Orest Porayko, Andrew F. Butt, Frank T. Leslie, John David Shillington, Elizabeth A. Bannister, Bruce Patrick, Margaret Morgan and A. Lindsay Laxton v. Minister of National Revenue, [1993] 2 CTC 3098, 93 DTC 1430

Rowe, D.T.C.C.J.:— On February 10, 1993, the Honourable Judge Hamlyn of the Tax Court of Canada ordered that this appeal be heard in part by way of common evidence with the appeals of Andrew F. Butt (88-1837), John David Shillington (88-1842), Elizabeth A. Bannister (88-1867), Bruce Partrick (88-1871), Frank T. Leslie (88-1884), Margaret Morgan (88-1885) and A. Lindsay Laxton (88-1900).

While different taxation years were under appeal for some appellants, basically the appeals were launched as a consequence of the respondent, in each case, disallowing farming losses with respect to a farming operation by the appellants on Gambler Island Sea Ranch on the basis the activities carried on by the appellants were not a business or a farming business carried on for profit or with a reasonable expectation of profit. The appellants appeared without counsel or agent and the procedure agreed upon by them and counsel for the respondent was that evidence would first be led with respect to the issue as to whether or not the farming operation carried on by them at Gambler Island had a reasonable expectation of profit. As each appellant testified and adduced evidence by way of documents, the next appellant would then advise whether or not the preceding evidence was adopted by him or her and additional evidence would be presented. The appellants had agreed upon a method of presenting evidence which enabled one or more of them to deal with specific details in an effort to avoid duplication of testimony. At the conclusion of the case for the appellants on the issue as to whether or not the Gambler Island Sea Ranch had a reasonable expectation of profit, evidence was then heard from each appellant pertaining to the expenses claimed in the various years under that particular individual appeal.

Frank T. Leslie testified he is a professional forester and that he became involved in the Gambler Island property which is located 25 kilometres from Horseshoe Bay, near Vancouver, British Columbia. The Gambler Island Sea Ranch comprised 334 acres of which 35 acres consisted of recreational lands and 55 acres dedicated to farming. There were about 110 acres of mature timber. There were three fields suitable for farming which were not divided and were in rough condition. The developer had purchased the property in 1977 and it had apparently been used as a farm, orchard and dairy farm since 1886. The forested areas had stands of cedar, hemlock and fir. The developer created a subdivision with 33 strata lots, divided into Lot A and Lot B, for a total of 66 lots. The farm equipment consisted of a tractor, backhoe, outbuildings, feeding pens, bams and stables which had been constructed between the years 1982 to 1984. A sheep chute and lambing pens had also been added. After purchasing his strata lot, he and the other owners worked to clear the fields of rocks and debris. The Real Estate Prospectus of Gambler Island Sea Ranch Ltd. was filed as Exhibit A-1 and sets forth a description of the property, details of the intended use and an explanation of the facilities located thereon. A portion of the land was included in the Agricultural Land Reserve, a designation which, under British Columbia Law, required use restricted to agriculture. In April, 1984, in his capacity of the Forestry Committee, he decided to undertake some logging in order to generate revenue. About 90,000 board feet were cut and a log broker was contacted to sell the product which had to be skidded to Long Bay for transport. The next project was to harvest alder near Brigade Bay and a contractor was hired to cut 120,000 board feet which was sold through a broker to the export market. In 1985, he engaged the services of a timber cruiser to establish an inventory. He obtained photographs, forest typing and prepared a cruise plan and volume summary (Exhibit A-15). In 1990, the farming group purchased a small sawmill for use on the property. In his estimation, there is nearly $300,000 worth of marketable timber on the property but the owners have chosen not to pursue any timber sales since 1985.

In cross-examination, Mr. Leslie stated the strata lots ranged in size from one-quarter of an acre to two acres. The fields had only been roughly cleared by the developer and some fences had been installed. Reference was made to a brochure, filed as Exhibit A-2, entitled The Re-Making of a Dream, extolling the virtues of the idyllic life to be found on Gambler Island and the statement that "as an operating ranch, each owner-rancher may claim mortgage and land tax deductibility of up to $5,000 per annum under section 31 of the Income Tax Act" [R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act")]. The appellant, Mr. Leslie, stated that the original farm house was on the property when he became a purchaser in October, 1983. At that time, the only means of transportation to the island was by water taxi from Horseshoe Bay or to use the 36-foot boat operated by the caretaker-manager of the Gambler Island Lodge. Other transportation of materiel was accomplished by the use of a small barge. A series of photographs were referred to by Mr. Leslie to indicate the progress on the Sea Ranch between 1983 and the present.

The appellant, Orest Porayko, testified he is a neurosurgeon living at Coquitlam, British Columbia. In August, 1983, he saw an advertisement regarding Gambler Island Sea Ranch and he travelled there to look at the property. He saw it as an opportunity to acquire recreational property and as a business opportunity. He felt the farm could be viable and, with the multiple owners available to provide labour and monetary funding, the concept could lead to a workable business entity. To a large extent, Gambler Island was “like a timewarp", without public transportation, telephone system, adequate roads, and with a wharf and pier on only one side of the inlet. He purchased a strata lot for the sum of $67,900, of which sum, it was agreed between he and the vendor that $40,000 would be allocated to the common property. In 1983, the livestock roamed freely on the property and it became obvious that someone had to take control of the farming operation. In 1983, he and the other property owners built 2,000 feet of perimeter fence with the bulk of the work being done by the resident caretaker-manager. There were 60 ewes on the property which were not in good condition and the fields were infested with parasites. Dr. Porayko and his wife joined the Lower Mainland Sheep Producers Association in an effort to learn about raising of sheep. In addition, he consulted with experts in sheep farming and had them attend at the farm to offer advice. In accordance with the advice received, the soil was tested and in 1985,11 tons of lime was spread on the soil. In 1986, eight tons of fertilizer was applied and fall rye was planted on two fields. The grass improved from a rating of "poor" to "fair" and low-lying areas were ditched and drained. Swamp grass and moss was eradicated. The ewes were culled to reduce the flock to 50. Parasite control was accomplished by injecting the animals and other measures were taken to upgrade the health of the sheep. As a consequence of the appropriate husbandry, the mortality rate of the progeny was greatly reduced. In 1985, there was a 190 per cent return of lambs. The sheep were tagged and records were maintained on each animal regarding lambing birth weights and if an ewe had two barren years she was sold. The breeding stock included two rams. In order to get through the lambing season, it was necessary to utilize volunteer labour to assist during births and to prevent exposure to the elements and to discourage eagles from carrying off the newborn lambs. The owners of the lots had developed a marking system to enable them to know if a particular ewe had been bred by the ram, permitting the recording of probable conception so that 147 days thereafter a birth would result. By feeding a special diet to ewes, the number of births of twins could be increased. Of the lambs raised to maturity, the owners acted as their own sales force to sell the product and also consumed about 20 per cent of total production for their own use. The common property consisted of roads, wharf, utilities, tennis courts, and the lodge, all of which were supported by a monthly fee paid by the owners of the strata lots. The tennis courts were not used after 1983 as they were in poor and unsafe condition. Transportation to the island was by a converted 36-foot prawn boat and, in his opinion, the farm itself would have required use of that craft without any recreational component. The caretaker-manager spent about 25 per cent of his time doing "hands-on work" related to the farm. Various discussions were held by the individual owners within the co-operative to augment the quality of the farming operation. for the 1984-85 season, there were projections of 200 ewes. The Strata Council formed a Farm Committee which concerned itself with improving the land and the grass. The sheep were rotated through different paddocks and the property is now divided into eight separate areas. The farm equipment, for the most part, had been purchased by the developer. As for the basis of the projections for a flock of 200 ewes, Dr. Porayko stated he did not recall seeing any results of" number-crunching” but the general consensus of the committee was that this number of animals would be able to sustain a stand-alone, profitable business.

In cross-examination, Dr. Porayko stated that he had been attracted to the advertisement shown to him by counsel, which document was marked as Exhibit R-1 and which contained the reference to the property as being "an outstanding tax shelter”. The building of the residence on his lot was begun in October, 1983 and was completed the following year. At the time of his purchase, there was an established farm committee and in 1984, Mrs. Porayko became a member and later served as the chairperson. She also sat on the Strata Council although she was not on the title of the property as an owner. During the 1985-87 period, the highest number of ewes attained was 65. The winters were quite harsh and the animals were housed in sheltered pole-barns with a roof and one open side. They had to be fed from supplies stored on the property. In general, while the expert consulted on the sheep farming queried the reason the group were sheep farming, nonetheless, the appellants were left with the impression that the land would sustain 200 ewes. Dr. Porayko agreed that of the 91 lambs produced in 1985 that he and his fellow farmerresidents purchased 35. There was a $5 per person charge to ride on the boat but often the fare was not collected. The mechanism of ownership was that he had title to the bare-land strata lot, together with /66 ownership of the common property. The appellants did not directly purchase any shares in the corporation, Gambler Island Sea Ranch Ltd. There were three full-time residents of the island, including the caretaker-manager. The lodge was located on common property and the charge for occupancy was set by the Strata Council at $10 per person. The lodge could accommodate 20 people and it was usual for persons to stay there while a house was being constructed on a newly-purchased lot. Even with only 60 ewes, Dr. Porayko stated that his research and knowledge of the sheep industry revealed that their operation was one of the largest in British Columbia with the biggest one on Saltspring Island numbering only 200 animals. Dr. Porayko identified a work schedule for the 1985 season and a 1982 financial statement for the Strata Corporation, which were filed as Exhibits R-3 and R-4, respectively. For several years, the residents of the Sea Ranch held a lamb roast and sold tickets to the affair but it had since been discontinued.

The appellant, Alexander “ Bill” Laxton testified he purchased his Gambler Island strata lot in 1980 on the basis that farm losses would be deductible and the marketing of the lots had been done on the basis of them being a tax shelter. At the time, he was the fifth person to have purchased a lot on that property. He served as chairman of the Farm Committee and produced farm revenue and expense statements for the years 1982 to 1986, inclusive, which were filed as Exhibits A-3 to A-7, inclusive, corresponding to each year. In 1982, loss attributable to the farming operation was in the sum of $19,627.13 which divided by 66 — the total number of strata lots — created a per unit loss of $297.38. In 1983, the financial statement indicated a profit of $1,504.90 and included in the revenue side of the statement was monthly maintenance fees paid by owners totalling $6,564 together with another amount in the sum of $40,983.67 in monthly fees paid by the developer-owner corporation, Gambler Island Sea Ranch Ltd. for the unsold lots held in inventory. In 1984, there was a loss on the farming operation in the sum of $4,441.49, which divided by 66, created a per unit loss of $67.29. Again, over $49,000 of the total farm revenue of $59,637.61 came from monthly fees charged on a per lot basis by the Strata Council. The 1985 statement showing a profit of $11,866.51 with revenue in the sum of $88,055.39, of which the sum of $46,934 came from monthly strata fees. The sale of lambs produced income in the sum of $8,217.03 and the lamb roast raised proceeds in the amount of $4,431. Charges levied for use of the boat and rental of the lodge by various persons brought in another $3,248 and sale of logs produced revenue to the extent of $17,746.56. In 1986, revenue from lambs and hogs and the lamb roast produced revenue in the sum of $14,942 and expenses, including capital cost allowance of $2,067, reduced profit to nil. The appellant, Mr. Laxton, quit-claimed his property back to the developer in 1984.

The appellant, Andrew F. Butt, testified that he emigrated to Canada from South Africa in 1982 with his wife and four children. He had operated a private game preserve in South Africa that combined conservation with profit. He saw an advertisement for Gambler Island Sea Ranch and thought it represented a good concept for his family and they visited the property. His employment as sales manager for Cansulex Ltd., a sulphur exporting company based in Vancouver, took him away for several months a year but he believed the strata lot concept combining recreational and farm use was viable and was assured by the developer that farm losses would be deductible from other income. He purchased his lot in 1983 at a price of $69,750 and in order to do so borrowed $40,000 at a high rate of interest. He understood the purchase price was for the bare lot and for an interest in the common property. He devoted a considerable amount of his time to the installation of fences so that the farming areas could be segregated from the rest of the common property and a large part of his efforts and of the other strata lot owners was to upgrade the farm operation.

The appellant, Bruce Partrick, testified that he and the other appellants retained the services of Thorne Riddell, Chartered Accountants, to respond to the reassessment by the respondent and identified the submission on their behalf, dated November 12, 1985, which was filed as Exhibit A-9. He purchased his lot in 1980 at a price of $76,000 and he understood that the sum of $40,000 was to be allocated to common property. Prior to purchase he was given a prospectus, Exhibit A-11, in which it was stated that part of the land was within the Agricultural Land Reserve. He was also provided with rules and regulations governing the operation of Gambler Island Sea Ranch (Exhibit A-12). On February 14, 1982, Mr. Partrick stated there was a discussion at the annual meeting of the strata members that a flock of 400 sheep was a desired target.

In cross-examination, the appellant stated he thought he was investing the sum of $40,000 in the ranch and common property but agreed that his interim purchase agreement (Exhibit A-14) contained no reference to any allocation of purchase price. He built a house on the property in 1981 and had intended to rent it but ended up using it for recreational purposes and for shelter while he spent time working on the farm. He served as Secretary-Treasurer of the Strata Council but did not prepare the budgets. In 1980 and 1981, the farm had cattle, sheep, chickens and pigs and the various strata lot owners spent a lot of time and energy trying to make the farm a viable proposition.

The appellant, John David Shillington, is a retired social worker. He stated that his fellow appellant, Dr. Porayko, had accurately described the work done on the farm to clear land of rocks and debris, removal of diseased trees, and to generally render nine separate pastures suitable for raising of sheep. The main arn was on the property at the time of his purchase in June, 1980, and in the ensuing years a hay barn, capable of storing 10 tons of hay, was added. A total of 12 lambing pens were constructed with facilities for isolating sick animals and for the rams. Lumber was milled on site to undertake repairs and he became involved in the cleaning and repair of water storage tanks. A float was constructed as an adjunct to the bulkhead to make it easier to bring in supplies by barge for the farm and for the individual owners. Most of the care of the sheep was carried out by the owners with the exception of shearing. Lambing time is particularly onerous and required 24 hour per day monitoring of the expectant ewes. The marketing of lambs was difficult and attention had to be paid to the slaughter, butchering, and transport of product to market. The intention was to sell animals at a weight of 50 pounds and they were shipped by barge or water taxi to the mainland. One season, the owners were able to market 70 lamb skins at a unit price of $50. On many occasions, he assisted in repair of farm equipment and often transported feed in his own vehicle and travelled in the Fraser Valley and down to Washington looking for good hay. He stated that Dr. and Mrs. Porayko went to great lengths to acquire expertise in the specialty of raising sheep. Different owners of the lots had diverse skills and one, an architect, provided his professional skills to design and construction of buildings. A longshoreman cared for the operation and maintenance of the boat. Although there were three horses on the property which were used for pleasure, the boat was not used other than for mere transport and by 1984 the tennis courts were completely unusable. In his opinion, all of the strata lot owners involved in farming gave as much or more time to the farm than they did to their own property.

In cross-examination, the appellant, Mr. Shillington, stated he was the first buyer of a lot on the Sea Ranch property. He owned his own boat and used it to travel to the island. The ranch boat was purchased in 1983. Until the building on his own lot was suitable for habitation at the end of 1982, he stayed in the lodge.

The appellant, Elizabeth A. Bannister, testified she is the Executive-Director of Save The Children Fund of British Columbia. She was among the early owners on Gambler Island Sea Ranch. At that time she travelled to the island on her own boat and stayed in the lodge and later shared a cabin with the Shillingtons. The interior of the lodge was basic, without electricity or appliances, no central heating, and a wood-burning oven and fireplace. During the recessionary times following 1982, some owners were walking away from their investment in the property but additional buyers began to come forward when the developer offered to build a cabin on a purchased lot for a modest sum. She stated that she and/or her husband have always been a member of the Strata Council. A plan was developed for improving the lodge which included installation of a septic tank, plastering and painting, purchase of a refrigerator, propane lights and hot water heater. Stringent guidelines were implemented for fire prevention. During the years 1982 through 1984 the lodge did not produce revenue but in 1985, rental revenue of $1,188 was produced, followed by another $2,500 in 1986. The necessary work on the lodge was accomplished by various work parties which were formed from time to time.

The appellant, Margaret Morgan, is a retired school principal. Together with her husband, they purchased their lot in 1981 on the basis it was part of a viable farming operation. Due to the fact the lodge was there, they did not intend to erect a house on their own lot.

On the issue as to whether or not the appellants had a reasonable expectation of profit, their joint position was that they had been sold what appeared to be a property with a combination of recreational and business use, that is, the business of farming. In their view, their hard work and application of diverse skills were such that they had embarked on the path of a viable business enterprise and were heading toward a profitable, stand-alone farming enterprise and should be entitled to whatever losses apply to each individual's particular situation for the taxation years applicable.

Counsel for the respondent submitted that, conceptually, it was difficult to envisage how the farming operation could be carried on in the context of and using the vehicle of a residential strata corporation to operate a business. As a strata corporation, each had to buy an individual lot in order to obtain an interest in the designated common property, which could not be sold apart from the building lot. The revenue from the monthly strata fees and other revenue, such as produced by rental of the lodge, of fares charged for persons using the ranch boat, may have been revenue of the strata corporation but could not in anyway be seen to fall into the category of farming income as defined by the Income Tax Act.

The Strata Titles Act of British Columbia, R.S.B.C. 1966, c. 46, and its successor legislation, Condominium Act, R.S.B.C. 1979, c. 61, clearly set out that an individual's interest in the common property cannot be sold or otherwise disposed of separate and apart from the strata lot itself. Sections 116 and 117 of the Condominium Act set out the duties and powers of the strata corporation, none of which contain any reference to the carrying on of business or the ability to flow profits through the corporation back to the individual owner-members.

The definition of “farming”, found at subsection 248(1) of the Income Tax Act, is as follows:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

In the present appeals, for the relevant period, over 80 per cent of the revenue came from payment of monthly fees to the strata corporation. The sale of logs in 1985 in the sum of $17,746.56 and rental revenue from the lodge or use of the boat did not constitute income from farming. The appellants faced further difficulty in that the total revenue produced from farming within the definition of the Income Tax Act was divided into 66 parts — with the developer continuing to receive a portion of the proceeds as a consequence of retaining unsold lots. Under the peculiar structure utilized, the appellants would have had to create enough revenue from farming in order that ‘/6 of the resultant profit would be sufficient to cover their own expenses on an individual basis when applied to the process of generating that farming income. It was not possible, having regard to the amount of revenue that could reasonably have been expected from farming. Further, the operation of the farm, as part of the common property, as part of the combined individual residential ownership of a strata lot, as part of common recreational property, could not be done by a residential strata council managing the affairs of the strata corporation. The Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 dealt with the issue of reasonable expectation of profit and Dickson, J. (as he then was) stated at pages 485-86 (C.T.C. 313-14, D.T.C. 5215):

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: The Queen v. Matthews, [1974] C.T.C. 230, 74 D.T.C. 6193 (F.C.T.D.).

A review of the financial statements for the farming operations for the years 1982-86, inclusive, reveals that expenses attributable to the farming operation were as follows:

In 1986, unlike previous years, only 10 per cent of the caretaker's wages was charged against the farming operation. However, for the same period, excluding non-farm revenue such as monthly strata fees, charges for the boat, rental of the lodge, the sale of trees, and excluding an unexplained category labelled "miscellaneous", the actual farm revenue was as follows:

The sale of lambs would have had to increase fivefold to generate gross revenues equal to expenses but in so doing the feed costs would have increased and additional facilities would have been required. There was no viable opportunity for such an increase to have taken place in view of the nature of the operation and the available space. Assuming for the moment that a profit of $2,000 could have been obtained, and assuming that it was possible to segregate out the farming activities from the strata corporation on the basis of finding the appellants were co-venturers, then that profit would have to be divided into 66 parts, leaving a per unit profit of $30.30. Against that profit, appellants would still be seeking to deduct interest payments in the thousands of dollars and other costs attributable to the production of that small sum. The foregoing assumption is made only for the purpose of illustration as no potential for any profit whatsoever existed.

Having found that the appellants were unable to have a reasonable expectation of profit, operating in the manner they did, it is not necessary to deal with the matter of expenses claimed against farm income by each appellant. However, by way of illustration as to the futility of the appellants’ position, Mr. Leslie in 1984 claimed mortgage interest in the sum of $4,470 as a deduction from other income on the basis the farm was included in the purchase of his strata lot. He also claimed a deduction in the sum of $744 for monthly strata fees but this amount was already included in the income of the strata corporation under the category of farming, the receipt of which then served to reduce the amount of his /66 share of the loss in the first place. Other deductions claimed by other appellants were capital in nature and other expenses would not have been permitted in any event as they did not have a nexus with the purpose of earning income within paragraph 18(1)(a) of the Income Tax Act. An example of this is deducting the entire cost of mooring a sailboat so the owners could sail to the island to look after the sheep.

The idyllic lifestyle on the Gambler Island Sea Ranch as foreseen by the appellants was incapable of being a farming business as required by the jurisprudence. There is no doubt that a tremendous amount of talent and energy went into the farming operation and the skills of the individuals, borne of their various disciplines, was formidable. No one can question their devotion to the concept, the expenditure of time, energy, talent or their integrity, but the particular mechanism used to function, purportedly as partners or coventurers, but though an impossible sharing formula through a residential strata corporation, leaves no room for any other conclusion than it did not and could not meet the business test. As such, there is no need to undertake a case by case, year by year, examination of deductions claimed by those appellants against other income on the basis of being farming losses. The appeals of all appellants are in each instance dismissed.

Appeals dismissed.