Paul a Klie v. Minister of National Revenue, [1979] CTC 2262, 79 DTC 254

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.