Harold Bud Karpish v. Minister of National Revenue, [1986] 2 CTC 2347, 86 DTC 1782

Christie, A.C.J.T.C. [Orally]:—The appellant seeks to deduct farming losses against other income on the limited basis provided under subsection 31(1) of the Income Tax Act for his 1979 to 1982 taxation years inclusive.

The notice of appeal bearing the date June 28, 1984, reads:

I appeal to the above assesment reason being my farming activity was and is carried on with a reasonable expectation of profit.

I have developed the land and continue to do so, it is not held for personal use or enjoyment. I have farming experience and background and during crop seasons spend a lot of time working the land.

Since acquiring the land, I have made investments in machinery, equipment and upgraded buildings, thus hoping for future expansion.

I have had an income and expense in the years 1979, ’80, ’81, ’82 and my full expectations are for an income from my farming operation.

Paragraphs 2 to 6 inclusive of the reply to notice of appeal dated December 21, 1984, read:

2. With respect to the first unnumbered paragraph in the letter dated June 28, 1984 he denies that the Appellant’s “farming activity was and is carried on with a reasonable expectation of profit’’ which is the issue in this Appeal.

3. With respect to the second unnumbered paragraph in the letter dated June 28, 1984, he admits that during the taxation years here in issue, the Appellant conducted grain farming activities on an 80 acre parcel of farmland located near Prince Albert, Saskatchewan but otherwise has no knowledge of the allegations therein set forth and puts the Appellant to the strict proof thereof.

4. With respect to the third unnumbered paragraph in the letter dated June 28, 1984, he admits that the Appellant purchased some farm machinery and equip- ment necessary to conduct grain farming activities, but otherwise has no knowledge of the allegations therein set forth.

5. With respect to the fourth unnumbered paragraph in the letter dated June 28, 1984, he states that in declaring his income for the taxation years here in issue, the Appellant reported, inter alia, as follows:

Taxation Year	1979	1980	1981	1982
Employment &
Other Income	$17,083.10	$19,859.91	$23,153.57	$25,656.83
Farm Income
(Gross)	$ 3,180.32	$ 4,204.19	$ 3,302.53	$ 3,684.15
Expenses	$ 9,804.28	$11,704.19	$ 5,820.90	$ 7,479.55
C.C.A.
Claimed	$ 3,262.93	$ 3,815.55	nil	nil
Net Farm
Income (Loss)	($ 6,623.96)	($ 7,500.00)	($ 2,518.37)	($ 3,795.40)
Restricted
Farm Loss
Claimed	($ 4,561.98)	($ 5,000.00)	($ 2,509.18)	($ 3,147.70)

6. In assessing the tax liability for the Appellant’s 1979, 1980, 1981 and 1982 taxation years, he assumed, inter alia, that:

(a) from the acquisition of the farm in 1978 no profit has been earned by the Appellant from the farming operation;

(b) the Appellant had insufficient land for the purpose of grain farming and insufficient grain inventory on hand to cover operating expenses;

(c) for the taxation years in issue, the Appellant had no plans to expand his farming operation;

(d) in each of the taxation years here in issue, the Appellant was employed as a letter carrier, which employment constituted the centre of the work routine of the Appellant and his main source of income;

(e) the farming activities of the Appellant in the said taxation years were not carried on with a reasonable expectation of profit and therefore did not constitute the carrying on of a business by the Appellant in the said taxation years;

(f) the amounts claimed by the Appellant as farming expenses in the said taxation years were personal or living expenses and not outlays or expenses incurred to earn income from a business or property.

These additional matters were established in evidence: the appellant was born on a farm in the Prince Albert area in 1939; the farm consisted of one quarter section; he was one of eight children; it was a mixed-farming operation and he left the farm in 1955 and went to work for an uncle in Nipawin until 1958. During this period, however, he continued to help on the farm, seeding and harvesting. He returned to the farm in 1958 and in 1959 secured employment with Burns and Company in Prince Albert. He continued to live on the farm, which was about 18 miles away.

There was some contradictory evidence given in relation to what follows, but I believe that when sorted out this is what transpired. In 1970 he became involved in a farming undertaking with his brother, who owned two quarter sections and farming equipment. This was farmed along with the quarter section first referred to in these reasons until 1975, at which time the brother secured other employment. The appellant continued farming the three quarter sections until the fall of 1979, at which time this terminated. In 1980 he received the 80 acres referred to in paragraph 3 of the reply to notice of appeal as a gift from his mother-in-law. He commenced a farming operation on this land on his own. He set about acquiring necessary machinery. In 1985 he was injured to such an extent that he had to give up farming altogether. The injury has also severely interfered with his ability to work in other employment. The appellant’s returns of income show that in each of the years 1979 to 1982 he claimed expenses in relation to “salary and wages". The amounts are, in 1979 — $1,000; in 1980 — $1,200; in 1981 — $1,667.72 and in 1982 — $2,000. This money was paid to his children. The appellant said, however, that he did the bulk of the work pertaining to the farming. He sustained farming losses in 1983 and 1984; details of these are not in evidence. This, I think, is an adequate review of the relevant facts before me.

In disposing of this appeal the question to be answered is whether the appellant’s farming endeavours can be regarded as constituting a business within the meaning that word has in relation to the relevant provisions of the Act as determined by judicial authority binding on this Court. This in turn raises the question whether, during the years under review, the appellant had a reasonable expectation of profit. In Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071; 84 D.T.C. 1094, this is said at 2072 (D.T.C. 1095):

The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deepfelt they may be. The issue is to be decided by objective testing.

The onus is on the appellant to establish the reassessments are in error. Where the onus lies has been estabalished by numerous authorities. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Logging Company v. The King, [1925] S.C.R. 45; [1917-27] C.T.C. 198 and Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182. In cases of this kind the appellant’s knowledgeability of farming is invariably gone into in the course of adducing evidence. I am satisfied that during the relevant times the appellant was experienced and knowledgeable in the field of farming in which he was engaged.

The figures in paragraph 5 of the reply to notice of appeal are not in dispute. If reference is made to the net farming losses and gross farming income stated therein it will be seen that in 1979 losses were 208 per cent of income. The same percentages for the other years under appeal are: 1980

— 178, 1981 — 76 and 1982 — 103. The wages paid, for the relatively minor contribution they reflect, were 31 per cent of gross farming income in 1979. The percentages for the other years are: 1980 — 28, 1981 — 50 and 1982 — 54.

I believe that in 1980 the appellant is properly to be regarded as having been in the start-up position. It has been said, and with persuasion, that money expended in that context should be given special affirmative regard in relation to losses in determining the question of the existence of a reasonable expectation of profit. In Donald Baxter v. M.N.R. I delivered oral reasons for judgment at Edmonton on June 25, 1985. They are unreported. I said this:

The appellant was in a start-up position and this must not be lost sight of when considering whether a reasonable expectation of profit existed. The authorities, however, show that in order for the farming expenses incurred by the appellant to be properly characterized as start-up costs he must establish on a balance of probabilities the existence of an organized and comprehensive program for the earning of profit from farming and that the initial outlays were an integral part of that process and capable of being absorbed in anticipation of profits in the reasonably foreseeable future: Warden v. M.N.R., 84 D.T.C. 1118.

There is no evidence of such a plan in the case at bar. The substance of the evidence regarding planning for the future was the hope of buying more land and building a home on the 80 acres. The appellant found that, as a practical matter, for him there was no buyers' market.

Viewing the whole of the evidence from an objective point of view, as the law requires, I can only conclude that the appellant has failed to discharge the onus of establishing that in the years under review he had a reasonable expectation of profit from his farming operations. This, however, does not end the matter. At the outset of the hearing, counsel for the respondent brought to my attention in particular paragraph 10 of the reply to notice of appeal. It reads:

10. The respondent respectfully submits that although the Appellant did not have a reasonable expectation of profit when he incurred losses with respect to his farming activities during the 1979, 1980, 1981 and 1982 taxation years, he will consent to judgment allowing the Appeal to the extent that the Appellant be allowed to deduct restricted farming losses pursuant to Section 31(1) of the Income Tax Act for the 1979 and 1980 taxation years without prejudice to his position with respect to the 1981 and 1982 taxation years.

In light of that, I dispose of this litigation by allowing the appeal and referring the matter back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct a limited farming loss as provided under subsection 31(1) of the Income Tax Act in respect of his 1979 and 1980 taxation years. He is entitled to no other relief. I make no order regarding costs.

Appeal allowed in part.