Citation: 2003TCC32
Date: 20030214
Docket: 2002-1867(IT)I
BETWEEN:
BRIAN G. HAWKINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] In 1997, the
Appellant received $25,316 from the sale of timber harvested from
land owned in common with his wife. The issue is whether the
Appellant meets the criteria in the definition of "qualified
farm property" in subsection 110.6(1) of the Income
Tax Act and, therefore, be entitled to the preferential
capital gains deduction under subsection 110.6(2). The criteria
that the Minister of National Revenue submits that the Appellant
does not meet includes: (i) the gross income from the farming
business of the Appellant never exceeded his income from his
other sources; and (ii) he was never engaged in farming on a
regular and continuous basis.
[2] Subsection
110.6(1) reads in part:
110.6(1)
For the purposes of this section,
"qualified farm property" of an individual
... at any particular time means a property owned at that
time by the individual ... that is
(a) real
property that was used by
(i) the
individual
...
in the course of carrying on the business of
farming in Canada and, for the purpose of this paragraph,
property will not be considered to have been used in the course
of carrying on the business of farming in Canada unless
(vi) the
property ... was owned by a person who was the individual,
... throughout the period of at least 24 months immediately
preceding that time and
(A) in at
least 2 years while the property was so owned the gross revenue
of such a person, ... from the farming business carried in
Canada in which the property was principally used and in which
such a person ... was actively engaged on a regular and
continuous basis exceeded the income of the person from all other
sources for the year, ...
[3] A secondary issue
is whether the Appellant was in partnership with his spouse with
respect to the sale of the timber and the business of farming.
The Appellant was represented by Mrs. Pat Morton. Both the
Appellant and his wife Penelope testified.
[4] In 1992, the
Appellant and his wife purchased 160 acres of land in Hixon,
British Columbia, 60 acres of which was in hayfields. His primary
occupation through 1990 and before was in the trucking business
and he continues fulltime trucking to this day. In 1997 and 1998,
he drove a truck for BC Rail as an employee earning annually
approximately $50,000 and $41,000, respectively.
[5] The Appellant
argues that he was actively engaged in the farming business on a
regular and continuous basis within the meaning of the
Act. In 1995, he acquired a backhoe and tractor used to
clear an area of land to build a home and later, used to clear
stumps and debris from the area where the trees were cut by a
lumber corporation. A neighbour cut two-thirds of the hay
annually and the Appellant stored the remaining one-third in his
barn. No net yearly income over $50 was ever realized. The
Appellant added that his intention was to clear the area from
which the timber had been to use as hay fields.
[6] In 1997, the
Appellant and his wife sold timber from the property for a net of
$25,316 paid directly to him by the sawmill purchasing the logs.
The Appellant and his wife received gross revenues of $3,000 from
selling the hay in 1997, the net income from which was $50. In
1998, he received gross revenue of $1,500 from selling hay. His
net farming income was $1.00. Further, in 1997 and 1998, he and
his wife acquired four male llamas for which I believe the
purchase price did not exceed $300.
[7] They have never
attempted to enter the llama business. The fourth llama was given
to them. It was old and blind. Female llamas cost in the
neighbourhood of $10,000 and they have no intention of buying
one. Mrs. Hawkins stated she has an old freezer filled with
matted llama wool that she does not know what to do with. They
have never obtained any income from their llamas and have no
prospects to do so.
[8] In computing
their income for the 1997 taxation year, neither the Appellant
nor his spouse reported a gain on the sale of timber nor the
gross and net income from farming of $3,000 and $50,
respectively. Nor did they report gross and net farming income of
$1,500 and $1.00 in 1998. The Minister assessed the Appellant on
October 9, 2001 for a taxable capital gain of $18,987 on the sale
of the timber.
[9] The Appellant
filed a Notice of Objection for the 1997 taxation year objecting
to the inclusion of the gain and at the same time, he made a
separate request to the Minister asking that he reassess the 1997
and 1998 taxation years to include the net farming income of $50
and $1.00, respectively. The Minister subsequently reassessed the
Appellant's 1997 and 1998 taxation years to include the farm
income.
The Appellant's Position
[10] The Appellant's
agent relied on the Federal Court of Appeal decision in The
Queen v. Larsen.[1] When the Appellant purchased the property
in 1992, it consisted of hay fields and timbered land. She
presented that the Appellant and his wife had the timber removed
to increase the hay fields from 60 acres to 80 acres. The
issue is whether the timber is qualified farm property. Relying
on Larsen,[2] Mrs. Morton stated that farm income does not have
to be higher than other income of the taxpayer in the relevant
year. In Larsen, the taxpayer worked outside the farm and
farming was secondary. Mrs. Morton added that Brian and Penelope
Hawkins were partners because the property was in both their
names and they both performed the work necessary.
The Respondent's Position
[11] The timber does not
meet the definition of "qualified farm property"
because the Appellant's gross revenue from farming on a
continuous basis did not exceed his income from other sources in
1996 and 1997.
[12] Secondly, counsel for
the Respondent stated that Mr. and Mrs. Hawkins were not carrying
on a business in partnership in 1997 because they do not meet the
criteria contained in the Partnership Act[3] and in the
jurisprudence, in particular, Continental Bank Leasing
Corporation v. The Queen et al.[4]
Analysis
[13] Clearly, the
Appellant's gross revenue from the farming activity
(business) never exceeded the Appellant's income from his
other sources, namely, his employment with the railway as a truck
driver. His gross farming income, including the timber sale was
under $26,000 in 1997.[5] His employment income was $50,000. In 1998, his
farming income was under $2,000 and his employment income
was $41,000. The legislation is clear in
clause 110.6(i)(a)(vi)(A). This was not an issue
dealt with in Larsen. The Appellant does not meet the
definition of "qualified farm property" because he was
not actively engaged on a regular and continuous basis in the
business of farming, his gross farming income was not greater
than his income from all other sources in at least two years
while he owned the property.
[14] On behalf of the
Appellant, Mrs. Morton argued that in the Larsen case, the
taxpayer's income from all other sources must have been
greater than his farming income. Neither the Tax Court of Canada
nor the Federal Court of Appeal dealt with that part of the
definition of "qualified farm property" in section
110.6 with respect to gross revenue from farming business
exceeding income from other sources.
[15] Unlike the present
situation, in Larsen, the land was used at all material
times as agricultural land. The timber was real property and part
of the farm property. The Federal Court of Appeal found that was
sufficient to bring it within the ambit of the qualified farm
property provisions of subsection 110.6(1).
[16] Counsel for the
Respondent indicated that in addition to the Larsen case,
the two other cases referred to in her book of authorities[6] do not deal with
the present issue. Larsen, Glassford and
Mel-Bar dealt with whether the disposition of timber was
on income or capital account. The Federal Court of Appeal in
Larsen confirmed that it was on capital account.
[17] The final issue is
whether a business partnership existed between Mr. and Mrs.
Hawkins with respect to the harvesting and sale of timber. This
was not dealt with in the pleadings and appears to be an
afterthought of the Appellant's agent. Nonetheless, it is
obviously a claim worthy of consideration. The realty of the
business relationship must be given validity particularly given
that this is under the informal procedure of this Court. Despite
the Respondent's counsel's capable argument to the effect
that there was no business and no partnership, I find to the
contrary. They owned the land which included the timber, equally.
They were business partners with respect to the ownership of the
timbered property. They made a joint decision with respect to the
harvesting and sale of the trees; Mrs. Hawkins had an equal
ownership in the timber. Surely there was a timber business
carried on with a view to profit. The fact that the timber mark
was held by Mr. Hawkins alone and the cheque from the lumber
company was to him does not dictate a partnership. I find as a
fact that they intended to be partners, they contributed equally
financially in that they shared ownership of the trees. They made
a joint decision to enter the business of having their trees
harvested and sold.
[18] Counsel referred me to
Continental Bank[7] wherein the Supreme Court of Canada stated
at page 6514:
... As stated in Lindley & Banks
on Partnership (17th ed. 1995), at p. 73: "in
determining the existence of a partnership ... regard must be
paid to the true contract and intention of the parties as
appearing from the whole facts of the case".
... The indicia of a partnership include the
contribution by the parties of money, property, effort,
knowledge, skill or other assets to a common undertaking, a joint
property interest in the subject-matter of the adventure, the
sharing of profits and losses, a mutual right of control or
management of the enterprise, the filing of income tax returns as
a partnership and joint bank accounts. ...
[19] For reasons given
previously, the Appellant and his spouse meet the spirit of these
indicia. The Appellant is unsophisticated in respect to
partnership criteria but I have no doubt that he and his wife
Penelope intended and, in fact, acted as business partners with
respect to the sale of timber. The fact that the timber was 50%
hers and they worked as a team cannot be ignored and are the
dominating factors.
[20] In conclusion, the
property on which the timber was located was not "qualified
farm property" and the Appellant is not entitled to an
enhanced capital gain deduction provided by subsection 110.6(2).
The Appellant was in equal partnership with his spouse Penelope
with respect to the sale of the timber.
[21] The appeal is allowed
for the 1997 taxation year and the assessment is referred back to
the Minister for reconsideration and reassessment on the basis
that 50% of the $25,316 capital gain from the sale of timber is
to be computed in the Appellant's taxable income. The appeal
for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 14th day of
February, 2003.
J.T.C.C.
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