Kroeker v. R., [1999] 4 CTC 2045, 99 DTC 1250

Beaubier T.C.J.:

This Motion by the Appellant was heard by telephone conference on June 9, 1999. It is for the following relief:

THE MOTION IS FOR an Order or Judgment of this Honourable Court, detailed in draft on Schedule A hereto:

(a) determining the question of law in favour of the Applicant that during the taxation years under appeal the farming partnership, of which the Appellant is a 50% partner, does have a reasonable expectation of profit (“reop”) (which is admitted by the Respondent), therefore constitutes a business and thus is determined to be a source of income from farming of the Appellant within the meaning of the Income Tax Act (Canada); accordingly reop, and the corollary questions of law relating to it, are no longer questions to be determined at the hearing of the tax appeal (presently set to be heard on June 22, 23 and 24, 1999) (the “Hearing”),

(b) to allow the appeal accordingly, to incorporate the foregoing in the final judgment of this Honourable Court in respect of the Hearing and to refer the reassessments back to the Minister for reconsideration and reassessment accordingly, to be effective concurrent with the final determination of the remaining issues in this tax appeal;

(C) alternative to ‘Ka) above, that the Respondent ought to be denied the Opportunity to raise the reop issue, lack of a business and lack of a source of income from farming at the Hearing since to do so would constitute an abuse of the taxation appeal process and the process of this Honourable Court;

(d) in the further alternative to a) above, that the Respondent ought to be denied the opportunity to raise the reop issue, lack of a business and lack of a source of income from farming at the Hearing since to do so would be to ask this Honourable Court to grant relief beyond its jurisdi- cation by rendering a judgment which could result in a higher assessment than the assessment under attack, and consequently the issue is moot and to hear it is of no use;

(e) such other corollary relief as this Honourable Court deems just and reasonable, in particular leave to admit evidence in support of the applica- tion as detailed in j|l of the draft Order attached hereto as Schedule A,

and

(f) costs on a solicitor and his own client basis in respect of this Motion as detailed in ][5 of the draft Order attached hereto as Schedule A.

The Motion is pursuant to subsection 58(1) of the Rules of General Procedure to determine a question that may dispose of all or part of the proceeding or substantially shorten the hearing. The Appellant was granted leave pursuant to subsection 58(2) to read in portions of the examination for discovery of the Respondent’s officer (witness) and to file an affidavit of the Appellant in support of the motion.

In examination for discovery, the Respondent’s witness admitted that the reassessment was not based upon whether the farming operation conducted by a partnership between the Appellant and her husband, rather, the reassessment was based upon Section 31 of the Income Tax Act and only allowed the Appellant a restricted farm loss.

The Respondent’s witness specifically admitted (Question 45) “that the farm partnership has a reasonable expectation of profit during the years in question”.

The pleadings by the Respondent pleaded the question of reasonable expectation of profit in the alternative in paragraph 13, subparagraph 15(f) and paragraph 22; which read:

13. Alternatively if the purported payments of salaries to Ben were not properly disallowed, the Appellant did not have a reasonable expectation of profit from the farming activity in the 1993, 1994 and 1995 taxation years (notwithstanding that the Minister has allowed the Appellant the restricted farm losses).

B. Issues to be Decided

15. The issues are:

(f) Alternatively if the purported payments of salaries to Ben were not properly disallowed, whether the Appellant had a reasonable expectation of profit from the farming activity in the 1993, 1994 and 1995 taxation years (notwithstanding that the Minister has allowed the Appellant the restricted farm losses).

C. Statutory Provisions, Grounds Relied on and Relief Sought

22. In the alternative it is further submitted that if the purported payments of salaries to Ben were not properly disallowed, the Appellant had no reasonable expectation of profit from the farming activity in the 1993, 1994 and 1995 taxation years (notwithstanding that the Minister has allowed the Appellant the restricted farm losses).

The Respondent’s witness was examined for discovery to provide admissions to clarify the issues between the parties. The admission in paragraph 45 is fatal to the paragraphs and sub paragraph quoted.

However, the question of a restricted farm loss leaves in issue the Appellant’s chief source of income. As Robertson, J.A. said in R. v. Donnelly (1997), [1998] 1 C.T.C. 23 (Fed. C.A.):

12 Any doubt as to whether the taxpayer’s chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a “reasonable expectation of profit” is not synonymous with an “expectation of reasonable profits”. With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of “substantial” profits from farming.

13 In the present case, it was incumbent on the taxpayer to establish what he might have reasonably earned but for the two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. While there is no doubt that the loss of Mr. Rankin, and the changes in American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.

As a result of the admission in question 45, the Hearing of this matter will not receive evidence respecting reasonable expectation of profit as described in paragraph 13, subparagraph 15(f) and paragraph 22 of the Reply.

Costs of this motion will be costs in the cause.

Order accordingly.