Date: 20010502
Docket: 2000-3476-IT-I
BETWEEN:
ROY PAWLUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
__________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Margaret McCabe
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Edmonton, Alberta, on Friday, March 2, 2001)
Margeson, J.T.C.C.
[1] The matter before the Court at this time for decision is that of Roy Pawluk and Her Majesty the Queen, 2000-3476(IT)I. The sole issue before the Court is whether or not the Appellant, during the years 1997 and 1998, was entitled to claim the restricted or limited farm losses which he claimed in those years of $2,469.49 and $2,374.75, respectively.
[2] Roy Pawluk testified in this case. He purchased this land of 160 acres. It was raw bush and it was on what he referred to as the northern edge of crop farming. To the south the land had some farming potential and to the north there was no farming potential at all. His intention was to live there and operate a farm there.
[3] He worked and prepared the land. There is no doubt that he expended a large amount of effort and a considerable amount of money trying to prepare the farm so that he would be able to operate it as a business and to earn income therefrom. All expenses were recorded but they were not all claimed. He did not consider it to be a hobby or a full-time farm but said that he was in between. In other words, in the restricted farm loss category.
[4] He expected a profit in 1997, but due to his illness and the death of his neighbour, who was going to go into partnership with him, or at least assist him in turning this operation around, he did not make a profit. When he was sick he received help from his neighbour’s children.
[5] It was stated to him by somebody from RevenueCanada that he made the choice to stay, to hold on to the farm but perhaps he should have let it go. He did not want to do this. He said that Revenue Canada, in making the initial decision to disallow the restricted farm losses did not take into account all of the facts as they were presented. Then he said that he was encouraged by somebody from Revenue Canada in the Edmonton office to proceed with the appeal based upon the arguments that he put forward here today.
[6] Stanley Robert Clark testified that he was a farmer and equipment operator. He lived in the area where this farm was located. To the north the land was mere bush and obviously would not have been suitable for farming. In the south, it was starting to open up, but even there the land was marginal. He was familiar with the 160 acres involved here. He described some of the work that the Appellant performed in trying to get this farm started, such as cutting down the bush and bringing in utilities. He saw him working there on weekends and holidays. He made big improvements in the plot. He put up fences, roads were installed and a hay crop was started. This was all done for the purposes of farming.
[7] His father passed away in January of 1997. His father had the intention of helping out the Appellant in the operation of the farm and had he been able to do so his suggestion was that things might have been better. His father was in the process of retiring. He would have been able to expend a fair amount of time with the Appellant in operating the farm and trying to make it viable. He looked after the place when the Appellant was sick.
[8] That was basically the evidence, apart from the presumptions contained in the Reply to the Notice of Appeal (“Reply”). All of the Minister’s presumptions contained in the Reply have been admitted with the exception of subparagraph 10(f), which said that the activity had no crops or livestock in 1997 or 1998. The Appellant maintained that there was a hay crop in 1997 but he further testified that it was taken off and given away for some work that the neighbours had done for him. He disagreed with subparagraph 10(i), which said that the activity had not provided the Appellant with a source of income in 1997 or 1998. When asked by the Court he said that there was no income in those years.
Argument of the Respondent
[9] In argument, counsel for the Respondent said that in the case at bar there was no reasonable expectation of profit. She referred to several cases. R. v. Donnelly, 1997 CarswellNat 1562, which is the most recent one; Hilts v. Canada, [1991] T.C.J. No.22 which was a decision of this Tax Court dated January 10, 1991, which is somewhat similar to the present case although the circumstances there were a lot rosier than they are in the present case. There was also a decision of Judge Taylor in Salerno v. M.N.R., 84 DTC 1639. All three of these cases were findings against the Appellant taxpayer. The Donnelly case, supra, was an appeal from the Tax Court of a horse-farming operation, where the Tax Court originally allowed the appeal and the Court of Appeal overturned it. All of these cases basically set out the principles involved in a case like this.
[10] The basic principle as referred to by the Minister in the Reply is well taken. Sections 3, 4 and 9, subsection 248(1) and paragraph 18(1)(a) of the Income Tax Act, (“Act”) are all relevant sections. In considering these sections in conjunction with the facts of this case the Appellant is required to satisfy the Court on a balance of probability that in the years in question, which are 1997 and 1998, there was a reasonable expectation of profit from the operation. On the basis of the evidence counsel argued that there was no chance of profit, there was no source of income. There was no income from the property, from the so-called business, so how could there be a source of income? There was no income. There was no way in which to make any money from that farm in 1997 and 1998 even on the evidence of the Appellant himself.
[11] She comforts him in the sense that she appreciates the work that he did and what he was trying to do, but all this work was for naught in the sense of running a business because it had not developed to the stage where there was a reasonable expectation of profit. Her position was, and it is well taken, that this is a restricted farm loss case. But you do not even get to the restricted farm loss situation unless you can show that there is a reasonable expectation of profit. Even in a restricted farm loss case you must meet the same burden. You must be able to show that there was a source of income, that there was a reasonable expectation of profit from the operation of the enterprise. She says that that does not happen here. There was no chance of profit. The appeal should be dismissed.
Argument of the Appellant
[12] The Appellant, for his part, said that the cases that were referred to by counsel for the Respondent were operations which were up and running, they were smaller operations, more compact operations. One would expect that in a case of that nature one would have a reasonable expectation of profit but that is not the case here. This 160 acres was viable, it was feasible, one could expect to make a profit. He compared it to homesteading. He was close to a profit and he put his fingers up and showed a very small space between his two fingers and said that is how close he was to making a profit. He was unable to produce any figures that would support that contention.
[13] This is a case where the Appellant basically says, “I would have had a profit but for”. It is one of those “but for” cases. But for the death of his friend and neighbour who was going to help him; but for his illness, he would have had a profit in 1997 or 1998. The department did not consider his health, it did not consider the neighbour’s help that was given to him and it did not consider the anticipated profit that he had. He falls within section 31 and should be entitled to a restricted farm loss.
Analysis and Decision
[14] It is trite to say that in a case of this nature, as rough as it may appear to some people, on the basis of the cases referred to in Moldowan v. The Queen, 77 DTC 5213, and other cases, in order for there to be a deduction as a restricted farm loss as well as a full farm loss claim there has to be a reasonable expectation of profit. These cases are talking about a reasonable expectation of profit in the years in question. In order to decide the issue the Court has to look at what history there is to the operation, what has happened before, what would be likely to happen in the future. There was no evidence given as to what happened after 1997 and 1998.
[15] The facts as set out in the Reply and agreed to by the Appellant show that there was an operation from 1991 to 1998. There was some indication that it is continuing, or at least it is still there, but there were apparently no losses claimed after 1998. The Minister, according to the Appellant’s testimony, did allow restricted farm losses between 1991 and 1996. It was only in 1997 and 1998, the years in question here, that the Minister stopped allowing these farm losses.
[16] There can be no doubt that as far as this Court is concerned, the Minister was really stretching a point when he permitted the losses to be claimed between 1991 and 1996. One can only conclude that the Minister must have considered those to be reasonable start-up years. The Court accepts the Appellant’s argument that you just cannot go and buy a farm, if it’s a new one, and then automatically in the next year start making a profit. You have to build up your capital assets, you have to build up your stock, you have to obtain equipment. That is what the start-up costs are intended to do. But there comes a time when somebody has to say, well look, is there going to be a profit? The usual thing that the Minister says is, when will you make a profit? That is normally what he does before he reassesses and disallows the losses.
[17] In this particular case the best face that the Court can put on it in favour of the Appellant would be that if the Minister had not allowed any start-up costs at all, if he had not allowed this person the opportunity to make a profit and yet the Appellant were able to show that there was a plan here, there was a scheme in place that within the reasonable foreseeable future would enable the operation to produce a profit, that decision might be questioned. But we still have to look at the two years in question, 1997 and 1998 and the Court must ask, during 1997 and 1998, taking into account all of the factors that the Court has before it, was there a reasonable expectation of profit? The Court has to conclude resoundingly that there was no evidence at all before it from which it could conclude that there was any chance of making a profit in 1997 and 1998. In 1997 and 1998 the evidence makes it clear there was no livestock, there were no crops, there was no possible way in which the Appellant could have made a profit in 1997 and 1998.
[18] The Appellant said that he was “that close to a profit”; but again, there was no evidence before the Court that in 1997 and 1998 there was a reasonable chance of profit and that is what the Appellant has to establish. How he could have done it on the evidence before this Court it fails to see. The evidence also seems to indicate that the losses that he claimed were not full losses. He said himself that he did not even claim all of the expenses, he did not claim all of the losses that he incurred. So that is further indication that this was a very difficult project from which to make a profit. The Court can see no reasonable basis in 1997 and 1998, no matter how it stretches the evidence, to conclude that there would have been a reasonable expectation of profit.
[19] This Court can only conclude, regretfully for the Appellant, and bearing in mind the amount of work he has put into this, that there was no reasonable expectation of profit.
[20] The Court takes into account all of the facts before it and in spite of the Appellant’s argument this is a “but for” case, but for his illness he would have been able to make a profit; the Court can see no basis for concluding that even if there was no illness he would have made a profit. There is nothing before the Court that would entitle it to draw that conclusion.
[21] In any event, the facts in this case dictate that there was nothing there from which this Appellant, in those years, could reasonably be expected to make a profit.
[22] The appeals are dismissed and the Minister’s assessment is confirmed.
Signed at Ottawa, Canada, this 2nd day of May 2001.
"T.E. Margeson"
J.T.C.C.