Date: 20011123
Docket: 2000-4465-IT-I
BETWEEN:
DONALD V. MYLES,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Edited from the transcript of Reasons delivered orally from
the Bench at Ottawa, Ontario on June 29, 2001.)
Hershfield, J.T.C.C.
[1] This is an appeal of the Appellant's 1996, 1997 and 1998 taxation years which were assessed and, in respect of his 1997 and 1998 years, reassessed by the Minister of National Revenue. Such assessment in respect of 1996 and such reassessments in respect of 1997 and 1998, denied losses claimed in those years from certain activities of the Appellant filed as two distinct businesses, namely, a professional consulting forestry engineering business and a farming business that included a woodlot operation. The losses were denied on the basis of there being no reasonable expectation of profit from the subject activities. The Appellant also puts in issue the quantum of depletion allowed in respect of the woodlot.
[2] The losses claimed were as follows:
Net income (loss) 1996 1997 1998
Professional ($ 5,432) ($ 4,067) ($ 3,944)
Farming ($ 7,016) ($ 8,005) ($ 5,649)
[3] With respect to the professional consulting business, the Appellant claimed losses from 1991 through 1998 as follows:
Professional Gross Net income
Income Revenue Expenses (loss)
1991 $ 3,104 $ 10,543 ($ 7,439)
1992 - 1,849 ($ 1,849)
1993 2,600 4,915 ($ 2,315)
1994 1,900 6,860 ($ 4,960)
1995 140 10,893 ($10,753)
1996 - 5,432 ($ 5,432)
1997 - 4,057 ($ 4,057)
1998 - 3,944 ($ 3,944)
Total $ 7,744 $ 48,493 ($40,749)
[4] The business was started when the Appellant retired in 1991 as a forestry engineer. He was on pension and was looking for something to do. He thought he could do consulting. He had an unfinished project at that time and thought he could turn it into consulting work. He said he knew the industry and did not have to do any market studies. He admitted though that after trying in the earlier years to get some business in the Vancouver area, he did not actively pursue work. In the subject years he did no marketing and had no plan of action to derive revenue, let alone profit. Indeed, he testified that in the later years he figured that the best thing to do was to get out of the forestry business. The testimony of the Appellant on the issue of whether there was a business here, a source of income, has led me to conclude that there was no commercial activity being carried on. That he was an expert in his field with commercial potential, if pursued in a commercial manner, is not sufficient. There must be a genuine commercial activity with some motivation to profit - to generate revenues. Such motivation did not exist in the subject years.
[5] Therefore, in accordance with an abundance of jurisprudence in this area, I find there is no source of income against which losses can be claimed in this case. As such, the appeal is denied in respect of the professional consulting activity.
[6] Turning to the next activity, which was the farming woodlot activity, the Appellant has asserted that he carried on a genuine farming business together with a woodlot operation. He relies on Interpretation Bulletin IT-373R to support the deductions taken, particularly deductions in respect of depletion on the woodlot which the Appellant believes should be higher (according to his understanding of conversations with someone at Revenue Canada when he prepared his return for 1997) than the allowance permitted under the assessment and reassessments. While the Bulletin has no bearing on the proper application of the Act, it is hard to see how the Bulletin assists the Appellant in any event. It clearly sets out an administrative practice for farming operations that include a woodlot where income from the woodlot is minor in relation to income from other farming activities. In this case, as I will elaborate on shortly, there is no farming or other farming business. Further, the depletion that the Bulletin purports to allow is in fact the depletion allowed by the Minister.[1] In any event, the Appellant, having combined the farming and woodlot activities, has made segregating the expenses from each such activity difficult and his evidence was not helpful in this regard. Isolating incomes from each activity is easier.
[7] In respect of the farming activity, the income is nominal. The 1996 return showed pasture rental income of $1,100 (with no revenues from the woodlot). Expenses claimed were $12,633.96. For 1997, hay revenue was $300[2] (woodlot revenues were $17,172). Expenses claimed were $30,982.93 including depletion of $17,172.00.[3] In 1998, hay and pasture revenues were $300 (woodlot revenues were $14,575.55). Expenses claimed were $23,675.47 including depletion of $14,558.40.
[8] In question here is a total of 300 acres of which some 100 acres is a woodlot. The balance is grazing pasture (125 acres) and land under cultivation for the production of hay (75). The pasture land and the land cultivated for hay are what the Appellant asserts to be the farming operation which it seems he feels compelled to argue in order to bring his woodlot into the administrative practices set out in the Bulletin. Such linkage is not helpful in this case. The woodlot stands alone as a distinct business activity in my view and is entitled to normal business expenses if shown by the Appellant to have been incurred for the purpose of earning income. That the Appellant has claimed expenses from a "farming" business to which he has attached his woodlot operation should not result in a denial of proper expenses relating to the woodlot as a separate business.[4] The difficulty with the Appellant's approach is that he was unwilling or was unable to provide evidence as to which expenses related to the farm, i.e. the activity that is not a business and that does not give rise to expenses deductions, and which expenses related to the woodlot, i.e. the activity that is a business and does give rise to expenses deductions. He did not satisfy the burden of proof, expense by expense, in the matter and seemed to insist that being a farmer he did not have to allocate expenses between the "farm" and the "woodlot". This position was to his detriment and he would not be deterred from it in spite of being offered an adjournment to afford him time to properly document appropriate expense claims. His refusal to accept the need to allocate expenses to the woodlot could have led to no expenses being allowed. Fortunately for the Appellant, Respondent's counsel conceded that the Respondent would accept that certain amounts claimed related to the woodlot.[5] I have allowed the appeals to that extent.
[9] The history of these operations is relevant to consider. The subject lands have been in the Appellant's family for five generations. The Appellant and his brother inherited the land at a time when it had a nominal value (in the late 1930s) and more recently (in 1998) he bought his brother out at a declared value of $20,000.[6] The Appellant said he wanted to feed his own cattle on the pasture lands and thought he could do it profitably. He started farm operations in 1987 (at a loss every year since) and there is no evidence that he ever raised cattle on these lands.[7] He rents the lands to his neighbour for his neighbour's cattle for modest amounts. When the cattle purchases commence, likely the farming business will commence as well.[8]
[10] I also note that the Appellant lives in Ottawa. The "farm" is in Quebec. Although he does not live on the farm he acknowledged his son did during the subject years. The Appellant also acknowledged that the property was to be passed on in the family and had to be maintained for that reason. These are material personal elements that warrant the application of the reasonable expectation of profit test.
[11] While I accept that the woodlot is a commercial operation, it is clearly distinct from the farm which I find not to be a commercial operation in the years in question. As to any rental business in respect of the pasture lands I am not satisfied that any expectation of profit in the subject years would be anything but fanciful. The Crown argued reasonable expectation of profit in relation to the separate acreage that did not constitute the woodlot and I agree. The test is the same as applied in respect of the professional consulting business and that is: Was there a genuine commercial enterprise being carried on in the subject years? The activity might be to maintain property for the future purpose of farming, but there is no activity here that constitutes a business by the Appellant with any expectation of profit in the subject years.
[12] What we have left, the woodlot, is the only actual operation that can be isolated as a commercial activity and that isolated activity has generated significant income in two of the subject years. Isolating and proving expenses in respect of that business is the onus of the Appellant. His testimony was inconsistent. On the one hand he maintained he needed roads, fences and improvements to select-cut the woodlot and on the other hand he maintained he could not start the cattle operation until these were done. He is responsible for defending the allocation of expenses. In this case, the allocations were never made and the Respondent has properly disallowed them all, except as consented to by the Respondent during the course of trial.
[13] As to depletion, the reassessments allowed depletion under Schedule VI of the Regulations for 1997 and 1998. I am satisfied that Schedule VI is the appropriate schedule to apply and that the depletion allowance allowed has been correctly calculated by Revenue Canada in accordance with the Income Tax Act, its Regulations and that Schedule.[9]
[14] Exhibit R-5, showing the calculation of the Schedule VI allowance, was reviewed in light of the specific provisions of Schedule VI during the course of the hearing. The auditor gave evidence for the Respondent as to the source of the data needed to run the depletion allowance calculations and I am satisfied with his evidence. The Appellant gave no evidence contradicting the data used by Revenue Canada (most if not all of which had been supplied by the Appellant in the first place). The Appellant simply wanted more "cost" recognition than he was entitled to under the Act for depletion purposes and wanted it all up front against the first cords of wood cut and sold.[10]
[15] I accept that it has taken years of well managed woodlot operations to yield the revenues achieved in 1997 and 1998 and that there may well be unaccounted for expenses along the way that have not been recognized. The Appellant argues he has 40 years of unexpensed property taxes and costs relating to his selective cutting procedures that he has practiced at considerable cost without credit in the tax system. He expects that credit in a depletion allowance that on its own terms gives no recognition of any such unclaimed expenses (which he has only talked about but not proven).[11] Perhaps there is room for a broader definition of "capital cost" used in Schedule VI in calculating the allowance in these cases but it is for Parliament to provide same. This Court has no jurisdiction to expand the Act and its Regulations.
[16] Based on the Respondent's consent to permit certain expenses claimed in relation to the woodlot operation, the appeals are allowed as follows: In respect of the 1997 taxation year an additional deduction of $6,319 is allowed and in 1998 an additional deduction of $2,893 is allowed.
[17] While deductions (other than depletion) may have been appropriate for 1996 as there was a woodlot business in that year, even without revenue, none were isolated or proven by the Appellant so the appeal in respect of 1996 is dismissed.
Signed at Toronto, Ontario, this 23rd day of November 2001.
|
"J.E. Hershfield" |
J.T.C.C.
COURT FILE NO.: 2000-4465(IT)I
STYLE OF CAUSE: Donald V. Myles and
Her Majesty the Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: June 29, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge J.E. Hershfield
DATE OF JUDGMENT: November 23, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Rosemary Fincham
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
[1] The Bulletin speaks of "depletion" as does the Appellant as do these Reasons. However, the Schedule VI allowance referred to in the Bulletin is one permitted under Regulation 1100 and is, strictly speaking, a capital cost allowance. However, the Schedule clearly affords a depletion type allowance in that it allows a deduction of the capital cost of a timber limit, as timber is removed, on the basis that each cord in the limit has a pro-rata cost. This allowance has been given to the Appellant even though he was not considered to be a farmer in the subject years. This is an administrative concession, it seems, as the alternative allowance that might be available, Class 15 of Regulation 1100, would give less than that afforded under Schedule VI in this case.
[2] The Appellant testified that he had pasture lands rental income in 1997 as well but he apparently failed to report it. This speaks to the Appellant's record keeping and credibility.
[3] It seems the Appellant's idea of depletion was to shelter woodlot revenues against historical costs. The "capital cost" is relevant for depletion calculations in Schedule VI but the Appellant's notion of cost was argumentative. He offered no documented records of costs to be included for depletion allowance purposes and was unfamiliar and unappreciative of the Regulations to the Act which dictated the amount of the allowance.
[4]Some expenses claimed by the Appellant, such as a vehicle, were allocated by him as between personal and business use. Excepting expenses relating to the woodlot, all such expenses were personal in my view.
5 The Appellant and Respondent's counsel were afforded two recesses to try to work through which expenses related to which activity and to sort out any personal expenses. While no consensus was reached, the Respondent conceded certain expense deductions relating to the woodlot operation. That no consensus was reached seemed to reflect the Appellant's dissatisfaction with the process (i.e. the process of being asked to allocate expenses and admit that any claimed expenses were personal) and, more particularly, his dissatisfaction with the low depletion being recognized. Regardless, evidence pertaining to a proper allocation of expenses was never brought before me.
[6] That is, in respect of 1996 and 1997, there was a nominal cost associated with the woodlot. There was an addition to cost in 1998. The Appellant, on coming to understand the relevance of cost, argued that the value of the land at the time of the acquisition from his brother was higher than declared earlier to Revenue Canada. He backtracked when advised of the adverse consequences this could have on the transaction with his brother. The Appellant's position on this, and on other matters, puts his credibility at issue.
[7] His farming loss for 12 consecutive years ranged from $3,400 to $13,500 and totalled $94,947 over that period. It seems possible if not likely that some woodlot expenses were claimed in those years although there is no evidence of that except in the subject years where clearly expenses like property taxes on the woodlot were claimed as farming expenses and allowed in the reassessments.
[8] Until 1996, Revenue Canada allowed restricted farm losses and carryovers of prior year's restricted farm losses were apparently allowed in the subject years as well.
[9] In determining the correct allowance for a woodlot, if any is going to be recognized at all, the exercise starts with determining whether it is a "timber resource property" as defined in subsection 13(21) of the Act since the subject schedule does not apply to a timber resource property. While an expert in forestry, the Appellant provided no assistance to the Court in categorizing his woodlot. No evidence necessary to categorize the subject woodlot was tendered. To be a timber resource property, issues as to time of acquisition of timber limits and times of renewals of original rights or licenses must be addressed. In this case we likely have no timely acquired rights in the sense used in the definition of timber resource property. The timber limit in this case seems to arise from the administrative practice of Revenue Canada to allow "farmers" Schedule VI treatment. That practice has not been denied the Appellant even though Revenue Canada has denied that he is a "farmer". In any event, the Respondent in its Reply relied on the application of Schedule VI and in doing so denied that the woodlot in question was a "timber resource property". Indeed in referring to the Bulletin the Appellant himself seemed to accept the application of Schedule VI (incorporated by reference in Regulation 1100(1)(e)). Alternatively, the woodlot might fall into Class 15 under Regulation 1100(1)(f). The auditor, as a witness for the Respondent, pointed out that this allowance calculated under Schedule IVwould yield a smaller deduction than allowed under Schedule VI.
[10] While I do not think it is necessary to set out the operative provisions of Schedule VI, I do note that section 1 allows the deduction of the lesser of the amounts set out in paragraphs (a) and (b). Paragraph (b) is the UCC of the timber limit. The UCC is the undepreciated capital cost which was nominal until 1998, so in 1996 and 1997 the allowance would be nominal in both those years. In fact, the Appellant made no claim in 1996 and was given $100 as an allowance in 1997 under section 4 of the Schedule. Section 4 provides for a $100 deduction in lieu of the section 1 deduction. The $100 deduction would not be available in 1996 under section 4 as the Appellant had no woodlot revenues in that year. The formula in respect of 1998 is somewhat more complicated. The theory is straightforward though. There has been a $20,000 addition to the heretofore nil UCC. It is therefore necessary to calculate the section 1(a) amount which will define the lower limit of the allowance for 1998. The 1(a) amount is the aggregate of the amounts described in (a)(i) and (ii). The latter (ii) amount refers to specific expenses not incurred in this case and is "nil". The limit of the allowance is therefore the amount described in (a)(i) which is that fraction of the capital cost of the timber limit that exists in 1998 (i.e. in the year acquired in this case) that equals the fraction of that limit that is sold in the year. The cost of the limit is $15,000 (cost of woodlot less $5,000 residual value of land as estimated by the Appellant). The Appellant has estimated 1,280 cords were on the woodlot at the beginning of 1998, so the cost of the cords sold in 1998 (540.58) relative to the cost of the cords there at the beginning of the year can be determined and that is how the allowance for the year under paragraph (1)(a) of $6,330.92 was calculated. The allowance has been correctly calculated according to the information provided by the Appellant.
11 As noted, at least in the subject years, property taxes were allowed as an expense against the woodlot operation and prior to 1996 expenses were allowed on a restricted farm loss basis. The Appellant treated the woodlot as part of the farm during those years and presumably took into account his woodlot expenses in calculating his losses in those years. If he did not or if they were not allowed, it is too late to seek accommodation through a depletion regulation that on its terms makes no such accommodation.