The
Chairman:—The
appeal
of
Paul
A
Klie
from
reassessments
dated
August
23,
2974,
in
respect
of
the
1971
and
1972
taxation
years,
was
first
brought
to
hearing
on
September
20,
1977.
At
that
time,
counsel
for
the
appellant
filed
a
notice
of
motion
requesting
leave
to
amend
the
notice
of
appeal.
Counsel
for
the
respondent
objected
to
the
appellant’s
motion
on
the
grounds
that
a
new
issue
was
being
introduced.
The
presiding
Member,
the
late
Alex
Prociuk,
Esq,
considered
that
the
appellant’s
motion
was
well
founded
and
he
granted
the
motion.
The
appeal
was
adjourned
sine
die
to
permit
the
appellant
to
amend
his
notice
of
appeal
and
the
respondent
was
also
allowed
to
amend
his
reply
in
so
far
as
he
would
find
it
necessary
and
appropriate
to
do
so.
It
is
on
the
basis
of
these
amended
documents
and
other
pleadings
that
the
Board
has
to
review
the
assessments
presently
under
appeal.
All
the
evidence
having
been
heard,
counsel
were
directed
to
Submit
written
arguments
and
submissions.
I
propose
to
deal
immediately
with
a
procedural
issue
raised
by
the
appellant.
The
appellant
questions
the
validity
of
the
Minister’s
amended
reply
on
three
grounds.
Appellant’s
Grounds
for
Objection
to
Amended
Reply
The
appellant’s
first
procedural
point
is
that
the
Minister’s
amended
reply
did
not
address
itself
to
any
of
the
grounds
raised
in
the
amended
notice
of
appeal
and
is
therefore,
not
a
valid
reply.
Counsel
argues
that
Rule
6(1)
of
the
Rules
of
Practice
and
Procedure
in
appeals
to
the
Tax
Review
Board
requires
that
the
Minister
of
National
Revenue
file
a
reply
to
the
notice
of
appeal.
Section
8
of
these
Rules
provides
that
Where
no
Reply
to
a
Notice
of
Appeal
has
been
filed,
the
Board
may
dispose
of
the
appeal
on
the
basis
that
the
allegations
of
fact
contained
in
the
Notice
of
Appeal
are
true.
He
concludes,
therefore,
that
the
Board
should
allow
the
appeal.
The
second
procedural
point
raised
by
the
appellant
is
that
the
Minister’s
amended
reply
is
not
merely
an
amplification
of
his
original
reply,
but
is
an
attempt
to
cross-appeal
on
his
own
original
assessment.
The
third
point
is
that
the
amended
reply
is
an
attempt
by
the
Minister
to
utilize
the
appeal
procedure
to
reassess
the
taxpayer.
Respondent’s
Position
on
Appellant’s
Objections
Counsel
for
the
respondent
refers
to
the
order
made
by
Mr
Prociuk,
the
then
presiding
member,
who
granted
the
appellant’s
motion
to
amend
his
notice
of
appeal,
permitting
the
respondent
by
the
same
order
to
amend
his
reply.
He
alleges
that
whether
or
not
the
appellant’s
amended
notice
of
appeal
was
meant
to
supersede
his
original
appeal,
it
was
not
the
intention
of
the
Minister
to
supersede
his
original
reply,
but
to
amplify
it
so
that
the
amended
reply
would
meet
all
the
issues
set
out
in
the
original
and
the
amended
notices
of
appeal.
The
Board,
in
my
opinion,
is
now
squarely
faced
with
an
important
procedural
question
which
has,
on
several
occasions,
been
raised
before
the
Board
in
one
form
or
another.
The
appellant’s
main
objection
concerns
the
nature
of
the
pleadings
in
tax
appeal
cases
and
more
particularly,
the
relationship
between
the
Minister’s
pleadings
and
his
assessments
in
respect
of
which
the
appeal
is
taken.
The
departure
from
procedures
and
practices
which
are
normally
followed
but
are
not
incorporated
in
statutory
or
case
law,
does
present
serious
problems
in
determining
the
validity
of
the
procedures
followed
and
the
position
taken
by
the
parties.
In
order
to
determine
the
procedural
issue
raised
by
the
appellant,
I
would
like
to
examine
the
assessments,
the
notifications
and
the
subsequent
pleadings,
before
making
any
further
comments.
Appendix
“A”
TAXATION
YEAR:
1971
Paul
A
Klie
RR
No
1
HARROW,
Ontario
NOR
1G0
The
combined
rental
and
farm
incomes
have
been
segregated
per
attached
schedule
and
Section
13
of
the
pre
1972
Income
Tax
Act
applied
restricting
the
farm
loss
deductible
to
$4292.70.
The
balance
of
the
farm
loss
disallowed
amount-
ing
to
$1792.69
may
be
claimed
in
accordance
with
Section
111(1)(c)
of
the
1972
Income
Tax
Act.
ADJUSTMENTS
TO
DECLARED
INCOME
|
|
Net
Income
declared
|
|
$6783.68
|
Add:
Combined
rental
and
farm
loss
claimed
|
$2500.00
|
|
A
share
of
rental
income
|
3585.39
|
|
Less:
share
of
farm
loss
(Section
13)
|
(4292.70)
|
1792.69
|
Revised
Net
Income
|
|
$8576.37
|
Deduct:
Personal
Exemptions
|
$3250.00
|
|
Standard
Deduction
|
100.00
|
3350.00
|
Revised
Taxable
Income
|
|
$5226.37
|
Appendix
“B”
TAXATION
YEAR:
1972
Paul
A
Klie
RR
No
1
HARROW,
Ontario
NOR
1G0
ADJUSTMENTS
TO
DECLARED
INCOME
|
|
Net
Income
declared
|
|
$9314.58
|
Add:
Combined
rental
and
farm
loss
claimed
|
$2500.00
|
|
/4
share
of
rental
income
|
4564.76
|
|
Less:
share
of
farm
loss
(Section
31)
|
(4282.38)
|
2282.38
|
Revised
Net
Income
|
|
$11596.96
|
Deduct:
Personal
Exemptions
|
$3400.00
|
|
Standard
Deduction
|
100.00
|
3500.00
|
Revised
Taxable
Income
|
|
$8096.96
|
The
combined
rental
and
farm
incomes
have
been
segregated
per
attached
schedule
and
Section
31
of
the
1972
Income
Tax
Act
applied
restricting
the
farm
loss
deductible
to
$4782.38.
The
balance
of
the
farm
loss
disallowed
amounting
to
$2282.38
may
be
claimed
in
accordance
with
Section
111(1)(c)
of
the
1972
Income
Tax
Act.
Appendix
“C”
NOTIFICATION
BY
THE
MINISTER
WHEREAS
the
taxpayer
was
assessed
for
income
tax
by
Notice
of
Assessment
in
respect
of
the
taxation
year
ended
December
31,
1971,
AND
WHEREAS
by
Notice
of
Objection
the
taxpayer
has
objected
to
the
assessed
tax
for
the
reasons
therein
set
forth,
The
Honourable
the
Minister
of
National
Revenue
having
reconsidered
the
assessment
and
having
considered
the
facts
and
reasons
set
forth
in
the
Notice
of
Objection
hereby
confirms
the
said
assessment
as
having
been
made
in
accordance
with
the
provisions
of
the
Act
and
in
particular
on
the
ground
that
income
from
each
source
has
been
determined
within
the
meaning
of
subsection
(1a)
of
section
139
of
the
Act,
and
as
the
taxpayer’s
chief
source
of
income,
is
neither
farming
nor
a
combination
of
farming
and
some
other
source
of
income
his
farming
loss
has
been
determined
within
the
provisions
of
section
13
of
the
Act,
as
the
law
was
in
force
in
the
year
under
objection.
DATED
at
Toronto
this
7th
day
of
May,
1975.
To:
|
Mr
Paul
A
Klie,
|
Minister
of
National
Revenue
|
|
RR
No
1,
|
|
|
HARROW,
Ontario
NOR
1G0
(Signed)
|
And
To:
|
Allen
&
Durocher,
|
Per:
W
WSS
S
Milne,
|
|
Chartered
Accountants,
|
Regional
Director
of
Appeals,
|
|
Box
850,
|
Appeals
Branch,
|
|
HARROW,
Ontario.
|
Department
of
National
Revenue,
|
|
NOR
1G0
|
Taxation.
|
Attention:
Mr
R
J
Agar
Appendix
“D”
NOTIFICATION
BY
THE
MINISTER
WHEREAS
the
taxpayer
was
assessed
for
income
tax
by
Notice
of
Assessment
in
respect
of
the
taxation
year
ended
December
31,
1972,
AND
WHEREAS
by
Notice
of
Objection
the
taxpayer
has
objected
to
the
assessed
tax
for
the
reasons
therein
set
forth,
The
Honourable
the
Minister
of
National
Revenue
having
reconsidered
the
assessment
and
having
considered
the
facts
and
reasons
set
forth
in
the
Notice
of
Objection
hereby
confirms
the
said
assessment
as
having
been
made
in
accordance
with
the
provisions
of
the
Act
and
in
particular
on
the
ground
that
income
from
each
source
has
been
determined
within
the
meaning
of
section
4
of
the
Act,
and
as
the
taxpayer’s
chief
source
of
income
is
neither
farming
nor
a
combination
of
farming
and
some
other
source
of
income
his
farming
loss
has
been
determined
within
the
provisions
of
section
31
of
the
Act.
DATED
at
Toronto
this
7th
day
of
May,
1975.
To:
|
Mr
Paul
A
Klie,
|
Minister
of
National
Revenue
|
|
RR
No
1,
|
|
|
HARROW,
Ontario
NOR
1G0
(Signed)
|
And
To:
|
Allen
&
Durocher,
|
Per:
W
WSS
S
Milne,
|
|
Chartered
Accountants,
|
Regional
Director
of
Appeals,
|
|
Box
850,
|
Appeals
Branch,
|
|
HARROW,
Ontario.
|
Department
of
National
Revenue,
|
|
NOR
1G0
|
Taxation.
|
Attention:
Mr
F?
RJ
Agar
Appendix
“E”
July
8,
1975
Registrar
of
the
Tax
Review
Board
Kent
Professional
Building
381
Kent
St
Ottawa,
Ontario
Dear
Sirs:
RE:
PAUL
A
KLIE
RR
#1
HARROW,
ONTARIO
1971
and
1972
ASSESSMENT
TORONTO
REGIONAL
APPEALS
OFFICE
Pursuant
to
the
Notifications
By
The
Minister
dated
May
7,
1975
the
taxpayer
wishes
to
appeal
these
assessments.
Under
the
general
law,
the
source
of
income
has
been
held
to
be
that
place
where
is
situated
the
capital
from
which
the
income
flows.
In
this
situation
the
capital
investment
is
a
farm
and
therefore
the
income
derived
is
farm
income.
Whether
you
call
the
income
rent,
service
charge
or
occupancy
cost
the
fact
remains
that
the
income
is
derived
from
farm
property
being
used
for
farming
purposes.
The
definition
of
farming
states
that
it
'includes
tillage
of
the
soil’.
This
requires
the
use
of
machinery
and
implements
and
in
this
case
machinery
and
implements
are
being
used
to
level
and
maintain
a
roadway
as
well
as
annually
maintaining
a
breakwall.
Farming
can
also
include
the
rental
of
land
such
as
under
a
share
cropping
arrangement.
Additional
reasons
for
appealing
the
assessment
are:
1.
The
Minister
did
not
consider
or
take
into
acount
the
split
of
the
expenses.
In
respect
to
CCA
allowances,
Part
XI
assets
were
transferred
to
Part
XVII
assets
but
maximum
allowances
were
not
taken
under
Part
XVII
as
were
taken
under
Part
XI.
The
taxpayer
is
not
in
a
position
to
readily
allocate
expenses
but
if
he
were
to
attempt
to
on
a
reasonable
basis
he
would
proportion
the
expenses
in
accordance
with
the
time
spent
on
each
area.
For
example
much
of
the
time
with
crops
takes
place
in
the
spring
preparing
the
ground
and
planting
and
in
the
fall
harvesting.
The
rest
of
the
time
is
used
in
maintaining
the
breakwall
and
hauling
materials
in
the
summer
and
clearing
the
roadways
in
winter
and
preparing
the
water
system
for
winter
in
the
late
fall.
Probably
a
50-50
split
on
expenses
would
be
a
reasonable
estimate.
2.
The
Minister
did
not
indicate
whether
the
splitting
of
income
into
two
sources
could
be
shared
in
different
ratios
by
the
partners.
A
fair
split
considering
the
time
spent
by
each
of
the
partners
and
capital
intested
would
be:
|
Farm
|
Beach
|
Total
Total
|
Paul
A
Klie
|
11/12
|
7/12
|
3/4
|
Donald
Klie
|
1/12
|
3/12
|
1/6
|
Douglas
Klie
|
|
2/12
|
1/12
|
3.
The
Minister
did
not
consider
allowing
the
partners
to
rent
their
properties
to
the
partnership;
however
this
would
be
taken
care
of
in
the
allocation
of
profits
proposed
in
2
above.
4.
No
provision
has
been
made
in
the
splitting
of
the
income
and
expense
statement
for
non
cash
transactions.
For
example
the
taxpayer
may
provide
services
such
as
custom
work
for
other
farmers
with
his
machinery.
He
is
compensated
for
these
services
by
these
farmers
assisting
him
in
hauling
materials
and
maintaining
the
breakwall.
The
service
provided
would
constitute
farm
income
whereas
the
expense
would
apply
to
the
beach
operation.
Such
an
arrangement
among
farming
people
is
common
but
not
accounted
for.
However,
in
this
situation,
if
you
are
splitting
income
and
expenses,
this
becomes
quite
important.
In
summary,
the
taxpayer
is
appealing
against
the
splitting
of
his
statement
of
farm
income
and
expense.
He
realizes
that
his
employment
income
would
cause
him
to
have
restricted
farm
loss
for
purposes
of
section
31.
However,
in
view
of
the
reassessments
made,
the
taxpayer
would
like
to
maximize
his
farming
losses
up
to
$7,500
(restricted
to
$5,000).
As
stated
in
the
‘statement
of
facts
and
reasons’
accompanying
his
notices
of
objection
he
feels
that
the
department
is
placing
undue
pressure
on
him
to
keep
unnecessary
records
when
the
net
results
would
be
changed
by
nominal
amounts.
He
has
tried
to
be
fair
in
filing
his
returns
by
only
claiming
$2500
in
loss
each
year.
This
should
be
an
indication
that
he
was
not
trying
to
get
back
all
the
tax
dollars
he
could.
In
effect,
he
has
been
reinvesting
as
much
of
his
money
into
the
farm
and
beach
in
the
form
of
machinery
equipment
and
shoreline
protection.
He
has
been
offered
75%
grants
from
the
government
to
build
a
dock
but
because
of
the
lack
of
funds
for
the
other
25%
he
has
been
unable
to
take
advantage
of
this.
The
address
for
service
of
this
appeal
may
be:
Mr
Paul
Klie
c/o
Durocher
&
Agar
Chartered
Accountants
Box
850
Harrow,
Ontario.
Yours
truly,
Ronald
Agar
Durocher
&
Agar
Chartered
Accountants
Appendix
“F”
TAX
REVIEW
BOARD
IN
RE
the
Income
Tax
Act
BETWEEN:
PAUL
A
KLIE,
Appellant,
and
THE
MINISTER
OF
NATIONAL
REVENUE,
Respondent
REPLY
TO
NOTICE
OF
APPEAL
In
reply
to
the
Notice
of
Appeal
herein
filed
on
July
16,
1975,
from
assessments
of
tax
in
respect
of
the
Appellant’s
1971
and
1972
taxation
years,
the
Respondent,
the
Minister
of
National
Revenue,
states
as
follows:
A.
Statement
of
Facts:
1.
Except
as
specifically
hereinafter
set
forth
he
does
not
admit
any
of
the
facts
as
set
out
in
the
Notice
of
Appeal.
2.
In
computing
his
income
for
the
1971
and
1972
taxation
years,
the
Appellant
sought
to
deduct,
in
each
case,
the
amount
of
$2,500
as
a
farming
loss.
3.
By
Notices
of
Re-assessment
each
dated
August
23,
1974,
made
in
respect
of
the
1971
and
1972
taxation
years,
the
Respondent
disallowed
as
a
deduction
in
the
computation
of
income
the
aforesaid
losses
of
$2,500
and
in
lieu
thereof
assessed
tax
on
the
basis
that:
(a)
with
respect
to
the
1971
taxation
year,
there
is
to
be
included
in
the
computation
of
the
Appellant’s
income
rental
income
of
$3,585.39
and
allowed
to
the
Appellant
as
his
share
of
a
farm
loss
the
amount
of
$4,292.70;
and
(b)
with
respect
to
the
1972
taxation
year,
there
is
to
be
included
in
the
computation
of
the
Appellant’s
income
rental
income
of
$4,564.76
and
allowed
to
the
Appellant
as
a
farm
loss
the
amount
of
$4,782.38.
4.
In
assessing
tax
as
aforesaid,
the
Respondent
found
or
assumed,
inter
alia,
that:
(a)
the
Appellant
was
at
all
material
times
employed
in
the
City
of
Windsor
on
a
full
time
basis
by
Chrysler
of
Canada
Ltd.;
(b)
the
Appellant,
his
brother
and
their
father
at
all
material
times
owned
a
property
consisting
of
approximately
106.6
acres,
bordering
on
the
north
shore
of
Lake
Erie
on
a
site
near
Harrow,
Ontario
(hereinafter
referred
to
as
“the
property”);
(c)
the
Appellant,
his
brother
and
their
father
conducted
on
the
property
two
separate
operations,
being
a
farming
business
and
a
rental
of
a
portion
of
that
property;
(d)
the
rental
of
the
above
mentioned
property
required
the
use
of
approximately
9
acres
which
were
divided
into
100
spaces,
and
the
said
spaces
were
leased
to
cottage
owners
on
a
yearly
basis;
(e)
the
Appellant’s
chief
source
of
income
for
the
1971
and
1972
taxation
years
was
neither
farming
nor
a
combination
of
farming
and
some
other
source
of
income;
(f)
in
1971
the
Appellant’s
share
of
the
farm
loss,
after
his
claim
for
capital
cost
allowance
was
$6,085.39
and
the
Appellant’s
share
of
the
rental
income
from
the
property
was
$3,585.39;
(g)
in
1972
the
Appellant’s
share
of
the
farm
loss
after
his
claim
for
capital
cost
allowance
was
$7,064.76,
and
the
Appellant’s
share
of
rental
income
was
$4,564.76;
(h)
pursuant
to
Sections
13
and
31
of
the
Income
Tax
Act
as
it
applied
to
the
1971
and
1972
taxation
years,
respectively,
the
maximum
amounts
which
the
Appellant
may
claim
on
account
of
the
aforesaid
farm
loss
is
$4,292.70
in
respect
of
the
1971
taxation
year,
and
$4,782.38
in
respect
of
the
1972
taxation
year.
B.
Statutory
Provisions
Upon
Which
the
Respondent
Relies
and
the
Reasons
Which
He
Intends
to
Submit:
WHEREFORE
the
Respondent
submits
that
this
appeal
be
dismissed.
5.
The
Respondent
relies,
inter
alia,
on
Sections
3,
13
and
139(1
)(a)
of
the
Income
Tax
Act,
RSC
1952,
Chapter
148,
as
amended,
and
Sections
3,
4
and
31
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended.
6.
The
Respondent
submits
that
since
the
Appellant’s
chief
source
of
income
was
neither
farming
nor
a
combination
of
farming
and
some
other
source
of
income
the
maximum
amount
which
the
Appellant
may
deduct
on
account
of
the
farming
operation
carried
on
by
him
in
1971
and
1972
is
$4,292.70
and
$4,782.38,
respectively.
7.
And
the
Respondent
further
submits
that
the
amounts
of
$3,585.39
and
$4,564.76
are
to
be
included
in
the
computation
of
the
Appellant’s
income
for
1971
and
1972,
respectively,
from
the
rental
operation
carried
on
by
him,
his
brother
and
father.
DATED
at
Toronto,
this
5th
day
of
September,
1975.
The
Minister
of
National
Revenue
by
his
Solicitor
The
Deputy
Attorney
General
of
Canada
PER:
S
M
Borraccia
To:
|
The
Registrar,
|
|
Tax
Review
Board,
|
|
381
Kent
Street,
|
|
Ottawa,
Ontario,
|
|
K1A
0M1.
|
And
To:
|
Durocher
&
Agar,
|
|
Chartered
Accountants,
|
|
53
King
Street
East,
|
|
PO
Box
850,
|
|
Harrow,
Ontario,
|
|
NOR
1G0.
|
|
Appendix
“G”
|
|
IN
THE
TAX
REVIEW
BOARD
|
|
IN
RE
THE
INCOME
TAX
ACT
|
|
BETWEEN:
|
|
PAUL
A
KLIE,
Appellant,
|
|
and
|
|
THE
MINISTER
OF
NATIONAL
REVENUE,
Respondent.
|
|
AMENDED
NOTICE
OF
APPEAL
|
PURSUANT
TO
an
order
of
A
W
Prociuk,
QC,
Member,
Tax
Review
Board,
made
on
the
20th
day
of
September,
1977,
and
granting
leave
to
the
Appellant
to
amend
his
Notice
of
Appeal
in
the
manner
hereinafter
set
out
and
did
further
directing
that
the
Appellant
file
with
the
Tax
Review
Board
an
Amended
Notice
of
Appeal
restating
the
grounds
of
the
Appellant’s
appeal
as
follows:
THE
APPELLANT
APPEALS
from
the
assessment
of
the
Minister
of
National
Revenue
against
the
Appellant
in
respect
of
the
Appellant’s
return
of
income
for
taxation
years
1971
and
1972
on
the
following
grounds:
1.
That
the
Minister
of
National
Revenue
erred
in
treating
the
Appellant’s
farming
activities
as
being
subject
to
the
provisions
of
Section
31
of
the
Income
Tax
Act
as
amended
(formerly
Section
13
of
the
Income
Tax
Act,
1952);
and
that
the
farming
activities
of
the
Appellant
constituted
a
business,
the
losses,
if
any,
of
which
are
fully
deductible
in
accordance
with
the
provisions
of
Section
3
of
the
Income
Tax
Act.
2.
That
irrespective
of
whether
the
farming
activities
of
the
Appellant
are
subject
to
the
provisions
of
Section
31
of
The
Income
Tax
Act
or
otherwise,
the
income
derived
by
the
Appellant
from
the
leasing
of
land
is
income
incidental
to
his
farming
activities
and
the
leasing
of
land
does
not
constitute
a
separate
and
distinct
source
of
income
pursuant
to
Section
4
of
The
Income
Tax
Act
as
amended
(formerly
Section
139(1a)
of
The
Income
Tax
Act,
1952).
3.
That
in
the
event
the
Tax
Review
Board
should
determine
that
the
Appellant’s
income
from
leasing
of
land
constitutes
a
separate
and
distinct
source
of
income,
the
Appellant
appeals
against
the
Minister’s
allocation
of
expenses
between
the
Appellant’s
farming
activities
and
the
leasing
of
land
on
the
grounds
that
the
Minister’s
allocation
is
arbitrary
and
without
basis.
3(a)
The
Minister
did
not
consider
or
take
into
account
the
split
of
the
expenses.
In
respect
of
CCA
allowances,
Part
XI
assets
were
transferred
to
Part
XVII
assets
but
maximum
allowances
were
not
taken
under
Part
XVII
as
were
taken
under
Part
XI.
The
Taxpayer
is
not
in
a
position
to
readily
allocate
expenses
but
if
he
were
to
at-
tempt
to
on
a
reasonable
basis
he
would
proportion
the
expenses
in
accordance
with
the
time
spent
on
each
area.
For
example,
much
of
the
time
with
crops
takes
place
in
the
spring
preparing
the
ground
and
planting
and
in
the
fall
harvesting.
The
rest
of
the
time
is
used
in
maintaining
the
breakwall
and
hauling
materials
in
the
summer
and
clearing
the
roadways
in
winter
and
preparing
the
water
system
for
winter
in
the
late
fall.
Probably
a
50-50
split
on
expenses
would
be
a
reasonable
estimate.
3(b)
The
Minister
did
not
indicate
whether
the
splitting
of
income
into
two
sources
could
be
shared
in
different
ratios
by
the
partners.
A
fair
split
considering
the
time
spent
by
each
of
the
partners
and
capital
invested
would
be:
|
Farm
|
Beach
|
Total
Total
|
Paul
A
Klie
|
11/12
|
7/12
|
3/4
|
Donald
Klie
|
1/12
|
3/12
|
1/6
|
Douglas
Klie
|
|
2/12
|
1/12
|
3(c)
The
Minister
did
not
consider
allowing
the
partners
to
rent
their
properties
to
the
partnership;
however,
this
would
be
taken
care
of
in
the
allocation
of
profits
proposed
in
3(b)
above.
3(d)
No
provision
has
been
made
in
the
splitting
of
the
income
and
expense
statement
for
non
cash
transactions.
For
example,
the
taxpayer
may
provide
services
such
as
custom
work
for
other
farmers
with
his
machinery.
He
is
compensated
for
these
services
by
these
farmers
assisting
him
in
hauling
materials
and
maintaining
the
breakwall.
The
service
provided
would
constitute
farm
income
whereas
the
expense
would
apply
to
the
beach
operation.
Such
an
arrangement
among
farming
people
is
common
but
not
accounted
for.
However,
in
this
situation,
if
you
are
splitting
income
and
expenses,
this
becomes
quite
important.
ALL
OF
WHICH
IS
RESPECTFULLY
SUBMITTED.
DATED
at
Windsor,
this
29th
day
of
September,
1977.
Paroian,
Courey,
Cohen
&
Houston
Barristers
and
Solicitors
875
Ouellette
Avenue
Windsor,
Ontario
N9A
6S7
Solicitors
for
the
Appellant,
Paul
A
Klie
PER:
K
W
CHEUNG
In
reply
to
the
Amended
Notice
of
Appeal
herein
from
an
assessment
of
tax
in
respect
of
the
Appellant’s
1971
and
1972
taxation
years,
the
Respondent,
the
Minister
of
National
Revenue,
states
as
follows:
To:
|
The
Registrar,
Tax
Review
Board
|
|
381
Kent
|
|
|
Ottawa,
Ontario
|
K1A
0M1
|
And
To:
|
D
P
F
Hermosa
|
|
|
Department
of
Justice
|
|
PO
Box
57,
Toronto-Dominion
Centre
|
|
Toronto,
Ontario
|
M5K
1E7
|
|
Solicitor
for
the
Respondent,
|
|
The
Minister
of
National
Revenue
|
|
Appendix
“H”
|
|
75-465
|
|
TAX
REVIEW
BOARD
|
|
IN
RE
the
Income
Tax
Act
|
|
BETWEEN:
|
|
PAUL
A
KLIE,
Appellant,
|
|
and
|
|
THE
MINISTER
OF
NATIONAL
REVENUE,
Respondent.
|
|
AMENDED
REPLY
TO
AMENDED
NOTICE
OF
APPEAL
|
A.
Statement
of
Facts:
1.
Except
as
specifically
hereinafter
set
forth,
the
Respondent
does
not
admit
any
of
the
facts
set
out
in
the
Notices
of
Appeal.
2.
In
assessing
tax
the
Respondent
found
or
assumed,
inter
alia,
that:
(a)
the
rental
income
derived
from
the
leasing
of
land
constituted
a
separate
and
distinct
source
of
income;
(b)
the
allocation
of
expenses
between
the
Appellant’s
farming
activities
and
the
rental
of
a
portion
of
the
property
for
summer
cottages
is
reasonable
and
proper
in
the
circumstances;
(c)
the
Appellant
was
not
operating
a
business
involving
farming
activities
prior
to,
or
during
the
1971
or
1972
taxation
years,
and
consequently,
no
portion
of
the
expenses
claimed
by
the
Appellant
and
allocated
by
the
Respondent
to
the
farming
activities
in
the
taxation
years
in
issue
were
made
or
incurred
for
the
purpose
of
gaining
or
producing
income
from
a
business
of
farming;
(d)
the
amount
claimed
by
the
Appellant
and
allocated
to
the
farming
activities
constituted
expenses
for
his
own
amusement
and
entertainment
as
a
hobby;
(e)
having
regard
to
the
total
income
received
by
the
Appellant
during
the
1971
and
1972
taxation
years,
and
during
the
taxation
years
prior
thereto,
the
expenses
incurred
by
the
Appellant
were
unreasonable,
and
consequently
the
farming
activities
were
merely
a
sporting
venture
and
favoured
passtime
and
not
a
business
carried
on
for
a
profit,
or
with
a
reasonable
expectation
of
a
profit.
B.
Statutory
Provisions
Upon
Which
the
Respondent
Relies
and
the
Reasons
Which
He
Intends
to
Submit:
3.
The
Respondent
relies,
inter
alia,
on
Sections
12
and
139
of
the
Income
Tax
Act,
RSC
1952,
Chapter
148
as
amended,
and
Sections
4,
18
and
248
of
the
Income
Tax
Act,
SC
1970-71-72,
Chapter
63
as
amended.
4.
The
Respondent
submits
that
the
income
derived
by
the
Appellant
from
the
lease
of
certain
lands
is
not
income
incidental
to
certain
farming
activities,
but
rather
is
income
which
is
derived
from
a
separate
and
distinct
source
of
income
pursuant
to
Section
4
of
the
Income
Tax
Act,
SC
1970-71-72
with
respect
to
the
1972
taxation
year,
and
Section
139(1)(a)
of
the
Income
Tax
Act,
RSC
1952,
Chapter
148
in
connection
with
the
1971
taxation
year.
5.
The
Respondent
states
that
the
disallowance
of
certain
deductions
claimed
by
the
Appellant
as
expenses
in
the
1971
and
1972
taxation
years,
was
proper
on
the
basis
the
farming
activities
were
not
carried
on
in
the
manner
of
a
business
carried
on
for
a
profit,
or
with
a
reasonable
expectation
of
a
profit;
and
on
the
ground
that
since
these
expenses
were
incurred
by
the
Appellant
in
his
participation
in
farming
activities
of
a
sporting,
or
hobby
nature
for
his
own
benefit,
they
were
personal
or
living
expenses
within
the
meaning
of
Subsection
139(1),
and
therefore
were
not
deductible
under
Section
12
of
the
Income
Tax
Act,
1952,
Chapter
148
as
amended,
in
connection
with
the
1971
taxation
year
or,
within
the
meaning
of
Subsection
248(1),
and
therefore
were
not
deductible
under
Paragraph
18(1)(h)
of
the
Income
Tax
Act,
SC
1970-71-72,
Chapter
63
as
amended.
WHEREFORE,
the
Respondent
respectfully
submits
that
this
appeal
be
dismissed.
The
Minister
of
National
Revenue,
by
his
solicitor,
the
Deputy
Attorney
General
of
Canada.
Per:
D
P
F
Hermosa
The
appellant’s
first
procedural
argument
is
to
the
effect
that
the
Minister’s
amended
reply
is
not
valid
because
it
did
not
address
itself
to
any
of
the
grounds
raised
in
the
amended
notice
of
appeal.
Since
the
appeal
was
taken
from
the
Minister’s
assessments,
it
is
presumed
that
the
Notice
and
the
amended
notice
of
appeal
were
designed
to
enable
the
appellant
to
discharge
his
onus
of
proof
that
the
assumptions
of
fact,
on
which
the
Minister
based
his
assessments,
were
wrong.
The
Minister’s
reply
aims
at
supporting
these
assumptions.
Whether
or
not
the
respondent
chooses
to
reply
to
the
grounds
raised
in
the
notice
of
appeal
is
his
decision
to
make.
There
are
no
statutory
rules
which
prescribe
what
the
Minister
should
include
in
his
reply.
The
Board,
of
course,
will
evaluate
the
pertinence
and
the
strength
of
the
Minister’s
reply,
but
I
cannot
see
how
the
Board
would
be
justified
in
declaring
an
amended
reply
invalid
because
it
did
not
address
itself
strictly
to
the
appellant’s
grounds
for
appeal.
Moreover,
it
would
appear
that
when
the
appellant
in
his
amended
notice
of
appeal
raised,
as
a
new
complaint,
the
non-allowance
of
his
farm
loss
for
the
full
100%,
the
respondent’s
answer
that
none
of
the
farm
expenses
should
have
been
allowed
is
not
that
surprising.
The
appellant’s
second
procedural
point
is
the
one
which,
in
my
view,
raises
some
questions
in
respect
of
what
appears
to
be
a
growing
practice.
The
appellant
objected
to
the
Minister’s
amended
reply
because,
if
indeed
it
were
an
amplification
of
the
Minister’s
original
reply
as
claimed
by
the
respondent,
it
was,
nevertheless,
an
attempt
by
the
Minister
to
cross-appeal
his
original
assessments.
It
is
important
to
state
here
that
the
Board,
under
justifiable
circumstances,
allows
some
flexibility
to
the
appellant
in
his
attempt
to
comply
with
the
onus
of
proof
which
lies
on
him.
This,
in
my
view,
is
also
one
of
the
principles
enunciated
in
the
Supreme
Court
decision
in
R
W
S
Johnston
v
MNR,
[1948]
CTC
193;
3
DTC
1182.
The
question
that
arises
here
is
whether
the
respondent,
having
based
his
assessments
on
certain
presumed
facts,
has,
during
the
course
of
an
appeal
procedure,
any
latitude
in
varying
or
adding
to
these
assumptions.
The
practice
seems
to
have
arisen
in
which
the
Minister
adds
to
his
original
assumptions
by
including
in
his
reply
what
has
now
become
known
as
the
Minister’s
alternative
assumptions.
In
such
instances,
the
Board,
though
in
principle
not
in
favour
of
the
Minister’s
apparent
departure
from
his
original
assumptions,
has
nevertheless
permitted
a
case
to
proceed
because
it
was
reluctant
to
prevent
the
presentation
of
all
the
pertinent
and
acceptable
evidence
available
at
the
time
of
hearing,
which
could
affect
the
final
determination
of
the
matter
before
it.
This
position
is
in
keeping
with
the
statement
of
Gibson,
J
in
Nathaniel
C
Brewster
v
Her
Majesty
the
Queen,
[1976]
CTC
107;
76
DTC
6046,
where
he
States
at
pp
111,
6049:
Pleading
assumptions
in
the
alternate
is
novel
in
view
of
the
state
of
the
law.
In
law
the
onus
is
on
the
taxpayer
to
destroy
some
or
all
of
the
assumptions.
But
it
is
open
to
the
defendant
to
plead
other
facts
not
relied
in
making
the
assessments
or
reassessments,
but
in
that
event,
the
onus
is
on
the
Minister
of
National
Revenue
to
prove
such
other
facts.
I
do
not
believe
that
in
these
remarks
the
learned
judge
said,
or
intended
to
say,
that
in
pleading
other
facts
the
Minister
was
allowed
to
substantially
vary
the
basis
of
his
assessments.
Although
the
Minister
may
have
been
given
some
latitude
(in
the
Brewster
decision)
in
his
pleadings
in
respect
of
his
assumptions
of
fact,
the
basic
nature
of
the
assessments
themselves
from
which
the
appeal
is
taken
cannot
subsequently
be
changed
by
the
Minister
in
his
reply.
In
the
instant
appeal
an
examination
of
the
assessments,
the
reply,
and
the
amended
reply,
indicates
to
me
that
the
Minister
has
gone
well
beyond
an
amplification
of
the
originally
assumed
facts
and
indeed,
in
some
respects,
contradicts
his
own
assessments.
Counsel
for
the
respondent
alleges
that
the
amended
reply
was
not
meant
to
supersede
the
original
reply.
However,
other
than
counsel’s
statement,
there
is
no
indication
in
the
amended
reply
that
the
original
reply
still
stands.
There
is
no
reference
whatever
in
the
amended
reply,
part
B,
page
2,
“Statutory
provisions
upon
which
the
respondent
relies
and
the
reasons
which
he
intends
to
submit”
to
the
provisions
relied
on
or
the
reasons
to
be
submitted
in
the
Minister’s
original
reply.
The
assessments
from
which
the
appeal
was
taken,
in
my
opinion,
still
stand
and
the
pleadings,
including
the
amended
reply,
must
be
considered
in
so
far
as
they
are
pertinent
to
the
assessments.
Based
on
the
facts
presented
to
it,
the
Board
will
decide
whether
or
not
the
appellant
was
properly
assessed.
The
appellant’s
third
point
of
procedure
was
that
in
his
amended
reply,
the
Minister
sought
to
reassess
the
appellant.
The
latitude
given
the
Minister
in
pleading
in
the
alternative,
in
my
view,
permits
the
Minister
to
plead
only
new
facts
which
support
his
assessments.
Although
it
may
at
times
be
difficult
to
draw
the
line,
I
do
not
believe
that
it
is
open
to
the
Minister
to
introduce
new
facts
in
his
pleadings
which
would
radically
change
the
legal
basis
of
his
assessments.
Fundamental
changes
in
the
pleadings
which
destroy,
contradict
or
ignore
the
assumptions
in
which
the
assessments
were
originally
made,
could,
in
my
opinion,
result
in
changing
an
assessment
which
can
only
be
effected
by
a
reassessment.
As
I
read
the
assessments
under
review
and
the
Minister’s
original
reply,
the
question
was
not
whether
the
appellant
was
engaged
in
the
business
of
farming.
The
answer
to
this
question
was
implied
in
the
Minister’s
allowing
the
appellant
to
deduct
his
farming
losses
pursuant
to
section
31
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended.
The
issue
in
this
appeal
was,
and
still
is,
whether
the
rental
income
from
certain
lands
situated
within
the
boundaries
of
the
farm
property
should
be
considered
as
income
derived
from
the
appellant’s
operation
of
the
farm.
The
assessments
and
the
statutory
provisions
on
which
the
respondent
relied
in
his
original
reply
were
based
on
sections
3,
13,
and
paragraph
139(1)(b)
of
the
Income
Tax
Act,
RSC
1952,
c
148,
for
the
1971
taxation
year,
and
on
sections
3,
4,
and
31
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended
for
the
1972
taxation
year,
thus
permitting
the
appellant
to
deduct
amounts
of
$4,292.70
and
$4,782.38
for
the
years
1971
and
1972,
respectively,
on
account
of
farming
operations
carried
on
by
him
in
those
years.
In
his
amended
reply,
the
statutory
provisions
on
which
the
respondent
relies
are
sections
12
and
139
of
the
old
Act
for
the
1971
taxation
year,
and
sections
4,
18,
and
248
of
the
new
Act
for
the
1972
taxation
year.
Having
implied
through
his
assessments
and
his
original
reply
that
the
appellant
was
carrying
on
farming
operations
with
a
reasonable
expectation
of
profit,
the
respondent,
in
his
amended
reply,
now
claims
that
the
appellant’s
farming
activities
were
not
those
of
a
business
carried
on
with
a
reasonable
expectation
of
profit,
but
constituted
a
hobby
or
a
sport,
and
that
the
expenses
related
thereto
were
therefore
personal
and
not
deductible
for
income
tax
purposes.
In
my
view,
the
amended
reply
cannot
be
considered
as,
or
have
the
effect
of,
an
assessment
or
a
reassessment
regardless
of
what
it
may
contain.
The
pertinent
question
to
be
decided
is
whether
the
Minister’s
amended
reply
supports
his
assessments.
It
is
my
opinion
that
it
does
not,
but
tends
to
support
assumptions
of
facts
not
contained
in
his
assessments.
In
ruling
on
the
appellant’s
last
objection
I
find
that
the
Minister’s
reply,
which
superseded
his
original
reply,
has
no
effect
because
it
does
not
support
his
assessments,
but
purports
to
support
an
assessment
which
perhaps
he
most
likely
would
have
liked
to
have
made
but
did
not.
In
the
circumstances,
the
Board
will
consider
only
those
statements
made
by
the
respondent
which
justify
his
assessments
as
made.
The
issue
to
be
determined
by
the
Board,
therefore,
will
be
decided
on
the
basis
of
the
facts
and
the
law
on
which
the
assessments
were
based
and
on
the
strength
of
the
evidence
adduced
by
the
appellant
in
support
of
his
allegations
in
his
amended
notice
of
appeal.
The
appellant,
in
his
amended
notice
of
appeal,
has
made
two
main
points.
First,
that
the
entire
farm
loss
should
have
been
allowed
in
each
of
the
taxation
years,
and
secondly,
that
the
leasing
of
certain
portions
of
land
was
incidental
to
his
farming
operations
and
that
the
income
derived
therefrom
was
not
a
distinct
source
of
income.
It
was
established
that
the
appellant
was
employed
at
Chrysler
of
Canada
Ltd
in
Windsor,
Ontario,
and
received
income
from
a
source
other
than
farming
and
I
had
no
difficulty
in
concluding
that
section
31
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended,
was
properly
applied
by
the
Minister
in
his
assessments
of
the
appellant’s
income.
As
to
whether
the
appellant’s
leasing
of
certain
portions
of
land
was
an
integral
part
of
his
farming
operations,
it
must
be
noted
that
a
substantial
portion
of
the
appellant’s
farm
had
been
leased
on
which
the
tenants
built
summer
cottages.
No
portion
of
the
leased
land
was
used
or
was
intended
to
be
used
for
the
purpose
of
farming.
Whatever
work
may
have
been
required
on
the
leased
land,
such
as
repairing
breakwaters,
roadways,
etc,
had
no
relationship
to
the
appellant’s
farming
operations.
The
purpose
for
which
the
lands
were
leased
and
the
type
of
work
executed
in
connection
with
the
leased
lands
were
quite
different
from
the
appellant’s
farming
activities
and
thus
the
rental
income
derived
therefrom
cannot
be
considered
as
an
integral
part
of
the
appellant’s
farm
income.
Although,
as
admitted
by
the
appellant
that
an
accurate
allocation
of
expenses
between
the
farming
activities
and
the
leasing
operations
may
be
very
difficult
to
make,
it
is
incumbent
on
the
appellant
to
establish
to
the
satisfaction
of
the
Board
that
the
Minister’s
allocation
of
expenses
is
wrong
and
why
he
considers
it
to
be
wrong.
This,
the
appellant
has
failed
to
do
by
not
adducing
adequate
evidence
to
convince
the
Board
that
the
Minister’s
allocation
was
improper
or
unjustified.
For
these
reasons
the
appeal
is
dismissed
and
the
assessments
as
made
are
confirmed.
Appeal
dismissed.