Date: 19980512
Docket: T-1640-83
Present: THE HONOURABLE MADAME JUSTICE TREMBLAY-LAMER
OTTAWA, ONTARIO, MAY 12, 1998
Between:
CLAUDE F. ARCHAMBAULT,
Plaintiff,
- and -
HER MAJESTY THE QUEEN,
Defendant.
ORDER
The notices of reassessment made against the plaintiff are upheld except in respect of the sum of $5,000 added to the plaintiff's professional income. With costs against the plaintiff except in respect of the $5,000, for which each party will bear their costs.
"Danièle Tremblay-Lamer"
JUDGE
Certified true translation
C. Delon, LL.L.
Date: 19980512
Docket: T-1640-83
Between:
CLAUDE F. ARCHAMBAULT,
Plaintiff,
- and -
HER MAJESTY THE QUEEN,
Defendant.
REASONS FOR JUDGMENT
TREMBLAY-LAMER J.
[1] This is an appeal by a taxpayer under subsection 172(2) of the Income Tax Act1 against reassessments relating to the 1977, 1978, 1979 and 1980 taxation years, which were made by the Minister of National Revenue on April 22, 1983.
[2] The plaintiff, Claude Archambault, is a lawyer practising law in his own firm. On May 19, 1982, reassessments were made against him informing him that he had a balance payable in respect of the 1977, 1978, 1979 and 1980 taxation years:
| (a) The Minister had disallowed the farm losses claimed during the four taxation years in question; |
| (b) The Minister had disallowed the deductions claimed for interest expenses: $8,000 in 1977, $16,000 in 1978, $10,000 in 1979 and $24,000 in 1980; |
| (c) The Minister had added professional income of $30,000 and $3,000 to the reported income for the 1979 and 1980 taxation years, respectively; |
| (d) The Minister had added a taxable capital gain of $14,026 to the income reported for the 1980 taxation year; |
| (e) The Minister had added a penalty for late filing for the 1978 and 1980 taxation years. |
[3] The plaintiff disputed the reassessments, and accordingly served a notice of objection on the Minister. In a notice of reassessment dated April 22, 1983, the Minister allowed the plaintiff a deduction for restricted farm losses in computing his income. This was the only change made to the assessments in question.
PRELIMINARY QUESTION
[4] In this case, counsel for the plaintiff made a number of admissions at the examination for discovery. At trial, he denied having given his counsel instructions to make those admissions. He asked the Court to withdraw them, and that request was denied for the following reasons.
[5] The case law is clear on the question of withdrawing admissions: a party may not withdraw a "formal admission" (or "judicial admission") without first obtaining leave of the Court or consent of the adverse party.2
[6] In Canada Permanent Mortgage Corporation v. The City of Toronto,3 the Ontario Court of Appeal defined the expression "formal admission" to include all the facts admitted "for the purpose of trial".4 From that standpoint, an admission made by counsel for a party at an examination for discovery constitutes a formal admission which cannot be withdrawn without leave of the Court.
[7] Withdrawal of an admission falls within the discretion of the Court. Recently, the Federal Court of Appeal ruled as to the test to be applied in respect of the withdrawal of admissions, in Andersen Consulting v. Canada:5 the court must determine whether there is a "triable issue which ought to be tried in the interests of justice and not be left to an admission of fact".6 In examining the issue, the court must take into account a number of factors, including inadvertence, error, hastiness, lack of knowledge of the facts, discovery of new facts, and timeliness of the motion. The Court of Appeal stated the test as follows:
| Rather, they have adopted as a test that, in all the circumstances of the case, there be a triable issue which ought to be tried in the interests of justice and not be left to an admission of fact. Under such a test, inadvertence, error, hastiness, lack of knowledge of the facts, discovery of new facts, and timeliness of the motion to amend become factors to be taken into consideration in deciding whether or not the circumstances show that there is a triable issue which out to be tried in the interests of justice.7 |
[8] Accordingly, when the request to withdraw is made (as is the case here) at the last minute, while the admission took place several years earlier, and the request would cause serious prejudice to the adverse party, who is taken by surprise, it is not appropriate, in my view, to consent to it.
[9] In J.P.L. International Diffusion Inc. v. The Queen,8 one of the parties had sought leave to withdraw admissions made at the examination for discovery, which was denied. Madame Justice McGillis held:
| Even if I were to assume that counsel for the defendant made the impugned admission without authority or by mistake, I have determined, in the exercise of my discretion, that it would not be appropriate to permit him to withdraw his admission, which was made almost four years ago, on the basis that it would cause serious inconvenience and prejudice to the plaintiff if the admissions were withdrawn at this late stage in the proceedings. ... For these reasons, the request by counsel for the defendant to withdraw his admission is denied.9 |
[10] The admissions made by counsel for the party cannot be withdrawn simply because the party denies having expressly authorized his representative to make them. As the authors of The Law of Evidence state:10
| Counsel has the implied authority to make an admission on behalf of a client, which in the honest exercise of his or her judgment he or she things is proper, provided it is incidental to the suit. The fact therefore, that the client has not expressly authorized the admission to be made does not, in itself, entitle a client to subsequently withdraw it.11 |
[11] Moreover, in this case, it is most surprising that Mr. Archambault, who was himself present at the examination for discovery, would not have objected at the time, and would wait until ten years later, at the time of trial, to contend that his counsel was not instructed.
[12] As a result of those admissions, the questions of the taxable capital gain of $14,026, the penalty for late filing and the limitation period are no longer in issue.
ANALYSIS
[13] In any appeal of an assessment, the burden of proof rests on the taxpayer. Subsection 152(8) of the Act provides that the Minister's assessment is deemed to be valid and binding notwithstanding any error, defect or omission. It is therefore up to the taxpayer to prove that the Minister's assessment is wrong.12
FARM LOSSES
[14] In 1976, the plaintiff purchased farm lands and machinery with the intention of carrying on a farming business. During the taxation years in question, the business incurred losses: $33,983 in 1977, $43,457 in 1978, $30,921.40 in 1979 and $45,111 in 1980. The business was dissolved in 1980. The issue is whether the farm losses are entirely deductible or whether their deductibility is subject to the ceiling established by section 31 of the Act.
[15] A taxpayer who carries on a farming business may deduct all of a loss incurred in respect of that business just as may any other taxpayer carrying on a business. However, if farming or a combination of farming and some other source of income is not his "chief source of income", the amount of the taxpayer's deductible losses for the year will be subject to a ceiling. Under subsection 31(1) of the Act,13 the amount of his losses for the year from all the farming businesses carried on by him shall be deemed to be the aggregate of:
(a) the lesser of
(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and
(ii) $2,500 plus the lesser of
| (A) " the amount by which the amount determined under subparagraph (ii) exceeds $2,500, and |
| (B) $2,500, and |
(b) the amount, if any, by which
| (i) the amount that would be determined under subparagraph (a)(iii) if it were read as though the words "and before making any deduction under section 37 or 37.1" were deleted, |
exceeds
| (ii) the amount determined under subparagraph (a)(ii); |
and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss" for the year.
(a) de la moins élevée des sommes que representent:
(ii) la fraction du total de ses pertes pour l'année, déterminées en faisant abstraction du présent article et avant toute déduction en vertu des articles 37 ou 37.1, et provenant de toutes les entreprises agricoles exploitées par lui, qui est en sus du total des revenus, ainsi déterminés, qu'il a tirés pour l'année de toutes ces entreprises, ou
(ii) $2,500 plus la moins élevée des sommes suivantes:
| (A) " de la fraction du montant visé au sous-alinéa (i) qui est en sus de $2,500, ou |
| (B) $2,500, et |
(b) la fraction, si fraction il y a,
| (i) de la somme qui serait déterminée en vertu du sous-alinéa a)(i) s'il y était fait abstraction des mots "et avant toute déduction en vertu des articles 37 ou 37.1", |
qui est en sus
| (ii) de la somme déterminée en vertu du sous-alinéa a)(i), |
et aux fins de la présente loi, la fraction, si fraction il y a, du montant déterminée en vertu du sous-alinéa a)(ii), constitue la "perte agricole restreinte" subie par le contribuable pour l'année.
[16] In this case, by allowing the taxpayer a deduction for restricted farm losses, the Minister has agreed that the plaintiff operated his farm as a business and not as a hobby. The only question is therefore whether farming, or a combination of farming and some other source of income, comprised the plaintiff's chief source of income.
[17] In order to be considered as a chief source of income, farming must be the taxpayer's major preoccupation, and not merely an auxiliary interest. The test for determining whether farming is the taxpayer's chief source of income is both relative and objective. Farming must be compared to the taxpayer's other activities, having regard to three factors - the capital committed, the time spent and the profitability, actual or potential - in order to determine whether agriculture is a principal activity or not.14 What counts is the cumulative effect of the three criteria. However, contrary to what counsel for Mr. Archambault argued, the question of profitability takes centre stage in this determination. As Mr. Justice Robertson of the Federal Court of Appeal recently stated in Canada v. Donnelly (C.A.):15
| A determination as to whether farming is a taxpayer's chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer's other income source in terms of capital committed, time spent and profitability, actual or potential. The test is both a relative and objective one. It is not a pure quantum measurement. All three factors must be weighed with no one factor being decisive. Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act.16 |
[18] With respect to the first test, the purchase of farm lands and farm machinery and the operating expenses resulted in the plaintiff investing practically all the income from his law practice in his farming business. Accordingly, there is no doubt, with respect to the test of investment, that the comparison favours the farming business.
[19] With respect to the second test, the time invested, Mr. Archambault testified that he was present every step of the way to make his farming business work, and that he spent approximately 85% of his time on it during the period in issue. I doubt the credibility of that testimony. During the four years when the business was being carried on, he was the sole proprietor of a law office, where a number of lawyers practised. He managed the office himself. He was the only one who had access to the trust account. How could he have operated the office if he were away 85% of the time?
[20] With respect to the farming business, there were always at least two people to help him on a full-time basis during the years in question. When we look at the slight income from the farming business, a large part of the work could have been done by the two men, particularly in the winter when there were only about twenty animals to be tended.
[21] I therefore place little weight on Mr. Archambault's testimony. His conduct at the trial "heightens" this finding of fact. Mr. Archambault was a difficult witness, and on occasion he refused to answer questions put to him on cross-examination.17 He even left the witness stand during cross-examination to confer with his counsel, without the consent of the Court, and communicated with them during an adjournment. This kind of behaviour, coming from a witness who is a lawyer by profession, is particularly unacceptable, and the credibility of the witness is seriously affected by it.18 Mr. Archambault has therefore not satisfied me that he spent more time on his farming business than on his law practice.
[22] In any event, even if I had reached the opposite conclusion in terms of the time spent, it is certain that the taxpayer's farming business would not meet the third test, profitability.
[23] As we saw earlier, profitability must be examined from two standpoints: actual profitability and potential profitability. In this case, there was never actual profitability. This is confirmed by the plaintiff's income tax returns. Accordingly we need now only consider the potential profitability of the business.
[24] Mr. Archambault testified, as did Mr. Leblanc, an experienced agronomist, that between 450 and 500 arpents are needed in order to have a profitable farming business. Mr. Archambault never reached that minimum. Accordingly, it is not possible to talk about potential profitability, since in the best possible scenario Mr. Archambault never owned enough land to ensure a profitable business.
[25] In addition, Mr. Leblanc testified that cultivated land could produce between a half tonne and two tonnes of wheat per arpent. Assuming that the land is fully seeded and that it produces a maximum of two tonnes, and that the price of wheat remains at $80.00 per tonne, the maximum gross revenue could have amounted to $64,000.19 The expenses, to which must be added the interest incurred, being an average total of $50,000 per year, must be deducted from that income.20 Accordingly, the maximum profit that could be derived from the farming business would be $14,000.
[26] On the other hand, in an unlucky year, when conditions were not ideal or the land did not produce any more than a half tonne, the gross income would amount to only $16,000,21 less expenses of $50,000, which would obviously result in a substantial loss ($34,000).22 The farming activity therefore cannot compare favourably to the professional income, to which interest is added.
[27] I must therefore conclude that the chief source of the taxpayer's income in the years in question was the income from his profession, and not from the farming business.
[28] Accordingly, section 31 of the Act applies to restrict the income and the plaintiff's appeal is dismissed on this point.
INTEREST EXPENSES
[29] It appears from the reassessments that the Minister disallowed the interest expense deductions in the amounts of $8,000, $16,000, $10,000 and $24,000 for the 1977, 1978, 1979 and 1980 taxation years, respectively. Having regard to the foregoing conclusion in respect of the chief source of income, the interest expense must be disallowed because of the restriction set out in section 31 of the Act.
PROFESSIONAL INCOME
[30] In the reassessment, the Minister added $30,000 and $3,000 to the plaintiff's professional income for the 1979 and 1980 taxation years, respectively. The Minister contends that because of a flawed accounting system the plaintiff failed to declare professional income.
[31] For the 1979 taxation year, $28,000 was added to the income from the law profession. Mr. Archambault testified that his accountant at that time added all the income that was deposited in the trust account and refunds were deducted as expenses.
[32] The evidence established23 that the $28,000 was calculated twice as a refund, when it should have been deducted only once. The Minister therefore properly corrected that error, by adding $28,000 to the professional income. The taxpayer's appeal is dismissed on this point.
[33] On the question of the $5,000, which was carried over two years ($2,000 in 1979 and $3,000 in 1980), Mr. Archambault explained that this was an error and that the money was refunded to the client24 since it was not professional fees. I accept Mr. Archambault's testimony on this point, which is corroborated by the two cheques to the client that were entered in evidence.
[34] Accordingly, the reassessments made against the plaintiff are upheld, except in respect of the $5,000 added to the plaintiff's professional income. With costs against the plaintiff, except in respect of the $5,000, for which each party will bear their costs.
"Danièle Tremblay-Lamer"
JUDGE
OTTAWA, ONTARIO
May 12, 1998
Certified true translation
C. Delon, LL.L.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE NO: T-1640-83
STYLE OF CAUSE: CLAUDE F. ARCHAMBAULT v.
HER MAJESTY THE QUEEN
PLACE OF HEARING: MONTRÉAL, QUEBEC
DATE OF HEARING: APRIL 6 TO 9, 1998
REASONS FOR JUDGMENT OF TREMBLAY-LAMER J.
DATED: MAY 12, 1998
APPEARANCES:
ANNIE GODIN & FOR THE PLAINTIFF
JULIE BLOUIN
CHARLES CAMIRAND FOR THE DEFENDANT
SOLICITORS OF RECORD:
ARCHAMBAULT & ASSOCIÉS FOR THE PLAINTIFF
MONTRÉAL, QUEBEC
GEORGE THOMSON FOR THE DEFENDANT
DEPUTY ATTORNEY GENERAL OF CANADA
__________________
2 Canderel Ltée v. Canada (C.A.), [1994] 1 F.C. 3, 14 (C.A.); John Sopinka et al., The Law of Evidence in Canada, Toronto, Butterworths, 1991 at p. 972.
5 (October 27, 1997), A-375-97, [1997] F.C.J. no. 1433 (QL) (F.C.A.) [with citations to QL].
8 (February 26, 1998, T-3038-94 (F.C.T.D.).
12 Johnston v. Minister of National Revenue, [1948] S.C.R. 486.
13 Supra note 1, am. by Act to amend the statute law relating to income tax, S.C. 1973, c. 14, s. 7, Act to amend the statute law relating to income tax and to amend the Canada Pension Plan, S.C. 1979, c. 5, s. 9.
14 Timpson v. Minister of National Revenue (1994), 157 N.R. 237 (F.C.A.); Poirier (Bankrupt) v. Minister of National Revenue (1993), 142 N.R. 156 (F.C.A.); Minister of National Revenue v. Connell (1992), 139 N.R. 204 (F.C.A.); Minister of National Revenue v. Roney (1991), 124 N.R. 368 (F.C.A.); Morissey v. Canada (C.A.), [1989] 2 F.C. 418 (F.C.).
15 (October 15, 1997), A-604-93, (1988), 220 N.R. 392, [1997] F.C.J. no. 1451 (F.C.A.) [with citations to QL]. An appeal was filed in the Supreme Court of Canada, but the application for leave to appeal was dismissed with costs on March 19, 1998.
17 See the transcript of the sitting held on April 8, 1998, at pp. 7-10.
18 It is contrary to the rules of ethics for counsel to communicate with his or her witness during cross-examination of the witness. A breach of that rule may affect the weight placed on the witness's testimony: "If a cross-examination is interrupted by an adjournment or a recess, it is improper for counsel to communicate directly or indirectly with the witness. Once the cross-examination of a witness has commenced, counsel should not converse with him until it is concluded, unless leave is obtained. It is questionable whether, in addition to being a rule of ethical conduct, this rule is one of evidence which can result in rejection of evidence. Breach of the rule may, however, affect the weight to be given to the evidence" (Emphasis mine]. Supra note 2 at pp. 861-862.
19 400 arpents x 2 tonnes x $80.00 = $64,000.
20 See the table of losses reproduced at pp. 5-6 of the defence.
21 400 arpents x " tonne x $80.00 = $16,000.
22 This is more like a realistic scenario, since Mr. Archambault has never succeeded in producing more than a quarter tonne per arpent.