Date: 20010622
Docket: 1999-1963-IT-I
BETWEEN:
JEAN-PIERRE MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Watson, D.J.T.C.C.
[1] This appeal was heard at Trois-Rivières, Quebec, on June 15, 2001, under the informal procedure.
[2] In computing his income for the 1993, 1994, 1995 and 1996 taxation years, the appellant deducted $26,039, $23,484, $11,630 and $12,485, respectively, as losses from farming activities.
[3] By notices of reassessment dated September 22, 1997, the Minister of National Revenue ("the Minister") disallowed the amounts of $26,039, $23,484, $11,630 and $12,485 respectively as losses in computing the appellant's income for the 1993, 1994, 1995 and 1996 taxation years.
[4] In making the reassessments, the Minister assumed the following facts, inter alia:
[TRANSLATION]
(a) the appellant is a nurse in a remote area who reported the following amounts as employment income during the years at issue:
(i) 1993 $102,175
(ii) 1994 $74,070
(iii) 1995 $54,053
(iv) 1996 $67,593;
(b) in 1991, the appellant paid $60,000 to purchase a farm that had been in a state of neglect for about 10 years;
(c) the appellant borrowed $40,000 to purchase the said farm;
(d) the farm is located at 7 Chemin Doucet in Saint-Mathieu-du-Parc;
(e) the appellant intends to engage in fruit and berry farming, sell maple products, provide rental accommodations for holidays and carry on logging activities;
(f) during the years at issue, the appellant spent about three months working on the farm;
(g) in 1994, the appellant took out a loan of $85,000 to build his house;
(h) the gross annual income during the years at issue was almost nil:
(i) 1993 $1,040
(ii) 1994
(iii) 1995 $1,092
(iv) 1996 $1,100;
(i) the appellant does not know the source of the gross annual income he reported;
(j) the appellant has not done any profitability analysis and is relying on the farm's potential;
(k) the appellant has no experience operating a farm;
(l) the appellant had no reasonable expectation of profit in running the farm during the period from 1993 to 1996; and
(m) the expenses paid each year in connection with the farm were the appellant's personal or living expenses and were not incurred by him for the purpose of gaining or producing farming income.
[5] At the hearing, the agent for the appellant, Maurice Magny, admitted the facts alleged in subparagraphs (a) to (h) and (k) and denied the facts alleged in subparagraphs (i), (j), (l) and (m).
[6] The appellant was the only person who testified when the appeal was heard. He testified very honestly and showed that he had acted in good faith and had relied on his accountant's advice. During his testimony, he admitted subparagraph (j) above.
[7] The burden of proof is on the appellant, who must show on the balance of evidence that the reassessments are wrong in fact and in law. Each case stands on its own merits.
[8] There is a vast case literature on what "reasonable expectation of profit" means, including the decisions referred to below.
[9] In Moldowan v. Her Majesty The Queen, [1978] 1 S.C.R. 480, Dickson J. of the Supreme Court of Canada stated the following at page 485:
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 . . . 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.
[10] In Landry v. Her Majesty The Queen, 94 DTC 6624, Décary J.A. of the Federal Court of Appeal stated the following at pages 6625-26:
There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream. . . .
...
Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of the relevant periods, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer's good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.
[11] In Tonn v. Canada, [1996] 2 F.C. 73, Linden J.A. of the Federal Court of Appeal stated the following at pages 103-04:
... However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.
...
Another listing of the factors to be assessed was set out in Sipley (P.D.) v. Canada:
The objective test includes an examination of profit and loss experience over past years, also an examination of the operational plan and the background to the implementation of the operational plan including a planned course of action. The test further includes an examination of the time spent in the activity as well as the background of the taxpayer and the education and experience of the taxpayer.
[12] In McKinney v. Canada, [2000] F.C.J. No. 453, Robertson J.A. of the Federal Court of Appeal stated the following in a judgment delivered orally on April 3, 2000:
The applicant, a retired university professor, claimed accumulated expenses of $47,000 against revenue of $50 over the four taxation years in question. The expenses were incurred in regard to a number of research endeavours which the applicant hoped would lead to publications. In fact no publication resulted. In our respectful view, Judge Mogan did not err in holding that the applicant did not have a reasonable expectation of profit. Accordingly, the application should be dismissed.
[13] Having regard to all the circumstances of this appeal, including the appellant's testimony, the admissions and the documentary evidence, the Court is satisfied that the appellant has not been able to show on the balance of evidence that he had a reasonable expectation of profit during the years at issue and that the reassessments dated September 22, 1997, were wrong in fact and in law.
[14] Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of June 2001.
|
"D. R. Watson" |
D.J.T.C.C.
Translation certified true on this 6thday of January 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
1999-1963(IT)I
BETWEEN:
JEAN-PIERRE MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 15, 2001, at Trois-Rivières, Quebec, by
the Honourable Deputy Judge D. R. Watson
Appearances
Agent for the appellant: Maurice Magny
Counsel for the Respondent: Diane Lemery
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1993, 1994, 1995 and 1996 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of June 2001.
|
"D. R. Watson" |
D.J.T.C.C.
Translation certified true on this 6thday of January 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]