Date:
20020725
Docket:
2000-2779-IT-G,
2000-2787-GST-G
BETWEEN:
CAROLYN
MILLER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for judgment
Lamarre,
J.T.C.C.
[1]
These are appeals against assessments made on March 30, 2000 by
the Minister of National Revenue ("Minister") under the Income Tax Act
("ITA") for the appellant's 1995 and 1996
taxation years whereby the Minister disallowed all deductions for
farm expenses ($70,018 in 1995 and $67,314 in 1996 as per
Exhibit R-2) on the basis that the appellant did not have a
reasonable expectation of profit from her farming activity in
those years, and hence that the appellant was not operating a
business in those years. Correlatively, the
Minister also disallowed all the input tax credits
("ITCs"), totalling $8,730 (as per Exhibit R-1,
Tab 8), claimed by the appellant under the Excise Tax
Act ("ETA") for the reporting periods from
January 1, 1996 to December 31, 1997, by assessment
number 00000001412, dated February 4, 1999, which was
confirmed by a notice of decision dated May 3, 2000. The Minister
disallowed the ITCs on the basis that the appellant did not have
a commercial activity within the meaning of
subsection 123(1) of the ETA. In the Minister's
view, the farming activity was not carried on with the intention
of making a profit or with a reasonable expectation of
profit.
Facts
[2]
The appellant is a medical researcher with a PhD who worked as a
research scientist for Health and Welfare Canada and Environment
Canada from 1976 to 1993. She retired in 1993 due to a permanent
disability involving a sleep disorder. At that time she began to
receive long-term disability benefits.
[3]
The appellant lives on a farm located in the Township of North
Plantagenet in Prescott County, near Ottawa. She began living
there with her husband, also a scientist, in 1973. They bred and
trained horses on the farm, where they also taught riding
(dressage) skills. The appellant's husband died in
1988.
[4]
Since 1994, the appellant has devoted all her
attention and capital to her farm. Although the value of the land
was appraised at $290,000 in 1994 (Exhibit A-2), the
buildings and installations were in serious disrepair and needed
to be fixed up. In 1994, the
appellant completed a course in therapeutic riding for people
with disabilities. Afterwards, she gave classes in therapeutic
riding as an assistant instructor for one year under the
supervision of a certified instructor. She obtained her
certification as a therapeutic riding instructor from the
Canadian Therapeutic Riding Association ("CANTRA") on
November 27, 1995 and became one of its members.
[5]
In 1995, the appellant set up a totally new farm operation
complying with CANTRA standards, with the development of
therapeutic riding activities, in partnership with
Mr. Peter Cray under the name of Willowbank
Farm.
[6]
At first, Mr. Cray invested $16,000 and his physical labour in
that new venture. The appellant remained the sole owner of the
land and provided her management and teaching skills. They agreed
that the shares of the appellant and Mr. Cray in the partnership
would be 85 per cent and 15 per cent,
respectively.
[7]
In 1996, the appellant started to reinvest all her pension income
in the farm and they changed the partners' shares in the
partnership to 95 per cent for the appellant and 5 per
cent for Mr. Cray.
[8]
In 1995, the appellant developed a charitable organization under
the name of the Passage Equitation Therapeutic Riding Association
("Passage
Equitation"), of which
she was a non-voting board member. Passage Equitation was an
associate member of CANTRA. It was set up to create a therapeutic
program for disabled people referred by their physicians, and to
solicit volunteers to provide the training. The appellant filed a
list of approximately 60 physicians and 20 health and
education agencies that have referred their patients or students
to Willowbank Farm for therapeutic riding (Exhibit
A-8).
[9]
In 1996, Passage Equitation entered into an agreement with
Willowbank Farm whereby Passage Equitation would have access to
horses and equipment for the purpose of carrying on its
charitable undertaking of therapeutic riding programs. Passage
Equitation was charged an amount of money to use all Willowbank
Farm facilities. In 1996 and 1997, Willowbank Farm agreed to
provide those facilities as a charitable donation and was
provided with a receipt therefor by Passage Equitation. After an
audit by Revenue Canada, as it was then called, they were told
that this practice was not appropriate under the ITA. They
were told that only a transfer of property (and not a contract of
service) could give rise to a charitable donation under the
ITA. The appellant, who had not been aware of this, said
that they remedied the situation afterwards and did not follow
that practice any more.
[10]
In 1995, Willowbank Farm owned four horses as part of the
therapeutic riding programs and had 17 students enrolled in those
programs. In 1998, Willowbank Farm launched a new program
directed at mature and senior riders, using techniques similar to
those used for disabled people. The farm then had 11 horses
trained to offer those special needs services (see newspaper and
magazine coverage filed as Exhibit A-13). The appellant said that
they now own 12 horses for that purpose. Willowbank Farm is now
advertised extensively on television and in newspapers and
magazines and is one attraction indicated on the map of the Lower
Ottawa Valley (Prescott-Russell) (Exhibits A-9 and A-10). In
addition, it received the top excellence award from Prescott and
Russell's Business Development Corporation in two categories:
recreation and tourism, and community service.
[11]
The appellant also received business recovery assistance in 1998
and 1999 in relation to losses associated with the disaster
period of the 1998 ice storm in eastern Ontario. She undertook
three major cost-sharing projects through the Canada-Ontario
Business Recovery Assistance ("COBRA") program. These
projects related to marketing, beautification, networking and new
product testing on her property. Under them, the appellant was
required to match the COBRA grants and pay all labour costs
herself.
[12]
At that time, the appellant received help to revise her business
plan. Willowbank Farm received support under a program delivered
by the Farm Credit Corporation for Agriculture Canada whose
purpose is to encourage agribusinesses to develop formal business
plans. A projection of possible income was prepared and potential
users of the appellant's services were also identified. The
appellant was encouraged to set up a network including her
business and, in a sense, took a risk that she would not have
taken had the COBRA program not been implemented. Summer camps
started in 2000 and year-round programs are now available.
Teaching activities are carried on five or six days a week from
about May to the end of October. This is reduced to two days a
week during the rest of the year.
[13]
The appellant also had sideline businesses, operated from the
farm as complementary services offered in addition to the
therapeutic riding activity. She converted a granary on the farm
into accommodation with modern facilities suitable for
residential clients. She also started an asparagus plantation and
purchased breeding cattle and capons as part of her tourism
business. However, all activities related to the asparagus
plantation, breeding cattle and capons were terminated in 1997,
as the appellant realized that they were both too costly and
inappropriate in the circumstances (for example, the pesticide
spray that had to be used for the asparagus plantation was not
appropriate in light of the children attending the camps or the
therapeutic riding program). She then decided to focus mainly on
her therapeutic riding program and her tourism
business.
[14]
The appellant produced, as Exhibit A-17, a statement of gross
income, profit and loss situation and expenses incurred in
relation to her farm activities for the taxation years 1995
through 2000. This statement is reproduced below:
Gross Income
Profit/Loss Expense
Data from
Income Tax Returns
|
|
GROSS
INCOME
|
PROFIT/LOSS
|
EXPENSE
|
|
1995
|
$ 6,890
|
-$70,018
|
$76,908
|
|
1996
|
$16,062
|
-$67,315
|
$83,377
|
|
1997
|
$30,838
|
-$54,053
|
$84,891
|
|
1998
|
$34,221
|
-$38,099
|
$72,320
|
|
1999
|
$129,464
|
-$44,555
|
$174,019
|
|
2000
|
$71,833
|
$596
|
$71,237
|
[15]
The appellant also filed a statement of repayment of long-term
loans (Exhibit A-15). It shows a total debt reduction of $119,212
between 1995 and 2001 and an outstanding total of approximately
$260,000 for the loans in 2001.
[16]
The appellant received approximately $36,000 to $39,000 per year
in pension income between 1995 and 2000, with the exception of
1998, when she received $57,000 in pension income.
[17]
In addition, she withdrew approximately $36,800 from her
registered retirement savings plan in the 1996 and 1997 taxation
years that she reinvested in her farm activities.
[18]
It was also put in evidence that the appellant claimed losses
from the farm for the taxation years 1987 through 1994
(increasing from $15,000 in 1987 to $57,000 in 1994) (Exhibit
R-2).
Appellant's Argument
[19]
The appellant argued that her therapeutic riding and tourism
activity was a new business that was started up in 1995 and that
in the 1995 and 1996 taxation years, she certainly had a
reasonable expectation to make a profit from that new
business.
[20]
Counsel for the appellant submitted that the respondent has
admitted the fact stated in paragraph 8 of the Notice of Appeal,
which reads as follows: "In 1995, the Appellant formed a
totally new farm business partnership with Peter Cray."
Counsel is of the view that the respondent is not, at this stage,
in a position to argue that the appellant was operating the same
horse riding activities in prior years and "that for
approximately 20 years, the Appellant has been incurring repeated
losses and more specifically [that], from 1987 to
1997, losses were reported as shown on Schedule
'A'". Counsel argued that the respondent has not
established a history of 20 years of losses, as the Schedule
A referred to in the Reply to the Notice of Appeal was never
filed with the Reply.
[21]
In counsel's view, the therapeutic riding business could not
have been started up earlier than 1995. It was only in 1995 that
the appellant became a certified therapeutic riding instructor by
CANTRA. The clientele interested in this new business differed
completely from the clientele that attended the regular horse
riding lessons she used to give during her husband's
lifetime. The appellant started up the new business with a new
partner, Peter Cray. In counsel's view, all this is evidence
that the appellant was starting a new business venture in those
years. The appellant knew that the expenditures to be incurred in
the new business would be greater in those years but that they
would not last for more than a few years. Indeed, the major
capital expenditures incurred to start up the therapeutic riding
and tourism business have now been completed. Furthermore, the
cost-sharing projects through COBRA benefited the appellant's
business but at the same time entailed expenses that the
appellant would probably not have incurred without the
government's encouragement. Finally, the business's gross
income has increased, as can be seen from the statement of income
and losses from 1995 to 2000 (Exhibit A-17), which shows that
income has increased over the years and losses have been reduced,
with the result that there was even a small profit in
2000.
[22]
The appellant also argued that no personal expenses have been
deducted and that the respondent did not raise the reasonableness
of the expenses within the meaning of section 67 of the
ITA.
Respondent's Argument
[23]
Counsel for the respondent began by stating that he could accept
that the appellant had a reasonable expectation of profit from
the therapeutic riding activity in the taxation years at issue.
However, he submitted that only the expenses related directly to
that activity should be accepted. In his view, all expenses
relating to the sideline activities, such as the sale of beef
cattle, capons and asparagus, should not be accepted, as those
activities proved not to be profitable and were terminated in
1997. However, he admitted that the audit did not focus on the
apportionment of expenses between the different activities on the
farm.
[24]
In his pleadings, counsel for the respondent argued only that the
activity as a whole was not carried on with a reasonable
expectation of profit and that consequently the losses claimed
from the whole activity were not losses from a business or
property. No attempt was made in the pleadings to argue that the
therapeutic horse riding activity should be separated from the
sideline activities.
[25]
In the end, my understanding is that counsel for the respondent
is arguing that if I consider the activities on the farm as a
whole, the appellant has not shown that she had a reasonable
expectation of profit in the years at issue. In counsel's
view, the history of losses indicates a non-commercial intention
and a lack of a realistic business plan for the future. He
submitted that the appellant was given a reasonable number of
years to demonstrate that the activity was viable. As for the
admission of the allegation in paragraph 8 of the Notice of
Appeal, counsel stated that what was admitted was the existence
of the new partnership, but he reiterated that the previous
context of losses could not be disregarded.
Analysis
[26] This case
was argued before the decision in Stewart v. The Queen,
2002 DTC 6969, was rendered by the Supreme Court of Canada on May
23, 2002. The argument relied upon by the respondent is that the
activity did not constitute a source of income within the meaning
of sections 3 and 4 of the ITA on the basis that the
appellant had no reasonable expectation
of profit and therefore was not entitled to deduct losses
relating to that activity under the ITA. Since the
decision in Stewart, supra, this argument no longer
prevails as a stand-alone source test. In that case, the Supreme
Court of Canada said the following in paragraphs 4 and
5:
[4] In our view, the reasonable
expectation of profit analysis cannot be maintained as an
independent source test. . . .
[5] . . . As such, in order to
determine whether a particular activity constitutes a source of
income, the taxpayer must show that he or she intends to carry on
that activity in pursuit of profit and support that intention
with evidence. The purpose of this test is to distinguish between
commercial and personal activities, and where there is no
personal or hobby element to a venture undertaken with a view to
a profit, the activity is commercial, and the taxpayer's
pursuit of profit is established. However, where there is a
suspicion that the taxpayer's activity is a hobby or personal
endeavour rather than a business, the taxpayer's so-called
reasonable expectation of profit is a factor, among others, which
can be examined to ascertain whether the taxpayer has a
commercial intent.
[27] In order
for the appellant to deduct losses from her therapeutic horse
riding and tourism activity pursuant to subsection 9(2) of the
ITA, she had to show that this activity constituted a
source of income. To that effect, the Supreme Court stated in
paragraphs 52 and 54:
. . . where the nature
of a taxpayer's venture contains elements which suggest that
it could be considered a hobby or other personal pursuit, but the
venture is undertaken in a sufficiently commercial manner, the
venture will be considered a source of income for the purposes of
the [ITA].
. . .
. . . This requires the
taxpayer to establish that his or her predominant intention is to
make a profit from the activity and that the activity has been
carried out in accordance with objective standards of
businesslike behaviour.
[28] Among
these objective standards, the Supreme Court recognized the
reasonable expectation of profit test as a factor to be
considered at this stage, although it cannot be conclusive in
itself. In paragraph 55, the Court stated:
. . . We would also
emphasize that although the reasonable expectation of profit is a
factor to be considered at this stage, it is not the only factor,
nor is it conclusive. The overall assessment to be made is
whether or not the taxpayer is carrying on the activity in a
commercial manner. However, this assessment should not be used to
second-guess the business judgment of the taxpayer. It is the
commercial nature of the taxpayer's activity which must be
evaluated, not his or her business acumen.
[29] Turning
now to the right to claim ITCs under the ETA, it must be
reminded that they may be claimed only in respect of tax paid on
property or services acquired in the course of a commercial
activity. A commercial activity is defined as follows in
subsection 123(1) of the ETA:
"commercial
activity" of a person
means
(a) a
business carried on by the person (other than a business carried
on without a reasonable expectation of profit by an individual, a
personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the business involves
the making of exempt supplies by the person,
(b) an
adventure or concern of the person in the nature of trade (other
than an adventure or concern engaged in without a reasonable
expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except
to the extent to which the adventure or concern involves the
making of exempt supplies by the person, and
(c) the
making of a supply (other than an exempt supply) by the person of
real property of the person, including anything done by the
person in the course of or in connection with the making of the
supply . . .
[30] Thus, the
reasonable expectation of profit test is specifically included in
the legislative provision that defines a commercial activity. A
taxpayer must therefore demonstrate that he or she is carrying on
a business other than a business carried on without a reasonable
expectation of profit in order to claim that he or she is engaged
in a commercial activity.
[31] In my
view, the appellant has established that her predominant
intention in the taxation years at issue was to make a profit
from the therapeutic horse riding and tourism activity and that
it was carried out in accordance with objective standards of
businesslike behaviour. The expected profitability of the venture
is one factor, but not the only one, to consider in assessing
whether the appellant's activity evidenced a sufficient level
of commerciality to be considered a business source of
income.
[32] The
appellant had the proper training to develop a therapeutic horse
riding business. She devoted all her money and time to that
activity and obtained all the necessary qualifications to operate
such a business. This was a well-advertised and well-known
therapeutic program recommended by many physicians and various
agencies for their patients or clients. The appellant clearly
established that her intended course of action was to develop a
recreational centre revolving around her main interest, which is
therapeutic riding for disabled people and their families. In my
view, the sideline activities, namely the bed and breakfast, the
sale of beef cattle, asparagus and capons, and the summer camps,
were all part of a single business. It is my opinion that the
appellant used her own business judgment to determine whether to
activate or terminate those sideline activities. She was in the
best position to know whether those sideline activities would be
beneficial or detrimental to the business. She had valid business
reasons for putting an end to the sale of beef cattle, asparagus
and capons in 1997. The comments of Judge Bowman in Nichol v.
The Queen, 93 DTC 1216 (T.C.C.), at page 1219, are apposite
here:
[The taxpayer] made what
might, in retrospect, be seen as an error in judgment but it was
a matter of business judgment and it was not one so patently
unreasonable as to entitle this Court or the Minister of National
Revenue to substitute its or his judgment for it, or penalize him
for having made a judgment call that, with the benefit of 20-20
hindsight, that Monday morning quarterbacks always have, I or the
Minister of National Revenue might not make today. . .
.
[33] With
respect to the history of profits and losses, the respondent
showed that the appellant had suffered losses since 1987.
However, the respondent admitted that the appellant formed a
totally new farm business partnership with Peter Cray in 1995. In
my view, the clarification made by counsel for the respondent in
his argument, namely that this admission does not imply that the
losses incurred in the preceding years should be disregarded,
does not alter the fact that the appellant started up a new
business in 1995.
[34] The
evidence revealed that the appellant has definitely devoted all
her time to the farm since 1994. She took all the necessary
courses and obtained her certification as a therapeutic riding
instructor. She made all the capital outlays needed to start up
the therapeutic riding business. She concluded an agreement with
Peter Cray in 1995 with the firm intention of starting up that
new business.
[35] In my
view, most of the elements are present to show that the appellant
started up a new business, revolving around therapeutic riding,
in the years 1994 and 1995. It is therefore normal that the
appellant incurred losses in those years. The evidence
established that gross income increased and the losses were
reduced over the years. The appellant has testified that most of
the major expenses have now been completed. The activity even
showed a small profit in 2000.
[36] I am
therefore of the opinion that the appellant has shown that she
undertook the therapeutic horse riding and tourism activity in a
sufficiently commercial manner. She has also shown, in my view,
that she had a reasonable expectation of profit from those
activities on the farm during the years at issue. I therefore
conclude that she definitely had a source of income and that she
was carrying on a commercial activity in those years.
[37] With
respect to the deductibility of the expenses, the respondent
challenged, in her pleadings, the expenses incurred for the
renovation of the house in 1995 on the basis that this was a
non-income providing item (see paragraph 12(g) of the Reply to
the Notice of Appeal). The appellant explained that her house was
used as a guesthouse for clients. I have no reason to disbelieve
her, as she appeared to me to be a credible witness. Although she
made some mistakes, I am satisfied that she did her best to act
in conformity with good business practices and with the law. I am
therefore satisfied that the expenses in question were incurred
in relation to the business. Furthermore, the respondent did not
argue in her pleadings that the expenses were unreasonable and,
therefore, restricted due to the application of section 67 of the
ITA. Although counsel for the respondent filed a statement
of adjustments to the expenses claimed (Exhibit R-1,
Tab 8), it was not discussed at the hearing. The assumptions of
fact relied on by the Minister in paragraph 12 of the Reply to
the Notice of Appeal do not specify on what basis the expenses
were adjusted. The auditor for the Canada Customs and Revenue
Agency was not present at the hearing to explain why the expenses
were so adjusted. The appellant specifically testified that she
did not claim any personal expenditures. Furthermore, the few
expenses that were challenged by counsel for the respondent in
cross-examination were well explained by the appellant and there
is no reason to disallow them. Counsel for the appellant
mentioned that the depreciation of the opening inventory may need
to be adjusted. However, no specific figures were consented to by
either party. In the circumstances, it is difficult for me to
support the Minister's view and bring any changes to the
expenses as initially claimed by the appellant.
[38] In view of
my conclusion that the appellant had a source of income, I am in
a position to accept the deductibility of the losses relating to
that source. The evidence before me does not establish that the
losses claimed were not related to the appellant's farming
business.
[39] For these
reasons, the appeals are allowed, with costs.
Signed at
Ottawa, Canada, this 25th day of July 2002.
J.T.C.C.
COURT FILE
NO.:
2000-2779(IT)G
2000-2787(GST)G
STYLE OF
CAUSE:
Carolyn Miller and
Her Majesty
The Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
January 16, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge Lucie
Lamarre
DATE OF
JUDGMENT:
July 25, 2002
APPEARANCES:
Counsel
for the Appellant: M. Anne Robinson
Counsel
for the
Respondent:
Roger Leclaire
COUNSEL OF
RECORD:
For the
Appellant:
Name:
M. Anne Robinson
Firm:
Robinson Blokker
202-735 Wonderland Rd. N.
London, Ontario N6H 4L1
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-2779(IT)G
BETWEEN:
CAROLYN
MILLER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on common evidence with the appeal of Carolyn Miller
2000-2787(GST)G on January 16 and 17, 2002, at Ottawa,
Ontario, by
the
Honourable Judge Lucie Lamarre
Appearances
Counsel
for the
Appellant:
M. Anne Robinson
Counsel
for the
Respondent:
Roger Leclaire
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1995 and 1996 taxation years are allowed, with
costs, and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the appellant may deduct the claimed amounts of
$59,515 and $63,949, being her share of business losses claimed
for the 1995 and 1996 taxation years respectively.
Signed at
Ottawa, Canada, this 25th day of July 2002.
J.T.C.C.
2000-2787(GST)G
BETWEEN:
CAROLYN
MILLER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on common evidence with the appeals of Carolyn Miller
2000-2779(IT)G on January 16 and 17, 2002, at Ottawa,
Ontario, by
the
Honourable Judge Lucie Lamarre
Appearances
Counsel
for the
Appellant:
M. Anne Robinson
Counsel
for the
Respondent:
Roger Leclaire
JUDGMENT
The appeal from the assessment made under Part IX of the
Excise Tax Act, notice of which is dated February 4, 1999
and bears number 00000001412, is allowed, with costs, and the
assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the
appellant is entitled to her share of input tax credits totalling
$8,730 as claimed for the reporting periods from January 1, 1996
to December 31, 1997.
Signed at
Ottawa, Canada, this 25th day of July 2002.
J.TC.C.
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