Date: 19980724
Docket: 97-2492-IT-I
BETWEEN:
MICHAEL NACH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Christie, A.C.J.T.C.
[1] These appeals are governed by the Informal Procedure provided for under section 18 and following sections of the Tax Court of Canada Act. The years under review are 1992 and 1994.
[2] The issue is whether with respect to those years the appellant is entitled to deduct his full farming losses in computing his income. The position of the respondent is that none of the losses are so deductible.
[3] The Notice of Appeal reads:
“Notice of Appeal is hereby given by the Appellant of 49 Crawford Drive, Ajax, Ontario, L1S 3A9, from the reassessment of the Appellant’s 1992, 1994 taxation years under the Income Tax Act (Canada), which reassessments were confirmed by letter dated May 27, 1997.
Statement of Facts
1. The in (sic) years 1992 and 1994, the appellant carried on the business as a gentleman farmer and operated a horse racing business.
2. The Appellant did not have any other business and would spend much of his day attending to his horse business including the training and daily care of the horses.
3. The Appellant had farming losses of $9,733.00 for the year 1992, and $19,765.00 for 1994, which were deducted from income and were losses directly related to the farming business.
4. The Appellant maintained his racing operations with a realistic expectation of profit and submits that it was not a ‘Hobby’ and therefore the expenses incurred were in connection with the racing operation and not personal in nature.
The Issues
5. With respect to the above facts, the issue is whether the Appellant was able to claim the farming losses for 1992, of $9,733.00 and for 1994 of $19,765.00, as being deductions from his income.
Reasons/Statutory References
6. The Appellant relies on the provisions of the Income Tax Act (Canada), which should have enabled the Appellant to deduct losses from a farming business.”
[4] The opening paragraph and paragraphs numbered 1 to 6 inclusive of the Reply to the Notice of Appeal read:
“In reply to the Notice of Appeal for the 1992 and 1994 taxation years, the Deputy Attorney General of Canada says:
A. STATEMENT OF FACTS
1. He admits the authenticity of the Notification of Confirmation dated May 27, 1997 attached to the Notice of Appeal.
2. He denies all other allegations of fact contained in the Notice of Appeal.
3. In computing income for the 1992 and 1994 taxation years, the Appellant deducted the amounts of $9,733 and $19,765 respectively, as farming losses.
4. The Minister of National Revenue (the ‘Minister’) assessed the Appellant’s 1992 and 1994 taxation years, by Notices of Assessment thereof dated June 28, 1993 and June 22, 1995, respectively.
5. In reassessing the Appellant for the 1992 and 1994 taxation years, concurrent Notices of Reassessment thereof dated June 14, 1996, the Minister disallowed the deduction of farming losses in the amounts of $9,733 and $19,765, respectively.
6. In so reassessing the Appellant, the Minister made the following assumptions of fact:
(a) in the 1992 and 1994 taxation years, the Appellant reported gross farming income in the amounts of $22,950 and $2,260 respectively, arising out of the purported farming operation;
(b) in the 1992 and 1994 taxation years, the Appellant claimed expenses in connection with the purported farming operation in the amounts of $32,683 and $22,025 as shown in exhibits ‘A’ and ‘B’ attached hereto;
(c) the Appellant reported gross income and expenses and claimed farming losses in prior years as follows:
Gross Farming
Year Income Expenses Losses
1986 N/A N/A $ 6,982
1987 $45,401 $54,042 $ 8,641
1988 N/A N/A $13,576
1989 $ 7,535 $28,966 $21,431
1990 $ 2,000 $19,361 $17,361
1991 $20,410 $51,787 $31,377
(d) in the 1986, 1987, 1988, 1989, 1990 and 1991 taxation years, the Minister restricted the Appellant’s farm loss pursuant to subsection 31(1) of the Income Tax Act (the ‘Act’);
(e) for the 1995 taxation year, the Appellant reported gross farming income and expenses of $7,039 and $23,286 respectively, and claimed a farm loss of $16,247;
(f) expenses in excess of the amounts allowed by the Minister were not made or incurred, or if made or incurred, were not made or incurred for the purpose of gaining or producing income from the farming operation;
(g) during the 1992 and 1994 taxation years, the Appellant had no reasonable expectation of profit from the farming operation;
(h) expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining or producing income from farming, but were personal or living expenses of the Appellant.”[1]
[5] The onus is on the appellant to establish on a balance of probabilities that the reassessments are in error.
[6] In The Queen v. Donnelly, 97 DTC 5499 Robertson J.A., speaking for the Federal Court Appeal, encapsulates the law pertaining to farming losses in these words:
“Though it has been twenty years since Moldowan v. The Queen, [1978] 1 S.C.R. 480 was decided, we continue to hear appeals involving taxpayers who earn their income in the city and lose it in the country. In this appeal, the respondent taxpayer, a medical practitioner, sought to deduct from his professional income the full amount of farming losses incurred in the 1986, 1987 and 1988 taxation years. According to Moldowan, the taxpayer must satisfy two tests in order to succeed. First, he must establish that the farming operation gave rise to a ‘reasonable expectation of profit’ and, second, that his ‘chief source of income’ is farming (the so-called ‘full-time’ farmer). If the taxpayer is unable to satisfy the first test no losses are deductible (the so-called ‘hobby’ farmer). If he satisfies the first test but not the second then a restricted farm loss of $5,000 (now $8,500) is imposed under section 31 of the Income Tax Act (the so-called ‘part-time’ farmer).”
[7] There has been a great deal said and written over the years about reasonable expectation of profit. What follows has been said by me previously about that concept in other litigation. In order for business losses to exist, they must arise out of profit motivated commercial activity that can be regarded as a source of income. In Moldowan v. The Queen, 77 DTC 5213 Dickson J. (later Chief Justice), in delivering the judgment of the Supreme Court of Canada, said at page 5215:
“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., 72 DTC 6131.”
and later on the same page:
“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), 28 DTC 6193.”
What Dickson J. said about “objective determination” is most important in relation to cases of the kind at hand. In Kerr and Forbes v. Minister of National Revenue, 84 DTC 1094 (T.C.C”) this is said at page 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 deep-felt they may be. The issue is to be decided by objective testing.”
[8] After the Federal Court of Appeal delivered its reasons for judgment in Tonn et al. v. The Queen, 96 DTC 6001, serious questions arose about whether this case purported to alter the law as proclaimed in Moldowan. It is clear, however, from the subsequent decision of that Court in The Attorney General of Canada v. Mastri, 97 DTC 5420 that Tonn is not to be construed in that way.
[9] Having regard to the pleadings and the whole of the evidence I am of the view that the appellant did not have a reasonable expectation of profit in 1992 or 1994. In this regard I make special mention of the following evidence introduced by the appellant as Ex. A-1. In 1985 and 1993 there was farming income of $5,758.00 and $4,032.00 respectively in excess of losses. Otherwise there has since 1986 been a steady stream of losses in these amounts: 1986 - $6,982.00; 1987 - $8,641.00; 1988 - $14,299.00; 1989 - $27,722.00; 1990 - $30,361.00; 1991 - $18,377.00; 1992 - $9,733.00; 1994 - $19,765.00; 1995 - $16,247.00; 1996 - $6,069.00.
[10] Farming income during these years as a percentage of related expenses was: 1986 - 88.9; 1987 - 72.4; 1988 - no income, expenses of $14,299.00; 1989 - 21.4; 1990 - 6.2; 1991 - 52.6; 1992 - 70.2; 1994 - 10.3; 1995 - 30.2; 1996 - 58. The average percentage is 41. The income, the expenses and the related percentages speak for themselves in relation to the existence of a reasonable expectation of profit. The determination of these appeals is, I believe, consistent with Joudrey v. The Queen, [1997] T.C.J. No. 74 which is cited with approval in Mastri at page 5424.
[11] The appeals are dismissed.
Signed at Ottawa, Canada, this 24th day of July 1998.
“D.H. Christie”
A.C.J.T.C.C.
[1] As no expenses were allowed by the Minister, counsel for the respondent at trial agreed with that the reference to expenses in excess of the amounts allowed by the Minister in paragraphs 6(f), (g), (h) are redundant.