Date:
20010831
Docket:
2001-382-IT-I
BETWEEN:
JEAN-YVES
POULIOT,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasons for
Judgment
Tardif,
J.T.C.C.
[1] This is an appeal for the 1997 and 1998 taxation
years.
[2] The issue is whether losses of
$5,399 and $11,391 for 1997 and 1998 respectively are from
economic activities whose primary purpose was to produce farming
income; in other words, could the appellant realistically expect
to make a profit in those two years from operating the
Ranch
El-Jyma farm?
[3] For his appeal, the appellant
was represented by the person who does his accounting, Lucien
Gagnon.
[4] The following facts were
admitted at the start of the hearing:
[TRANSLATION]
(a) the appellant
retired during the 1997 taxation year after working for
Sûreté publique du Quebec as an emergency response
worker for 24 years;
(b) the appellant
was brought up on a farm and worked on the family farm until he
was 22 years old;
(c) the
appellant's farm was set up in successive stages:
(i)
purchase of a first parcel of land in 1981 for $10,000 and
construction of a 3,000-square-foot
building,
(ii) construction
of a 1,200-square-foot extension in 1985 for
$6,000,
(iii) purchase of a
second parcel of land in 1989 for $12,500,
(iv) purchase of a
truck in 1992 for $19,642,
(v) construction
of another, 4,400-square-foot, extension in 1995 for
$35,000,
(vi)
the appellant had a road built and
had piles of rocks buried under it,
(vii) the appellant has
acquired tillage implements since 1984,
(viii) over the years, the
appellant has purchased mares as his means permitted,
(ix) in 1997, he
started sowing part of the cultivable area;
(e) the farm is
called Ranch El-Jyma, and during the 1997 and 1998 taxation years
it encompassed 150 acres, 46 of which were
cultivated;
(g) despite the
fact that he was retired in 1997 and 1998 and despite the
increasingly numerous hours he devoted to this activity, the
appellant continued to claim losses for those years;
(h) the farm has
not generated any profits since it was started up, and the losses
claimed by the appellant for the period from 1987 to 1998
totalled $77,253;
[5] The following facts, on the
other hand, were denied:
[TRANSLATION]
(d) a love of
farming was what led to the lands being purchased and the farm
buildings being built; no market research survey was
done;
(f) for the
period from 1987 to 1998, the farm was mainly a
horse-breeding farm;
(i) during
the taxation years at issue, the appellant did not hire any
employees, and the main expenses he claimed were interest and
maintenance expenses for the farm machinery and the
truck;
(j) to make
his farming activity profitable, the appellant began sheep
farming in 1999 and is planning to substantially increase his
sales of wood and to continue selling a few fillies every
year;
(k) the Minister
has analysed the farm's future prospects based on information
obtained from the appellant and has concluded that, in the
current context, it will always run a deficit;
(l)
the appellant had no
reasonable expectation of profit from operating the
Ranch El-Jyma farm during the 1997 and 1998
taxation years;
(m) the expenses paid
each year to operate the Ranch El-Jyma farm were
personal or living expenses of the appellant and were not
incurred by him for the purpose of gaining or producing farming
income.
[6] The evidence showed that the
appellant initially became interested in horses with the purchase
of a riding horse in the late 1970s. He later purchased a small
plot of land to keep his horse.
[7] He testified that his interest
in horses gradually increased to such a degree that he decided to
make them a second career after he retired from
Sûreté publique du Québec in 1997.
[8] According to the evidence, the
appellant purchased a first parcel of land in the early 1980s. He
maintained that it was not until 1987 that he set up a real
structure so that he could eventually make a profit. At least,
that was when he started claiming losses. Over the years, his
losses were as follows (Exhibit I-2):
Table
showing the development of the business since 1992:
|
|
1992
|
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
|
Gross income
|
$5,172
|
$5,902
|
$9,384
|
$10,636
|
$14,020
|
$11,960
|
$14,934
|
|
Operating expenses
|
*
|
*
|
*
|
*
|
$6,419
|
$17,359
|
$16,934
|
|
Loss
before CCA
|
*
|
*
|
*
|
*
|
$2,399
|
$5,399
|
$2,911
|
|
Capital cost allowance
|
*
|
*
|
*
|
*
|
$1,779
|
$0
|
$9,380
|
|
Business loss
|
$5,565
|
$6,248
|
$6,907
|
$4,478
|
$4,178
|
$5,399
|
$11,391
|
[9] The appellant explained the
course he followed and described his interest in horses. He was
brought up on a farm, and he said that he has useful and relevant
basic knowledge, which he has supplemented by studying, having
discussions and consulting various professionals. He also
consulted the Quebec Department of Agriculture, Fisheries and
Food (Ministère de l'Agriculture, des Pêcheries
et de l'Alimentation) (hereinafter "MAPAQ"), which
organization supervised horse production and offered a service
aimed at the purification of horse breeds. Thus, he said,
MAPAQ's representatives guided him in choosing which horses
to purchase and ranked them so that his production would meet
strict quality criteria.
[10] The appellant also described the
various problems and pitfalls he had had to deal with. He said as
well that he had been unlucky with respect to the health of three
breeding mares, and he admitted that he made a mistake in
purchasing used machinery at first, since this created a number
of problems, such as delays in work performance and substantial
repair costs. Finally, he also said that his projections for
sales of foals and semen turned out to be wrong.
[11] He stated that he always hoped the
farm would be viable, although he set up and developed his
facilities on a modest scale based on his ability to pay. In this
regard, he said that he did the vast majority of the work himself
and that he hired students when he was able to take advantage of
a wage subsidy program. At such times, he got help in performing
his various work, including the haying. He also specified that
the tax refunds received as a result of the losses he claimed
were reinvested totally in the improvement and development of his
facilities.
[12] Although the appellant's
activities always generated losses year after year, on a
continuous basis, he never thought fit to stop to assess and
analyse things and to define a business plan or formulate a
scheme that would make it possible to increase income to a level
exceeding his expenses.
[13] Rather, the evidence showed that the
appellant's hopes were based much more on luck, chance or
uncertain data when he made decisions.
[14] Thus, the appellant explained that he
purchased a stallion from the Beauce region for $4,000,
hoping-hoping, I stress-to sell semen at $300 a unit. The
stallion, once acquired, produced semen, but practically no one
ever bought any. Purchasers in the area did not want to pay more
than $100 for the semen they needed. The appellant produced
semen, but there were no buyers. A real businessperson would
first have checked to see whether there was an actual market for
$300 semen or have established a market development
plan.
[15] None of that was done here, and the
appellant basically acknowledged his failure.
[16] The same applies to the breeding of
foals: no one wanted to pay what the appellant was asking. He
thus explained that he made just one sale at his price, and it
was to a purchaser from the Beauce region.
[17] This is a good example of the lack of
planning and the failure to have a business plan. The appellant
justified everything by saying that his was not a business like a
store on a commercial street. Admittedly, there is a considerable
difference between a farm and a conventional store, but the
profit-related criteria and requirements are the
same.
[18] Making a profit from the operation of
any business implies a real determination to achieve that goal by
putting together all the necessary ingredients: capital, work, a
market that takes account of demand, and prices based on
expectations.
[19] It is totally presumptuous to expect
a profit on the basis of one's own methods established
without considering good practice prevailing in the area of
economic activity in which one decides to invest.
[20] Animal production is certainly not
like running a tobacco shop, but it is an economic activity that
is subject to the same supply and demand constraints. Each area
of economic activity has its strengths, its weaknesses, its
constraints and its distinctive and particular features. Success
results from work, from having sufficient capital and from
knowledge of the area of activity, to which must be added
unforeseen events or imponderables that may be due to nature, the
market, economic circumstances and so on.
[21] I do not think it reasonable to claim
that one expects to make a profit eventually with a structure
that is unable to generate income that is higher than expenses,
unless the expenses are temporary and non-recurring, otherwise
the task to be accomplished is an impossible one.
[22] In reviewing the appellant's
file, the respondent asked him to complete a questionnaire
concerning income from the business; he answered question 9
(Exhibit I-1) as follows:
[TRANSLATION]
What type
of market research survey did you do before starting your
business, and what were the income and expense forecasts when you
started the business?
Answer:
none.
[23] In the instant case, it seems obvious
to me that the appellant did not invest time and money for the
sole purpose of incurring losses. It is just as obvious that the
appellant, who is an intelligent man, preferred to make profits.
But is this a sufficient reason for concluding that there was an
expectation of profit in 1997 and 1998? I do not think
so.
[24] Rather, I think that the appellant
wisely planned his retirement on the basis of his passion for the
land and for horses. Since he wanted to create an agricultural
asset base for himself, in keeping with his tastes, he invested
time and energy in strengthening his knowledge and developed his
assets over time using the opportunities that arose and his tax
refunds. Everything was organized much more according to his
intuitions than on the basis of inescapable economic
realities.
[25] That is a valid and perhaps normal
choice for someone who has a passion, who is active and whose
ability to pay is limited or at least reduced. However, it is a
personal choice, the consequences of which must all be personal
as well.
[26] A person cannot play it both ways,
claiming that a business is a genuine one in which the rules of
the game are basically economic ones and in which profit must be
a constant concern, while at the same time claiming that
recurring losses are normal and always justifiable. It may happen
that profits are not as high as anticipated, in which case the
person involved must react and make adjustments to overcome
obstacles that may be temporary or isolated.
[27] In the case at bar, the business was
not a genuine one, since the evidence did not show that the
appellant meticulously developed a plan that he adopted or
adjusted following certain acknowledgements of failure. According
to his accountant, he chose the slow method, that is, making
small outlays based on financial limitations and constraints,
with those outlays being supplemented by a total investment in
terms of work and time. This was a method that was just as valid
as the alternative, which may be called the quick
method.
[28] However, the concept of profit must
realistically and reasonably be present, whatever the speed at
which one has chosen to move.
[29] A business plan and
profitability-based planning imply that it is theoretically
possible to earn income that exceeds expenses within a time frame
of a few years. The first years may be and are for making
adjustments, effecting changes in approach and discovering or
taking note of various problems, but they are also for
identifying aspects that are more positive than
expected.
[30] Except in very exceptional cases
arising from circumstances that are just as exceptional, a period
of over 10 years with continuous losses in an area of activity
that is based more on personal passion than on rational
mathematics creates a very strong presumption that a reasonable
expectation of profit was not what was behind the activities
carried on.
[31] In this case, it was not shown on a
balance of probabilities that the appellant took appropriate
actions, made appropriate decisions or put in place the
appropriate elements for gaining or producing farming income in
1997 and 1998.
[32] In Tonn v. Canada, [1996] 2
F.C. 73, Linden J.A. of the Federal Court of Appeal took a good
nuanced approach to the question of personal motivation in
stating at pages 103-04:
Though I do not support the use in the Nichol case of the
word "patently", I otherwise agree that the
Moldowan test should be applied sparingly where a
taxpayer's "business judgment" is involved, where
no personal element is in evidence, and where the extent of the
deductions claimed are not on their face questionable. However,
where circumstances suggest that a personal or
other-than-business motivation existed, or where the expectation
of profit was so unreasonable as to raise a suspicion, the
taxpayer will be called upon to justify objectively that the
operation was in fact a business. Suspicious circumstances,
therefore, will more often lead to closer scrutiny than those
that are in no way suspect.
[33] To succeed, the appellant in the case
at bar would have had to demonstrate the existence of a real
market or of outlets for the sale of his products or to show that
he had established a market development plan.
[34] Once the potential was identified, it
became fundamental to establish the business's ability to
supply that market at acceptable prices, at the same time taking
production costs into account.
[35] The evidence basically showed that
the appellant dreamed of making his hobby profitable without
considering the inescapable and fundamental realities of the
situation. There was no evidence that he had the skills and
capital necessary to change marketplace rules in such a way as to
make the market compatible with his own development plan. His
business plan also had to provide and allow for adjustment of his
strategy at any time if surprise developments
occurred.
[36] The appellant has not discharged his
burden of proof in this regard and, accordingly, his appeal must
be dismissed.
Signed at Ottawa, Canada,
this 31st day of August 2001.
J.T.C.C.
Translation
certified true
on this 31st
day of May 2002.
Erich Klein,
Revisor
[OFFICIAL
ENGLISH TRANSLATION]
2001-382(IT)I
BETWEEN:
JEAN-YVES
POULIOT,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Appeal heard on August
8, 2001, at Rimouski, Quebec, by
the Honourable Judge
Alain Tardif
Appearances
Agent for the
Appellant:
Lucien Gagnon
Counsel for the
Respondent:
Annick Provencher
JUDGMENT
The appeal from the assessments made under the Income Tax
Act for the 1997 and 1998 taxation years is dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada,
this 31st day of August 2001.
J.T.C.C.
Translation
certified true
on this 31st
day of May 2002.
Erich Klein,
Revisor
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