Marois v. R., [1997] 3 C.T.C. 2389

Archambault T.C.J.:

1 Mr. Marois is contesting the notices of assessment of income tax by the Minister of National Revenue (Minister) for the 1990, 1991 and 1992 taxation years. For these three taxation years, the Minister disallowed net farming losses of $2,192 in 1990, $1,964 in 1991 and $3,776 in 1992. According to the Minister, Mr. Marois had no reasonable expectation of making a profit from his farming activities during the relevant period. Furthermore, assuming there had been a reasonable expectation of profit, Mr. Marois' chief source of income was not farming or a combination of farming and some other source of income during the 1992 taxation year.

Facts

2 Mr. Marois is a carpenter. His income from his employment with Rosaire Côté Inc. was $41,979 in 1990 and $39,326 in 1991. During the 1992 taxation year, Mr. Marois was employed by Constructions André Boucher Inc. For that year, he reported employment income of $28,548 and $6,867 in unemployment insurance benefits.

3 Mr. Marois was not brought up on a farm, but rather in Saint-Nicolas, a suburb of Québec. On a few occasions, however, he did the haying on his grandparents' farm.

4 In 1983, Mr. Marois purchased 12 arpents of land, on which his home and a stable with five or six stalls are located. Half of this land is wooded and the other half is rough pasture. Mr. Marois said he had owned a racehorse in 1989 and that this horse had raced for approximately three years. In addition, Mr. Marois boarded a few horses. The testimony of the Minister's auditor was that Mr. Marois owned only one-third of the racehorse, and that testimony was not contradicted.

5 Mr. Marois stated that he subsequently purchased two mares for breeding purposes. The first attempts were not successful. One of the mares had twins which were born prematurely and were put down. The other colts born to these mares were sold without much success. Mr. Marois tried to get rid of these horses in 1996, since racing had declined significantly in popularity.

6 In 1990, Mr. Marois decided to purchase a heifer calf [TRANSLATION] “so she could eat the dusty hay that his horses could not eat.” Mr. Marois said that in 1996 he owned six breeding heifers and two heifer calves in addition to a bull. He hopes to own a herd of 15 cows one day.

7 The Minister's auditor testified that he had seen Mr. Marois' three horses grazing at the neighbour's place when he did his audit in October 1993. He said that the quality of Mr. Marois' land was not good enough to graze his animals there. Mr. Marois said he had always owned a small tractor. A second, larger tractor was purchased in the spring of 1993. The following year, Mr. Marois purchased a second piece of land. The vendors preferred to give him their farm machinery with the land rather than sell it to someone else at a very low price. Mr. Marois also doubled the floor space of his stable. In 1996, Mr. Marois owned two hay wagons, a hay mower, a “pick-up rake” and two tractors.

8 Mr. Marois learned from his neighbour how to do artificial insemination. He took a course during the winter of 1995 with the ITA, an acronym whose meaning Mr. Marois was unable to explain to the Court.

9 Mr. Marois said he had met with an agronomist from the Department of Agriculture, Fisheries and Food during 1993. This individual prepared a management plan for him. At the hearing, Mr. Marois filed a page which gives budget forecasts for 1994, 1995, 1996 and 1997. Mr. Marois was unable to explain some of the items in this budget estimate. The agronomist was not in court to explain his forecasts or to provide an opinion on the profitability of Mr. Marois' farming activities. This budget document does not include any items for interest charges or for capital cost allowance. Furthermore, the amount for property tax remains the same for the four years of operation.

10 Statements of farming income and expenses were filed for 1990 to 1995. The following table presents these figures:

[TRANSLATION]

1990	1991	1992	1993	1994	1995
INCOME
Income from purses:	$71
Boarding income	1,949
Other farming income	$2,208	$2,208	$2,916	$2,665	-	$3,878	$2,964
TOTAL	$2,020	$2,028	$2,916	$2,665	$3,878	$2,964
EXPENSES
Purchases	$1,927	$1,929	$2,672	$2,135	$2,632	$1,101
Insurance	439	320	406	406	406
Maintenance and repairs	457	745	2,748	370	60	503
Electricity	100	100		150	100	100
Boarding expenses	521
Depreciation	433	378	349	1,601	261	2,376
Property tax and other assessments	308	265	54	1,845	1,781	650
Professional fees	27	255	463	696	503	736
Interest				769
TOTAL	$4,212	$2,063	$6,692	$7,972	$5,743	$5,466
Refund			-1,274	-2,294
Profit (Loss)	( $2,192)	( $1,964)	( $3,776)	( 4,033$)	$429	( $2,502)

11 Mr. Marois stated that he spent approximately two hours a day and all day Saturday on his farming.

Analysis

12 To be able to deduct his farming losses, Mr. Marois had the burden of showing on the preponderance of the evidence that his activities constituted a source of income, that is a business, and to succeed in this task he had to satisfy me that he had a reasonable expectation of profit in 1990, 1991 and 1992. The condition that Mr. Marois had to meet was stated as follows by Dickson J. of the Supreme Court of Canada in Moldowan v. R.:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. Minister of National Revenue

13 The interpretation of this rule has been a source of considerable difficulty for the courts that have had to apply it. The courts have developed a number of tests for determining whether a taxpayer's activity constituted a source of income. The recent decision by the Federal Court of Appeal in Tonn v. R.,in which Linden J.A. reviews these tests, is worth noting. He describes them as follows in paragraphs 66 et seq.:

A variety of factors have been proposed over the years by which objective reasonability might be demonstrated in given circumstances. In the original Moldowan decision, these factors were enumerated as follows:

The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after capital cost allowance. The list is not intended to be exhaustive.

Another listing of the factors to be assessed was set out in Sipley v. Q.:

The objective test includes an examination of profit and loss experience over past years, also an examination of the operational plan and the background to the implementation of the operational plan including a planned course of action. The test further includes an examination of the time spent in the activity as well as the background of the taxpayer and the education and experience of the taxpayer.

Finally, Landry v. Q. suggests the following items to consider:

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

These quotations suggest that the list of relevant factors is growing and that it may continue to grow. What this indicates is that a detailed look at the business in the context of its operations is what is required, and that reasonableness is to be assessed on the basis of all the relevant factors, both the already listed ones and any new ones that may be helpful.

(Footnotes omitted.)

14 Counsel for Mr. Marois contended that this decision supported his argument that Mr. Marois' subjective intention had to be accepted in order to determine whether Mr. Marois had a reasonable expectation of profit. I cannot share counsel's point of view. In my opinion, he is incorrectly interpreting the meaning of Linden J.A.'s comments in Tonn. On this point, Linden J.A. stated in paragraph 38:

It is necessary to be clear about the purpose of the test, both as it is derived from the original Moldowan decision and from its comparison to relevant statutory tests. The Moldowan test is stricter than the business purpose tests set out in subsection 9(1) and paragraph 18(1)(a). As mentioned above, these tests stipulate that a taxpayer be subjectively motivated by profit when incurring an expenditure. The Moldowan test, however, also requires the presence of a profit motive, but, in addition, it must be objectively reasonable.

(My emphasis.)

15 In the instant case, Mr. Marois has not persuaded me that he had gone into business and that he had a reasonable expectation of profit. I believe instead that his activities in connection with raising horses and calves during the three taxation years in issue were a hobby for him. It all started with the acquisition of a minority share in a racehorse. It seems that Mr. Marois agreed to board this animal. On the evidence adduced before me, I do not believe that Mr. Marois could have expected to make any profits with this racehorse. There is nothing to indicate he had expertise or experience in this area. The subsequent results in no way change my perception of what reasonable expectation Mr. Marois had when he purchased this horse and during the relevant years. Indeed, the only racing income reported by Mr. Marois from 1990 to 1995 was $71 in 1990.

16 I have reached the same conclusion with respect to Mr. Marois' decision to raise calves. The first heifer calf seems to have been purchased more to eat the hay not used by the horses than to start a herd of cows in any serious way. The evidence does not show that Mr. Marois had sufficient skill in 1990, 1991 and 1992 to undertake such an activity on a commercial basis. Mr. Marois was not brought up on a farm. It was his neighbour who showed him how to do artificial insemination and he did not take any courses on this technique until the winter of 1995. Mr. Marois was not even able to give the full name of the school where he took these courses.

17 Mr. Marois had neither the land nor the machinery needed to grow his own hay or grain. He had to purchase all the feed needed for the animals. The few arpents of land he had in pasture were not of sufficient quality to feed his horses. In fact, they were put out to graze on a neighbour's land. The stable he owned during the years in issue contained only five or six stalls.

18 Nor does the evidence show that Mr. Marois had drawn up a business plan in order to ensure the commercial success of his livestock farming. The only document produced at the hearing that bore any resemblance to a business plan was prepared in 1993, after the period in issue. Moreover, this document does not appear to me to be very persuasive on the question of the determination of the profitability of Mr. Marois' alleged business. Furthermore, the agronomist who prepared this document did not appear to testify. This budget estimate does not indicate any expenditure items for financing charges or for capital cost allowance. Moreover, I have no evidence that would allow me to assess the reasonableness of the assumptions on which this budget estimate is based.

19 In conclusion, there is nothing to indicate to me that Mr. Marois undertook horse and calf farming in any serious way and with the purpose of making a profit from it.

20 For these reasons, Mr. Marois' appeals for the 1990, 1991 and 1992 taxation years are dismissed.