Ellie Isabel Manaigre v. Minister of National Revenue, [1991] 1 CTC 2376, [1991] DTC 443

Sarchuk, T.C.J. [Orally] I am not going to reserve on this. Ms. Lloyd does not seem particularly surprised. You have heard my earlier comments. They reflect my perception of the evidence as I have heard it.

The appeals of Ellie Isabel Manaigre are from her 1985, 1986 and 1987 taxation years. The issue before me is whether she is entitled to deduct full farm losses on the basis that her chief source of income is farming or a combination of farming or some other source, or whether the Minister was correct in restricting her deductions in accordance with section 31 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

I will borrow from counsel’s summary of the facts. The appellant and her husband bought approximately 11.5 acres of vacant land in the Okanagan Falls Valley area in July 1983. This land was acquired after considerable research, discussion with experts and was specifically chosen for the purpose of establishing a vineyard.

Substantial evidence was given as to the time and effort expended by the appellant and her husband in the preparation of the land, the clearing of the land, and the installation of an irrigation system during 1983 and 1984. In 1985, approximately 8,000 vines were planted. Planting was completed in 1986, and the appellant produced her first crop in 1987.

The appellant had a contract with a small winery, I believe, from 1986 on—I am not sure of the year. In 1987 their crop was fairly small and it was sold to an estate winery. In 1988, their gross grape sales amounted to $37,220. In 1989, gross sales were $42,340. Projected sales in 1990, 1991 and 1992, and I will use the lower figures, are $55,000, $75,000 and $90,000. As I indicated in my earlier comments, even if you discount those projections by say, 20 per cent, they are substantial. The evidence also indicated that the major costs have been stabilized and other than inflationary factors, are not likely to increase much over the 1989 levels.

It is unquestionable that in determining whether the source of income qualifies as a chief source, I have to consider this taxpayer's reasonable expectation of income from the various revenue sources and from her ordinary mode and habit of work. In Moldowan v. The Queen, [1978] S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, the Court set out a number of factors I am entitled to look at, and indeed, I am required to look at.

Very quickly without attempting to be exhaustive, I will refer to the following. The time spent, in my view, was more than sufficient to meet all the requirements of the farm operation. While there was perhaps not, in an economic sense, a change of occupational direction, but certainly from the evidence, the intention of the taxpayer from 1983 onward, was to ultimately utilize the farm as not only her chief source of income but probably as her sole source of income. That this could not be done overnight is not surprising, and the utilization of other sources of income during the start-up years is a perfectly appropriate approach to take. The capital committed, given the results in five or six years, appears to have been adequate.

As to the issue of profitability, the two years following the taxation years in issue, 1988 and 1989, demonstrated the existence of an actual profit as distinguished from the many, many other cases that we have heard in this Court and in the Federal Court.

As to the matter of continued profitability or the likelihood of continued profitability, I note that as of 1989, the appellant had a six-year contract with Brights. This contract has built into it what amounts to an approximate four per cent increase in the price on an annual basis. In this context I also take into account the evidence of several witnesses who dealt with the appellant at arm's length. One in particular is Mr. Brenner, the senior employee at one of the Brights wineries who was and is involved in the purchasing of grapes. His testimony was that the production of the appellant's vineyard was rated by Brights as exceptional or good. This rating in the years 1988 and 1989 entitled the vineyard to bonus payments as permitted by the contract. These bonus payments can go as high as 120 per cent of the base price; or in the case of a good rather than exceptional crop to 110 per cent. I take into account, and I am not ignoring the fact that a bad year could result in a reduction of the base contract price paid to the appellant.

With respect to the farm itself, the evidence is that it has good soil, proper soil for grape growing. It is blessed with a good location, and this conclusion is based not only on the testimony of the taxpayer herself but also on independent evidence. Mr. Maveti's testimony was that the farm was, as he perceives it, properly managed. He is himself the owner of a vineyard; he has substantial experience in the business and has been on various committees for, I believe it is called the Grape Growers' Association of British Columbia. There is no reason to believe that the appellant's product quality would deteriorate, except as a result of the vagaries of weather or due to other unforeseen circumstances.

As to the taxpayer's knowledge, before buying the property in question, she and her husband took the time to learn the Business. They sought expert advice, they chose good quality land, they selected vines which would produce a high quality product. I believe it was described as a premium product. They approached the planting of vines and structured their vineyard on a new perspective, utilizing what was described as a high density planting. All of the factors which they took into account from the beginning in their planning and development of the vineyard have led, in my view, to the existence of a reasonably sound commercial operation.

A number of cases were cited, most of which can be distinguished on their own particular facts. However, there are some comments which I will refer to in this particular case. In Matthews v. M.N.R., [1974] C.T.C. 230; 74 D.T.C. 6193, Mr. Justice Mahoney said at 236 (D.T.C. 6197): "Each case where the realization of profit is so postponed will have to be examined on its own merits to ascertain that the profit is not merely notional and that the expectation of profit is indeed reasonable.”

In that judgment the Court was speaking of a tree farm in which there would be no income, never mind profit, for twenty-five years. Without commenting on that particular case, the excerpt that I have just read accurately reflects the approach to be taken.

Examining this case on its own merits, I am satisfied that profit has been demonstrated to exist, and although notional in the first year or first years (small is perhaps a better word) there is sound reason upon which one can conclude that (I do not like using the word "substantial" because that would be speculative) this vineyard, as a commercial operation, will in due course produce a profit which is more than what one would expect from a sideline business.

As Mr. Justice Mahoney said in Morrissey v. The Queen, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, and I quote from 242 (D.T.C. 5084):

On a proper application of the test propounded in Moldowan, when, as here, it is found that the profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income.

He went on to say: "To be income in the context of the Income Tax Act that which is received must be money or money's worth." I would find in this case, that since I have found that profitability is probable, then the conclusion must be that farming is a chief source of this taxpayer's income.

I have considered, I believe, most of the factors that are relevant. In my view, they predominantly favour the appellant. I have considered her other income-earning activities and the time spent. I have taken into account their plans’ both early plans as—I have taken into account their plans as they have been put into operation, in what I perceive to be a practical and businesslike manner. I can only conclude that Mrs. Manaigre was, indeed, a taxpayer, who, in the taxation years in question and in the foreseeable future, could look to farming or to farming in some subordinate source of income for her livelihood.

Accordingly, the appeals will be allowed with costs to be taxed.

Appeals allowed.