Meredith v. R., [1975] C.T.C. 570, 75 D.T.C. 5412

Cattanach, J:

1 These are appeals from the assessments to income tax by the Minister of National Revenue whereby the Minister disallowed claims for deductions from income made by the plaintiff in his 1969, 1970 and 1971 taxation years in the respective amounts of $2,112.68, $1,991.01 and $1,556.87.

2 In 1963 or thereabouts the plaintiff conceived the idea of operating fishing ponds in the immediate vicinity of Tilbury, Ontario, no doubt inspired by discussions with Mr Wayne Taylor and from his observations of a similar operation in the United States of America. The concept of a fishing pond is comparatively simple. Natural or created depressions in the land are filled with water, thereby resulting in a pond or small lake, the pond is then stocked with fish caught elsewhere (they do not reproduce in the pond), pumping facilities are installed to change the water to sustain the fish, then customers are invited to catch the fish for a fee. It is closely akin to fishing in a barrel or like a fish pond at a church bazaar where for a fee a prize of doubtful value is obtained.

3 As I have said the plaintiff had seen these fish ponds in operation in Indiana and Ohio possibly with some success. The fish to stock those ponds were obtained from Lake St Clair, the shores of which lake were a few scant miles from Tilbury. The plaintiff had seen fish being caught and transported in tank trucks to the fish ponds in the United States.

4 The plaintiff was active in business. He had operated an automobile dealership from 1940 to 1956. In 1952 he acquired the Tilbury Hotel which became the principal source of his income.

5 Wayne Taylor was a young married man who had experience in operating a private fishing lodge as a recreational facility for a steel company. Accordingly the plaintiff and Taylor formed a partnership under the firm name and style of Tilbury Fishing Lakes. The plaintiff furnished the capital and Taylor furnished the experience to exploit the idea of a fishing pond in Canada.

6 A 10-acre parcel of land, at the juncture of highways No 401 and No 2, just outside Tilbury, was acquired from a farmer at a cost of $3,000. There was a large hole on the property to form the nucleus of a fishing pond. Apparently the plaintiff was encouraged in this endeavour by the provincial departments of Lands and Forests, Highways and Tourism, all three of which seemed anxious to have this business started in Canada.

7 The plaintiff acquired an additional 12-odd acres, abutting the 10 acres previously acquired, from the Department of Highways at a public auction, making a total of 22 acres.

8 Three fishing ponds were constructed, each about one acre in size. A well was drilled to furnish water. A pump was installed and a building constructed to house the pump. Another building was constructed to accommodate a small restaurant and washrooms. Scales, a butcher's ice box, a refrigerator and racks for fishing equipment were supplied for use of customers. Three large holding tanks for the fish were constructed. Bait and fishing tackle were kept for sale. Picnic tables and outdoor fireplaces were constructed on the property. Electricity was brought to the premises and poles erected for outdoor lighting so fishing could be done at night.

9 If my recollection of the evidence is correct, an amount of approximately $22,500 was expended by the plaintiff to acquire and improve the property. To finance this the plaintiff borrowed $18,000 from a bank.

10 The partnership obtained two seine net licences, one of 300 yards and the second of 100 yards, to catch fish in Lake St Clair with which to stock the pond and additional fish were bought from fishermen on that lake.

11 Tilbury Fishing Lakes began its operation for the summer season of 1963 with limited success, the customers for the most part being weekend visitors. The customers were expected from the large metropolitan population of Detroit, Michigan, some 42 miles distant. Advertising was minimal, mostly by word of mouth, with some free advertising in the local press and an article in a Detroit newspaper by the editor who was a friend of the plaintiff. The principal advertisement was a large billboard facing highway No 2, the legend reading “FISH FOR $3.00 NO LICENSE REQUIRED”. The plaintiff repeatedly emphasized that the fact there was no requirement for a fishing licence was the most important element to the success of the enterprise.

12 In 1965 the provincial government made it mandatory that a fishing licence was required and this despite numerous representations by the plaintiff to the appropriate government officials. In the plaintiff's view, this governmental action was directed specifically at Tilbury Fishing Lakes and he repeated, in evidence, that this action sounded the death knell of the enterprise.

13 The operation was met with a series of misfortunes from its inception.

14 In 1966 Mr Taylor was killed in an automobile accident leaving a widow and small children. To relieve the widow in these tragic circumstances, the plaintiff assumed full ownership of the partnership enterprise and sole responsibility for its obligations, but the plaintiff, who was advancing in years and looking forward to a life of retirement, had no intention whatsoever of attempting to operate the fishing pond himself.

15 In view of the governmental action in making fishing licenses mandatory the billboard advertising the premises was removed, not only because fishing licences were required but also because the sign had been defaced by racial slurs painted in red upon it. Obviously some of the local residents resented and resisted the customers attracted by the fishing pond.

16 The plaintiff indicated that it cost $1,700 to provide the service for a customer if licences were required and the return per customer was $1,000.

17 In 1967 the plaintiff entered into an informal verbal arrangement with an employee of the hotel to operate the lakes. He did so in the forlorn hope of realizing some return to meet the interest on the bank loan and property taxes. The essence of the arrangement was that the employee should attempt to operate the lakes, take a reasonable wage for himself and any balance would be divided between the employee and the plaintiff.

18 The employee attempted the operation for about 6 weeks and gave up. The plaintiff candidly admitted he didn't think the employee would make a go of it and that if he did he would need to be a magician to do so.

19 In 1967 the plaintiff sought to sell the property to a group from Detroit and to the Department of Highways, both of whom had expressed some interest in theproperty but those overtures came to nought. In 1968 the plaintiff sold the Tilbury Hotel and began his retirement. He travelled extensively in Europe and elsewhere.

20 In that year the plaintiff also entered into a similar arrangement, as he had done with an employee in 1967, with another person with the same results. And in 1968 the plaintiff listed the property with a real estate agent with instructions to get rid of it by any means, that is by sale or lease, with the full knowledge that no one was likely to buy the property for fishing. He also acknowledged that as for the operation of a fishing business the business was a lost cause, that the only possible use the property could be put to was a trailer camp, but that he, because he had retired, had no intention whatsoever of embarking upon that business with the attendant expense of installing the necessary facilities to convert the property to a trailer camp.

21 While in 1965 the death knell to the business had been sounded by the action of the provincial government in requiring fishing licences by the plaintiff's customers, the death blow was administered in 1969. Lake St Clair, the source of the fish to stock the fishing lakes, was found to be polluted with mercury. The provincial government banned all taking of fish from Lake St Clair. What the plaintiff termed a “mercury scare” was apparently well founded because the ban has not been lifted and persists to this day and all indications are that it is inevitable that the ban will be maintained.

22 The plaintiff was frank to admit that from 1969 forward the fishing lakes “as a business matter was a lost cause”.

23 In 1969 the plaintiff engaged a neighbour to the fishing lakes to cut the grass with a tractor, eradicate the weeds and generally look after the routine maintenance of the property and prevent vandalism. This was done to keep the property from becoming run down to facilitate a sale.

24 The plaintiff conceded, without equivocation, that his only possible hope for the sale of the property was to a purchaser who would use the property as a trailer camp and, as I have previously mentioned, the plaintiff had no intention of engaging in that business himself. The land could not be farmed, it was low-lying marsh land, municipal regulations and zoning prohibited its use as a housing, industrial or resort development. Swimming in the lakes was not feasible.

25 The plaintiff in his returns of income for his 1969, 1970 and 1971 taxation years claimed deductions from income of the following amounts:

1969       1970       1971
Interest on Bank loan                       $568.00    $575.00    $431.00
Property taxes                               319.84     360.50     269.01
Equipment maintenance                        118.00     121.21      91.75
Yard maintenance and weed control            245.00     228.00     244.00
License                                       40.00
Crane rental                                  20.00
Hydro                                         55.27      44.90      34.60
Insurance                                    170.80     170.80     170.80
Depreciation                                 575.77     490.60     315.71
                                         --------------------------------
                                          $2,112.68  $1,991.01  $1,556.87

26 From 1967 forward there was no income whatsoever from the business but in 1967 and 1968 the Minister allowed as deductions from the plaintiff's income like expenditures to those listed above for the next three ensuing years. This was done because in those years the property may have been leased under the very informal arrangements described above with the persons also mentioned above. However the Minister disallowed the deductions claimed by the plaintiff as having been listed in the plaintiff's subsequent taxation years.

27 In October 1971 the plaintiff sold the property to a purchaser for use as a trailer camp for $38,000, thereby realizing a gain in the approximate amount of $15,500. This the Minister did not seek to tax in the plaintiff's 1971 taxation year having considered the gain to have been realized on the sale of a capital asset, the plaintiff having considered it expedient to sell.

• (1) the expenditures were not made or incurred for the purpose of gaining or producing income;

• (2) the expenditures were expended or incurred on account of capital; and

• (3) the expenditures were personal or living expenses.

29 The onus of demolishing these assumptions falls on the plaintiff.

30 The contentions on behalf of the Minister may be summarized as follows:

31 1. The plaintiff did not expend the sums in his 1969, 1970 and 1971 taxation years for the purpose of gaining or producing income either from a business or property and accordingly is prohibited from claiming those sums as deductions by virtue of paragraph 12(1)(a) of the Income Tax Act which reads:

12. (1) In computing income, no deduction shall be made in respect of (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,

32 2. The plaintiff expended the amounts in question for the purpose of maintaining the property in a condition to sell it thereby obtaining a capital gain and as such the amounts were incurred or expended on account of capital and are prohibited from being claimed as deductions by virtue of paragraph 12(1)(b) of the Income Tax Act which reads:

12. (1) In computing income, no deduction shall be made in respect of (b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

33 3. The expenditures were personal or living expenses in that they were expenses of property not maintained in connection with a business carried on for profit or with a reasonable expectation of profit in accordance with paragraph 12(1)(h) and subparagraph 139(1)(ae)(i) of the Income Tax Act which read:

12. (1) In computing income, no deduction shall be made in respect of (h) personal or living expenses of the taxpayer ... [exception not applicable]

139. (1) In this Act,

• (ae) “personal or living expenses” include

  • (i) the expenses of properties maintained by any person for the use or benefit of the taxpayer ... and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

34 4. With respect to the claim for depreciation paragraph 20(6)(a) of the Income Tax Act reads:

20. (6 For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

• (a) where a taxpayer, having acquired property for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, has commenced at a later time to use it for some other purpose, he shall be deemed to have disposed of it at that later time at its fair market value at that time;

35 5. With respect to the claims for the deduction of interest, subparagraph 11(1)(c)(i) provides:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

• (c) an amount paid in the year ... pursuant to a legal obligation to pay interest on

  • (i) borrowed money used for the purpose of earning income from a business or property ...

36 These contentions on behalf of the Minister flow from the premise, accepted by him as the basis of his assumption, that in late 1968 and for the 1969 taxation year there was a change in the use of the property, that is to say, at that time the business of operating fishing lakes had come to an end and from that time forward the property was being maintained by the plaintiff for the sole purpose of keeping it in a condition to sell it.

37 On the facts as outlined, there is no question that the business of operating fishing lakes was definitely abandoned. All reasonable expectation of profit therefrom may well have ended in 1965 when the plaintiff stated that the death knell to the business was sounded by the provincial department responsible for such matters in requiring that fishing licences be obtained by the customers of the business to fish in those artificially created lakes, privately owned and stocked with fish. However, the plaintiff struggled on for a further three years against this adversity entertaining the hope that the business would survive. After his partner was killed in 1966, the plaintiff did not intend to attempt to operate the business himself but he did attempt to carry on the business by entering into what may be termed leasing arrangements with two persons who would operate the fishing pond. These efforts were not successful but because these efforts were made the Minister allowed the deductions from income claimed by the plaintiff in his 1967 and 1968 taxation years.

38 In 1969, however, the ban on taking mercury polluted fish from Lake St Clair, which was the source of fish for the plaintiff's lakes, definitely ended the business.

39 The property could not be put to any use other than for use as a trailer camp. The plaintiff was not prepared to assume the outlay to convert the property to that use. He acknowledged that the possibility of leasing the property was so remote as to be non-existent. Accordingly the only possible way the plaintiff could salvage his expenditure was by sale of the property and, in my opinion, based on the facts as outlined and the logical inferences to be drawn from these facts, that is precisely what the plaintiff did.

40 The plaintiff did say that he entertained the hope that the fishing lake business could be resuscitated. He put forward the analogy of a 98-year-old man with one foot on a banana peel to point out that the man was not dead but a spark of life remained. The analogy is not apt. The plaintiff overlooked the fact that under the life expectation tables the most a 98-year-old male could expect to live would be 1.75 years (a very low percentage) before the certainty of death, whereas the plaintiff's business had expired at the end of 1968 and no reasonable expectation could be entertained for its revival.

41 Accordingly it cannot be said that the assumptions upon which the Minister based his assessments were not well founded. Put another way, the plaintiff has not discharged the onus cast upon him to demolish those assumptions. That being so, a careful examination of the sections of the Income Tax Act upon which the Minister relies for the contentions advanced by him indicates that these contentions follow logically from the premise that the business of the operation of the fishing ponds by the plaintiff had come to an end at the end of the 1968 taxation year, which I have found to be the case.

42 The deductions from income for the taxation years in question claimed by the plaintiff are usual expenses normally incurred in the conduct of a business and as such are legitimate deductions. The difference in the present appeals is that a business was not being conducted.

43 The claim for depreciation is effectively precluded by paragraph 20(6)(a) of the Income Tax Act which has been reproduced above when construed in the light of the facts as I have found them to be in the present appeals.

44 The claims for maintenance of the property, property taxes, hydro charges and insurance are charges which follow from the ownership of property. They are not deductible if they were not expended in the operation of a business in which the property is used nor unless the property is itself used for the purpose of producing income therefrom. The fact is that these expenses were paid by the plaintiff for the purpose of maintaining the property with the view to its sale. The plaintiff is an intelligent businessman. His venture into the business of operating these fishing lakes, while attractive at the outset, was from its initial operation so beset with misfortune and adversity as to be disastrous and doomed to failure. The only sensible course, and the one adopted by the plaintiff, as a sensible businessman, was to salvage what he could from this misadventure by the sale of the property, which he was successful in doing in October 1971. These facts conform with the assumption of the Minister in assessing the plaintiff as he did that the expenses incurred on account of capital.

45 With respect to the deduction of the interest paid by the plaintiff on the bank loan, the money was borrowed by the plaintiff to acquire the property, to create the ponds and to instal the equipment necessary to operate the business. He was under a legal obligation to repay the principal and to pay the interest thereon. However a cardinal rule of interpretation of a statute is that the statute speaks from the present unless the context requires otherwise. Subparagraph 11(1)(c)(i) of the Income Tax Act quoted above permits the deduction in computing income for a particular year an amount paid in the year pursuant to a binding legal obligation to pay interest on “borrowed money used for the purpose of earning income from a business or property”. Income tax is an annual affair. While the obligation to pay the interest on the loan continued throughout the plaintiff's 1969 taxation year, the money borrowed was not being used in that year for the purpose of producing income from a business in that year. With reluctance, therefore, I conclude that consequent upon paragraph 11(1)(c) the deduction of the interest is also precluded.

46 I cannot refrain from pointing out that the plaintiff's submission that the deductions claimed by him are proper is susceptible of being construed as an admission that they were expenditures laid out for the purpose of producing income from a business. The business of operating the fishing ponds had come to an end. The question would then arise as to what the business was and that could only be a business of selling the property. In that event the property would no longer be a capital asset but stock-in-trade. If this is so, then the expenses would be deductible as claimed by the plaintiff, but the gain realized upon the sale of the property would be income and taxable as such. While I have not made the mathematical computations, it would appear, off hand, that the financial advantage to the plaintiff would lie in foregoing the claim for the deductions from income rather than accept the risk of an assessment of tax on the gain realized upon the sale of the property.

47 The Minister has been consistent in assessing the plaintiff as he did. In the 1967 and 1968 taxation years there was a faint spark of life in the business of operating the fishing ponds. He allowed the deductions from income in those years. In the 1969 taxation year that faint spark of life of that business was extinguished. Therefore the Minister disallowed the deductions claimed in the subsequent years.

48 On the sale of the property in 1971, the Minister did not seek to tax the gain realized thereon as income and in my view he was right in not doing so. When the property was acquired it was acquired exclusively as a capital asset without the alternative intention of turning the property to account by other means including its sale.

49 It is possible that the category of a capital asset may be changed and it may become inventory. Such was the circumstance in Moluch v Minister of National Revenue, [1967] 2 Ex. C.R. 158, [1966] C.T.C. 712, 66 D.T.C. 5463.

50 That circumstance does not prevail in these appeals and the only reason I have mentioned this possibility is that the claim for deductions made by the plaintiff might be susceptible of lending credence to that possibility although the principal thrust of the plaintiff's submission was that there was still life in the business in the 1969 taxation year which, for the reasons I have expressed, is contrary to the preponderance of evidence, but in so submitting the plaintiff must be taken as maintaining that the property was a capital asset and not stock-in-trade in the business of selling the property in which latter event the deductions claimed would be proper but the gain on the sale would be taxable.

51 The plaintiff acted as his own counsel and he was ill-advised.

52 Under the Income Tax Act a taxpayer who objects to an assessment may appeal that assessment to the Tax Review Board or to the Federal Court of Canada.

53 The Tax Review Board was established for the purpose of affording a dissatisfied taxpayer a quick, informal and inexpensive forum in which to appeal the assessment. There are no formalities such as examination for discovery and the like. The total fee payable by the taxpayer was $15 on the filing of the notice of appeal and that fee was repaid to the taxpayer if he was successful in the ultimate disposition of the appeal. Costs are not awarded by the Board. As a result of subsequent legislation there is now no fee whatsoever paid on the filing of the notice of appeal.

54 The plaintiff was aware of the choice of forum available to him. He chose to launch his appeal in the Federal Court of Canada rather than to the Tax Review Board where there would be no fees payable and no costs awarded. In exercising his choice as he did I think the plaintiff was ill-advised but the exercise of that choice was the absolute right of the plaintiff.

55 For the reasons expressed the appeals are dismissed.

56 Rule 344 provides that the costs of and incidental to all proceedings in this Court shall follow the event unless otherwise ordered. There are no circumstances present in these appeals which require that I should exercise my discretion contrary to the well established rule that costs follow the event. Accordingly Her Majesty is entitled to her taxable costs.