Tax Court of Canada Judgments

Date: 19991210

Docket: 1999-1842-IT-I

BETWEEN:

ARNOLD ROSENFELDT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the Informal Procedure was heard at Saskatoon, Saskatchewan on December 3, 1999. The Appellant was the only witness.

[2] The Appellant has appealed the disallowance of farm losses he claimed in 1995 and 1996, the disallowance of particular expenses pursuant to Section 67 of the Income Tax Act and the imposition of restricted farm losses upon him pursuant to Section 31.

[3] Paragraphs 7 to 12 inclusive of the Reply read:

7. In so reassessing the Appellant for the 1995 and 1996 Taxation Years, the Minister made the following assumptions of fact:

(a) the facts as admitted and stated supra;

(b) at all material times the Appellant was employed as a crane operator;

(c) the Appellant collected unemployment insurance benefits ("UI") for the period of time which he was not employed as a crane operator in the amounts of $10,173 and $8,155 respectively for the 1995 and 1996 Taxation Years;

(d) the Appellant received UI benefits for the period January 8, 1995 to June 3, 1995 and January 7, 1996 to May 4, 1996 respectively for the 1995 and 1996 Taxation Years;

(e) the Appellant earned the following amounts of employment income during the 1995 and 1996 Taxation Years respectively:

TAXATION YEAR & EMPLOYER	INCOME
1995 Premay Pipeline Hauling Ltd.	$9,479.94
1995 Heritage Pipeline Const. Prairie	$10,986.93
1995 Michetti Pipe Stringing Inc	$8,904.42
1995 Alta Construction Ltd	$18,724.33
TOTAL	$48,095.62
1996 Procrane Inc. O/A Sterling	$37,252.75
TOTAL	$37,252.75

(f) the Appellant purchases two quarter sections of pasture land, an incomplete quonset, some old buildings, some old corals and a 1,100 square foot bungalow for $80,000 in the 1992 Taxation Year;

(g) the Appellant financed the purchase of the property and dwellings with a $57,000 mortgage;

(h) the Appellant's farming operations entailed a cow/calf operation and sold hay bales;

(i) the Appellant had been raised on a cattle farm;

(j) the Appellant started his cow/calf operation by purchasing 9 bred heifers in 1992;

(k) the Appellant's inventory of cattle consisted of 23 cows or bred heifers at the end of the 1996 Taxation Year;

(l) the Appellant's breeding stock was all due to natural births except for 5 heifers purchased in 1994 or 1995;

(m) the Appellant sold all of the steers on a yearly basis;

(n) the Appellant had improved the fencing on the property, improved the watering system, purchased a hay baler, an older swather, an older tractor and a combine since returning to farming in the 1992 Taxation Year;

(o) a schedule of the expenditures which had been denied and amounts of unreported income for the 1995 and 1996 Taxation Year is listed below:

For the 1995 Taxation year:

ITEM	CLAIMED	ALLOWED	DENIED
Interest	$5,852	$2,926	$2,926
Property Tax	$1,454	$727	$727
Repairs	$5,678	$3,678	$2,000
Fuel	$4,920	$3,576	$1,344
Truck Lease	$13,934	$7,835	$6,099
GST refund	0	0	$1,454
Total			$14,550

For the 1996 Taxation Year;

ITEM	CLAIMED	ALLOWED	DENIED
Interest	$5,680	$2,840	$2,840
Repairs	$7,081	$4,081	$3,000
Fuel	$5,302	$3,805	$1,497
Truck Lease	$6,680	$4,800	$1,880
GST refund	0	0	$1,790
Cattle Sale	0	0	$1,000
Total			$12,007

(p) the Appellant claimed expenses in relation to the farm operations which were personal or living expenditures or constituted unreported income to the Appellant as set out in paragraphs (q) to (w) below;

(q) Interest Expense on $57,000 Mortgage

i) the interest expense was incurred in respect of the farm property as well as the residential dwelling on the land acquired in 1992;

ii) 50% of the interest expense was incurred for the purpose of producing or gaining income from a business;

iii) no more than $2,926 and $2,840 was incurred by the Appellant in his 1995 and 1996 Taxation Years respectively, for the purpose of gaining or producing income for a business;

(r) Property Tax Expense –

i) the property tax expense was incurred in respect of the farm property as well as the residential dwelling on the land acquired in 1992;

ii) 50% of the property tax expense was incurred for the purpose of producing or gaining income from a business;

iii) no more than $727 was incurred by the Appellant in his 1995 Taxation Year for the purpose of gaining or producing income for a business;

(s) Repairs and Maintenance Expense –

i) the repairs and maintenance expense was incurred in respect of personal or living expenditures of the Appellant as well as certain deductible amounts; and

ii) no more than $3,678 and $4,081 was incurred by the Appellant in his 1995 and 1996 Taxation Years respectively, for the purpose of gaining or producing income for a business;

(t) Fuel Expense –

i) the Appellant did not maintain a log book to distinguish between business and personal mileage;

ii) 60% of the fuel expense was incurred for the purpose of producing or gaining income from a business;

iii) no more than $3,576 and $3,805 was incurred by the Appellant in his 1995 and 1996 Taxation Years respectively, for the purpose of gaining or producing income for a business;

(u) Truck Lease Expense –

i) the Appellant did not maintain a log book to distinguish between business and personal mileage;

ii) 60% of the truck lease expense was incurred for the purpose of producing or gaining income from a business;

iii) no more than $7,835 and $4,800 was incurred by the Appellant in his 1995 and 1996 Taxation Years respectively, for the purpose of gaining or producing income for a business;

(v) Goods and Services Tax Unreported -

i) the Appellant is a GST registrant;

ii) the Appellant's farming operations are zero rated;

iii) the Appellant received refunds on his operating expenditures;

iv) the Appellant did not report these refunds into his income;

v) the Minister included the refunds received by the Appellant into income for the 1995 and 1996 Taxation Years in the amounts of $1,454 and $1,790 respectively;

(w) Cattle Sales Unreported –

i) the Appellant slaughtered two cattle for personal consumption and private resale as packaged meat in the 1996 Taxation Year;

ii) the Fair Market Value of the cattle slaughtered was estimated to be $1,000;

iii) the Appellant expensed amounts incurred for packaging and butchering of the cattle;

iv) the Appellant did not report into income the fair market value of the cattle slaughtered;

v) the Minister included the fair market value received by the Appellant into his income for the 1995 Taxation Year in the amount of $1,000;

(x) the Appellant reported farming income (losses during the 1992, 1993, 1994, 1995, 1996 and 1997 Taxation Years as follows:

TAXATION YEAR	GROSS INCOME	EXPENSES	NET INCOME (LOSS)
1992	$0	$9,014	($9,014)
1993	$5,150	$19,953	($14,803)
1994	$4,500	$36,355	($31,855)
1995	$8,734	$47,249	($38,515)
1996	$11,643	$41,728	($30,085)
1997	$17,088	$30,007	($12,919)

(y) the Appellant's gross income for the 1995 and 1996 Taxation Years can be broken down to the following categories:

TAXATION YEAR	Hay Sales	Cattle Sales	Custom Work
1995	$1,550	$5,684	$1,500
1996	$5,075	$6,568	$0

(z) the Appellant maintained his membership in the International Union of Operating Engineers Local #870 for the relevant Taxation Years;

(aa) the Appellant did not incur expenditures for the purpose of gaining or producing income from a business in the amount of $13,096 and $9,217 for the 1995 and 1996 Taxation Years respectively;

(bb) the Appellant failed to report income in the amount of $1,454 and $2,790 for the 1995 and 1996 Taxation Years respectively; and

(cc) the Appellant's chief source of income during the 1995 and 1996 Taxation Years was neither farming nor a combination of farming and some other source of income.

B. ISSUES TO BE DECIDED

8. The issues are:

(a) whether the amount of $13,096 and $9,217 were personal or living expenditures of the Appellant respectively for the 1995 and 1996 Taxation Years;

(b) whether the amounts of $1,454 and $2,790 were unreported farm income amounts for the 1995 and 1996 Taxation Years respectively, and

(c) whether the Appellant's chief source of income was farming or a combination of farming and some other source of income during the 1995 and 1996 Taxation years;

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

9. He relies on sections 3, 9 and 67.1 on subsections 31(1), and 248(1) and on paragraphs 18(1)(a) and 18(1)(h) of the Act as amended for the 1995 and 1996 Taxation Years.

10. He submits that during the 1995 and 1996 Taxation Years, the Appellant incurred personal expenditures in the amounts of $13,096 and $9,217 in accordance with paragraph 18(1)(a) and 18(1)(h) of the Act.

11. He submits that the Appellant failed to report farm income in the amount of $1,454 and $2,790 for the 1995 and 1996 Taxation Years respectively in accordance with section 9 of the Act.

12. He submits that during 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. As a result, the farming losses are restricted by subsection 31(1) of the Act to $8,750 and $8,750 for the 1995 and 1996 Taxation Years respectively.

[4] Assumptions 7(b), (c), (d), (e), (f), (g), (h), (i), (j), (m), (o), (x), (y) and (z) are either correct or were not refuted. With respect to the remaining assumptions, the Court finds:

7(k) At the end of 1996 the Appellant had 48 cattle in total. 23 were cows, there was at least 1 bull and the remainder were calves.

7(l) The 5 heifers were purchased in 1995.

7(n) Is true except that he never purchased a combine, and whether he "returned" to farming is problematic.

7(p) Will be detailed later.

7(q), (r), (v) and (w) were agreed to by the Appellant at the opening of the hearing.

7(s), (t) and (u) Will be detailed later.

7(bb) Was agreed to by the Appellant.

The remaining assumptions are disputed.

[5] The expenses which remain in dispute under assumption (o) are Repairs, Fuel and Truck Lease; by heading, the Court finds:

(1) Truck Lease – The Appellant deducted truck lease payments of $774.12 per month. The ceiling in each year was $650.00 per month and he is limited to that from the start. He did not keep a log of truck mileage. He, his wife and his father used the truck, a 1995 GMC extended cab 4x4, for both personal and farm use. The Appellant also had a 1978 Lincoln car that he and his wife drove for personal use and they had a 3-ton second-hand truck that the Appellant purchased for the farm. The Appellant submitted that personal use was 25% of the truck. However, he did not provide detailed evidence or a log book respecting the 25% or to rebut the assumption that only 60% was for personal use. For this reason, this part of the appeal is dismissed.

(2) Fuel – This item relates to bulk diesel fuel and gasoline that the Appellant stored on his farm and used. 60% was allowed on farm business. There is no evidence of the source of fuel for the 1978 Lincoln or whether the 3-ton truck was used personally or exclusively for business. For this reason, this portion of the appeal is not refuted.

(3) Repairs – Once again, it was the responsibility of the Appellant to deal with the repair invoices and refute the assumptions in detail. He did not. Therefore, this portion of the appeal is dismissed.

[6] Thus, the appeals of issues 8(a) and 8(b) in the Reply are dismissed in their entirety. The remaining issue, 8(c), relates to the appeal of the restricted farm loss.

[7] The Appellant is 43 and married. He was raised on a mixed farm about 60 km. north-west of Saskatoon until he was 12. He became a crane and pipeline sideboom operator and was employed at this in Saskatchewan and in the former Soviet Union during the years in question. He earns about $3,000 per week from this when he works.

[8] When his son was born in 1992 the Appellant decided that he wanted to raise his family on a farm. He decided that if he could operate a 60 cow beef cattle farm he could earn enough for a decent living full-time on the farm. He expected that it would take 5 to 7 years to make a profit. He decided to raise Hereford beef cattle and purchased a farm about 50 km. west of Saskatoon in 1992. It had a house, the necessary buildings and a run-down corral. That fall he purchased 9 bred cows with calves at their sides and 1 pure-bred Hereford bull. He purchased 5 more cows in 1993 and had 13 cows calving in 1993. He sold the steers and culled the cows to some extent. Prices in 1992 and 1993 were about $1.05 to $1.10 per pound and he sold them at 800 to 900 pound weights for about $1,000 per animal.

[9] In 1992 he purchased modest and obviously second-hand equipment for the cattle operation which he fixed up. He then purchased a second hand 3-ton truck and flat bed trailer and in 1994 or 1995 he purchased a John Deere 4020 tractor. His equipment purchases were modest and reasonable and were done economically. He used his employment income to finance these purchases and his mortgage payments on the farm.

[10] The Appellant had expected to have 30 breeding cows by 1995. Instead he had 23. In 1995 he tried to rent pasture since it was too expensive to purchase. He could not get into the community pasture. He then bid on a 2 section pasture on which he had hoped to put cows financed by the Wheat Pool with 5% down; he did not succeed in getting this. The land he had would only support the cattle he then had.

[11] In 1996 he leased 80 acres 20 miles away and found that it was too far to manage the cattle. In 1996 the price of cattle dropped to ½ the 1995 price and he decided to get out of cattle and go into Bison. He can pasture 3 Bison on his land for every 1 cow that he can pasture there. As a result, he began selling his cattle herd off in 1996. In 1997 he purchased his first Bison calves. He continued to sell off his cattle herd in 1997 and sold his last cattle in 1998.

[12] This restricted farm loss case is assessed in respect to a start-up operation. It is similar to that of William Moldowan v. The Queen, [1978] 1 S.C.R. 480, in which Dickson, J. said at 485 and 486:

... whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews [(1974), 74 DTC 6193]. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Whether a source of income is a taxpayer's "chief source" of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery, The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

[13] In R v. Donnelly, (which also appealed a restricted farm loss assessment), [1998] 1 C.T.C. 23 at paragraphs 12 and 13, Robertson, J.A. stated:

Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming.

In the present case, it was incumbent on the taxpayer to establish what he might have reasonably earned but for the two setbacks which gave rise to the loss: namely the death of Mr. Rankin and the decline in horse prices. I say this because the Tax Court Judge concluded that but for these setbacks the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. While there is no doubt that the loss of Mr. Rankin, and the changes in American tax law had a negative and unexpected impact on the business, no evidence was presented to show what profit the taxpayer might have earned had these events not occurred and whether the amount would have been considered substantial when compared to his professional income. It was not enough for the taxpayer to claim that he might have earned a profit. He should have provided sufficient evidence to enable the Tax Court Judge to estimate quantitatively what that profit might have been.

[14] Using Dickson J.'s criteria the taxpayer was helped by his father who had operated a mixed farm. He is also mechanically adept. His training was sufficient. His course of action and plan appears reasonable. His capital costs were minimal.

[15] At the end of Donnelly, Robertson, J.A. stated that three factors determine chief source of income: capital committed, time spent and profitability. All of the Appellant's capital was committed to this farm. On the evidence, during 1995 and 1996 he spent equal times working on the farm and at his employment on an annual basis. When he was employed his wife and his father helped out with the cattle.

[16] The Appellant suffered two set backs. The first was his failure to obtain additional cheap pasture in 1995. The second occurred when the price of cattle fell by ½ in 1996 putting an end to any expectation of profitability, whereupon he sensibly changed his operation and started up in Bison. The Appellant also acknowledged that he had only 23 breeding cows in 1995 when he had expected to have 30. This confirms the practicality of his conversion to Bison in 1996.

[17] When categorizing three classes of farmers in Moldowan, Dickson envisaged the first class as "a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine". No doubt it is upon this basis that Robertson, J.A. expanded in the quotation from Donnelly. However, there is a distinction between this case and both Moldowan and Donnelly. Moldowan started his operation in 1960 and was assessed for 1968 and 1969. Donnelly started his operation in 1972 and was assessed for 1986, 1987 and 1989. Rosenfeldt started purchasing his cattle in the fall of 1992 and was assessed for 1995 and 1996. Rosenfeldt reasonably expected that it would take him five to seven years to show a profit. His first full four seasons of farming occurred in 1993. He was assessed as a restricted farmer after two years of start-up in cattle. There is no question that Rosenfeldt is not what Donnelly described to be a "gentleman" farmer. On Revenue Canada's own presumptions he "returned" to farming; he had last been on a farm as a child on his father's mixed farm.

[18] In the Court's view the assessment under Section 31 is wrongly based. In 1995 and 1996 the Appellant was starting up and reasonably expected in 1995 that he would show a profit as a farmer sometime between 1997 and 1999 once he got to 60 cows. Concerns arose in 1995 as a result of not obtaining additional pasture. In 1996 the price setback caused the Appellant to amend his plan and convert to Bison. As a result he began to sell his cattle herd.

[19] The Appellant is entitled to try to go into business as a farmer in livestock. He is also entitled to try and remedy his operations in the face of unexpected set backs.

[20] In Enno Tonn et al. v. The Queen, 96 DTC 6001 (F.C.A.) Linden, J.A. distinguished between a business in which the Appellant has a personal interest and one without a personal interest. The Appellant acquired the farmland after his son was born with a view to raising his family on a farm. However, farmland can be used for pasture, to grow hay, to cultivate for grain crops or to raise cattle or hogs or chickens or other livestock. Thus raising children in a rural or farm environment must be distinguished from an actual farming operation.

[21] The Appellant was born in 1956. In 1992 he was 36. In the outdoor pipeline and construction industry, that is an old age if you are a skilled or unskilled labourer. When his son was born it was time for the Appellant to get on with the rest of his life and make a new occupation for himself. He decided on beef cattle farming.

[22] In the Court's view, the beef cattle operation was a sensible business plan for the Appellant's future. The beef cattle operation was purely commercial. There is no personal pleasure attending upon beef cattle during a Saskatchewan winter to break ice for their water, to spread hay or to pull calves or nurse them to survival. Beef cattle farming is a tough uncomfortable business with the constant risk of dead calves or cattle and a consequent pecuniary loss.

[23] The Appellant entered into it on a scale he could afford without excessive debt and with a plan to build his herd. As in Tonn's case, he erred in part due to market price and in part due to higher priced pasture land and a failure to obtain a suitable lease. He is entitled to succeed and to profit. He is also entitled to fail or, as in this case, to amend his plan. In Tonn's case, the Federal Court of Appeal found that three years was too short a time to judge success or failure. Certainly in a cattle operation, two or three years is too short a time. The Appellant's view of five or seven years is reasonable and it is also reasonable that he be allowed to make a decision to convert to Bison.

[24] The appeal is allowed on the basis that the Appellant was, in 1995 and 1996 what Dickson, J. referred to as the first class of farmer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. He was starting up.

[25] This matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly. The Appellant is awarded costs which are fixed at $1,000.00.

Signed at Vancouver, British Columbia this 10^th day of December, 1999.

"D.W. Beaubier"

J.T.C.C.