Fitzpatrick v. R., [1999] 4 CTC 2420 (Informal Procedure)

Watson D.J.T.C.:

This appeal was heard in Regina, Saskatchewan on August 5, 1999 under the Informal Procedure.

In computing income for the 1993, 1994 and 1995 taxation years, the appellant deducted the amounts of $16,316.63 and $12,438.09 as farm losses for the 1993 and 1994 taxation years respectively and $8,750.00 for 1995 as a farm loss pursuant to subsection 31(1) of the Income Tax Act (the “Act”) as follows:

In reassessing the appellant for these three taxation years, the Minister of National Revenue (the “Minister”) disallowed the deduction of these losses, making the following assumptions of fact:

(a) the facts admitted and stated supra:

(b) during the 1992, 1993, 1994, 1995 and 1996 taxation years the Appel lant was employed on a full-time basis and received employment in- come for each year as follows:

Year	Employment
	Income
1992	$27,480.00
1993	19,278.00
1994	24,519.00
1995	38,609.00
1996	31,813.00

(c) the Appellant carried on the business of farming on a full-time basis up to 1988;

(d) in 1988, the Appellant sold a portion of the land on which he was farming and commenced to be employed;

(e) the Appellant became bankrupt in 1991];

(f) subsequent to the bankruptcy, the Appellant reacquired, for $20,000.0, 40 acres of land previously owned by him and which contained his residence and some surrounding buildings;

(g) subsequent to the bankruptcy, the Appellant commenced the activity of growing and baling alfalfa (the “Activity”) on that portion of the 40 acres of land that was not covered by the yard site, including the surrounding buildings and corrals;

(h) the Appellant reported the following losses from the Activity in the 1991 and 1992 taxation years:

TAXATION	GROSS
YEAR	INCOME	EXPENSES	NET LOSS
199]	$ 687.00	$ 8,087.00	($ 7,400.00)
1992	4,694.00	18,288.00	( 13,594.00)

(i) the Appellant reported the following loss from the Activity in the 1996

taxation year:
TAXATION	GROSS
YEAR	INCOME	EXPENSES	NET LOSS
1996	$1,850.00	$5,851.00	($4,001.00)

(j) during the years under appeal, the Appellant did not take any steps or make any plans to develop or expand the Activity, nor has he taken any steps to do so since that time;

(k) the amount of land used by the Appellant in the Activity is not large enough in order to allow the Appellant to generate sufficient gross income to cover the expenses incurred;

(l) the Appellant did not have a reasonable expectation of profit from the Activity during the 1993, 1994 and 1995 taxation years;

(m) the expenses claimed in relation to the Activity were personal or living expenses of the Appellant.

At the hearing, counsel for the appellant admitted paragraphs (b), (c), (e) and (g) to (1); he denied paragraphs (d), (f) and (j) to (m).

The issue before the Court is whether the appellant had a reasonable expectation of profit from the activity in the 1993, 1994 and 1995 taxation years.

The appellant has the burden of establishing on a balance of probabilities that the Minister’s reassessment was ill-founded in fact and in law.

The appellant was the only witness at the hearing and he clearly demonstrated that he had acted in good faith at all times in relation to his farming activities in the years in issue relying on the advice received from his accountant.

1999-1 1-11

The appellant has been farming since he was 12 years old on land owned by his grandfather, father and finally which he inherited in 1959. In 1985 and 1986, due to financial difficulties he transferred all the land to the Farm Credit Corporation (“FCC”); in 1998 he bought back approximately 40 acres from the FCC for $20,000.00 and he leased the remaining portions from 1988 to 1990. The financial difficulties continued until they led him to bankruptcy in May of 1991. In 1988, the appellant started full-time employment at Valley View Centre as a maintenance welder. After his discharge from bankruptcy in 1992, he seeded the usable portion of his land with alfalfa and performed custom work for other farmers in the area. In 1991 he was diagnosed as having sleep apnea which sapped much of his energy. With the combination of his full-time employment, limited capital and medical problem, he was able to devote relatively little time to the alfalfa crop. Because of bad weather, weeds, germination problems, the farming operation was pretty much of a disaster. He and his wife lived in the farm house located on his 40 acres and quite a few of the expenses claimed were admittedly personal expenses, such as taxes, fence repairs, telephone, electricity, heating, house repairs, water, etc.

Available records for the six years from 1991 to 1996 show the total revenue from alfalfa sales and the outside custom work was approximately $8,000.00, expenses of approximately $80,000.00 resulting in net losses totalling approximately $70,000.00. During the three years in issue, the total revenue was approximately $1,500.00, with expenses of approximately $52,000.00, resulting in a net loss totalling approximately $50,000.00.

There is extensive case law on this type of appeal. A reasonable expectation of profit is an objective test and not just a fanciful dream. The objective test includes an examination of profit and loss in past years; the operational plan and the background to the implementation of the plan including the course of action; an examination of the time spent on the activity as well as the background of the taxpayer, including his education and experience; the time required to establish the intended business; the presence or absence of ingredients leading to profits; and the cause of the losses and flexibility to make adjustments in the face of losses.

In the case of Moldowan v. R., [1978] 1 S.C.R. 480 (S.C.C.), Mr. Justice Dickson stated as follows:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., [1972] C.T.C. 151; 72 DTC 6131. See also paragraph 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

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 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In the case of Landry v. R. (1994), 94 D.T.C. 6624 (Fed. C.A.), Décary J. stated as follows:

There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream. As Mr. Justice Pigeon noted in Deputy Minister of Revenue (Que.) v. Lipson:! [1]

... fhe only evidence submitted was as to the expectations they had on signing the lease, but these expectations were not realized, and the factors which caused the losses in the first three years were still present when the lease was renewed. No one could therefore imagine that a loss would not be incurred...

Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of the relevant period, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer’s good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.

Having regard to all the circumstances of this appeal, including the testimony of the witness and the admissions in the light of the well-established case law, I am satisfied that the appellant has failed in his onus of establishing on a balance of probabilities that he had a reasonable expectation of profit in the 1993, 1994 and 1995 taxation years in relation to the operation of his farm. Accordingly, the appeal is dismissed.

Appeal dismissed.