Date: 20000404
Docket: 1999-3465-GST-I
BETWEEN:
DENZIL SPENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1] This is an appeal from an assessment made by the Minister
of National Revenue ("Minister") under the Excise
Tax Act ("Act") claiming an amount of
$2,363.08 together with interest and penalties for an overpayment
of input tax credits that were claimed and received by the
appellant for the period from September 1, 1994 to August 31,
1996, and subsequently disallowed by the Minister.
[2] In assessing the appellant, the Minister relied on the
following facts in paragraph 2 of the Reply to the Notice of
Appeal:
a) At all relevant times, the Appellant was a full time
teacher; (admitted)
b) From 1991 to 1995, the Appellant carried on a farming
activity and incurred losses from the operation of its farm;
(admitted)
c) The Appellant's farming activity was terminated in
1995; (admitted)
d) The gross income produced by the farming activity between
1992 and 1995 did not exceed 600 $; (admitted)
e) The land was too small to give hope of profits;
f) The Appellant did not qualify for provincial farming
assistance;
g) The Appellant's farming activity was being carried on
without a reasonable expectation of profit;
h) For the period ending August 31, 1995, the Appellant
claimed and received ITC's for an amount of 830,31 $;
(admitted)
i) For the period ending August 31, 1996, the Appellant
claimed and received ITC's for an amount of 960,00 $;
(admitted)
j) Since the Appellant's farming activity did not
constitute a commercial activity within the scope of the Goods
and Services Tax Act, the Appellant was not entitled to recover
through the input tax credit mechanism, the tax paid on property
and services acquired for use in this activity.
[3] The appellant was the only one to testify. He explained
that he began carrying on farming activities when he became a
registered part-time farmer in October 1991. As such, he paid an
annual fee in order to obtain a "farmer's card"
that would make him eligible for the Quebec subsidization
programs if he was able to sell $2,000 worth or more of farm
produce. Furthermore, the appellant could have benefited from the
cow-calf subsidy program under the applicable provincial
agricultural programs if he built his herd up to ten cows.
[4] In 1991, the appellant had three cows and two calves and
reported gross income of $3,700 and a net loss of $8,658. By
1995, the appellant had five cows and three calves. His gross
income declined gradually over the years ($3,100 in 1992; $600 in
1993; $1 in 1994 and nil in 1995) while the net losses increased
in 1992 and 1993 ($9,150 in 1992 and $10,395 in 1993) and fell to
$2,500 in 1994 and $1,325 in 1995 (Exhibit R-3).
[5] According to the Statements of Farming Activities filed as
Exhibits R-5 and R-6, the appellant claimed very few current
expenses in 1994 ($690 for memberships and subscriptions and
$60.71 for veterinary fees, medicine and breeding fees) and none
in 1995.
[6] The appellant explained that his plan was to slowly build
his herd up to ten cows in order to receive the government
subsidy. He acknowledged that the farming activity was not viable
with less than ten cows. However, in January 1995, the rules of
eligibility for part-time farmers were changed in the Province of
Quebec. One had to gross over $5,000 in farm production in order
to retain the "farmer's card". The subsidy system
also changed. In order to qualify for the cow-calf subsidy, one
had to have 20 cows instead of ten. The appellant did not want to
borrow money to increase his herd and decided to abandon his
part-time farm operation in March 1995.
[7] Although he had terminated his farming activity in March
1995, the appellant made, in the month of September 1995, a claim
under the Act for an input tax credit of $830 for the
reporting period from September 1, 1994 to August 31, 1995 in
respect of such activity. A similar claim was made in September
1996 for an input tax credit of $960 for the reporting period
from September 1, 1995 to August 31, 1996 (Exhibits R-1 and
R-2).
[8] The Minister reassessed the appellant on the basis that
the appellant was not entitled to claim an input tax credit for
the two periods referred to above because the appellant's
farming activity no longer constituted a commercial activity
within the meaning of the Act.
[9] As a general rule, when tax is paid on the purchase of
goods used in connection with commercial activities, a registrant
is entitled to a refundable credit. The only issue before me is
whether the appellant's farming activity constituted a
commercial activity as defined in the Act for the period
from September 1, 1994 to August 31, 1996.
[10] "Commercial activity" is defined in subsection
123(1) of the Act as follows:
"commercial activity" –
"commercial activity" of a person means
(a) a business carried on by the person (other than a business
carried on by an individual or a partnership, all of the members
of which are individuals, without a reasonable expectation of
profit), 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 by an
individual or a partnership, all of the members of which are
individuals, without a reasonable expectation of profit), 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.
[11] The definition of "commercial activity"
excludes activities individuals engage in where there is no
reasonable expectation of profit. In Strachan (K.R.) v.
Canada, [1999] G.S.T.C. 72, Judge Hamlyn of this Court
summarized the tests to be applied in determining what
constitutes reasonable expectation of profit. He said at page
72-4:
[21] 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.
[22] Unless there is a personal element involved, the test
should be used sparingly and with latitude favouring the
taxpayer.1 If there is a personal element then the
examination requires closer scrutiny. In particular, the test
should not be used to second-guess good faith business judgements
that are flawed.
[23] Immediate profit is not required, however, certain things
must happen in the start-up period. Although every business is
entitled to a grace period for start-up costs, it still
must be shown that the business is "structured, organized,
manned, financed and planned in such a way as to be found to be
reasonably capable at that time of yielding a profit in due
course".2 When the business criteria are present
the length of time to lead to profitability is a direct function
of the endeavour in question.
__________________
1 Tonn v. Canada (1995), [1996] 1 C.T.C.
205, 96 DTC 6001 (F.C.A.).
2 Watt Estate v. Canada, [1997] 3 C.T.C.
462, 97 DTC 5459 (F.C.A.) at page 5461.
[12] In the present case, the appellant had to show that in
the period from September 1, 1994 to August 31, 1996, he had a
reasonable expectation of profit from his farming activity. This
activity had not shown a profit from the start. In 1994, no
income was declared and practically no expenses were claimed in
relation to the farming activity (Exhibits R-5 and R-6). The
appellant was a full-time teacher and did not demonstrate
that he put time and energy into operating the farm so as to make
it profitable. The appellant was waiting for subsidies but did
not invest any money in order to qualify for public assistance.
Indeed, he never qualified. According to the appellant himself,
he was not in a position to be competitive. With less than ten
cows, his activity was not viable. He therefore abandoned all
farming activity in March 1995.
[13] In the circumstances, I can only conclude that the
appellant has not shown on the balance of probabilities that
before the month of March 1995 his farming activity was
organized, financed and planned in such a way as to be found to
be reasonably capable of yielding a profit in due course (see
Watt Estate v. The Queen, 97 DTC 5459 (F.C.A.)).
Furthermore, the evidence disclosed that after March 1995 there
was no more farming activity.
[14] Consequently, the appellant was not engaged in a
commercial activity during the period from September 1, 1994 to
August 31, 1996 and was therefore not entitled to an input tax
credit in connection with his farming activity pursuant to
subsection 169(1) of the Act.
[15] The appeal is dismissed.
Signed at Ottawa, Canada, this 4th day of April 2000.
"Lucie Lamarre"
J.T.C.C.
Email this Content