Date:
20010622
Docket:
1999-1963-IT-I
BETWEEN:
JEAN-PIERRE
MARTIN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Watson,
D.J.T.C.C.
[1]
This appeal was heard at Trois-Rivières, Quebec, on June
15, 2001, under the informal procedure.
[2]
In computing his income for the 1993, 1994, 1995 and 1996
taxation years, the appellant deducted $26,039, $23,484, $11,630
and $12,485, respectively, as losses from farming
activities.
[3]
By notices of reassessment dated September 22, 1997, the Minister
of National Revenue ("the Minister") disallowed the
amounts of $26,039, $23,484, $11,630 and $12,485 respectively as
losses in computing the appellant's income for the 1993,
1994, 1995 and 1996 taxation years.
[4]
In making the reassessments, the Minister assumed the following
facts, inter alia:
[TRANSLATION]
(a)
the appellant is a nurse in a remote area who reported the
following amounts as employment income during the years at
issue:
(i)
1993
$102,175
(ii)
1994
$74,070
(iii)
1995
$54,053
(iv)
1996
$67,593;
(b)
in 1991, the appellant paid $60,000 to purchase a farm that had
been in a state of neglect for about 10 years;
(c)
the appellant borrowed $40,000 to purchase the said
farm;
(d)
the farm is located at 7 Chemin Doucet in
Saint-Mathieu-du-Parc;
(e)
the appellant intends to engage in fruit and berry farming, sell
maple products, provide rental accommodations for holidays and
carry on logging activities;
(f)
during the years at issue, the appellant spent about three months
working on the farm;
(g)
in 1994, the appellant took out a loan of $85,000 to build his
house;
(h)
the gross annual income during the years at issue was almost
nil:
(i)
1993
$1,040
(ii)
1994
(iii)
1995
$1,092
(iv)
1996
$1,100;
(i)
the appellant does not know the source of the gross annual income
he reported;
(j)
the appellant has not done any profitability analysis and is
relying on the farm's potential;
(k)
the appellant has no experience operating a farm;
(l)
the appellant had no reasonable expectation of profit in running
the farm during the period from 1993 to 1996; and
(m)
the expenses paid each year in connection with the farm were the
appellant's personal or living expenses and were not incurred
by him for the purpose of gaining or producing farming
income.
[5]
At the hearing, the agent for the appellant, Maurice Magny,
admitted the facts alleged in subparagraphs (a) to (h) and (k)
and denied the facts alleged in subparagraphs (i), (j), (l) and
(m).
[6]
The appellant was the only person who testified when the appeal
was heard. He testified very honestly and showed that he had
acted in good faith and had relied on his accountant's
advice. During his testimony, he admitted subparagraph (j)
above.
[7]
The burden of proof is on the appellant, who must show on the
balance of evidence that the reassessments are wrong in fact and
in law. Each case stands on its own merits.
[8]
There is a vast case literature on what "reasonable
expectation of profit" means, including the decisions
referred to below.
[9]
In Moldowan v. Her Majesty The Queen, [1978] 1 S.C.R. 480,
Dickson J. of the Supreme Court of Canada stated the following at
page 485:
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 . . . If the
taxpayer in operating his farm is merely indulging in a hobby,
with no reasonable expectation of profit, he is disentitled to
claim any deduction at all in respect of expenses
incurred.
[10] In
Landry v. Her Majesty The Queen, 94 DTC 6624,
Décary J.A. of the Federal Court of Appeal stated the
following at pages 6625-26:
There
comes a time in the life of any business operating at a deficit
when the Minister must be able to determine objectively, after
giving someone a head start for a number of years, as the case
may be, that a reasonable expectation of profit has turned into
an impossible dream. . . .
...
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 income in the course of the relevant periods, the
persistence of the factors causing the losses, the absence of
planning, and 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.
[11] In
Tonn v. Canada, [1996] 2 F.C. 73, Linden J.A. of the
Federal Court of Appeal stated the following at pages
103-04:
...
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.
...
Another
listing of the factors to be assessed was set out in Sipley
(P.D.) v. Canada:
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.
[12] In
McKinney v. Canada, [2000] F.C.J. No. 453, Robertson J.A.
of the Federal Court of Appeal stated the following in a judgment
delivered orally on April 3, 2000:
The
applicant, a retired university professor, claimed accumulated
expenses of $47,000 against revenue of $50 over the four taxation
years in question. The expenses were incurred in regard to a
number of research endeavours which the applicant hoped would
lead to publications. In fact no publication resulted. In our
respectful view, Judge Mogan did not err in holding that the
applicant did not have a reasonable expectation of profit.
Accordingly, the application should be dismissed.
[13] Having
regard to all the circumstances of this appeal, including the
appellant's testimony, the admissions and the documentary
evidence, the Court is satisfied that the appellant has not been
able to show on the balance of evidence that he had a reasonable
expectation of profit during the years at issue and that the
reassessments dated September 22, 1997, were wrong in fact and in
law.
[14]
Accordingly, the appeal is dismissed.
Signed at
Ottawa, Canada, this 22nd day of June 2001.
D.J.T.C.C.
Translation certified
true on this 6thday of January 2003.
Sophie
Debbané, Revisor
[OFFICIAL
ENGLISH TRANSLATION]
1999-1963(IT)I
BETWEEN:
JEAN-PIERRE
MARTIN,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on June 15, 2001, at Trois-Rivières, Quebec, by
the
Honourable Deputy Judge D. R. Watson
Appearances
Agent for
the
appellant:
Maurice Magny
Counsel for
the
Respondent:
Diane Lemery
JUDGMENT
The appeal from the assessments made under the Income Tax
Act for the 1993, 1994, 1995 and 1996 taxation years is
dismissed in accordance with the attached Reasons for
Judgment.
Signed at
Ottawa, Canada, this 22nd day of June 2001.
D.J.T.C.C.
Translation certified
true on this 6thday of January 2003.
Sophie
Debbané, Revisor
[OFFICIAL
ENGLISH TRANSLATION]
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