Thomas N F Todd v. Minister of National Revenue, [1972] CTC 2026, 72 DTC 1050

W O Davis:—This appeal was heard at Penticton, BC during the first week of May 1970 before the Tax Appeal Board, in conjunction with the appeals of William H White and four other members of The R B White Clinic in that city; and for the reasons given, and to the extent indicated, in my reasons for judgment in the appeal of William H White v MNR issued this day (p. 2033), the instant appeal is allowed in part with respect to car operating expenses, capital cost allowances thereon, and telephone charges paid on behalf of the appellant anaesthesiologist by the Clinic, and the matter is referred back to the Minister of National Revenue for reassessment accordingly.

In his notice of appeal, in addition to the items mentioned above Dr Todd objected to the disallowance as a deduction from his income of $2,416.40 of the loss which he claimed to have sustained in the year 1965 in connection with a 4.7-acre orchard which he operated on the property surrounding his residence. The total operating loss allegedly suffered in connection with this orchard was $2,939.67, of which $2,416.40 was designated by the Minister of National Revenue, in the assessment appealed against, as having been laid out in respect of personal or living expenses of the doctor and his family.

In making the said assessment, the Minister took the position that the said $2,416.40 of the loss claimed was laid out in respect of a property maintained for the use or benefit of the appellant and not in connection with a business carried on for profit “or with a reasonable expectation of profit”.

Dr Todd, having left British Columbia to take up residence in California, did not appear in person before the Board at the hearing of his appeal, but one Peaker, administrative officer of The R B White Clinic — and himself an orchardist — testified that he had been requested by Dr Todd to review and assess the prospects of the farm before the appellant acquired it in 1964. The farm consisted of 4.7 acres, of which 4.2 acres was under cultivation. Nearly one-half of the orchard was at that time planted in cherry trees of a mature age, and about half of the remaining acreage was in old apple and pear trees, the pear trees being in a very poor state, while the apple trees, though not so old as the pears, were no longer very productive. In addition, there were in the orchard some apricot trees, a small number of peach trees, and a few trees of a new variety of apple.

Because Mr Peaker had not seen the orchard since Dr Todd’s departure for California in 1967, he was unable to say anything with regard to the present production from the orchard. He did say, however, that Dr Todd had purchased the orchard subject to the proviso that the vendor could take the crop for the year of sale. Thus, for the year 1964, Dr Todd had received no income from the orchard. In 1965, as a result of a very severe frost, there was practically no crop worth picking, due to early bud damage. In 1966 there was a relatively light crop of cherries, a few peaches and a few apples. The reason for this was, according to Mr Peaker, that the rather ancient pear trees were suffering from a decline and were incapable of producing a commercial crop, the apple trees (other than those of the new variety) were past their prime and not in a state to produce a saleable crop, the peach trees had been frozen out, and the apricots, while still in good condition and capable of producing a commercial crop, were not capable of producing a profit because of a sharp decline in market price. Acting on Mr Peaker’s advice, at the end of that year Dr Todd removed all the old apple, pear, peach and apricot trees and replanted to a new controlled root-stock apple tree on a density planting basis, adding also a number of new peach trees on the speculation that they might be successful in spite of the risk of severe frosts.

Mr Peaker was quite definite in stating his opinion that when the orchard was purchased in 1964 it appeared to be a viable undertaking. He said that he considered there were sufficient cherry trees in the orchard to more than cover the costs of operation, cherries being a high-income-producing type of fruit. The witness added that, in his opinion, the orchard would, in time, have been capable of producing gross income in excess of ten thousand dollars a year, or a net income of about five thousand dollars, from a combined crop of apples and cherries, once the high-density apple plantings had had time to come into production and providing that the orchard suffered no excessive misfortunes from the weather. He knew that Dr Todd looked after his orchard personally and, when necessary, hired custom workers and equipment. It was for this reason that the doctor had had very little orchard equipment of his own.

During the period between Dr Todd’s purchase of the orchard in 1964 and his departure from the area in 1967, he had not had enough time to make a profit from his orchard.

A statement filed as Exhibit R-2 discloses the treatment accorded the loss claimed as a deduction by Dr Todd to have been as follows:

Thus the total of $504.33 allowed was said to relate to wages and tree-removal costs and other matters directly related to the orchard, and bore a definite relation to the earning of such income as the orchard had been able to produce. The items disallowed are taken to relate to the personal residence of Dr Todd, which happened to be located on the orchard property, and are therefore deemed to be in the nature of personal or living expenses for the upkeep and maintenance of the said residence and for general family transportation.

As already indicated, the witness Peaker was unable to speak with any certainty concerning the productivity of the orchard property subsequent to Dr Todd’s departure in 1967.

The evidence was that Dr Todd, who had only had his orchard for the relatively brief period of three years, had reported an operating loss for all three years, the amount claimed for 1965 having been in excess of the amount of $2,416.40 actually disallowed by the Minister. All but $504.33 of the total loss claimed was disallowed on the ground that the expenses represented outlays for personal or living expenses within the terms of paragraph 12(1)(h) of the Income Tax Act.

I find that the evidence with respect to Dr Todd’s operations as an orchardist has failed to establish any sound reason for disturbing the Minister’s assessment with respect to the disallowance of $2,416.40 of the orchard loss claimed. The appeal with respect to this phase of the matter therefore fails and must be dismissed.

In the result, as indicated at the beginning of these reasons, the appeal is allowed in part to the extent indicated in my reasons for judgment in William H White v MNR issued concurrently herewith, and the matter is referred back to the Minister for reassessment accordingly.

Appeal allowed in part.