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Docket: 2002-1867(IT)I |
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BETWEEN: |
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BRIAN G. HAWKINS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeals heard on November 29, 2002, at Prince George, British Columbia,
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By: The Honourable Judge C.H. McArthur |
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Appearances: |
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Agent for the Appellant: |
Pat Morton |
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Counsel for the Respondent: |
Jasmine Sidhu |
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JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1997 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant shall report 50% of the taxable capital gain of $18,897 from the sale of timber.
The appeal from the assessment of tax made under the Act for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 14th day of February, 2003
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"C.H. McArthur" |
J.T.C.C.
Citation: 2003TCC32
Date: 20030214
Docket: 2002-1867(IT)I
BETWEEN:
BRIAN G. HAWKINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] In 1997, the Appellant received $25,316 from the sale of timber harvested from land owned in common with his wife. The issue is whether the Appellant meets the criteria in the definition of "qualified farm property" in subsection 110.6(1) of the Income Tax Act and, therefore, be entitled to the preferential capital gains deduction under subsection 110.6(2). The criteria that the Minister of National Revenue submits that the Appellant does not meet includes: (i) the gross income from the farming business of the Appellant never exceeded his income from his other sources; and (ii) he was never engaged in farming on a regular and continuous basis.
[2] Subsection 110.6(1) reads in part:
110.6(1) For the purposes of this section,
"qualified farm property" of an individual ... at any particular time means a property owned at that time by the individual ... that is
(a) real property that was used by
(i) the individual
...
in the course of carrying on the business of farming in Canada and, for the purpose of this paragraph, property will not be considered to have been used in the course of carrying on the business of farming in Canada unless
(vi) the property ... was owned by a person who was the individual, ... throughout the period of at least 24 months immediately preceding that time and
(A) in at least 2 years while the property was so owned the gross revenue of such a person, ... from the farming business carried in Canada in which the property was principally used and in which such a person ... was actively engaged on a regular and continuous basis exceeded the income of the person from all other sources for the year, ...
[3] A secondary issue is whether the Appellant was in partnership with his spouse with respect to the sale of the timber and the business of farming. The Appellant was represented by Mrs. Pat Morton. Both the Appellant and his wife Penelope testified.
[4] In 1992, the Appellant and his wife purchased 160 acres of land in Hixon, British Columbia, 60 acres of which was in hayfields. His primary occupation through 1990 and before was in the trucking business and he continues fulltime trucking to this day. In 1997 and 1998, he drove a truck for BC Rail as an employee earning annually approximately $50,000 and $41,000, respectively.
[5] The Appellant argues that he was actively engaged in the farming business on a regular and continuous basis within the meaning of the Act. In 1995, he acquired a backhoe and tractor used to clear an area of land to build a home and later, used to clear stumps and debris from the area where the trees were cut by a lumber corporation. A neighbour cut two-thirds of the hay annually and the Appellant stored the remaining one-third in his barn. No net yearly income over $50 was ever realized. The Appellant added that his intention was to clear the area from which the timber had been to use as hay fields.
[6] In 1997, the Appellant and his wife sold timber from the property for a net of $25,316 paid directly to him by the sawmill purchasing the logs. The Appellant and his wife received gross revenues of $3,000 from selling the hay in 1997, the net income from which was $50. In 1998, he received gross revenue of $1,500 from selling hay. His net farming income was $1.00. Further, in 1997 and 1998, he and his wife acquired four male llamas for which I believe the purchase price did not exceed $300.
[7] They have never attempted to enter the llama business. The fourth llama was given to them. It was old and blind. Female llamas cost in the neighbourhood of $10,000 and they have no intention of buying one. Mrs. Hawkins stated she has an old freezer filled with matted llama wool that she does not know what to do with. They have never obtained any income from their llamas and have no prospects to do so.
[8] In computing their income for the 1997 taxation year, neither the Appellant nor his spouse reported a gain on the sale of timber nor the gross and net income from farming of $3,000 and $50, respectively. Nor did they report gross and net farming income of $1,500 and $1.00 in 1998. The Minister assessed the Appellant on October 9, 2001 for a taxable capital gain of $18,987 on the sale of the timber.
[9] The Appellant filed a Notice of Objection for the 1997 taxation year objecting to the inclusion of the gain and at the same time, he made a separate request to the Minister asking that he reassess the 1997 and 1998 taxation years to include the net farming income of $50 and $1.00, respectively. The Minister subsequently reassessed the Appellant's 1997 and 1998 taxation years to include the farm income.
The Appellant's Position
[10] The Appellant's agent relied on the Federal Court of Appeal decision in The Queen v. Larsen.[1] When the Appellant purchased the property in 1992, it consisted of hay fields and timbered land. She presented that the Appellant and his wife had the timber removed to increase the hay fields from 60 acres to 80 acres. The issue is whether the timber is qualified farm property. Relying on Larsen,[2] Mrs. Morton stated that farm income does not have to be higher than other income of the taxpayer in the relevant year. In Larsen, the taxpayer worked outside the farm and farming was secondary. Mrs. Morton added that Brian and Penelope Hawkins were partners because the property was in both their names and they both performed the work necessary.
The Respondent's Position
[11] The timber does not meet the definition of "qualified farm property" because the Appellant's gross revenue from farming on a continuous basis did not exceed his income from other sources in 1996 and 1997.
[12] Secondly, counsel for the Respondent stated that Mr. and Mrs. Hawkins were not carrying on a business in partnership in 1997 because they do not meet the criteria contained in the Partnership Act[3] and in the jurisprudence, in particular, Continental Bank Leasing Corporation v. The Queen et al.[4]
Analysis
[13] Clearly, the Appellant's gross revenue from the farming activity (business) never exceeded the Appellant's income from his other sources, namely, his employment with the railway as a truck driver. His gross farming income, including the timber sale was under $26,000 in 1997.[5] His employment income was $50,000. In 1998, his farming income was under $2,000 and his employment income was $41,000. The legislation is clear in clause 110.6(i)(a)(vi)(A). This was not an issue dealt with in Larsen. The Appellant does not meet the definition of "qualified farm property" because he was not actively engaged on a regular and continuous basis in the business of farming, his gross farming income was not greater than his income from all other sources in at least two years while he owned the property.
[14] On behalf of the Appellant, Mrs. Morton argued that in the Larsen case, the taxpayer's income from all other sources must have been greater than his farming income. Neither the Tax Court of Canada nor the Federal Court of Appeal dealt with that part of the definition of "qualified farm property" in section 110.6 with respect to gross revenue from farming business exceeding income from other sources.
[15] Unlike the present situation, in Larsen, the land was used at all material times as agricultural land. The timber was real property and part of the farm property. The Federal Court of Appeal found that was sufficient to bring it within the ambit of the qualified farm property provisions of subsection 110.6(1).
[16] Counsel for the Respondent indicated that in addition to the Larsen case, the two other cases referred to in her book of authorities[6] do not deal with the present issue. Larsen, Glassford and Mel-Bar dealt with whether the disposition of timber was on income or capital account. The Federal Court of Appeal in Larsen confirmed that it was on capital account.
[17] The final issue is whether a business partnership existed between Mr. and Mrs. Hawkins with respect to the harvesting and sale of timber. This was not dealt with in the pleadings and appears to be an afterthought of the Appellant's agent. Nonetheless, it is obviously a claim worthy of consideration. The realty of the business relationship must be given validity particularly given that this is under the informal procedure of this Court. Despite the Respondent's counsel's capable argument to the effect that there was no business and no partnership, I find to the contrary. They owned the land which included the timber, equally. They were business partners with respect to the ownership of the timbered property. They made a joint decision with respect to the harvesting and sale of the trees; Mrs. Hawkins had an equal ownership in the timber. Surely there was a timber business carried on with a view to profit. The fact that the timber mark was held by Mr. Hawkins alone and the cheque from the lumber company was to him does not dictate a partnership. I find as a fact that they intended to be partners, they contributed equally financially in that they shared ownership of the trees. They made a joint decision to enter the business of having their trees harvested and sold.
[18] Counsel referred me to Continental Bank[7] wherein the Supreme Court of Canada stated at page 6514:
... As stated in Lindley & Banks on Partnership (17th ed. 1995), at p. 73: "in determining the existence of a partnership ... regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case".
... The indicia of a partnership include the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts. ...
[19] For reasons given previously, the Appellant and his spouse meet the spirit of these indicia. The Appellant is unsophisticated in respect to partnership criteria but I have no doubt that he and his wife Penelope intended and, in fact, acted as business partners with respect to the sale of timber. The fact that the timber was 50% hers and they worked as a team cannot be ignored and are the dominating factors.
[20] In conclusion, the property on which the timber was located was not "qualified farm property" and the Appellant is not entitled to an enhanced capital gain deduction provided by subsection 110.6(2). The Appellant was in equal partnership with his spouse Penelope with respect to the sale of the timber.
[21] The appeal is allowed for the 1997 taxation year and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that 50% of the $25,316 capital gain from the sale of timber is to be computed in the Appellant's taxable income. The appeal for the 1998 taxation year is dismissed.
Signed at Ottawa, Canada, this 14th day of February, 2003.
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"C.H. McArthur" |
J.T.C.C.
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CITATION: |
2003TCC32 |
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COURT FILE NO.: |
2002-1867(IT)I |
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STYLE OF CAUSE: |
Brian G. Hawkins and Her Majesty the Queen |
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PLACE OF HEARING |
Prince George, British Columbia |
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DATE OF HEARING |
November 29, 2002 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge C.H. McArthur |
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DATE OF JUDGMENT |
February 14, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Pat Morton |
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Counsel for the Respondent: |
Jasmine Sidhu |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |