paretto group and had made a counteroffer. Thus, the only thing that can be said with any certainty was that the farming venture would be continued until construction of the golf course began. Although the Appellant believed that an equestrian centre associated with a golf club could be successful, there was no evidence that the concept was viewed with much favour by the other partners. In fact, consideration of such a centre was remarkably shortlived since construction of the golf course commenced in 1989 and all of the farm facilities and stables (but one) were bulldozed.
Nonetheless, the Appellant maintains that during this interregnum he was carrying on the business of farming conceding only that it was “in a drastically reduced level because we did not have access to all the horses”. He described his potential sources of income as consisting of an Arabian stallion, a foundation stallion of the Hanoverian breed and several brood mares purchased at the Barcrest auction. These horses were to be the basis of a stud service and breeding program. He also had and/or acquired 25 head of Aberdeen Angus “in calf and calf on the side”. The existing Nowak farm continued to be “cash-cropped” and hay was grown at Barcrest. Fifty additional acres were rented from Hydro for an alfalfa crop to provide fodder for his horses with the excess, if any, to be sold. He spoke of stall facilities and four arenas which were available for renting out and for shows. Income was also to be generated from a section of Barcrest which was accredited as a quarantine facility for livestock by the Ministry of Agriculture and from a government subsidized training program for horse trainers and grooms. He also made reference to several organized shows which were conducted at Barcrest including the Champion Trillion Show and the fact that the Olympic Training Team was “hosted” there prior to the Royal Winter Fair. According to the Appellant’s income tax returns in 1987 and 1988, these activities generated gross farm incomes of $56,200 and $67,665 and incurred total farm expenses of $186,031 and $293,773, respectively.
Almost no evidence was adduced as to the capability of the venture as capitalized to show a profit. The Appellant personally committed only $25,000 to the purchase price, borrowing $950,000 to complete the acquisition and to enable him to purchase horses. At that point of time, he was still in debt with respect to the Nowak farm. One might expect that prior to embarking on a highly financed acquisition such as this, the Appellant would have performed some form of analysis of the income-earning potential of his proposed venture. It is not enough to claim that he might have earned a profit. By way of example, it would not be inappropriate to assume that in order to attract buyers, the Appellant’s horses would have to be shown at various venues, but there is no evidence to indicate what expenses might be incurred thereby to which would have to be added such costs as those relating to staff required to assist in the breeding and in the showing of the horses. The failure to make any projections is of particular import in this case since what he appears to have had in mind was a combined “golf and equestrian club concept”. There is no evidence before me to indicate that any feasibility studies with respect to such a concept were performed or whether all of this was simply based on wishful thinking by the Appellant. In fact, there is no evidence as to how he proposed to convert Barcrest into a profitable venture other than his expressed belief that he could make a success of such an operation.
In response to a question regarding the failure by the Appellant to provide any evidence regarding financial projections, Counsel for the Appellant said:
I never knew a farmer that ever made a projection in my life about whether or not he was going to be a successful farmer. He went out and did it because he liked it.... My submission is simply, it’s all in his hand. Just simply the experience he had in hand all his life in dealing with that type of thing. Lots of people go into a business where somebody else fails and think they can make it. I have seen it a hundred times with people going in the restaurant business. Everybody wants to go in the restaurant business, they think it would be fun. About one in ten makes it.
I think farmers do much better than that by and large, but because somebody fails, there is no particular reason why the next person is going to fail as well.
Mr. Nowak didn’t give us any statistics or any figures on how much money he could make doing this, but what he is telling us is that he wanted to do it, because he knew he could. This was the thing he wanted to do, it is the thing he knew he could do. He certainly wouldn’t have gone into it with the view of losing money and not making money. That doesn’t mean to say that he couldn’t lose money, but it happens everyday with people.
...He didn’t have a plan that we have seen, nonetheless he had the courage to go ahead with it for better or for worse....
No comment is required.
The Minister’s disallowance of the farm loss expenses is based on the assumption that there was no source of income from farming and that Barcrest, when it was sold, was an inventory item and therefore, any gain was treated on income account. The interest which accumulated on the mortgages was added to the adjusted cost base as was the property tax and were included as part of the computation of the gain. No error in the Minister’s assessment has been demonstrated.
The Nowak farm - principal residence issue
The Appellant resided on the Nowak farm from its acquisition in 1983 until April 15, 1987 when he moved to Barcrest. It was sold on October 15, 1988 and in computing his income for that taxation year, the Appellant claimed that the whole of the Nowak farm fell within the definition of “principal residence” under subsection 54(g) of the Income Tax Act (the Act). The relevant portions of paragraphs 54(g)(i) and (v) define “principal residence” as follows:
54(g) “principal residence” of a taxpayer for a taxation year means a housing
unit, ... that was,
(i) ordinarily inhabited in the year by the taxpayer ...
and
(v) for the purposes of this paragraph the principal residence of a taxpayer for a taxation year shall be deemed to include, ... the land subjacent to the housing unit and such portion of any immediately contiguous land as may reasonably be regarded as contributing to the taxpayer’s use and enjoyment of the housing unit as a residence, except that where the total area of the subjacent land and of that portion exceeds 1/2 hectare, the excess shall be deemed not to have contributed to the individual’s use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment, ...
The Appellant described the property as rectangular in shape with the narrower eastern end fronting Highway 25. Proceeding west from the highway, the topography is quite varied, with the first hundred or so feet being relatively flat. The house and barn are situated on this portion of the property. Moving further west, the land slopes downward to a flood plain and a creek which transects the property from northeast to southwest. The largest part of the farm, some 35 acres, lies west of the creek and is part of the Niagara Valley Escarpment. The Appellant testified that the construction of a residence or any other buildings in that area was proscribed, although agricultural activities are permitted.
In the course of argument, the Appellant’s Counsel conceded that a claim for the whole of the Nowak farm was not tenable and submitted that given the topography of the land, 10 acres could appropriately be considered as constituting the Appellant’s principal residence. These 10 acres are located east of the creek and adjacent to the highway but do not include the portion on which the barn was sited. Counsel described this portion as “the land where the house is, where it runs steeply down to the creek on that side. It can’t be used for anything else. The only thing it can be used for is the simple use and enjoyment of the property for the house as a residence”.
The onus is on the Appellant to prove that any area in excess of one-half hectare (one acre) is necessary to his use and enjoyment of the housing unit as a residence. The nature of this onus was succinctly set out in Rode v. Minister of National Revenue,^ where Christie A.C.J T.C.C. stated:
...In these circumstances the law provides that the excess shall be deemed not to have contributed to the appellant’s use and enjoyment of the housing unit as a residence unless he establishes that it was necessary to such use and enjoyment. The underlined words are key. The word “deemed” in paragraph 54(g has this consequence. Even if an appellant establishes beyond controversy that what exceeds 1 acre did in fact make an important contribution to his use and enjoyment of the housing unit as a residence, this does not assist him because the fact has been nullified by the legislation unless he proves necessity. Therefore what an appellant must do in order to establish that his principal residence exceeds 1 acre is to prove that the excess was “necessary” to the use and enjoyment of the housing unit as a residence. I believe that in its context this requirement dictates that a stringent test shall be applied in determining the acreage of a principal residence....
He went on to Say:
Parliament has placed two things together contraposed. First, provision for the determination of variable dimensions of land which may constitute the principal residence of taxpayers in respect of which they can succeed in what they contend is the correct dimension by meeting the applicant of a flexible test. This applies to an area which has fixed lines of demarcation which must not exceed 1 acre. Second, provision for the determination of variable dimensions of land which may constitute the principal residence of taxpayers which are in excess of 1 acre and which have no fixed outer limits. I believe that in this regard it was the intention of Parliament that crossing the demarcation lines of 1 acre and the process of expansion beyond them shall be a formidable task. This is the effect of the injection of the word “necessary” in determining dimensions in exceed of 1 acre. Among the interpretations assigned to the word “necessary” in the Oxford English Dictionary is: “Indispensable, requisite, essential, needful; that cannot be done without”. From this selection I believe that the phrase “that cannot be done without” best epitomizes what a taxpayer must meet in order to establish that his principal residence can properly be regarded as greater than I acre....
The Appellant’s testimony was woefully inadequate. It is not disputed that he utilized a substantial portion of the property for raising sheep, horses, and that at various times, as much as 35 acres had been planted to various crops. A barn on the property had been reconstructed to permit the stabling of his horses and livestock, a road was rebuilt and a bridge constructed to provide access to the arable portions of the property. These steps were taken to enable the Appellant to commence a farm operation. Property dedicated to such use cannot be said to be necessary to the use and enjoyment of the housing unit as a residence.
As for Counsel’s estimate of 10 acres and his statement that it was an “excess area that cannot be done without” for the purposes of subsection 54(g of the Act, there is simply no evidence worth considering. Thus there is no basis upon which to find that the Minister erred in assessing to limit the principal residence exemption to one-half hectare (one acre).
Principal Residence - Barcrest
In computing his income for the 1988 taxation year, the Appellant also claimed a principal residence exemption pursuant to the provisions of subsection 54(g) of the Act with respect to the residence at Barcrest and three acres of land subjacent to the housing unit. The Appellant’s position was that two additional acres of land were required to provide an access road to the residence from the highway.
The Respondent’s position is that the Appellant must establish that the property in issue was a capital property before the principal residence ex- emption can be utilized. Counsel referred to Burnet v. R., ^ where Bowman J. observed:
... hat fact of course does not determine the matter. The exclusion from a tax- payer’s income of the gain or loss on the disposition of a principal residence occurs only if the property, in addition to being a principal residence, is also capital property. A gain or loss realized or sustained on the disposition of a property in which the taxpayer ordinarily resides (i.e. a “principal residence” or a “personal use property” within the ordinary sense of those words and not because of the definitions in section 54 of the Income Tax Act) falls entirely outside the ambit of subdivision c of Division B of the Act if that property is not a capital property in the taxpayer’s hands.
I agree with the comments of Bowman, J. with respect to the application of section 54. Since the Appellant’s profit from the sale of his interest in Barcrest was on income account, it follows that he is not entitled to the principal residence exemption with respect to the disposition of Barcrest.
I have one further reservation regarding this claim. The relevant provisions make it clear that in order to qualify as a principal residence for a particular taxation year, a housing unit must be designated as such by the taxpayer in prescribed form. Such a designation is generally made in the return filed for the year of disposition and only one property may be designated as a taxpayer’s principal residence for a particular taxation year. Having made a claim with respect to the residence on the Nowak farm in taxation year 1988, the Appellant was clearly precluded from making a similar claim with respect to Barcrest.
Is the Appellant entitled to the capital gains deduction with respect to the disposition of qualified farm property in the 1988 taxation year?
In computing his taxable income for the 1988 taxation year, the Appellant claimed a capital gains deduction in respect of qualified farm property pursuant to subsection 110.6(2) of the Act treating both the Barcrest property and the Nowak farm as one unit. The Minister, in his assessment, disallowed the capital gains deduction on the basis that neither property came within the definition of qualified farm property. The Minister, however, dealt with each property separately because with respect to the Nowak farm, in assessing the Minister allowed a capital gain for ‘other property’ pursuant to subsection 110.6(3) of the Act.
The relevant portions of the definition of qualified farm property provide:
110.6(1) “qualified farm property” of an individual means a property owned by
him or his spouse that was
(a) real property used by
(1) the individual, ...
in the course of carrying on the business of farming in Canada...
Since the Appellant was not carrying on the business of farming on either the Barcrest property or the Nowak farm in 1988, the Minister’s assessment on this issue was correct.
Did the Appellant make capital improvements to the Nowak and Barcrest farms that were not taken into account by the Minister in determining the adjusted cost base (ACB) of each property?
It is not disputed that with respect to the disposition of Barcrest and the Nowak farm, the Appellant in his return for the 1988 taxation year treated the proceeds therefrom as relating to a disposition of 100% of the properties. For the purposes of assessment the Revenue Canada auditor calculated the gain on the basis that there was a sale of a 90% interest in each case. No exception to these adjustments has been taken on behalf of the Appellant.
ACB - Nowak farm: The Appellant also included in the calculation of the adjusted cost base an amount of $100,000 as “improvements” made to the property. The Respondent’s position is that there has been no substantiation of this amount and it was excluded from the adjusted cost base in calculating the capital gain. Although some evidence was elicited from the Appellant with respect to improvements to the farm buildings, he was unable to provide any information regarding the actual costs incurred. Reference to the accountant’s working papers discloses an entry under the heading Nowak farm “$100,000” and a barely legible notation beside the entry reading “Improvements - Barn/Shed - Legals”. What the number $100,000 is specifically made up of is known only to the accountant.
ACB - Barcrest: In calculating the ACB with respect to the disposition of Barcrest, the Appellant included the cost of improvements in the amount of $161,719. Once again, no documentary evidence was provided in support of these adjustments other than the accountant’s working papers. The following items are identified in this document as making up this total: Lockers - $8,373 and $6,053; Stables - $87,293; ... (illegible) Stable - $60,000. The accountant’s working papers provide no evidence as to when or by whom the improvements were made.
The Appellant “believes” that the amount expended for “stables” represented the reconstruction of 47 stalls while the $60,000 expenditure was for the cost of new show ring seating arrangements. He said that any documents and receipts which he may have had were lost when a portion of the Barcrest offices was destroyed by fire in 1990. He did testify that some duplicates were obtained and that other documents were reconstructed but, unfortunately, none related to these specific items.
The position advanced on behalf of the Appellant by his Counsel is that although the records had been lost, “the accountant must have had them in making up his returns” and that the Appellant can only rely on whatever documents were submitted by the accountant to Revenue Canada at the time of the filing of the returns. There is of course no evidence that any supporting documents were ever submitted to Revenue Canada. If the Minister had no more information before him at the time of the assessments than I have before me, and it appears that was the case, he was perfectly justified in disallowing the deduction. The assessments of tax are not meant to be a guessing game nor are the auditors required to speculate as to the quantum of any expenses which may have been incurred by a taxpayer.
In addition to the foregoing, in the calculation of the adjusted cost base, a number of other items were claimed by the Appellant. All were disallowed by the Minister. These are best dealt with individually:
(a) Legal - Helson - $25,000.00: In cross-examination, the Appellant said “I believe this would have been the arrangements for the documents, the mortgages, and the expenses thereto”. No invoice or receipt was produced but the Appellant did make reference to a reporting letter from his solicitor. . The last attachment to that letter is the “statement of disbursements of monies received on sale”. Following the itemization of the disbursements paid, a separate portion of the statement notes the following:
| Fees on sale, discharge of mortgage, partner- | - $26,150.00 |
| ship agreements, corporate documents, etc. | |
| Disbursements | - 164.50 |
| $26,314.50 |
Assuming that this amount was paid to or retained by the Appellant’s solicitors and assuming that it accurately reflects the nature of the services provided, I can only conclude that the fees include work done on matters not related to the purchase and sale of Barcrest. For example, the reference to partnership may reflect the Appellant’s involvement with the Gasparetto group. If so, any legal fees which may have been incurred with respect to the negotiations in that regard, or the drafting or review of partnership agreements, cannot, on the evidence before me, be considered as appropriate for inclusion in the calculation of the ACB of Barcrest. The same comment applies to “corporate documents, etc.” Since there is no evidence before me to indicate that there is any relationship between the purchase and sale of Barcrest and whatever was done in the context of “corporate documents”. It must also be noted that based on his returns for the relevant taxation years, the Appellant treated Barcrest as his personal property and claimed a personal residence deduction on its disposition. Of all of the expense items in issue, the fees specifically relating to the acquisition/disposition of Barcrest should have been the most simple to establish. I find it most difficult to comprehend why this Appellant was given so little assistance in this context.
(b) Legal - Furlong est. - $5,000.00: The Appellant testified that this represented fees “for the arrangements of the documents and additional advice on different matters during that time in these difficult transactions with the equipment, identifying, drawing up these contracts”. He also said that a second amount referred to in the working papers as “Legal - Another est. - $800.00” was a further account from Furlong “for something that he did on these transactions”.^ According to the accountant’s working paper these amounts are estimates and no invoices or other proof of demand or payment were produced.35.
(c) Sheriff - $25,000.00: It is clear from the documents adduced and the Appellant’s testimony that this amount refers to actions taken by the Sheriff in 1985 and 1986 on behalf of the Appellants to collect on his judgment against the Hermanns.
(d) McCarthy - est. - $70,000.00: This amount is the Appellant’s estimate of certain legal costs and is made up of the following items. 6
(i) The amount of $45,245.98 represents legal fees paid to McCarthy, Tetrault. In support, the Appellant referred to an account dated January 27, 1989 in the amount of $45,000.00 for “professional services rendered during the period October 1, 1985 to December 31, 1988”. He says these “legal costs” were incurred in respect of several suits involving him and Ingle, including criminal charges preferred against the Appellant at the instigation of Ingle, as well as services rendered by Brown with respect to suits and counter-suits involving the Hermanns. Given the fact that the account covered an extended period of time, the Appellant was specifically asked whether he could provide any information as to what portion of that amount, if any, related to the acquisition of Barcrest and was unable to do so.
(ii) “May 16, 1986 - Barcrest copyright - $123.00” relates to another action by the Hermanns against the Appellant while “Barcrest stallion - $235.00” reflects costs incurred by the Appellant for the recovery of a horse from the Hermanns in 1986. He concedes that neither expense relates to the purchase or disposition of Barcrest.
(iii) The next two items listed are: “re: Hermanns $5,000.00” and “re: Hermanns $10,000.00”. According to the Appellant, the Hermanns paid him $10,000.00 “for the catering of the show sale of the horses”. In the Appellant’s words:
...And subsequently there were action taken personally by the Hermanns and there was a defence I believe —
His Honour: Action taken by the Hermanns?
Witness: Well, what happened is -- I guess it even went then into actually with a final conviction of the Hermanns. One of them was criminally convicted for that action, but that was what set off a lot of bad activities on the side of the Hermanns personally, rather than Barcrest farms. And the defence relating to that was corresponded by John Brown.
Q. So?
A. It’s ---
Q. You paid it out to John Brown or the Hermanns paid you the $5,000.00? I’m unclear of what you’ve just said.
A. I believe this was part of the money paid to John Brown in regard to the defence.
The Appellant has failed to establish any connection between these expenses and the Barcrest sale.
(iv) Insurance - $1,093.60 - This was another expense incurred in the period of time when Barcrest was in receivership. The Receiver apparently filed a suit against the Appellant with respect to an allegation of a trespassing by the Appellant’s stock on the Barcrest property. Brown represented the Appellant. This action clearly predates his acquisition of Barcrest and was properly excluded by the Minister.
(v) Re: North Canadian Insco - $4,289.00 - The Appellant’s response to Counsel’s questions with respect to this item was as follows:
This would have related— 1987 to 1988. So this would have related to a defence action that I mentioned earlier such as Ingle suing me.
The Appellant has conceded this occurred after he had acquired Barcrest.
56 It is not possible from the evidence before the Court to determine what portion of this account, if any, related to work performed by McCarthy, Tetrault with respect to the acquisition of Barcrest. Furthermore, as I understood the Appellant, Brown’s involvement was restricted to negotiations with the Bank while the offer, as well as the arrangements for the financing and so forth were attended to by Helson. All that was elicited from the Appellant by his Counsel with respect to the McCarthy’s account is found in the following exchange:
Question: Now, under McCarthy’s accounts there is the item for $45,000.00 and some old cents. And if we look to the third page, we see McCarthy’s account by replacement account. It says:
Professional services rendered during the period October 1st, 1985 to December 31st, 1988.
Now, your testimony is that during this time, you negotiated for the purchase of the property and your solicitors, negotiated, were McCarthy’s John Brown. Would any part of that account relate to negotiations for the purchase of the farm? Answer: Yes.
This answer was, to put it bluntly, woefully inadequate, as were the Appellant’s efforts to justify some of the expenses that had been incurred in the course of his difficulties with the Hermanns on the basis, as I understood him, that they were all an inseparable part of a whole, i.e. the acquisition of Barcrest. Although the Appellant sees this as part of the overall process to acquire Barcrest, I am satisfied that this amount was properly excluded by the Minister from the calculation of the ACB.
I have dealt with the expenses claimed by the Appellant in his calculation of the adjusted cost base in somewhat more detail than the specific items warranted, but I do so for a particular reason. Although Counsel for the Appellant attempted to attribute some of the Appellant’s claims to “aggressive accounting”, in my view the inclusion of these amounts is the responsibility of the Appellant. He is a well-educated individual, has experience in the business world and bears the responsibility for certifying that the information contained in his return is true, correct and complete in every respect. His attempt to justify the patently inappropriate deductions are simply a further example of his lack of credibility. Given the quality of the Appellant’s testimony on this and other issues, I would be extremely loath to accept the accuracy of these amounts both with respect to the nature of the work performed and the alleged expenses incurred.
I am not aware of any requirement in the Income Tax Act mandating that expenses be supported by documentation such as invoices, receipts or cancelled cheques. Given the onus on the Appellant to demonstrate that the Minister’s assessments were wrong, some acceptable and admissible evidence must be presented to the Court. In this case, the lack of credible evidence coupled with the absence of persuasive documentation (even if for reasons beyond the Appellant’s control) makes it impossible for the Court to conclude that the Minister’s assessments were unwarranted.
The appeals are dismissed, with costs.
Appeals dismissed.
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