David R Meakes v. Minister of National Revenue, [1984] CTC 2781, [1984] DTC 1670

Christie, CJTC:—This appeal relates to the appellant’s 1979 and 1980 taxation years. The issue is whether he is entitled to deduct from his total income in those years the restricted farming losses allowable under subsection 31(1) of the Income Tax Act, RSC 1952, c 148 (“the Act’’). Restricted losses are limited to a maximum of $5,000 in a taxation year.

The only issue to be determined is whether the appellant’s farming undertaking during the years under review was a business within the meaning of subsection 31(1). This in turn raises the question whether the appellant has established, by a preponderance of evidence, the existence of profit or reasonable expectation of profit. If the answer is in the negative the appeal fails. In Kerr & Forbes v MNR, [1984] CTC 2071; 84 DTC 1094 it is said at 2072 [1095]:

The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep-felt they may be. The issue is to be decided by objective testing. In Moldowan, 77 DTC 5213, this is said at page 5215:

“There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. 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 charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v Matthews (1974), 28 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In summary, the salient evidence is that the appellant is a teacher by profession. The site of his farming venture consists of 20 acres purchased in the Sicamous area of British Columbia in 1973 for $20,000. At that time his family consisted of his wife and two infant children; a third child was born subsequently. The farming operation got under way in 1975. Prior to this the appellant had no farming experience except gardening for household use. The same is true of his wife. Both were raised in urban communities. Still they were very interested in living the life of farmers. Independent experienced advice was not secured with respect to the proposed venture nor was a financial plan or projection prepared. The appellant was told at the time by an agricultural lending agency that it would be inadvisable to enter into farming in British Columbia because of the high cost involved. The appellant testified that between 1973 and 1975 he studied farming and he has accumulated a considerable library in this regard.

The appellant’s notices of objection dated March 31, 1982, include an elaborate statement of facts which he regards as germane to this appeal. Copy of that statement was also attached to the notice of appeal. The portion of the statement which I regard as having possible relevance to the appeal and which was not discredited by counsel for the respondent in any substantial way at the hearing is as follows:

(a) The property in question is included in the Agricultural Land Reserve with the neighbourhood consisting of small farms and some single family residences. The property is approximately 20 acres in size with 2 acres being intensively cultivated for market gardening and a further 5 acres fenced for livestock. The farm has been operated by us since 1975 and our plans were to develop and cultivate all acres which could be put to good agricultural use. This plan has been pursued by us over the last 4 years given capital availability. A 1975 appraisal indicates that this land is an average size for the area. Soil is prime agricultural clay loam, completely free of rocks. During 1980 a decision was reached to turn from marketing gardening to a fruit orchard having approximately 1,000 fruit trees. Several more acres were logged in 1980 in preparation for the trees. Two hundred trees consisting of Spur Mac and Spartan Apples on MMIV rootstock, Early and Late Italian Prune Plums and Tilton Apricots were ordered in July. The trees were received and planted in May, 1981. During the fall of 1981 7 more acres were logged and a further 300 trees ordered from Byland Nurseries, Kelowna, BC.

(b) Over the last few years a great deal of time and effort have been spent by myself and my family in attending to the farm. During “off’ season my family and I spend a conservative average of 30 hours per week building sheds, repairing facilities and equipment, clearing land, tending livestock etc. My wife and family also attend to the farm operations on a daily basis. During “crop” season the family spends 17 hours per day in farm activities. Weeding alone takes 6 hours per day for the entire season. From the time school is out in late June the farm takes all my available time on a full time basis and about 3 hours for each member of the family in order to have a successful crop as well as look after the livestock and prepare further land for cultivation and/or trees.

(c) Over the past years a history of our activity is as follows:

1977

Raising of corn and organic produce on 2 acres of land. Began a garage and shop which includes wood, metal and a pit for servicing and repairing vehicles. Purchased an orchard mower, cement mixer, tractor bucket for the tractor, a radial arm saw, and a tractor (B275 International).

1978

Grew sweet corn and vegetables, purchased chickens and other livestock and began to sell eggs. The garage and workshop were completed. Equipment acquisitions included a Howard Rotavator, Tiller power unit (walking tractor), tiller disc cultivator a TDCS crawler, and a mulching mower.

1979

Grew sweet corn and other vegetables, kept a flock of laying hens in order to sell eggs, bought a partially finished small barn and moved it onto the property, built a 14' X 16' hay shed and attached corral, fenced a part of the property and logged and rough cleared approximately 2 more acres. Other acquisitions during the year included 8HP rototiller, water pump and pipe and bought a herd of over 20 goats and milked several through to Spring, 1980 and sold the milk.

1980

Grew sweet corn and vegetables, finished a small chicken barn and tool shed, built a road to the river and fenced a further 5 acres. We also continued milking goats and selling eggs. As a result of continued poor summer weather for sweet corn and other vegetable crops we consulted with Mr Ted Barry, District Agriculturalist for Salmon Arm and Mr John Price, Horticulturalist (Vernon). Mr Price has visited our farm twice and I have consulted him several times by phone. As a result of these discussions we began developing an orchard of Spartan and Spur Mac apples, Italian Prune Plums and Tilton Apricots. The fall of 1980 was spent preparing for planting the trees in spring 1981.

1981	198]
	Continued growing and selling sweet corn and other organic vegetables. Received
	and planted 200 fruit trees. Continued to fence the property and built a chicken
	barn. Logged a further 7 acres for additional 300 trees for delivery in 1983.
	1982
	Intend to continue growing corn and other organic vegetables, to raise chickens for
	egg sales, to prepare 7 acres for the additional 300 trees ordered for spring 1983.
	Any land which is marginal for fruit trees due to flooding will be put into pasture.
	Future
	Expand the fruit orchard to 1,000 trees (given enough non flooding acreage) and
	expand the flock of laying hens and beef cattle. The trees are expected to yield
	$9,000 in 5 years and $45,000 by 10 years. $4.50 per box, approximately 10 boxes
	per tree. Due to the high cost of fruit trees, land clearing, building and fencing this
	may only proceed as funds permits. ($2,000-$4,000 for orchard establishment not
	including land costs 1970 Quote).

(d) .. The summer of 1979 was extremely hot and dry. This caused a poor crop for the year. The summers of 1980 and 1981 were extremely wet and resulted in far lower yields of crops than could be expected in a usual summer season. As a result of poor yield revenues were kept far lower than originally expected. This continued run of poor weather led to the decision to convert into orchard farming.

The decision to launch the orchard venture was taken in 1980 and the first 200 trees were planted in the following year. The orchard can be of no assistance to the appellant in respect of his 1979 taxation year. It might be in respect of his 1980 year but, of course, it is just another factor to be weighed together with whatever else may be relevant.

Included in the evidence at the hearing were Statements of Farming Income and Expenses which form part of the appellant’s income tax returns for the years 1976-81 inclusive. Additionally, evidence of gross income, expenses and losses for 1982 and 1983 was forthcoming. This evidence portrays a consistently dismal financial picture in respect of the appellant’s farming operation. The specially striking feature in this regard is the magnitude of farming expenses vis-à-vis gross farm income. The following table shows the figures arrived at when gross income is translated into a percentage of losses in each year:

Further losses are anticipated in 1984. Unquestionably the appellant has been under-financed, but this does not help his cause. In my opinion the ability of a person to finance a farming undertaking on a proper and reasonable basis is relevant to answering the question whether a reasonable expectation of profit existed. If that ability is absent or severely impaired, this points in the direction of a negative answer. I have no doubt that the appellant and members of his family have dedicated much of their time and resources to the farming venture and I do not question his bona fides regarding his ambition to become a commercially successful farmer. Nevertheless when the evidence is regarded in its entirety I can only conclude that an expectation of profit, if regarded objectively as it must be, did not exist during the years under appeal. It follows that the appellant cannot succeed.

The appeal is dismissed.

Appeal dismissed.