Date: 20000404
Docket: 1999-3465-GST-I
BETWEEN:
DENZIL SPENCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1] This is an appeal from an assessment made by the Minister of National Revenue ("Minister") under the Excise Tax Act ("Act") claiming an amount of $2,363.08 together with interest and penalties for an overpayment of input tax credits that were claimed and received by the appellant for the period from September 1, 1994 to August 31, 1996, and subsequently disallowed by the Minister.
[2] In assessing the appellant, the Minister relied on the following facts in paragraph 2 of the Reply to the Notice of Appeal:
a) At all relevant times, the Appellant was a full time teacher; (admitted)
b) From 1991 to 1995, the Appellant carried on a farming activity and incurred losses from the operation of its farm; (admitted)
c) The Appellant's farming activity was terminated in 1995; (admitted)
d) The gross income produced by the farming activity between 1992 and 1995 did not exceed 600 $; (admitted)
e) The land was too small to give hope of profits;
f) The Appellant did not qualify for provincial farming assistance;
g) The Appellant's farming activity was being carried on without a reasonable expectation of profit;
h) For the period ending August 31, 1995, the Appellant claimed and received ITC's for an amount of 830,31 $; (admitted)
i) For the period ending August 31, 1996, the Appellant claimed and received ITC's for an amount of 960,00 $; (admitted)
j) Since the Appellant's farming activity did not constitute a commercial activity within the scope of the Goods and Services Tax Act, the Appellant was not entitled to recover through the input tax credit mechanism, the tax paid on property and services acquired for use in this activity.
[3] The appellant was the only one to testify. He explained that he began carrying on farming activities when he became a registered part-time farmer in October 1991. As such, he paid an annual fee in order to obtain a "farmer's card" that would make him eligible for the Quebec subsidization programs if he was able to sell $2,000 worth or more of farm produce. Furthermore, the appellant could have benefited from the cow-calf subsidy program under the applicable provincial agricultural programs if he built his herd up to ten cows.
[4] In 1991, the appellant had three cows and two calves and reported gross income of $3,700 and a net loss of $8,658. By 1995, the appellant had five cows and three calves. His gross income declined gradually over the years ($3,100 in 1992; $600 in 1993; $1 in 1994 and nil in 1995) while the net losses increased in 1992 and 1993 ($9,150 in 1992 and $10,395 in 1993) and fell to $2,500 in 1994 and $1,325 in 1995 (Exhibit R-3).
[5] According to the Statements of Farming Activities filed as Exhibits R-5 and R-6, the appellant claimed very few current expenses in 1994 ($690 for memberships and subscriptions and $60.71 for veterinary fees, medicine and breeding fees) and none in 1995.
[6] The appellant explained that his plan was to slowly build his herd up to ten cows in order to receive the government subsidy. He acknowledged that the farming activity was not viable with less than ten cows. However, in January 1995, the rules of eligibility for part-time farmers were changed in the Province of Quebec. One had to gross over $5,000 in farm production in order to retain the "farmer's card". The subsidy system also changed. In order to qualify for the cow-calf subsidy, one had to have 20 cows instead of ten. The appellant did not want to borrow money to increase his herd and decided to abandon his part-time farm operation in March 1995.
[7] Although he had terminated his farming activity in March 1995, the appellant made, in the month of September 1995, a claim under the Act for an input tax credit of $830 for the reporting period from September 1, 1994 to August 31, 1995 in respect of such activity. A similar claim was made in September 1996 for an input tax credit of $960 for the reporting period from September 1, 1995 to August 31, 1996 (Exhibits R-1 and R-2).
[8] The Minister reassessed the appellant on the basis that the appellant was not entitled to claim an input tax credit for the two periods referred to above because the appellant's farming activity no longer constituted a commercial activity within the meaning of the Act.
[9] As a general rule, when tax is paid on the purchase of goods used in connection with commercial activities, a registrant is entitled to a refundable credit. The only issue before me is whether the appellant's farming activity constituted a commercial activity as defined in the Act for the period from September 1, 1994 to August 31, 1996.
[10] "Commercial activity" is defined in subsection 123(1) of the Act as follows:
"commercial activity" – "commercial activity" of a person means
(a) a business carried on by the person (other than a business carried on by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
[11] The definition of "commercial activity" excludes activities individuals engage in where there is no reasonable expectation of profit. In Strachan (K.R.) v. Canada, [1999] G.S.T.C. 72, Judge Hamlyn of this Court summarized the tests to be applied in determining what constitutes reasonable expectation of profit. He said at page 72-4:
[21] 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.
[22] Unless there is a personal element involved, the test should be used sparingly and with latitude favouring the taxpayer.1 If there is a personal element then the examination requires closer scrutiny. In particular, the test should not be used to second-guess good faith business judgements that are flawed.
[23] Immediate profit is not required, however, certain things must happen in the start-up period. Although every business is entitled to a grace period for start-up costs, it still must be shown that the business is "structured, organized, manned, financed and planned in such a way as to be found to be reasonably capable at that time of yielding a profit in due course".2 When the business criteria are present the length of time to lead to profitability is a direct function of the endeavour in question.
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1 Tonn v. Canada (1995), [1996] 1 C.T.C. 205, 96 DTC 6001 (F.C.A.).
2 Watt Estate v. Canada, [1997] 3 C.T.C. 462, 97 DTC 5459 (F.C.A.) at page 5461.
[12] In the present case, the appellant had to show that in the period from September 1, 1994 to August 31, 1996, he had a reasonable expectation of profit from his farming activity. This activity had not shown a profit from the start. In 1994, no income was declared and practically no expenses were claimed in relation to the farming activity (Exhibits R-5 and R-6). The appellant was a full-time teacher and did not demonstrate that he put time and energy into operating the farm so as to make it profitable. The appellant was waiting for subsidies but did not invest any money in order to qualify for public assistance. Indeed, he never qualified. According to the appellant himself, he was not in a position to be competitive. With less than ten cows, his activity was not viable. He therefore abandoned all farming activity in March 1995.
[13] In the circumstances, I can only conclude that the appellant has not shown on the balance of probabilities that before the month of March 1995 his farming activity was organized, financed and planned in such a way as to be found to be reasonably capable of yielding a profit in due course (see Watt Estate v. The Queen, 97 DTC 5459 (F.C.A.)). Furthermore, the evidence disclosed that after March 1995 there was no more farming activity.
[14] Consequently, the appellant was not engaged in a commercial activity during the period from September 1, 1994 to August 31, 1996 and was therefore not entitled to an input tax credit in connection with his farming activity pursuant to subsection 169(1) of the Act.
[15] The appeal is dismissed.
Signed at Ottawa, Canada, this 4th day of April 2000.
"Lucie Lamarre"
J.T.C.C.