André Roy v. Minister of National Revenue, [1988] 1 CTC 2361

Couture, C.J.T.C. [Translation]:—The appellant is appealing assessments issued by the respondent for the 1981 and 1982 taxation years. He presented his own case and his evidence revealed the following facts.

Since 1970 he has had a teaching career at the University of Sherbrooke and in 1972 he acquired a piece of uncleared land having an area of 52 acres in Waterville, Province of Quebec, for $6,400. In 1976 he built a house on it for $60,000 and has been living there since that time.

In 1973 he began planting spruce and pines which he obtained from the Quebec government free of charge and in 1986 there were 12,000 spruce and 5,000 pines in this plantation. The spruce trees were to be sold as Christmas trees whereas he planned to sell the pine trees when they matured as construction lumber.

From 1977 to 1981 the appellant engaged in chicken farming and growing his trees. In 1978 he also purchased four short-horn cows which he sold three months later owing to certain problems with his fences.

In 1979 and 1980 his activities were limited to growing his trees, keeping chickens, purchasing a horse and building fences. It was not until 1981 that the appellant began breeding Herefords for slaughter.

In 1981 he bought three heifers and two calves and sold a bull in the autumn. In 1982 one calf was born from the herd and he sold it in the autumn. At the end of the year he was therefore left with two heifers and three cows. At the end of 1983 his herd consisted of three heifers, three cows and one bull; in 1984 one heifer, five cows and one bull and in 1985 six cows and one bull. The increase in his herd over these years took place through natural reproduction.

The appellant explained that he had conducted certain studies on cattle breeding before becoming involved in this activity. He had been able to establish, taking into account the various expenses for this type of farming, that his unit cost for a pound of meat would be approximately $0.80. Since the selling price for meat in 1980 was $0.95 and $0.90 in 1981 he could therefore expect to make a profit of $0.15 and $0.10 per pound.

This is of course pure speculation on the part of the appellant and has not been corroborated. It does not constitute very convincing evidence that the operation he was contemplating in 1980 provided a reasonable expectation of profit, which is an essential requirement for establishing that such an operation is a "business" for purposes of the Act.

Unfortunately, according to his account, the price of meat fell in 1981 and in addition the price of hay rose from $50 per ton to $75 per ton in 1982 and went up to $100 in 1983, increasing his production cost to $0.87 per pound in 1982 while the selling price was $0.80. For 1983 his cost was approximately $1.05 while the selling price for a pound of meat remained $0.82. He explained to us that given this situation he had not wished to purchase any additional animals to increase his herd since he was destined to suffer losses. The grazing area on his farm could have sustained a maximum of 15 head.

The information contained in the reply to the notice of appeal shows that the losses claimed by the appellant during the years under appeal and subsequent years amounted to:

According to the allegations in this document, which were not contradicted by the appellant, the losses in the amount of $4,583 for the 1981 taxation year included expenses of $1,200 attributable to the operation of the tree plantation, but no income was reported from this source for the said year.

For the 1982 taxation year the appellant made income of some $2,008 from the sale of trees and had expenses of $1,000 for a net profit of $1,008. The losses of $2,366 claimed by the appellant for 1982 take this net profit into account.

With regard to the cattle breeding activities, I am of the view that in the context of the 1981 and 1982 operations, the reasonable expectation of profit was based much more on the appellant's aspirations than on economic reality.

I accept that he seemed to be sufficiently familiar with the requirements of the industry when he launched his project in 1981 and that the economic data on which he was relying at the time seemed reasonable, in theory at least. Unfortunately the reality turned out to be quite different.

Daniel Gélinas, an employee of Revenue Canada, who had audited the appellant's file, was called as a witness by counsel for the respondent. He was invited by counsel to give the reasons that had led him to determine that the appellant's farming operations did not provide an expectation of profit for 1981 and subsequent years. His thesis comes down to the fact that the variable costs of the operations were too high for them to be profitable. Using the appellant's figures for 1982, he proceeded to carry out the following exercise.

He assumed a herd of ten cows each of which would give birth to one calf every year. The variable expenses incurred during 1982 in connection with this part of the operations were $5,549. From this amount he deducted $2,100 regarded as being personal in nature. The difference, being $3,450, represented his variable operating costs for a herd of three cows and one steer. According to his testimony, the unit price for a pound of meat in the spring of 1984 was $0.75.

From these figures he arrived at the following equation: ten calves weighing 700 pounds each at $0.75 per pound equals $5,250. Since it had cost $3,450 to keep three cows and one steer in 1982, he multiplied this cost by three to cover a herd of ten cows, giving $10,350 or a loss of $5,100.

This is obviously a fairly simplistic thesis. It is based on relatively flexible data, but even if certain major corrections are made, it points to results which support the respondent's position regarding a reasonable expectation of profit.

Assuming that the cost of meat increased by 50 per cent per pound and that the operating cost was reduced by 20 per cent, these being fairly substantial fluctuations, the operations would still have shown a loss.

Regardless of the validity of this thesis, it was up to the appellant, according to the case law, first to prove to the Court that it was not realistic in the circumstances and also to explain in support of his position how he eventually planned to make a profit from his operations. In order to discharge the onus on him and reverse the presumption that the assessment was valid, it was not sufficient for him to submit mere theories based on vague aspirations unsupported by specific data. It was up to him to establish that his operation administered in accordance with recognized business principles, in the absence of factors beyond his control, was capable of making a profit over a more or less long period.

Since the appellant has not presented such evidence, I must uphold the respondent's submission that his farming activity did not provide an expectation of profit during the 1981 and 1982 taxation years.

For these reasons, the appeals for 1981 and 1982 are dismissed.

Appeals dismissed.