Date: 20020430
Docket: 2000-4595-IT-I
BETWEEN:
CONRAD MOBLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Beaubier, J.T.C.C.
[1] The name and address of the agent for the Appellant is changed to Dewey Lotosky, 1675 Pandosy Street, Kelowna, British Columbia.
[2] These appeals pursuant to the Informal Procedure were heard at Kelowna, British Columbia on April 12, 2002. The Appellant testified and called Kent Gopett, a llama breeder and farmer.
[3] Paragraphs 7 to 11 of his Reply read:
7. By Notices dated May 18, 2000, the Minister reassessed the Appellant's 1995 and 1996 taxation years as follows:
(a) to revise the net business losses to nil for the 1995 and 1996 taxation years;
(b) to allow net farm loses of $8,750 in each of the 1995 and 1996 taxation years as detailed in the attached Schedules "H" and "I", respectively;
(c) to allow restricted farm losses for the 1995 taxation year of $16,906.26 as detailed in the attached Schedule "H"; and
(d) to allow restricted farm losses for the 1996 taxation year of $6,389.39 as detailed in the attached Schedule "I".
8. The Minister relied on the following assumptions of fact in reassessing the Appellant:
a) the Appellant commenced an activity raising Llamas in 1992 (the "Activity");
b) the Appellant was an equal partner in the Activity with his spouse Marlene Mobley (the "Spouse");
c) the Appellant claimed losses from the Activity as follows:
1992 $21,064.00
1993 $31,928.00
1994 $35,391.00
d) in the 1995 and 1996 taxation years, the Appellant did not substantiate all expenses claimed for the Activity;
e) in the 1995 and 1996 taxation years, expenses claimed for the Activity in excess of those allowed by the Minister were not incurred to earn income from a business or property, were personal or living expenses of the Appellant or were capital in nature;
f) the Appellant accounted the inventory using the accrual method of accounting;
g) in the 1995 and 1996 taxation years, the Appellant declared T4 employment income of $52,816.00 and $52,860.00, respectively;
h) in 1996 the Appellant was employed by Northwood Pulp and Timber Limited;
i) the Appellant's chief source of income in the 1995 and 1996 taxation years was neither farming or a combination of farming or some other source of income;
j) the Activity did not provide most of the Appellant's income in the 1995 and 1996 taxation years;
k) the Appellant did not have any previous farming experience;
l) the Appellant did not prepare a business plan to determine if the Activity would be profitable;
m) the Activity was not the center of the Appellant's work routine; and
n) the Appellant did not devote most of his time to the Activity;
o) the Appellant claimed the cost of a pendant and display as an expense of the Activity in the 1995 taxation year;
p) the Appellant sold the pendant and the display in 1996 for $300.00 and $920.00, respectively;
q) the Appellant did not report the income from the disposition of the pendant and the display in the 1996 taxation year;
r) the Appellant did not replace the pendant and the display in the 1996 taxation year;
s) automobile expenses claimed in 1995 and 1996 included CCA on class 10 depreciable property as shown in the attached Schedules "B" and "F";
t) the Appellant had misclassified a 1990 truck class 10.1 depreciable property (the "Class 10.1 Property") as a class 10 depreciable property;
u) the Appellant disposed of the Class 10.1 Property in 1995;
v) the opening UCC of the Class 10.1 Property did not exceed $25,680.00 in 1995;
w) the Appellant is not entitled to a terminal loss on the disposition of the Class 10.1 Property under subsection 20(16.1) of the Act;
x) the Appellant is not entitled to CCA for class 10.1 in excess of $3,852.00 in the 1995 taxation year as shown in the attached Schedule "J"; and
y) the Appellant did not own any class 10.1 depreciable property in the 1996 taxation year as shown on Schedule "E";
B. ISSUES TO BE DECIDED
9. The issues are whether:
(a) the Appellant's chief source of income was from farming or a combination of farming and some other source of income in the 1995 and 1996 taxation years;
(b) the Minister properly restricted the Appellant's farm loss under section 31 of the Act in the 1995 and 1996 taxation years;
(c) the Minister properly calculated CCA on class 10.1 depreciable property in the 1995 taxation year; and
(d) the Minister properly included the disposition of the pendant and the display in income in the 1996 taxation year.
C. STATUTORY PROVISIONS RELIED ON
a) He relies on sections 3, 9, 13, 28, 31, 67, 67.1, 67.3 and subsections 18(12), 20(16.1) and 248(1) and paragraphs, 18(1)(a), 18(1)(b), 18(1)(h), 20(1)(a) and 20(1)(b) Act and Regulation 1100 of the Regulations.
D. GROUNDS RELIED ON AND RELIEF SOUGHT
10. He respectfully submits that for the 1995 and 1996 taxation years the Appellant's chief source of income was neither farming nor a combination of farming and some other source of income with the result that the farming losses are restricted by section 31 of the Act.
11. Alternatively, if this Honourable Court determines that the Appellant is entitled to farm losses, which is not admitted but is denied by the Respondent, the amounts allowable for the 1995 and 1996 taxation years are as set out in Schedules "H" and "I", respectively.
[4] In argument the following items in dispute were concluded:
1. The Respondent conceded that the truck in question is depreciable under Class 10 and that the Appellant was entitled to a terminal loss respecting it.
2. The pendant and display that were sold are income to the Appellant which were replaced at a cost of $1,222; as a result, on the evidence, the Appellant incurred a loss of $2 on the total series of transactions.
[5] What remained in dispute was the restricted farm loss on the llama breeding farm. That was a start up in 1992 by the Appellant and his wife as partners. Mrs. Mobley was born and raised on a mixed farm in Saskatchewan. They researched llamas and other farming possibilities before buying the llamas, Mrs. Mobley spent all her time on the farming operation and Mr. Mobley spent more time on the farm operation than at his employment. They committed all of their acreage and all of their capital (a total of about $230,000) and they changed their habits of work to become farmers. On the evidence, they formed a plan at the outset to build-up a profitable farm within five years but they did not put that plan in writing.
[6] In 1992 they expected to make profits in five years, based on projections they received from Mr. Gopett, from gross sales of about $115,000 (about five llamas). Their total 1995 expenses claimed were $71,701.68. Using those expenses their profit in 1997 would have been about $28,000, which is substantial.
[7] Their original plan and reason for entering into farming was to have a substantial farm income in ten years (by 2002) when Mr. Mobley expected to retire on a very small pension. Llamas take two years after birth to grow into mature animals. The Mobleys' plan was to make most of their profits from breeding and selling llamas. Thus they needed the gestation period plus, more or less, two years before their operation would permit any sales. In total, that accounts for 1992, 1993 and 1994 which were the years of operation until the assessment years of 1995 and 1996. They expected that, in ten years, a basic herd of 15 animals would yield sales sufficient to yield an average profit of $50,000 per year. (These figures were supported by material they received from Mr. Gopett before they began their llama operation.) As a result, their farm income would be much greater than their off-farm income and would be substantial in relation to other income.
[8] Two things happened which set them back:
1. In 1995 Mr. Mobley was diagnosed with cancer and required extensive treatment in Vancouver. Mrs. Mobley conducted a maintenance operation on the farm near Prince George during this period and Mr. Mobley required a recovery period in 1995.
2. In 1996, the Government of Canada opened the border to the general import of llamas and prices plummeted drastically. The Mobleys had originally purchased one female with a young at her side for $20,000 and a sire for $25,000. As a result of the Government's actions the market for llamas remains poor. It should also be noted that after almost two years of medical treatment, their original sire llama died.
[9] The Mobleys went into the operation using their saved capital, rather than borrowed money. They had a modest and reasonable plan and they suffered severe setbacks in their first five years of operation. The biggest one was when the Government of Canada opened the border to the import of llamas and destroyed the prices of the llamas in Canada.
[10] In the Court's view they were legitimate start-up farmers with a reasonable expectation of substantial profits based on the market prices of llamas at their start-up in 1992. At a conservative estimate, the Appellant is entitled to a start up period of 5 years in order to build up a herd and have a few sales. The three-year period assessed by the Minister is too short in view of the maturity period that llamas require. The 1995 set back was an unforeseeable Act of God - Mr. Mobley's cancer. Their 1996 set back was caused by the Government of Canada when it opened the border and caused llama prices to be reduced drastically - that too was unforeseeable by the Mobleys. This Court cannot penalize them for an act by the Respondent which the Appellant could not anticipate so as to restrict his farm loss.
[11] The Court finds that Mr. Mobley's chief source of income in 1995 and 1996 was from a combination of farming and his employment. Therefore the appeals are allowed on the basis that 1995 and 1996 were start-up years. However the allowable losses to be reassessed are those set out in Schedules "H" and "I" of the Reply to the Notice of Appeal as amended by particulars set out in paragraph [4] of these reasons. Therefore the Appellant is entitled to deduct the following farm losses subject to the amendments set out in paragraph [4]:
1995 - net farm loss - $25,656.26
1996 - net farm loss - $15,139.39
[12] These matters are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
Signed at Saskatoon, Saskatchewan, this 30th day of April, 2002.
« D.W. Beaubier »
J.T.C.C.
COURT FILE NO.: 2000-4595(IT)I
STYLE OF CAUSE: Conrad Mobley v. The Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: April 12, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF JUDGMENT: April 30, 2002
APPEARANCES:
Agent for the Appellant: Dewey Lotosky
Counsel for the Respondent: Michael Taylor
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4595(IT)I
BETWEEN:
CONRAD MOBLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 12, 2002 at Kelowna, British Columbia, by
the Honourable Judge D. W. Beaubier
Appearances
Agent for the Appellant: Dewey Lotosky
Counsel for the Respondent: Michael Taylor
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the matter is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
The name and address of the agent for the Appellant is changed to Dewey Lotosky, 1675 Pandosy Street, Kelowna, British Columbia.
Signed at Saskatoon, Saskatchewan, this 30th day of April, 2002.
|
"D. W. Beaubier" |
J.T.C.C.