REASONS
FOR JUDGMENT
Campbell J.
[1]
This is an appeal from a reassessment,
dated July 25, 2013, made under Part IX of the Excise Tax Act (the
“ETA”), denying the Appellant income tax credits (“ITCs”) in the amount
of $15,689 for the period June 29, 2009 to December 31, 2009 (the “Period”).
The Minister of National Revenue (the “Minister”) confirmed the decision on February 10, 2015.
[2]
Mr. and Mrs. Dahl
registered Living Friends Tree Farm as a partnership for GST/HST purposes on
June 29, 2009. A return was filed for the reporting period claiming nil GST/HST
collected and ITCs of $15,689, resulting in a net tax credit of $15,689.
[3]
Mrs. Dahl was the
only witness. She testified that she and her husband moved from Vancouver to
Alberta in 2007 and eventually purchased 160 acres in Rocky View in 2009. They
wanted to work and live in an area surrounded by trees that would provide
oxygen to the environment and a shelter for wildlife. Their plans included the
construction of a greenhouse, a barn and eventually a house. The aim was to
construct them in as environmentally green a manner as possible. They purchased
a windmill and solar panels and sought out tradespeople that could work with
them in this endeavour.
[4]
The Notice of
Appeal, at paragraph B(e), states that “… we divided our land into 150 acres
personal and 10 acres business”. The 10 acres, which operated under the
partnership name, was to be devoted to Christmas tree farming. Of the remaining
150 acres, Mrs. Dahl, on cross-examination, stated that 30 acres was used for growing
hay and alfalfa. The Dahls had a verbal agreement with a neighbour whereby the
neighbour’s cattle grazed on a portion of this 150 acres and, in return, that
neighbour harvested the Dahls’ crop and retained half of it for his own use.
However, because nothing was claimed, this was not part of the activities that
the Appellants were claiming as a business.
[5]
Mrs. Dahl described 2009 as a “ground-breaking” year in which preparatory work had
to be completed. This included: construction of roads, fences and gates; soil
testing and preparation; site drainage approvals; drilling of three wells; and
foundational work respecting the barn. Tradespeople were hired in September of
2009. Mrs. Dahl filed numerous exhibits to support invoiced amounts and the
payments with respect to these tradespeople. A project manager had also been
hired. Once the ground became frozen, and with the arrival of snow, the preparatory
work was suspended.
[6]
In March of 2010, the Appellants were informed
by a building inspector that there were serious deficiencies with the portion
of the barn that had been constructed during the fall of 2009. A stop-work
order was issued after the inspection, which necessitated the Appellants hiring
various engineers and different tradespeople to assess and correct these
deficiencies. These deficiencies were substantial and included: joists were not
straight and could not support the floor; the second floor of the barn was
cracked due to concrete shrinkage and lack of proper curing procedures; upper
floor walls were not built to code and cracked; water leaks; voids in the cement
in the ICF walls; some of the sonotube footings were up to 6 inches out of
alignment from the wall; window openings not supported when concrete was poured,
resulting in bulges in the openings; barn doors finished to size but no room
left for framing; floor sinking; no cross bracing; and other deviations from
the initial drawings. (Exhibit A-8 and testimony of Mrs. Dahl).
[7]
Mrs. Dahl testified that these deficiencies
resulted in several lawsuits against contractors in addition to time devoted to
locating alternate tradespeople to correct the problems. One of these lawsuits
resulted in the company declaring bankruptcy and the final lawsuit is scheduled
to proceed to court later this year. Mrs. Dahl testified that, as a result of
their preoccupation, in terms of time and costs, with these actions, only 50
saplings were planted in the spring of 2010, and 30 to 50 have been planted
each subsequent year, except for 2014 when none were planted. None of these
saplings were purchased, as the Dahls instead foraged for them. On cross-examination,
Mrs. Dahl testified that, prior to commencing the tree farming operation in
2009, she had purchased 150 saplings from a commercial supplier to plant at
their personal residence at a different location from the 160 acres. She also
stated that, to date, less than half of the 10 acres has been devoted to
planting trees and, in addition, it is their intention to retain bushes on this
acreage for shelter for wildlife. She also confirmed, on cross-examination,
that they have never sold any trees as it takes many years for saplings to
reach maturity. More mature trees could be planted but they are much more
expensive to purchase.
[8]
By the end of 2011, the barn had finally been
completed. Until this point, the Appellants had never lived on the property but
they did reside in the upper level of the barn in 2012 and 2013, as well as
part of 2014. When their residence was completed on the property, they
relocated there.
[9]
Smaller tools and equipment, such as shovels,
rakes and wheelbarrows, had been purchased, commencing in 2009. Mrs. Dahl did
state that they sold the tractor to help pay for legal bills related to the
lawsuits over construction of their barn. These items were stored in the barn.
Some of those tools were for use personally on the 150 acres.
[10]
The Appellants have not advertised for customers
as the trees are not mature enough to be sold. Mrs. Dahl stated that the
business was inadvertently listed in the yellow pages on one occasion but those
potential customers had to be turned away as there were no trees to sell to
them.
[11]
With respect to their business background and
experience, Mrs. Dahl is an economist working full time for a German banking
conglomerate. As well as an economics degree, she has degrees in early
childhood development and in teaching. Her husband also works full time as a
doctor of naturopathic medicine. When questioned about her apparent lack of
experience in agriculture, she stated that her grandfather owned over 5,000
hectares of farmland outside Vienna, where she grew up, and that her family
still owns a winery. From an early age, she had worked at both the farm and the
winery.
[12]
The ITCs, which the Appellants claimed, related
primarily to the construction of the barn, roads, walls, soil sampling,
utilities, and legal expenses. No income or losses were reported in respect to
the partnership activities.
[13]
In determining the Appellants’ net worth for the
Period, the Minister relied on the following assumptions of fact in its Reply
to the Notice of Appeal:
The Barn
a) In or around June 2009, Agnes and Eldon purchased an agricultural
property near Cochrane, Alberta with the legal description 5;4;28;15 SW;
b) In 2009, the Agnes and Eldon began construction of a barn on their
property;
c) The barn structure consisted of:
i.
. A basement mechanical room;
ii.
A main floor, consisting of parking spaces,
equipment space, and stalls for horses; and
iii.
An upper floor which Agnes and Eldon began to
use as their principal residence in 2011;
d) Agnes and Eldon do not own horses or other livestock;
Living Friends
…
g) Living Friends has never conducted any mass planting of trees;
h) Living Friends has not conducted any other agricultural activities;
i)
Living Friends does not own horses or other
livestock;
j)
Living Friends has not purchased equipment,
trees, or any other items necessary for the operation of a tree farm;
k) Living Friends has never generated, recorded, or reported revenue;
and
l)
During the Reporting Period, Agnes and Eldon did
not operate a tree farm or any other business as Living Friends.
Analysis
[14]
The issue is whether the Appellants were engaged
in a “commercial activity” during the reporting Period.
This will determine whether the Minister was correct in denying ITCs of
$15,689. Respondent counsel, during concluding submissions, advised the Court
that the Crown was no longer taking issue with the amounts submitted by the Appellants
but simply whether those amounts were incurred in the course of a commercial
activity.
[15]
The Respondent contends that the partnership was
not engaged in a commercial activity in the Period as the evidence supports
that there was no active pursuit of profit. The Appellants argued that all of
the work undertaken, in respect to the preparation of the property with roads,
fencing, wells, and construction of barn and greenhouse, was preparatory and
that this type of agricultural activity meant that profit would not be
immediate but would be expected at some point in the future when the trees
matured.
[16]
Whether a taxpayer will be entitled to
ITCs is dependent upon whether GST was paid in relation to a “commercial activity”. The term “commercial activity” is
defined 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;
[17]
With respect to this definition, Favreau J. in
Bowden v. The Queen, 2011 TCC 418, [2011] TCJ No. 346, at paragraphs 20 and
21, stated the following:
[20] This
definition clearly establishes that a business carried on without a reasonable
expectation of profit is not a “commercial
activity” for GST purposes.
[21] In Moldowan v. The Queen, 77 DTC 5213, at page 5215, the
Supreme Court of Canada made the following comment
concerning the meaning of the expression “reasonable expectation of profit”:
There is
a vast case literature on what reasonable expectation of profit means and it is
by no means entirely consistent. In my view, whether a taxpayer has a
reasonable expectation of profit is an objective determination to be made from
all of the facts. The following criteria should be considered: the profit and
loss experience in past years, the taxpayer’s training, the taxpayer’s intended
course of action, the capability of the venture as capitalized to show a profit
after charging capital cost allowance. The list is not intended to be
exhaustive. The factors will differ with the nature and extent of the
undertaking. …
[18]
Despite the uncertainty and difficulty
surrounding the application of the “reasonable
expectation of profit” test, the Supreme Court of Canada in Stewart v
Canada, 2002 SCC 46, [2002] 2 S.C.R. 656, acknowledged the objective criteria
listed by Dickson J. in Moldowan v The Queen, [1978] 1 S.C.R. 480, as the
basis for determining whether an activity is being conducted in a businesslike
or commercial manner. The Supreme Court, in Stewart, referred to those
criteria as “indicia of commerciality” or “badges of trade” and, although not
exhaustive, that list includes:
1.
the profit and loss experience in past years;
2.
the taxpayer’s training;
3.
the taxpayer’s intended course of action; and
4. the capability of the venture to show a profit.
[19]
According to the definition of commercial
activity contained in subsection 123(1) of the ETA, a business endeavour
must be conducted in a commercial manner with a view to gaining a profit and
exhibit those badges of trade that would generally be associated with an
undertaking of that nature and extent. In Land & Sea Enterprises Ltd. v The
Queen, 2011 TCC 101, [2011] TCJ No. 70, at paragraph 14, I stated the
following in respect to business activities conducted in the initial start up
phase:
[14] It is
clear that an activity may be considered a commercial activity well in advance
of the stage of profitability. It will always be a question of fact.
Expenditures giving rise to ITCs in the start-up phase of a commercial activity
may be eligible provided that there is clear intention to commence a business
and that measurably significant and fundamental steps and actions have been put
into place.
[20]
While I recognize that a tree farm has an
initial start-up phase that will be substantially longer than many other commercial
enterprises due to the length of time it takes for trees to reach maturity, I cannot
ignore that, according to the evidence before me, the Appellants have yet to
formulate clear positive steps in establishing the future path of this tree-growing
operation as a potentially viable commercial endeavour in the years to come.
Although it was Mrs. Dahl’s evidence that, weather permitting, it generally
took two to three years before tree growth would permit sales, there have been
no sales to date since the first planting of the 50 saplings in 2010 and,
presently, less than half of the 10 acres, originally designated for the tree
growing activities, has been planted with saplings. She explained that this
limited planting has occurred because their attention and monetary reserves
have been taken up with the several court actions against seemingly
unscrupulous tradespeople. However, the saplings that have been planted have
been foraged at no cost from surrounding areas. While I appreciate that these
court actions have taken years to wind their way through the system and have extracated
their toll on the Appellants, both financially and emotionally, it appears
that, although the intent existed from the outset to operate a tree farm, the
goal has been for all intents and purposes shelved, perhaps until the actions
are dealt with or, perhaps as the evidence suggests, until they can retire and
devote full-time attention to the activities through a more definitive business
plan. This would include greater and deliberate planting, advertising for
customers and a focus on profit from the activities. There is no business plan.
No partnership agreement was produced. Mrs. Dahl did state, in cross-examination,
that she is an economist and was constantly thinking about the numbers and
financial estimates. However, nothing appears to have been committed to paper
and I have nothing concrete before me, either orally or through documentary
evidence, respecting a business plan with long-range profit projections.
[21]
In 2010, 50 saplings were foraged and planted
and thereafter 30 to 50 in subsequent years, with none planted in 2014. Even if
I assume a yearly average of 40 trees planted in 2011, 2012, 2013, and 2015 together
with 50 saplings in 2010, this totals 210 saplings over six years compared to
the one-time purchase of 150 saplings by Mr. and Mrs. Dahl for their personal
use at another residence prior to purchasing the 160 acres.
[22]
To reiterate my comments in Land & Sea
Enterprises, the eligibility of expenses that give rise to ITCs in the start-up
phase of any business will require that a taxpayer show not only a clear
intention to commence a commercial enterprise but also evidence of the steps
taken in support of that stated intention. In the present appeal, I believe
that the Appellants had an intention to commence a Christmas tree growing
operation when they purchased the property in 2009. However, it was
intermingled with a lifestyle that the Appellants envisioned for themselves
surrounded by nature, particularly trees and wildlife habitat. These personal
objectives are so co‑mingled with the business goals that, even if I
could allow this appeal, I would be unable to do so because I have very little
evidence on the actual split between personal and business. Their home is now
located on the 160 acres so some of the preparatory costs for the roads,
fencing and utilities may have been in respect to personal use. The barn is
used for both business and personal storage but I have no evidence respecting
the percentage breakdown.
[23]
While it is commendable that Mrs. and Mrs. Dahl
exhibit such respect for their surroundings and are excellent stewards of the
land, based on the evidence, I cannot conclude there existed a commercial
endeavour with a goal of actively pursuing profit. ITCs cannot be allowed where,
from the overall totality of the relevant facts, there is no evidence of the
indicia of commerciality.
[24]
On a final note, although Respondent counsel
attempted to make something of the fact that Mrs. Dahl’s background was as an
economist and not in agriculture, her evidence suggests something quite
different. She grew up in a farming family, working not only the farm but in
the family winery. Although her several degrees are not in agriculture, I
believe Mrs. Dahl’s background, experience and knowledge qualify as a positive
factor but, unfortunately, it does not outweigh the other factors that I had to
consider in coming to my conclusion. She is a well educated and well spoken
individual and I am sure that with court cases behind her she will be successful
in bringing the tree farm to a profitable enterprise.
[25]
The appeal is dismissed without costs.
Signed at Ottawa,
Canada, this 11th day of May 2016.
“Diane Campbell”
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