Charles Garcia v. Minister of National Revenue, [1983] CTC 2263, 83 DTC 224

The Chairman:—In his tax return for the 1978 and 1979 taxation years the appellant claimed restricted farm losses in the amount of $4,400 and $5,000 respectively in accordance with section 31 of the Income Tax Act, SC 1970- 71-72, c 63 as amended. By notice of reassessment the Department disallowed the said farm losses on the grounds that the appellant did not have a reasonable expectation of profit from his farming operations and was therefore not entitled to claim any farm losses.

Summary of the Facts

The appellant was a full-time high school teacher with the Northumberland Newcastle School Board until his retirement in 1979. His evidence was that at the end of 1972 or early 1973 he acquired a 53-acre farm for the purpose of living there with his family and to stable the horses he then owned which had previously been boarded out. At the time of acquisition, according to the appellant’s testimony, it was not his intention to operate a horse farm. The appellant admitted however that he was seeking a way to increase his pension income when he retired in 1979.

The idea of boarding horses for other owners was conceived some time after the farm was acquired. It is the appellant’s evidence that he could board from 10 to 12 horses for $90 to $120 per month per horse. Income could also, according to the appellant, be realized from the sale of surplus oats and hay grown on the farm after feeding his own horses and the other horses boarded in his stables. During the years 1973 until he retired the appellant, during week-ends and during the summer months, worked on the farm building fences around the property and repairing the barn. He constructed a riding ring and appropriate horse-jumping facilities. In season the appellant harvested and stored the hay grown on the farm.

The appellant, in giving evidence, stated that his two daughters, who in 1973 were 17 and 13 years of age, gaving riding lessons but that it was understood that the income derived from that source would not be included in the farm operations. The potential income from the operation of the horse farm was therefore limited to the boarding of horses and the sale of surplus crop. In 1973 to 1977 the appellant reported losses of $4,992; $4,258; $3,798; $5,673 and $7,912 respectively but, according to section 31 of the Act, claimed only the restricted farm losses provided for in that section. The Minister of National Revenue for all those years allowed the appellant’s restricted losses.

The appellant testified that at the end of 1977, because of a down-turn in the economy, the arrival of a competitor in the area and severe weather conditions, he concluded that the farm operation was not viable. Indeed the evidence is that, other than his own horses, only three horses were boarded at the farm for the period of two years at the most from 1973 to 1977.

From 1976 to 1979 the sale of crop averaged roughly $945 a year and the boarding of horses for 1976 and 1977 averaged $760 a year. The net farm losses for the period of 1973 to 1979 totalled approximately $40,000 (Par 4 (c&d) of the Minister’s reply). The appellant did not dispute the figures.

Late in 1978 the appellant, having abandoned his previous farming operations, undertook to rent to his daughter his house, his horses and all his farming equipment in the operation by her of a group home for adolescent girls. The appellant was advised by his accountant that he could charge a rent of 8-10% of the capital value of the property and estimated that to be between $10,000 to $12,000 a year.

The substantial increase of the farm expenses for 1978-1979 ($10,551 and $11,816 respectively) was partly explained by the appellant as repairs to the residence and a relocation of the water supply to better serve the occupants of the group home. It is my understanding however that the appellant and his wife also resided at the daughter’s group home and indeed there were very few adolescent girls in the home during 1978-79. In those years the horses that were boarded and claimed as an expense were the appellant’s own horses.

By the end of 1979 it became evident to the appellant that the daughter, notwithstanding the Government subsidy which she received from the Children’s Aid Society and the possible renting out of the appellant’s horses to the adolescent girls, was unable to meet the rent asked for the appellant’s farm and its equipment. In 1980 the appellant decided to abandon the current farming operations and decided not to claim any further farm losses.

The question to be decided is whether the appellant, either in 1973 or in 1977, had a reasonable expectation of profit from his farm operations.

The appellant, in acquiring the farm in 1972, had not intended to operate it as a horse farm; it was only after some time and at the suggestion of his accountant that the appellant conceived the idea of having a horse-centred farm. The appellant had no firm plan for realizing anything more than a supplement to his pension income when he retired in 1979. He had not figured out how he would in fact be able to realize a profit from the operation of the farm. It is true, as suggested by the appellant’s daughter in giving evidence, that an arable farm does have the potential of producing a profit. But that of course is predicated on what plans are made for the farm and what in fact is done with it.

Because the appellant is a horseman and loves horses, he would know that the boarding of horses alone at any period of time is generally not a profitable venture; while considerable effort may have been made by the appellant and indeed his family in fencing the property and building a riding ring, a minimum effort was made in cultivating a crop sufficiently large to meet expenses of the operation. No thought apparently had been given at that time to renting the appellant’s horses to clients at $3 to $4 an hour which could have been a source of income. Looked at objectively, the appellant’s limited farming activities do not warrant the conclusion that he could have had a reasonable expectation of profit from 1973 to 1977. The appellant might well be knowledgeable and experienced in horse maintenance and training and he may have spent considerable time and money in improving the farm for his own purposes. That purpose is not necessarily the operation of a farm with a reasonable expectation of deriving a profit from its operation. The preponderance of evidence is that the appellant was seeking to provide for himself and his family a life style which obviously was pleasing to all. The expenditures were personal living expenses rather than expenses incurred to earn income from the business of horse farming.

During the 1978 and 1979 taxation years which are under appeal, the appellant could not reasonably expect to derive a profit from the operation of the farm by renting it to his daughter for the operation of a group home for adolescent girls under the Children’s Aid Society. While the appellant’s offer to rent the farm to help his daughter succeed in her undertaking is most commendable, it cannot by any reasonable business standard be considered as a realistic means of deriving a profit from the operations of a farm whose expenditures during the period 1978-1979 are equal or greater than the potential earnings of a group home under the most favourable conditions.

I believe that the appellant acted in good faith on the advice of his accountant and there is no question here of the appellant’s honour and integrity. The question is a purely legal one and it is that the appellant did not succeed in convincing the Board that he had a reasonable expectation of profit from the renting of his farm and equipment to his daughter for the operation of a group home in the 1978 and 1979 taxation years.

For these reasons, judgment will go dismissing the appeal.

Appeal dismissed.