Date: 20010130
Docket: 2000-173-IT-I
BETWEEN:
HENRY GRZYWNOWICZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the Bench at London, Ontario on December 7, 2000)
Beaubier, J.T.C.C.
[1] This appeal was heard in London, Ontario on December 7, 2000. The Appellant was the only witness. Paragraphs 4 to 6 inclusive of the reply to the Notice of Appeal read:
4. In reassessing the Appellant for the 1995 and 1996 taxation years, by concurrent Notices of Reassessment thereof dated March 4, 1999, the Minister disallowed farm losses in amount of $3,543.00 and $3,205.00 respectively.
5. In so reassessing the Appellant, the Minister made the following assumptions of fact:
(a) in November of 1992 taxation year, the Appellant purchased 57 acres of farm land located at 332 Donnybrook Drive, Dorchester of Ontario;
(b) of total 57 acres, about 45 acres renting out to a neighbour for farming were workable, about 1.5 acres were used for principal residence and the balance were being repaired and developed;
(c) at all material times, the Appellant was employed full time by Kellogg Canada Inc.;
(d) the Appellant's main source of income was employment income earned from his job at Kellogg Canada Inc.;
(e) During the 1995 and 1996 taxation years, the Appellant reported the gross farming income in amounts of $3,733.00 and $3,464.00 which consisted of rents from the land and tax rebates;
(f) the Appellant's chief source of income during the 1995 and 1996 taxation years was neither farming nor a combination of farming and some other source of income;
(g) the Appellant reported gross farming income and net farming losses in other years as follows:
YEAR GROSS INCOME NET FARMING LOSSES
1993 $3,541.00 $2,712.00
1994 $3,679.00 $3,322.00
1997 $4,147.00 $4,456.00
1998 $4,520.00 $2,760.00
(h) the farming losses were not incurred for the purpose of gaining or producing income from farming;
(i) The Appellant did not have a reasonable expectation of profit from the farming activity in the 1995 and 1996 taxation years.
6. The issue is whether the Appellant is entitled to deduct farm losses in the 1995 and 1996 taxation years.
[2] Assumptions 5 (a), (c), (d), (e) and (g) were not refuted. Assumption 5 (b) is correct but the one or two acres of the balance were planted to a mixture of five varieties of around 250 trees. The remaining assumptions are in dispute.
[3] The Appellant planted the 250 trees in 1994 and sold $520 worth in 1998 and $170 worth in 1999. The remainder were not saleable for a variety of reasons from deer eating them to their degree of maturity to the fact that no reason was given with respect to the spruce trees.
[4] From 1993 to 1999 the Appellant received rent from the land. From 1993 to 1997 inclusive the rent and Ontario Property Tax Rebates were the only income from the land. He was allowed rental losses on the farm land but not the farm office as claimed. The auditor treated the tree income as "incidental". Certainly the arable acreage which the Appellant devoted to the trees planted was less than five per cent of the amount rented. Moreover, the small number and the great variety of planted trees indicates that the Appellant did not intend to tree farm. Nor did he allege such intentions at any time. Thus the evidence is that the trees and any income from them was in fact incidental to both the land itself and any income from it.
[5] In William Moldowan v The Queen, DTC 5213, at paragraphs 11 and 12, Dickson J. said:
11 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 MNR...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.
12 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]...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."
[6] Using the headings in paragraph 12 as quoted, the court finds:
1. The Appellant's experience to date is entirely of losses.
2. The Appellant did not describe any training that he had in farming. He said that he had a little experience.
3. The Appellant did not describe any plan or intended course of action to realize a profit from farming, nor did he establish by evidence what he might earn from farming the land. He testified that he made a gross income of $3,900 from corn, plus $1,500 from land rent in 1999 but reported a loss after CCA of $4,754.91, of $5,273.33. He also testified that after deducting CCA in 2000 he will suffer a loss. He did not establish when and how he might reasonably earn a profit as he is required to do pursuant to The Queen v Andrew Donnelly, 97 DTC 5499 (FCA) at 5501.
4. There is no evidence that the alleged farming operation had a reasonable expectation of profit during the years in question, or that the Appellant had any plan of operation to enable that to occur.
[7] In fact, the evidence establishes that in both 1995 and 1996 the land was rented and it was a rental property. Moreover, the Appellant testified that half of the price of the land was relating to the existing residence on the land, which is near London, Ontario. The equipment that he bought - a tractor and a small 50 inch cultivator - could readily be used to clear snow and cultivate shelter for decorative trees. The "barn" that he built could very well be a garage for the family vehicle and the tractor.
[8] On the evidence, during 1995 and 1996, the Appellant was not farming. He was renting 45 acres of farm land.
[9] The appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of January, 2001.
"D.W. Beaubier"
J.T.C.C.