Walter W Lorenz v. Minister of National Revenue, [1984] CTC 2110, 84 DTC 1118

Rip, TCJ: This is an appeal from income tax assessments for 1977 to 1980 inclusive in which the respondent disallowed the appellant’s claim of restrictive farm losses.

During the years in appeal, and for some years earlier, the appellant was an Ontario land surveyor being employed by a surveying firm in Toronto, Ontario, of which he was a shareholder. In 1974, the appellant had purchased a farm for $12,500 in Madoc, Ontario, on which he intended to retire. In 1975, after starting to build a house on the farm, the appellant suffered a heart attack and his doctor advised him to leave his surveying firm and move to Madoc where he could start his own surveying business near the farm. At the appellant’s urging his surveying firm agreed, albeit reluctantly, to open a branch office in Madoc and the appellant continued to work from the branch office until March 1979, when he left the employment of the surveying firm and started his own business with savings and borrowed money. The appellant moved to the farm in 1976 and his wife moved in a year later.

After he purchased the farm, the appellant took a three-month general farming course at the University of Guelph which took up one or two evenings a week.

The appellant had spent the early post-war years on his wife’s parents’ farm in Germany for three years. His wife was raised on a farm. Other than working on the farm in Germany, the appellant was, in his words, ‘‘a city slicker”.

The appellant described the land purchased as being in “a state of neglect”, with the only good piece being a small piece of land that had been leased to a neighbouring farmer. The appellant discussed and walked the farm with an agricultural representative who gave the appellant advice on rotation of crops and other agricultural information.

There were water problems on the farm which caused ‘‘lots of expenses”. Drainage was improved and a culvert installed. A few chickens and ewes were purchased and later a ram to breed a special kind of sheep for coloured fleeces was acquired. Prior to 1980, the appellant never had more than 30 chickens and four sheep on the farm. Ten acres of land were planted for red clover in 1977 but because of heavy rains the appellant had to be satisfied with hay, some oats and barley which were later planted in another area of the farm and were sold. The appellant would have a neighbour do custom work on the farm since he himself did not have the necessary machinery.

In 1980, the appellant suffered another reversal in health and lost a season of operation.

The appellant testified that during 1976 to 1979 he devoted more time to farming than to surveying. In 1979, when he started his own surveying business, his time was more flexible; he would spend 30 to 35 hours a week surveying “during the busy season” and during the summer would spend 30 to 40 hours on the farm.

The appellant’s income and expenses from farming in the years under appeal are as follows:

*$12,000 of proceeds of disposition of three acres of land is deleted from income for

1977.

**Optional value of livestock of $1,329 is deleted from income for 1980.

The appellant’s employment income for 1977, 1978, 1979 and 1980, was respectively $16,297, $18,726, $17,106 and $16,654; he also received dividends from his firm in the amounts of $29,400 in 1979 and $29,531.25 in 1980.

In 1977, the appellant’s income from farming was the result of renting 18 acres and selling three acres of his land. In 1980, only $180 was earned from the sale of oats, barley and forage crops, the balance coming from renting 11 acres of the farm and from pasture rents; in 1979, the appellant received $200 from forage crops and $300 from pasture rentals. Sales in 1980 included $140 from the sale of oats and $250 from forage crops; pasture rentals garnered another $350.

To characterize the expenses incurred by the appellant as “start-up” costs as argued by Mr. Seed, his agent, would require the appellant to show “the existence . . . of an organized program for the earning of profit from a business, and proof that the initial outlays were an integral part of that process . . . capable of absorption .. . in anticipation of . .. profits” (Vide WH Warden v MNR, [1981] CTC 2379; 81 DTC 322. In this case there was no evidence that the appellant incurred the expenses claimed with a view to earning a profit at some reasonable time in the future.

As can be seen from the above table, the appellant’s losses from farming are not being reduced but are increasing; his cash flow is in a negative position. Also, the appellant has been unable to adduce evidence of activity of a business nature from 1977 to the end of 1980 which could demonstrate clearly a reasonable expectation that profit will flow from the farm.

It is therefore difficult to find that in the years in appeal the appellant was farming for profit or with a reasonable expectation of profit and in the circumstances his appeal will be dismissed.

Appeal dismissed.