Date: 20000110
Docket: 97-2955(IT)I
BETWEEN:
RUSSELL ZALINKO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
97-2956(IT)I
BETWEEN:
BARBARA ZALINKO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(delivered orally from the bench
at Saskatoon, Saskatchewan on
December 3, 1999)
Beaubier, J.T.C.C.
[1] These appeals were heard together on common evidence on December 2, 1999 in Saskatoon, Saskatchewan by consent of the parties. Mr. Zalinko testified for the Appellants. The Respondent called the auditor on the files, Katherine Willis.
[2] The Appellants are husband and wife. They were reassessed and allowed restricted farm losses for 1993 and 1994. They appealed on the basis they were entitled to all of their farm losses in those years.
[3] Paragraphs 8 to 12 inclusive in the Reply to Russell's Notice of Appeal read:
8. In computing income for the 1993 and 1994 Taxation years, the Appellant deducted the amounts of $37,076.23 and $36,225.00 respectively as farming losses.
9. In reassessing the Appellant, the Minister of National Revenue (the "Minister") restricted the Appellant's farming losses in accordance with subsection 31(1) of the Income Tax Act (the "Act").
10. In so reassessing the Appellant for the 1993 and 1994 Taxation Years, the Minister made the following assumptions of fact:
(a) the facts admitted supra;
(b) the Appellant commenced farming in 1972;
(c) the Appellant purchased one quarter section of land from his father in 1972;
(d) the Appellant purchased additional land in 1976 and 1978;
(e) the Appellant farmed fifteen quarter sections of land until 1988;
(f) a portion of the fifteen quarter sections of land farmed until 1988 were rented;
(g) the Appellant stopped renting land in 1988;
(h) the Appellant does not maintain his residence at the farm;
(i) the Appellant lives in Regina, Saskatchewan and commutes to the farm;
(j) the Appellant was previously employed as a school teacher;
(k) the Appellant retired from teaching school in the 1988 Taxation Year;
(l) the Appellant farmed in a partnership with his spouse;
(m) the partnership split profits and/or losses on the basis of 60% to the Appellant and 40% to his spouse;
(n) the Appellant reported farming income (losses) during the 1990 to 1994 taxation years as follows:
|
|
1990 |
1991 |
1992 |
1993 |
1994 |
|
|
|
|
|
|
|
|
Sales |
107,292 |
63,631 |
66,552 |
80,527 |
82,666 |
|
less |
|
|
|
|
|
|
Cash expenses |
112,343 |
66,293 |
78,029 |
142,320 |
106,019 |
|
|
(5,051) |
(2,662) |
(11,477) |
(61,793) |
(23,353) |
|
less |
|
|
|
|
|
|
Capital Cost Allowance |
37,495 |
29,310 |
30,097 |
0 |
38,623 |
|
|
(42,546) |
(31,972) |
(41,574) |
(61,793) |
(61,976) |
|
plus change in inventory |
|
|
|
|
|
|
|
0 |
0 |
0 |
0 |
1,600 |
|
Net Loss |
(42,546) |
(31,972) |
(41,574) |
(61,793) |
(60,376) |
|
|
|
|
|
|
|
|
Appellant share 60% |
(25,528) |
(19,183) |
(24,944) |
(37,076) |
(36,226) |
(o) the Appellant reported non-farm income of $39,697 and $44,000 in the 1993 and 1994 Taxation Years respectively;
(p) the appellant disposed of seven quarter sections of land in the 1993 Taxation Year;
(q) six quarter sections were foreclosed on by the bank and one quarter section was sold to the Appellant's son;
(r) in the 1993 and 1994 Taxation Years the Appellant rented the six quarter sections which the bank foreclosed on to continue his farming operation;
(s) the Appellant reported a taxable capital gain in the amount of $153,106 in respect of the disposition of farm land as a result of the bank foreclosure and the sale to his son in the 1993 Taxation Year;
(t) the Appellant claimed a capital gain deduction of $152,960 to offset the inclusion of the gain in his income in the 1993 Taxation Year;
(u) the Appellant operated a grain farm during the 1993 and 1994 Taxation Years;
(v) the Appellant's chief source of income during the 1993 and 1994 Taxation Years was neither farming nor a combination of farming and some other source of income.
B. ISSUES TO BE DECIDED
12. The issue is whether the Appellant's chief source of income was farming or a combination of farming and some other source of income during the 1993 and 1994 Taxation Years.
[4] Subparagraphs 10(b) to (u) inclusive of the assumptions were accepted by Russell. He accepted similar assumptions in the Reply to Barbara's Notice of Appeal. However, the history of this matter is more complicated than that.
[5] Russell grew up on a farm and obtained his Bachelor of Agriculture from the University of Saskatchewan in 1956. He worked a year on the farm. He then returned to the University of Saskatchewan for one year and obtained his teaching certificate and eventually his Bachelor of Education. He then taught from 1958 to 1988 when he retired from teaching.
[6] Barbara graduated from the University of Saskatchewan in Home Economics and became employed by the Saskatchewan Department of Parks and Renewable Resources until she retired in 1997. They have at least one son.
[7] Russell always wanted to farm. In 1972 they purchased one quarter section of land from his father for $10,000 with borrowed money. In 1976 they purchased three quarter sections near Viceroy, Saskatchewan, east of Assiniboia with financing from the Bank of Montreal and then the Bank of Nova Scotia. All of the money was borrowed. That was sold to Russell's brother in 1976. In 1976 they purchased three quarter sections near Rouleau, Saskatchewan, and in 1978 they purchased four more quarters near Rouleau. Rouleau is near Regina. A down payment on the 1976 Rouleau purchase came from the 1976 sale to Russell's brother. All of the rest was financed. In 1980 they consolidated all of their loans with the Royal Bank of Canada. They farmed all of this land through these years.
[8] In addition, in 1982 they rented seven quarter sections of farmland near Regina, and they rented an additional quarter section there in 1986. They gave these leases up in 1986.
[9] In 1988 Russell retired as a teacher with a pension of over $30,000 per year. He then devoted himself full time to farming. Barbara helped out and spent about 30 hours per week of work time farming in season while working full time at her civil service job in Regina. Russell also worked selling farm lighting during the years in appeal. This was clearly a sideline which required less than 10 hours per week during farming season in 1993 and 1994.
[10] Russell admitted that their other incomes subsidized the farm and gave them their living during all of these farming years.
[11] In 1992 they suffered an early frost and the grade was low, so the price was poor. They had been suffering falling grain prices for years. The Royal Bank then began foreclosure proceedings. On February 15, 1993 the Appellants transferred all except one quarter of land to the Royal Bank of Canada. They transferred the remaining one quarter to their son. They then leased the other six quarters back from the Royal Bank (R-1, Tab 2). As a result of this they reported the capital gain in 1993 which brought this audit about. At the time of the deal with the Royal Bank of Canada, they owed $1,175,942.19 including over $484,000 of accrued interest. They also owed $22,000 in taxes on the farmland.
[12] The Appellants reported their income on a cash basis, so the unpaid interest and taxes would not have to be deducted by them in the years immediately prior to 1993. Despite this, as shown in Russell's assumptions, their joint farming losses were:
1990 $42,546
1991 $31,972
1992 $41,574
1993 $61,793
1994 $61,976
Had the taxes and interest been paid, they would have added substantially to the losses before 1993.
[13] As against these figures they reported joint gross farm income in 1993 and 1994 of $80,527 and $82,666 including crop insurance. In 1995 their grain sales were $109,362.91. Actual grain sales in 1993 appear to be $37,076.23, and in 1994, $48,051.49 respectively. However, there are no records by which the Court can compare the grain sales in 1990, 1991 and 1992. It should be noted that grain sales from a 1992 crop would normally occur in the following calendar year, 1993.
[14] In Regina v. Donnelly, [1992] 1 CTC 23 at paragraph 12 and 13, Robertson J.A. stated:
12 Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence that taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a 'reasonable expectation of profit' is not synonymous with an 'expectation of reasonable profits'. With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of 'substantial' profits from farming.
In the present case, it was incumbent on the taxpayer to establish what he might reasonably have earned but for two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. While there is no doubt that the loss of Mr. Rankin, and the changes in the American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.
[15] The Appellants did not establish what they might have reasonably earned but for the frost of 1992. They did indicate that as yet grain commodity prices have not risen.
[16] Thus, the question before the Court is whether the Appellants, who bear the onus of proof, have established that had the 1992 frost and the declining grain prices not occurred, the farm would have yielded them a substantial profit compared to their other incomes. Russell's pension income was over $34,000 in 1993 and in 1994. Barbara's employment income was over $45,000 in 1993 and in 1994. Their farm operation was past any possible start-up period. They had suffered losses from 1990 on despite the fact that they did not pay interest on their loans to the Royal Bank of Canada until 1993, when they only paid some interest and some property taxes, and in 1994 when they did not pay any property taxes.
[17] On the evidence, the $109,000 grain sales in 1995 is an aberration. But even with this income, the farm lost money in 1995 when, as Moldowan v. The Queen, [1978] 1 S.C.R. 480 required, capital cost allowance was calculated. Thus the 1990 - 1992 years appear to be the norm on the evidence. In those years they lost money despite the fact that they did not deduct unpaid interest and property taxes.
[18] The Appellants have failed to meet their onus to establish evidence that they had a reasonable expectation of substantial profit from farming in 1993 and 1994.
[19] For this reason their appeals are dismissed.
Let the above Reasons for Judgment, delivered orally from the Bench at the Tax Court of Canada, Court of Queen's Bench, 520 Spadina Crescent East, Saskatoon, Saskatchewan, on December 3, 1999, be filed.
|
"D.W. Beaubier" |
J.T.C.C.
COURT FILE NO.: 97-2955(IT)I and 97-2956(IT)I
STYLE OF CAUSE: Russell Zalinko and The Queen
Barbara Zalinko and The Queen
PLACE OF HEARING: Saskatoon, Saskatchewan
DATE OF HEARING: December 2, 1999
REASONS FOR JUDGMENT BY: The Honourable Judge D.W. Beaubier
DATE OF JUDGMENT: January 10, 2000
APPEARANCES:
For the Appellant: Russell Zalinko
Counsel for the Respondent: Carol Fleischhaker
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada