Tax Court of Canada Judgments

Date: 20000327

Docket: 98-2393-IT-I

BETWEEN:

GEORGE J. TKACH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Rowe, D.J.T.C.C.

[1]            The appellant appealed from assessments of income tax for his 1994 and 1995 taxation years in which the Minister of National Revenue (the "Minister") disallowed the deduction of farm losses in the amounts of $5,463.23 and $1,746.56, respectively. The Minister took the position the appellant did not have a reasonable expectation of profit from any farming activity undertaken by the appellant during those taxation years.

[2]            John Melnychuk testified he is presently retired but grew up on a mixed farm where he lived until 1941. He served in the Canadian Army between 1941 and 1946 and following his discharge began farming in the area near Kelvington, Saskatchewan. Later, he moved to Regina and began working for Inland Cement and remained there until he retired in 1988. While working for the cement company, he purchased farm land. During the winter of 1989-90, he saw an advertisement in the paper placed by George Tkach - the appellant - requiring an interested person to contact him in connection with helping work a market garden/farm. Melnychuk responded to the advertisement and in the spring of 1990 began working on the land owned by the appellant near Craven, Saskatchewan. The arrangement they made was that Melnychuk could grow his own garden on the property and also pick the berries located on the property. There was to be no payment for his services until the activity showed a profit. He and the appellant worked on weekends and during their spare time. He was aware the appellant had sold his law practice but was still working for his former firm. In 1990, the appellant went to the United States to attend university and Melnychuk worked the land in order to keep down the weeds. The appellant owned two tractors - a John Deere and a Ford - as well as a tractor used by walking behind it. The tractors were old and required a lot of repair and maintenance. In 1990, the equipment was stored at another site - owned by the appellant - near Fairy Hill which was about 12 miles from Craven. At the Fairy Hill site, there were some buildings and irrigation equipment, pumps and a 1000-gallon tank. The land at Craven was flat and had 10 acres suitable for cultivation, divided into two parcels, one higher than the other. In 1990, a crop of alfalfa and another of brome grass were planted which produced hay on an annual basis to be cut and baled. In 1991, plans were made for the spring and Melnychuk agreed to help out the appellant as previously agreed. In June, the appellant suffered a heart attack and was not able to help out on the farm for the rest of the year. Melnychuk looked after his own garden on the property and cultivated, as needed, to control the weeds. In 1992, the garden-farm project was continued but the appellant underwent open-heart surgery and was not able to help out until late fall when the tractors were moved back to Fairy Hill for storage. In 1993, the appellant discussed building a structure to store the tractors on the Craven property and they attempted to improve the machinery during that year. In 1994, a contractor was hired to build a storage shed with a second floor to be used for storing files, boxes and office furniture previously used in the appellant's law office. The tractors were housed on the main floor. In 1994, there was a good crop of berries and the appellant and Melnychuk discussed growing other crops such as potatoes and garlic using organic methods which avoided the use of chemicals. The appellant came out to the farm on Saturdays and Sundays and sometimes during the evenings but there was no fixed work schedule. In 1995, a flood covered about 75% of the bottom part of the farm. As a result, the garden had to be moved to higher ground. The flooding affected the raspberries, strawberries and potatoes. The garlic did not grow well. A new roadway had to be built to create a new entrance to the property. After the water receded, the weeds grew tall and a mower had to be used to cut them down. By this time, it was fall. In 1996, Melnychuk explained there was still some flooding and it was evident the flooding of the previous year had removed some topsoil and in its place there was a layer of pebbles and weeds. The appellant had purchased a new Diesel garden tractor with several attachments and began to build dykes around the buildings as a flood protection measure since the water had actually entered the storage building in 1995. The alfalfa and brome grass crops had been rotted out by the water. The plan was to plow it under the following year. In 1997, the grass was plowed under by someone hired by the appellant on a custom basis because it required special equipment. Even after the land had been plowed, it required re-working during that year. In the fall, some garlic was planted. In 1998, the garlic grew quite well and while there were problems associated with the harvest - overall - the crop was satisfactory. The portion of land previously damaged by the floods was flooded again. The planting activity on the small parcel that year involved blueberries, raspberries and strawberries together with 6 or 7 varieties of fall garlic planted on the lower portions. In 1999, 10 or 12 varieties of potatoes were planted together with garlic and berries. The garlic produced some good results but some was not satisfactory as the summer was cool and the garlic did not mature properly. Some of the crop was retained for seed purposes and the rest was handed out as samples to interested purchasers. Some types of potatoes proved to be better than others and samples were provided to potential buyers. Overall, Melnychuk stated that he still had hope he would be able to share in profits from the farming operation some day.

[3]            In cross-examination, Melnychuk stated he had grown up on a quarter-section of land owned by his father. He enjoyed helping out the appellant with his project and liked farming, picking berries and growing his own garden. Being retired, he is able to devote time to the activity and while he conceded the progress appeared to be slow, the flooding affected the land for four out of five years. Once the appellant's health improved after having surgery in 1992, he stated they worked equally on the land, putting in 10 hours a week in 1994 and 1995. The farm at Craven is located 41 kilometres from Regina.

[4]            George Tkach testified he is a Barrister and Solicitor looking forward to retirement. He was raised on a small farm of 160 acres - with good soil - adjoining a tree nursery. His family grew fruits and vegetables and also ran a small dairy operation. In 1944 - after completing school at age 17 - he joined the RCAF. After his discharge from the service, he attended the University of Saskatchewan and graduated from law school. He began practising at Carlisle, Saskatchewan and became a partner in a small grain farm which he later sold. He moved to Regina and began taking pre-medical school classes while practising law part time including returning to Carlisle one day a week. In 1963, he began a full-time law practise. In 1970, he started looking for land in the Qu'appelle Valley, an area known for market gardening located along 40 - 50 miles of river. He purchased some land - about 14 acres - located in the centre of the market gardening area. The land flooded in 1971 and again in 1972 so he sold it - at a loss - later that year. He continued to look for property and found some land located east of Craven where the Qu'appelle River meanders through the area. In 1973, he owned a total of 139 acres at Fairy Hill - divided into three parcels - of 60, 70 and 9 acres. The property featured ravines and some flat areas on which there was gravel and trees. Some of the flat land was suitable for cultivation and he bought a small tractor and some implements. He was able to reclaim two or three acres in three or four different places. He built a two-storey shed to store equipment. In 1975, he purchased the subject property - Parcel C - at Craven. In 1977, he decided to build his own office building in Regina and, in order to finance this project, sold the 60-acre parcel forming part of the Fairy Hill property. He retained the other two parcels and planted tomatoes as a test crop. However, these properties were difficult to cultivate and he found it was not worth the effort. The land at Craven - totalling 10 acres - had flat areas suitable for cultivation. At the same time, he also purchased two other adjoining parcels of 130 and 90 acres, each on a separate title. In the mid-1980's he began considering use of the land which was located just off a paved road. He hired someone to work the land with the tractor and machinery. He planted five or six acres of alfalfa and brome on the 10-acre parcel by entering into a crop-sharing arrangement with a local farmer on the basis the farmer was entitled to the entire first three crops, following which they would split remaining crops on a 1/3 - 2/3 basis, with the larger portion going to the farmer. Tkach stated his share of the crop brought in between $200 and $300 per year. He started summerfallowing five acres leading down to the river. In 1981 or 1982, he decided to add on to his office building in Regina. The interest rates rose to 22% and, in order to raise money for his building project, he sold the 90 and 130-acre parcels adjoining Parcel C, the river lot. In 1985-86, he planted long rows of raspberries. In 1989, with a view to beginning his retirement, he sold his three-person law firm but stayed on as an employee. In 1990, he went to the University of Arkansas - at the Fayetteville campus - to take post-graduate instruction in Agricultural Law. Prior to attending there, he was informed he had to take a pre-requisite course at Georgetown, Washington DC and it was at this time he placed an advertisement in the Regina newspaper. John Melnychuk responded and met with the appellant indicating he was interested in helping out on the property. Tkach stated he left Regina in June, 1990 for six weeks and returned home for only one week before going back to Arkansas. He remained at university until mid-May, completing two semesters of the three-semester course. He had retained his membership in the Law Society of Saskatchewan and worked on some files until June when he suffered a heart attack which put him in the hospital. In mid-August he returned to Arkansas to complete the third semester and left Melnychuk in charge of the farm. In 1992, he had to attend again at the University of Arkansas in order to complete a paper and it was during this time he attended upon a cardiologist who found four blockages in the arteries requiring surgery which was performed the next day. Tkach did not return to Regina until March of 1992 when he rented a small office and began taking on some clients. In 1993-94, he felt some headway had been made on the Craven farm so he decided to build an equipment shed. The Fairy Hill property had been used to store old files and office equipment since 1975. After the shed was built, the Craven parcel was planted to potatoes in the course of experimenting with various test crops. He also grew berries and thought he could grow seed for certain crops on an organic basis which was becoming increasingly popular. They had never used chemicals on the land at Craven and were able to satisfy requirements for chemical-free produce. The raspberries were not sold on a commercial basis even after a development period of three years. In 1995, flooding destroyed the raspberries and the alfalfa and brome grass. He attempted to plant garlic which had been avoided by market gardeners in the area due to the problem of late maturation which took it beyond the season for selling in roadside stands. However, he discovered that by planting garlic in the late fall, it matured the following August during the market-garden season. He believed this crop had commercial potential and tried planting it in different areas within the small plots. An organic farm - four acres in size - had been established about three miles away. In 1997-98, Tkach began inquiring into the certification program for organic farmers. He discovered there is a period during which a farm has to be inspected and then certified. In 1999, he had completed one year of the three-year program. Flood-protection measures had been carried out in order to protect the equipment shed and the fall garlic was planted. In 1999, 13 varieties of potatoes were planted. His research revealed that only 20% of the Regina market was supplied by local farmers and 80% was imported. The 1999 crop was not large enough to be sold commercially but he packaged up some samples and provided them to restaurants and other potential buyers including those who would buy them for use as seed. It was difficult to locate seed garlic in Saskatchewan and he also saw a potential market for that crop. As a result, he and Melnychuk monitored production on the various small plots of land. Once the alfalfa and brome crops were destroyed by flooding, the Craven farm never generated any income. All the farm income reported came from the property at Fairy Hill which was only useful to be rented out as pasture land. In 1997, he sold the 70-acre parcel and the 9-acre parcel was sold the following year. He used the funds from the sale in order to purchase 100 acres of adjoining land to be used for natural hay crops. This was the same piece of property he had owned 15 years earlier. In the appellant's view, it was not possible to forecast results and the flooding problem was unusual in that the Craven area - over the long term - was not prone to flooding. The average organic farm is only four acres and production costs are about $4,000 per acre which leads to a net profit of $1,000 per acre, all other factors being equal. He deliberately chose to develop the infrastructure at Craven on a slower, methodical basis, especially when purchasing machinery. He stated he cannot demonstrate that a profit is possible by 2004 but he is willing to devote additional time and money to the project. It appeared - to him - to be feasible when one considers garlic is imported from China or British Columbia. In addition, he thought there is potential in the potato market but diversification requires time and capital to bring a project to fruition.

[5]            In cross-examination, Tkach agreed that - in 1994-95 - his law practice occupied much of his time and that he was putting in 12-hour days. The work on the farm was intensive and he had to hire part-time help to assist John Melnychuk, who was then 76. Tkach stated he wanted the project to pay for itself and to be able to re-pay Melnychuk for all his efforts over the past 9 years.

[6]            The appellant submitted the evidence demonstrated there was potential for producing income once the proper infrastructure was in place in the sense of having the proper machinery, storage sheds, tools and a process for planting test crops. The varieties of potatoes and garlic had been reduced to eliminate all but the better producers and the necessary capital investment had already been made. Several marketing strategies had been attempted and, while he may have been too cautious in developing the project, he did not want to be over-extended. In the appellant's submission, "farming is farming" and not some activity carried out under strict laboratory conditions and it must be regarded in a different light and not merely in strict, statistical, economic terms but with a view to recognizing the potential inherent in the project which cannot simply be abandoned.

[7]            Counsel for the respondent submitted there was an unduly long start-up period during which there were steady losses - totalling $71,606 - reported by the appellant for the majority of the years between 1981 and 1997. The farming income reported from the Fairy Hill property was not actually farm income - for the most part - and once that land was sold there was no income produced at Craven. The efforts of the appellant - in Counsel's view - were in the experimental stage and no firm plan was in place during the years in question notwithstanding the appellant and John Melnychuk were both well qualified to carry out the undertaking. Overall, there was no basis to find there was any reasonable expectation of profit during the years under appeal.

[8]            In Tonn et al. v. The Queen, 96 DTC 6001, the Federal Court of Appeal examined the concept of reasonable expectation of profit as it has evolved over the years since the judgment of the Supreme Court of Canada in Moldowan v. Q., [1978] 1 S.C.R. 480. Linden, J.A., writing for the Court, undertook the analysis and at p. 6009 of the reasons for judgment, His Lordship stated:

"A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. The cases in which the "reasonable expectation of profit" test is employed can be placed into two groups. One group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Such activities have included horse farms,30 Hawaï and Florida condominium rentals,31 ski chalet rentals,32 yacht operations,33 dog kennel operations,34 and so forth. Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a "pious wish" or "fanciful dream".35 It is only a secondary motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure."

[9]            Linden, J.A. went on to discuss a number of cases involving hobbies or where the activity was driven by the element of personal enjoyment. When an appellant has demonstrated a long-standing pursuit of a goal, there is a tendency for the Minister to regard the dedication as being akin to that of a hobbyist. However, that must be examined carefully in the context of the particular circumstances. As I noted in Gordon Dick v. Her Majesty the Queen, unreported, 95-3189(IT)I :

"One would expect a fledgling entrepreneur to have some knowledge of a product, process or service that is about to be launched as a commercial venture. The nub of it, in my view, is to look at the extent to which the purported business is intertwined with the leisure or recreational pursuits of the taxpayer having regard to the passion and devotion attributable to a hobbyist or, in the true sense of the word, an amateur, as opposed to an activity that is undertaken outside the constraints of full-time employment in which a taxpayer can utilize previously acquired skills, tools, equipment or knowledge of a process."

[10]          For the purposes of examining the evidence in the within appeal, in my view, the appellant is not someone falling into the category of hobbyist or a person carrying on an activity in which there is a strong personal element. As a result, the standard to be applied is as stated by Linden, J.A. in Tonn, supra, as he continued at pages 6012-6013:

"The primary use of Moldowan as anobjective test, therefore, is the prevention of inappropriate reductions in tax; it is not intended as a vehicle for the wholesale judicial second-guessing of business judgments. A note of caution must be sounded for instances where the test is applied to commercial operations. Errors in business judgment, unless the Act stipulates otherwise, do not prohibit one from claiming deductions for losses arising from those errors. This point was stated strongly by Sheldon Silver:

It is submitted that it should not be the role of Revenue Canada to determine what businesses taxpayers should attempt to pursue. In fact, governments in Canada have often stated that new businesses and risk-taking should be encouraged and have, from time to time, enacted legislation to encourage such activity. Canadian chartered banks have recently been seriously criticised by the press and government officials for not providing adequate lending facilities to small and new businesses. Clearly, Revenue Canada's attempt to penalize taxpayers who are unsuccessful after taking these risks is inconsistent with the government's promotion of private entrepreneurs.52

This criticism was echoed by Bowman, T.C.C.J. in Bélec v. Q. where he stated:

It must be noted that these losses were incurred solely in a business context. There was no personal element either in his purchase nor in his use of the building. The appellant is an experienced businessman. He took his decision in good faith on his best judgment and on the facts available to him at the time. It is not up to the Minister (or this Court) to substitute his business acumen for that of the taxpayer, with the benefit of hindsight. The question to be asked is not, "Knowing what I know now, would I have embarked upon this enterprise?" The answer is no doubt "No", because the question only comes up when there are losses.53

And finally, the same caution was reiterated in Nichol v. Q.:54

[Mr. Nichol] made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and it was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or penalize him for having made a judgment call that, with the benefit of 20-20 hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today. We were, after all, not there in 1986.55

Though I do not support the use in the Nichol case of the word "patently", I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer's "business judgment" is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect."

[11]          Following the decision in Tonn, supra, the Federal Court of Appeal in Mastri v. The Queen, 97 DTC 5420 was urged by Counsel for the Minister to reconsider the decision in Tonn which - to the Minister - seemed to make application of the principles in Moldowan, supra, applicable only where the evidence established the taxpayer had engaged in activity giving rise to "an inappropriate reduction in tax", the presence of a "personal benefit" or under circumstances where the expectation of profit was so unreasonable so as to "raise a suspicion". The argument by the taxpayers in Mastri was that where the taxpayer's motives were purely commercial there was no need - according to the reasons in Tonn - to apply the reasonable expectation of profit test in its usual form. At pages 5422-5423 of his judgment, Robertson, J.A. stated:

"I do not propose to deal with the Minister's argument in detail for the reason that it is devoid of merit. There is no basis for postulating that the Court in Tonn confused the concept of deductibility of an expense with the concept of deductibility of rental losses from income derived from other sources. Admittedly, there are oblique references to the reasonable expectation of profit test established in Moldowan being used to disallow the deduction of personal expenses rather than business or property losses: see Tonn, supra at 6007 and 6009. These references arose in the context of an analysis seeking to show the origin of the reasonable expectation of profit test which can be traced to the prohibition against deduction of "personal living expenses" under subsection 18(1)(h), which term is defined in subsection 248(1). I cannot help but acknowledge that even tax commentators have succumbed to the same slip of the pen: see S. Silver, "Great Expectations: Are They Reasonable?" in Corporate Management Tax Conference - 1995, Real Estate Transactions: Tax Planning for the Second half of the 1990s (Toronto: Canadian Tax Foundation, 1996) 6:1 at 6:15-16, quoted in Tonn at 6008. In the end, however, it is readily apparent that the Court in Tonn recognized that the issue before it was whether the rental losses could be deducted from other sources of income: see Tonn, supra at 6002 and 6004.

For the sake of doctrinal purity, I should also point out that a distinction must be drawn between the determination of whether a taxpayer's source of income is from a business as opposed to a property. I may own a rental property but whether I carry on a business in regard thereto is a distinct legal issue giving rise to other tax consequences not relevant to the cases under review. Thus, strictly speaking it is inappropriate to speak of business expenses incurred in relation to a rental property unless, of course, the taxpayer's endeavours are regarded in law as a business. In any event, it is helpful at this point to set out the specific findings of law articulated in Moldowan.

First, it was decided in Moldowan that in order to have a source of income a taxpayer must have a reasonable expectation of profit. Second, "whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts" (supra at 485-86). If as a matter of fact a taxpayer is found not to have a reasonable expectation of profit then there is no source of income and, therefore, no basis upon which the taxpayer is able to calculate a rental loss. There is no doubt that, post-Moldowan, this Court has followed and applied that decision: see Landry v. Canada, 94 DTC 6624; Poetker v. Canada, 95 DTC 5614; and Hugill v. Canada, 95 DTC 5311. The only remaining issue is whether Tonn departs from that jurisprudence by postulating that the reasonable expectation of profit test remains irrelevant to the question of deductibility of losses until such time as it can be established that the case involves an inappropriate deduction of tax, the presence of a strong personal element or suspicious circumstances. There are two passages in Tonn which are cited in support of that proposition of law and are worthy of reproduction (supra at 6009 and 6013):

The Moldowan test, therefore is a useful tool by which the tax-inappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.

...I otherwise agree that the Moldowan test should be applied sparingly where a taxpayer's "business judgment" is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicions circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

In my respectful view, neither of the above passages support the legal proposition espoused by both the Minister and the taxpayers. It is simply unreasonable to posit that the Court intended to establish a rule of law to the effect that, even though there was no reasonable expectation of profit, losses are deductible from other income sources unless, for example, the income earning activity involved a personal element. The reference to the Moldowan test being applied "sparingly" is not intended as a rule of law, but as a common-sense guideline for the judges of the Tax Court. In other words, the term "sparingly" was meant to convey the understanding that in cases, for example, where there is no personal element the judge should apply the reasonable expectation of profit test less assiduously than he or she might do if such a factor were present. It is in this sense that the Court in Tonn cautioned against "second-guessing" the business decisions of taxpayers. Lest there be any doubt on this point, one need go no further than the analysis pursued by the Court in Tonn.

In Tonn, the Court clearly held that no personal advantage had accrued to the taxpayer who was seeking to deduct rental losses from his other sources of income. Nonetheless, the Court continued to pursue the deductibility of losses issue by applying the factors set out in Moldowan when assessing whether there was a reasonable expectation of profit. The Court's summary, provided at 6015, lays to rest any doubt as to what was decided in Tonn:

My disposition of this case is therefore as follows. The Tax Court Judge erred in principle as well as in his application of the reasonable expectation of profit test, as it is now understood. He did not consider all of the factors he should have considered, nor did he assess the context fully. The evidence clearly showed that the taxpayers engaged themselves in a business enterprise and their expectations of profit were not unreasonable in the circumstances. A small rental business was launched without the aid of sophisticated market analysis at a time when the rental market looked promising. Soon after, as a result of unforeseen circumstances, it became precarious. No personal benefit accrued to the taxpayers by the rental arrangements. The property was not a vacation site. The house was not used to give free or subsidized housing to relatives or friends. They made an honest error in judgment and lost money instead of earning it. It is not for the Department (or the Court) to penalize them for this, using the reasonable expectation of the profit test, without giving the enterprise a reasonable length of time to prove itself capable of yielding profits.

In summary, the decision of this Court in Tonn does not purport to alter the law as stated in Moldowan. Tonn simply affirms the common-sense understanding that it is not the place of the courts to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated."

[12]          It is worthwhile to examine the quotation from the judgment of Dickson, J. (as he then was) in Moldowan v. The Queen, [1978] 1 S.C.R. at p. 485 where he stated:

"There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, 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. Matthews3. 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."

[13]          In applying the facts in the within appeal to the criteria set forth in Moldowan, it is clear the profit and loss experience in past years was unimpressive. The location for the intended market garden activity was changed three times within 10 years and the revenue reported in the 1994 and 1995 taxation years was derived from the following sources:

                1994:        Sale of hay                                                                             $261.32

                                Rental for road use to gravel pit                         $250.00

                                Rental of pasture                                                   $1,000.00

                                Total gross income                                                               $1,511.32

                1995:        Sale of hay                                                                             $261.30

                                Insurance refund                                                      $12.00

                                Rental for road use to gravel pit                         $250.00

                                Rental of pasture                                                   $1,000.00

                                CCA recapture (tractor sale)                               $502.41

                                                Total gross income                                               $2,025.71

There were losses in the amounts of $5,463.23 in 1994 and $1,746.56 in 1995.

[14]          All of the farm income reported in these taxation years came from the land at Fairy Hill. It was useful only to rent out for pasture land or access to a gravel pit. Those parcels of land were sold in 1997 and 1998. The appellant combined the operations at Fairy Hill and Craven into one business for purposes of reporting income. Losses were recorded each year from 1989 to 1997, inclusive. A profit in the sum of $946.00 was reported in 1981. There was a loss of $1,629.00 in 1992 and the 1993 taxation year indicated zero income and zero loss. The 1984 taxation year showed a profit of $38.00 and there were profits of $130.00 in 1985, $85.00 in 1987 and $287.00 in 1988. The profits produced were the result of having entered into a hay crop-sharing arrangement with a local farmer. As soon as the appellant began purchasing machinery, building sheds and hiring some custom work, the losses began to accumulate. The hay crop flooded and there was no longer any revenue produced from that previously reliable source. There was never any attempt to produce revenue from other crops such as berries, potatoes or garlic. The berries were picked by John Melnychuk and others and the remainder of the produce was given away in the course of some elementary marketing plan. The appellant and his hard-working unpaid assistant - Melnychuk - were experimenting with different types of potatoes and garlic and were moving their planting locations around in order to determine the most efficient areas of production. It was an experimental farm. Counsel for the respondent conceded the appellant and Melnychuk were capable of carrying out the intended activity. I agree. However, the production of income from the land owned - at various times - by the appellant was subservient to his other commercial activities such as acting as his own general contractor while building an office building in Regina. In order to finance the project, he sold one parcel of land at Fairy Hill. Later, in 1981-82, when funds were needed to complete an addition to his commercial rental building, two parcels of land at Craven were sold. Throughout the years, the land purchased was generally not suited to cultivation. Of the 10 acres at Craven, only five or six were arable and there were problems caused by flooding four out of five years at one point. Land located on a riverbank tends - from time to time - to flood. The appellant's desire to have the Craven parcel certified as an organic farm was subject to a three-year process, commencing in 1998. There was no evidence of a definable market for the produce either by way of consumption or sale for seed purposes. The appellant had not yet settled on a particular type of potato or garlic bulb to be produced and sold. The appellant stated his research indicated one could make a net profit of $1,000 per acre from an organic farm but there were no data or comparisons from other operations in the area to support that supposition. The venture was adequately capitalized in terms of need - considering the pace at which the activity was being carried out - and the appellant was fortunate to have struck a bargain with Melnychuk so as to obtain nine years of free labour and allow him to attend university, recover from health problems, build his office building in Regina and carry on a law practice. For most of the period between 1990 and 1995, the appellant devoted minimal time to the market garden activity. In 1993, Melnychuk devoted his time to repairing the machinery. In 1994, a contractor built a storage shed on the Craven parcel for the purpose of storing a tractor and some equipment but also to house boxes of files and discarded office furniture from the appellant's previous law offices. Again, the berry crop was not sold and no revenue was produced from any farming activity. It is apparent on the evidence the activity, as structured - setting aside the issue of profit - had no capacity to produce revenue during the years under appeal. Further, there was no foundation in place which would lead onwards and upwards to an income stream sufficient to produce a profit in later years. This was demonstrated by the appellant continuing to carry out further experiments without any definite plan to be followed. In so stating, this is not the application of hindsight or second-guessing the business practices of the appellant. Rather, it is a recognition - on an objective analysis of the facts - that there was not any reasonable expectation of profit during the years under appeal. The activity carried out by the appellant was in an immature, experimental and evolving state and, despite the passage of more than ten years, had not developed to the point where it was reasonable to project a flow of revenue capable of meeting costs of operation, apart from producing a positive cash flow. In disallowing the deductions for farming losses, the Minister was correct.

[15]          The appeal is dismissed.

Signed at Sidney, British Columbia, this 27th day of March 2000.

"D.W. Rowe"

D.J.T.C.C.

COURT FILE NO.:                                                 98-2393(IT)I

STYLE OF CAUSE:                                               George Tkach and H.M.Q.

PLACE OF HEARING:                                         Regina, Saskatchewan

DATE OF HEARING:                                           January 26, 2000

REASONS FOR JUDGMENT BY:      Honourable Deputy Judge D.W. Rowe

DATE OF JUDGMENT:                                       March 27, 2000

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Carol Fleischhaker

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

98-2393(IT)I

BETWEEN:

GEORGE J. TKACH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on January 26, 2000 at Regina, Saskatchewan by

the Honourable Deputy Judge D.W. Rowe

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Carol Fleischhaker

JUDGMENT

          The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years is dismissed in accordance with the attached Reasons for Judgment.

Signed at Sidney, British Columbia, this 27th day of March 2000.

"D.W. Rowe"

D.J.T.C.C.