Sebulski v. R., [1999] 4 CTC 2497 (Informal Procedure)

Watson D.J.T.C.:

This appeal was heard in Regina, Saskatchewan, on August 4, 1999 under the Informal Procedure.

In computing his income for the 1993, 1994 and 1995 taxation years, the Appellant deducted the amounts of $4,769.14, $5,966.22 and $6,044.43 respectively in these taxation years as farming losses and increased the amount carried forward as farm losses by $2,269.11, $3,466.22 and $3,544.42 in these years. He calculated his net losses as follows:

1993

Income

crop income	1,916.44
rebates & other income	1,091.40
total income	3,007.84
Expenses
property taxes	1,279.53
machinery & truck expense	3,834.70
motor vehicle expense (farm share)	618.50
building repairs	276.26
small tools	142.31
insurance — crops, building, livestock	90.50
accounting, office, etc.	287.80
telephone (farm share)	421.44
electricity (farm share)	232.50
heating fuel (farm share)	329.01
custom work & machine rental	48.15
clearing or improving land & gravel	431.81
capital cost allowance	2,053.61
total expenses	10,046.12
Net Loss	( 7,038.28)
Less Increase to Loss Carry Forward	2,269.14
Loss Claimed on 1993 Return	( 4,769.14)
1994
Income
crop income	2,048.84
rebates & other income	888.48
total income	2,937.32
Expenses
property taxes	1,549.52
fuel and oil for machinery & truck	3,364.12
motor vehicle expense (farm share)	963.99

1994

building & fence repairs	1,700.00
insurance — crops, building, livestock	367.00
accounting, office, etc.	145.00
telephone (farm share)	706.85
electricity (farm share)	634.07
heating fuel (farm share)	165.10
custom work & machine rental	20.00
other expenses	531.25
capital cost allowance	2,222.86
total expenses	12,369.76
Net Loss	( 9,432.44)
Less increase to Loss Carry Forward	3,466.22
Loss Claimed on 1994 Return	( 5,966.22)
1995
Income
crop income	647.55
rebates	580.65
other income	280.84
total income	1,509.04
Expenses
property taxes	1,398.69
fuel and oil for machinery & truck	2,973.06
motor vehicle expense (farm share)	955.97
small tools	162.00
insurance — crops, building, livestock	372.00
accounting, office, etc.	167.61
telephone (farm share)	677.59
electricity (farm share)	742.33
heating fuel (farm share)	149.91
clearing or improving land	85.00
house repair (farm share)	413.52
capital cost allowance	3,000.21
total expenses	11,097.89
Net Loss	( 9,588.85)
Less Increase to Loss Carry Forward	3,544.42
Loss Claimed on 1995 Return	( 6,044.43)

The Respondent in his Reply to the Notice of Appeal made the following admissions:

(a) the Deputy Attorney General admits that the Appellant is a retired school teacher;

(b) the Deputy Attorney General admits that the Appellant built a small greenhouse and that it is not in commercial production;

(c) the Deputy Attorney General admits that the Appellant’s nephew farms approximately 320 acres of land owned by the Appellant;

(d) the Deputy Attorney General has no knowledge of the Appellant providing labour and puts this in issue; and

(e) the Deputy Attorney General denies the remaining allegations of fact in the Notice of Objection.

By Notices of Reassessment dated December 2, 1996 and Notification of Confirmation dated June 6, 1997, the Minister of National Revenue (the “Minister”) disallowed the losses deducted by the Appellant on his income tax returns for the 1993, 1994 and 1995 taxation years.

In so reassessing the Appellant, the Minister relied on the following assumptions of fact:

(a) the facts admitted or stated above;

(b) the Appellant has owned farmland legally described as the east half of 20-29-9 WZM (the “Farmland”) for at least 30 to 40 years;

(c) at all material times the Appellant’s nephew farmed the Farmland together with his land as one farming operation;

(d) until the Appellant’s retirement in 1989 the Appellant’s nephew did not pay any rent to the Appellant for the use of the Farmland and paid all expenses, including property taxes, that were incurred;

(e) since the Appellant’s retirement, and throughout the 1993, 1994 and 1995 taxation years, the Appellant received no more than /3 of the net income from the crops his nephew produced on the Farmland, and the Appellant was responsible for payment of the property taxes assessed on the Farmland;

(f) the Appellant and his nephew have no intention of changing their arrangement;

(g) in 1986 the Appellant acquired an additional 10 acres of land located in the NW quarter of 10-30-9 WZM (the “Homestead”);

(h) the Appellant moved to the Homestead in 1989 when he retired;

(i) 2 to 3 acres of the Homestead are used as the Appellant’s residence, which only leaves 7 to 8 acres of land for growing crops;

(j) at all material times the Appellant has owned minimal farming equipment;

(k) during the 1993, 1994 and 1995 taxation years the only machinery acquired by the Appellant was a chop saw, 2 grain bins, a wheel barrow, a plow, a cultivator and a front end loader;

(l) the Appellant’s nephew uses his equipment to plant and harvest any crops grown on the Homestead;

(m) the greenhouse the Appellant built on the Homestead has only been used to grow produce for the Appellant’s own consumption or use;

(n) at all material times the Appellant has had no intention of expanding his farming activities;

the amounts the Appellant earned from employment and pensions dur- ing the 1993, 1994 and 1995 taxation years were as follows:

Taxation	employment pension		interest
Year	income	income	income	Total
1993	5,127.34	30,384.06		35,511.40
1994	3,558.24	58,258.65		61,816.89
1995	4,248.74	31,217.82	64.69	35,531.25
Total	12,934.32	119,860.53	64.69	132,859.54

(p) the Appellant’s capital is limited;

(q) for the 1987 to 1996 taxation years the Appellant calculated that his

losses from his farming activities were:
Taxation	Gross Income	Net Income (Losses)
Year
1989	486.00	( 2,587.00)
1990	965.00	( 4,409.00)
199]	1,712.00	( 3,637.00)
1992	530.00	( 8,822.00)*
1993	3,007.00	( 4.769.00)*
1994	2,937.00	( 9,432.00)*
1995	1,509.00	( 9,588.00)*
1996	3,763.57	(12,010.80)
Total	14,909.57	(55,254.80)
Notes:
the Appellant claimed restricted farm losses in each of these
years and a portion of the losses were carried forward

(r) at least $928.27, $3,397.42 and $1,677.76 of the expenses deducted in the 1993, 1994 and 1995 taxation years, respectively, related to utilities, insurance and repairs and maintenance for the Appellant’s house;

(s) the amounts deducted as telephone expenses in the 1993, 1994 and 1995 taxation years were only comprised of the monthly line rental fees and personal long distance telephone calls and were personal or living expenses of the Appellant;

(t) at least $1,874.17, $2,437.48 and $1,443.84 of the amounts deducted as fuel and oil for machinery and truck expense and as motor vehicle expense in the 1993, 1994 and 1995 taxation years, respectively, were personal or living expenses of the Appellant;

(u) the Appellant used his vehicles no more than 50% in farming activities:

(v) the expenses deducted by the Appellant when calculating his farming income (loss) for the 1993, 1994 and 1995 taxation years were personal or living expenses of the Appellant and were not incurred for the purpose of gaining or producing income from a business or property;

(w) the Appellant did not have documentation to support that he incurred all of the amounts deducted as expenses on his 1993, 1994 and 1995 income tax returns;

(x) the Appellant did not operate a farm with a reasonable expectation of profit during the 1993, 1994 and 1995 taxation years;

(y) during the 1993, 1994 and 1995 taxation years the Appellant did not depend upon farming as a source of income or as his livelihood; and

(Z) the Appellant’s chief source of income during the 1993, 1994 and 1995 taxation years was neither fanning nor a combination of farming and some other source of income.

At the hearing, counsel for the Appellant admitted paragraphs (b) to (d), (g) to (m), (o), (q), (r), (t), (u), (y) and (z) and denied paragraphs (e), (f), (n), (p), (s) and (v) to (x).

The issues before the Court are whether the Appellant had a reasonable expectation of profit from farming in the 1993, 1994 and 1995 taxation years and, if so, whether the Appellant is entitled to deduct the expenses set out above when determining his farm losses and restricted farm losses for these years.

The Appellant has the burden of establishing on a balance of probabilities that the Minister’s reassessment disallowing the expenses claimed in these years was ill-founded in fact and in law.

The two witnesses at the hearing were the Appellant and his nephew Rick Sebulski.

The Appellant had a very loose arrangement with his nephew for the cultivation of his 200 acres of usable land since 1989. His nephew farmed the Appellant’s land, paid all expenses including seeding, spraying, harvesting, equipment and sold the grain in his own name; the balance of the net amount received after deduction of his expenses, if any, was paid to the Appellant. In turn, the Appellant provided full-time labour to help his nephew on all the land his nephew farmed of approximately 13 quarters that his nephew leased from other relatives.

From the very modest net revenue received from the farming operation, the Appellant deducted additional expenses such as taxes on the land, machinery and truck owned by the Appellant, building repair, insurance, fuel and utilities including telephone, heating and electricity.

As set out in the Reply to the Notice of Appeal, over the period from 1989 to 1996, the Appellant claimed farming income of approximately $14,909, expenses of approximately $70,000 for net losses totalling approximately $55,000.

During the three years in issue, the Appellant claimed farming income of approximately $7,450, expenses of approximately $30,000 for a net loss of approximately $23,000. Many of the expenses claimed were in relation to his personal expenses such as the greenhouse, farm house used as his family residence and fuel for his own vehicle and not related to his nephew’s farming operation. The Appellant did not carry on his own farming activities, but provided his personal services to his nephew in return for his nephew’s farming the Appellant’s 200 acres using equipment not owned by the Appellant.

There is extensive case law on this type of appeal. A reasonable expectation of profit is an objective test and not just a fanciful dream. The objective test includes an examination of profit and loss in past years; the operational plan and the background to the implementation of the plan including the course of action; an examination of the time spent in the activity as well as the background of the taxpayer including his education and experience; the time required to establish the intended business; the presence or absence of ingredients leading to profits; and the cause of the losses and flexibility to make adjustments in the face of losses.

In the case of Moldowan v. R. (1977), [1978] 1 S.C.R. 480 (S.C.C.), Mr. Justice Dickson stated as follows:

11. 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. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., [1972] C.T.C. 151, 72 D.T.C. 6131. See also paragraph 139(1 )(«e) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasona- ble expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

12. 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, [1974] C.T.C. 230, 74 D.T.C. 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 the case of Landry v. R. (1994), 94 D.T.C. 6624 (Eng.) (Fed. C.A.), Décary, J. stated as follows:

It is possible for someone, with the best will in the world, to practise an activity that takes all his or her time and that activity may still not be a business for the purposes of the Income Tax Act (“the Act”). For the purposes of determining whether there is a source of income, only an activity that is profitable or that is carried on with a reasonable expectation of profit is a business...

Further on he states as follows:

There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream. As Mr. Justice Pigeon noted in Deputy Minister of Revenue (Que) v. Lipson ([1979] 1 S.C.R. 833 at 839):

... The only evidence submitted was as to the expectations they had on signing the lease, but these expectations were not realized, and the factors which caused the losses in the first three years were still present when the lease was renewed. No one could therefore imagine that a loss would not be incurred....

Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of three relevant periods, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer’s good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.

Having regard to all the circumstances of this appeal including the testimony of the witnesses, the admissions and the documentary evidence in the light of the well-established case law, I am satisfied that the Appellant has not succeeded in his onus of establishing on a balance of probabilities that he had a reasonable expectation of profit in the 1993, 1994 and 1995 taxation years in relation to the operation of his farm. Accordingly the appeal is dismissed.

Appeal dismissed.