Tax Court of Canada Judgments

Date: 20001204

Docket: 1999-3782-IT-I

BETWEEN:

DONALD SPILLER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.T.C.C.

[1]            This is an appeal by Donald Spiller from an assessment of tax with respect to his 1996 taxation year. In computing income for that year, the Appellant deducted expenses in the amount of $7,850 as a farming loss. In reassessing the Appellant the Minister of National Revenue (the Minister) disallowed the deduction on the basis that the Appellant's sheep-raising activity did not constitute a source of business income.

[2]            Appellant's Testimony:        The Appellant is a 50-year old truck driver employed by Pete Quintain & Son in Brandon, Manitoba. For the past 10 years, he has been hauling livestock (cattle, pigs and sheep) from Canada to the United States and estimated that over the course of a year approximately two-thirds of his time was spent on the road. The length of the trips varied with the longest being a stretch where he left on day one and returned, generally before noon, on the third day. The Appellant's decision to build up a sheep farm was "to eventually get off the road and retire on the farm with a source of income". To this end, in or about 1993 he acquired 160 acres of farmland in Shilo, Manitoba by way of a lease with a two-year option to purchase. He moved a house trailer onto the property, built an addition onto it, brought in sewer, water, telephone and hydro and put up fencing.[1] A corral was built and a school bus was moved onto the property as a potential shelter for lambs. In 1994, he acquired 40 to 50 "orphaned" lambs from a feed lot. These were not purchased but rather were lambs whose "mothers were shipped off to market" and which the feed lot owners "give them away rather than knock them on the head". These lambs were taken home from the feed lot and bottle fed. The males were raised to market weight and sold while approximately 20-23 females were kept as potential ewes and bred out in the fall to "lamb out" in the spring of 1995.

[3]            The Appellant's decision to commence a sheep farm at that time was based on the premise that his wife and daughter could operate it until it reached a size that would enable him to retire. He said that a factor in his decision was the belief that his wife and daughter could handle the sheep with less chance of getting hurt than if he were to attempt to raise pigs or cattle. Although he had no previous experience with sheep farming the Appellant decided to proceed in part because, as he put it:

... going with orphaned lambs I would know what diseases they could get. Getting them from the feedlot all the diseases would come at me and therefore I would know how to control the diseases once I got my herd built up.

He also said that prior to embarking on this project, he spoke to several people regarding sheep farming, obtained several books on the subject and the family joined the Manitoba Sheep Association.

[4]            The Appellant said that in 1995 or 1996, he exercised the option to purchase for $30,000 and for that purpose borrowed "$32,000-$35,000, something like that" from a friend with an interest rate of "2% or something like that".[2] This loan was subsequently replaced by what the Appellant described first as a "line of credit" and later as a "mortgage through the bank" bearing interest at 1% over prime.

[5]            The sheep venture was not the Appellant's first foray into farming. From 1989 to 1993, he was involved in a grain operation carried out on approximately 110 acres located at Alexander, Manitoba. This land was leased from a friend for an amount of rent equal to the property taxes. The reason for such favourable treatment was that no one else wanted the land because it was infested with leafy spurge, an obnoxious weed which is extremely difficult to control. He was aware from the outset that this land was rated I to J for crop insurance purposes and that these were the lowest ratings. This venture was abandoned when, notwithstanding the use of chemicals and fertilizer, the Appellant "realized that grain farming is not the way to go".

[6]            The Appellant reported losses from the grain farm venture in each of the years from 1989 to 1993 but says that these were "drought years". He gave up grain farming in 1993 and commenced the sheep operation the following year. The following table sets out the farming losses incurred by the Appellant in the years up to and including the year under appeal:

Taxation Year Grain	Gross Income	Expenses	Net Income(Loss)	Employment Income
1989	5,908	7,746	(1,838)	30,339
1990	4,581	8,695	(4,114)	31,278
1991	4,442	8,310	(3,868)	38,821
1992	7,238	13,613	(6,375)	N/A
1993	7,236	17,953	(10,717)	N/A
Sheep
1994	5,069	15,863	(10,794)	41,803
1995	1,070	9,564	(8,494)	48,220[3]
1996	1,263	9,113	(7,850)	48,563

Although he reported gross farm income in 1994, that amount reflected the sale of the remaining portion of the previous years' grain crop while the expenses related primarily to the sheep project.

[7]            The Appellant says that as a result of the reassessment of his 1996 taxation year and the assessor's comments that the Appellant's projections and "business plan would not work", he decided to sell the sheep and to end that operation in 1997. In so doing, he recognized and accepted the fact that he needed "a bigger facility for the lambing operation" and for that purpose erected a 32' by 48' Quonset hut. He says this structure and the existing corral will provide the space needed for a 200-ewe operation. He also observed that it would still be necessary to purchase feed because "the pasture land that I have, I'm breaking up to plant forage in and that forage would accommodate the 200 ewes". As of the date of the hearing that had not been done.

[8]            In 1997, the Appellant acquired some calves which he fattened to the 500-pound range and sold. In his 1997 return, he reported a net loss of $320 from the disposition of his stock of "purebred sheep and lambs" at $70 a head.In taxation year 1998, the Appellant says he continued to "farm" by raising and selling "slaughter cows and bulls" and reported a net income after adjustments of $53.[4] The Appellant was not involved in any farm activity in 1999.

[9]            The Appellant also testified that in 1987 or 1988, three horses were acquired. Two more were added later and all were used for pleasure riding. Ownership of these horses was transferred to his daughter about "three, four years ago, five years ago". At all relevant times they were quartered on and made use of the farm properties. He estimated the value of the five horses to have been $1,000 "because at that time, the price of horse meat was 10 ¢ a pound", and added that their current value is $3,000. He conceded that the five horses were insured in 1998-1999 for a total value of $9,000.[5] The Appellant also conceded that no effort was made to separate the sheep farming expenses from the horse expenses.

Conclusion

[10]          In this appeal the taxpayer, a truckdriver, sought to deduct from his income the full amount of farming losses incurred in the taxation year in issue. As has been observed on a number of occasion, in order to succeed, the Appellant must satisfy two tests. First he must establish that the farming operation gave rise to a "reasonable expectation of profit " and second that his "chief source of income" was farming. The Appellant, who was not represented, spoke of his belief that the sheep-raising venture as it existed in 1996 was viable and would in time be profitable. He also spoke of having attained a breakeven point in 1997 at which time the "reasonable expectation of profit was reached". He contends that the construction of the barn and the plans he currently has in place to provide his own forage, support his conclusion that a 200-ewe sheep operation is not just viable but will provide him with a full-time job in the near future. He said that he needed "nothing more to go back into the sheep farming except the sheep themselves".

[11]          In a fairly recent decision Kaye v. The Queen,[6] Bowman J. made the following comments with respect to the phrase "reasonable expectation of profit":

                I do not find the ritual repetition of the phrase particularly helpful in cases of this type, and I prefer to put the matter on the basis 'Is there or is there not truly a business?' This is a broader but, I believe, a more meaningful question and one that, for me at least, leads to a more fruitful line of enquiry. No doubt it subsumes the question of the objective reasonableness of the taxpayer's expectation of profit, but there is more to it than that. How can it be said that a driller of wildcat oil wells has a reasonable expectation of profit and is therefore conducting a business given the extremely low success rate? Yet no one questions that such companies are carrying on a business. It is the inherent commerciality of the enterprise, revealed in its organization, that makes it a business. Subjective intention to make money, while a factor, is not determinative, although its absence may militate against the assertion that an activity is a business.

                One cannot view the reasonableness of the expectation of profit in isolation. One must ask 'Would a reasonable person, looking at a particular activity and applying ordinary standards of commercial common sense, say `yes, this is a business'?' In answering this question the hypothetical reasonable person would look at such things as capitalization, knowledge of the participant and time spent. He or she would also consider whether the person claiming to be in business has gone about it in an orderly, businesslike way and in the way that a business person would normally be expected to do.

                This leads to a further consideration -- that of reasonableness. The reasonableness of expenditures is dealt with specifically in section 67 of the Income Tax Act, but it does not exist in a watertight compartment. Section 67 operates within the context of a business and assumes the existence of a business. It is also a component in the question whether a particular activity is a business. For example, it cannot be said, in the absence of compelling reasons, that a person would spend $1,000,000 if all that could reasonably be expected to be earned was $1,000.

                Ultimately, it boils down to a common sense appreciation of all of the factors, in which each is assigned its appropriate weight in the overall context. One must of course not discount entrepreneurial vision and imagination, but they are hard to evaluate at the outset. Simply put, if you want to be treated as carrying on a business, you should act like a businessman.

The approach suggested by the foregoing comments is most appropriate for the present appeal.

[12]          The question is whether the sheep-raising activity carried on by the Appellant in 1996 and in the two preceding years examined in the context of the Appellant's plans in place in 1996 has sufficient of the indicia of commerciality to bring it within a definition of carrying on a business. In my view, the evidence adduced by the Appellant fails to establish that fundamental requirement. He went into the sheep business with absolutely no experience and with nothing more than a hit and miss approach to gaining it. There was no real plan in evidence nor any sense of business organization. What projections may have been made prior to his entry into the sheep business were "just verbally between my wife, my daughter and myself".[7] While an Appellant is not required to establish that the farming operation is currently or soon to be profitable, there is no evidence that the sheep operation as it was being carried on in 1996 was capable of producing anything other than losses for an indefinite period of time. The Appellant's argument that a reasonable expectation of profit existed premised on the financial results in 1997 and 1998 is not well-founded. First, the loss of $320 in 1997 resulted from the disposition of the whole of his stock of sheep and the termination of that operation. The $50 net income reported in 1998 reflected the sale of calves. Second, in both years there was a tacit admission that not all expenses were taken into account in those years.

[13]          Assessing the activity in issue as described by the Appellant, including the capitalization, the Appellant's experience (or lack thereof), the time available for him for the farming operation and the failure to show any progress towards the making of a profit, I am unable to conclude that the operation was a business. I must particularly emphasize that in the course of his testimony, there was nothing to indicate that the Appellant's intended course of action in 1996 reflected an awareness that the facility as it existed at that time was incapable of supporting anything but a minimally-sized sheep operation. There was also no evidence from the Appellant that in 1996, he had any intention to increase its capacity. As well, I cannot ignore the fact that in the preceding six years he wrote off substantial farm losses from his grain-growing venture, a project which can only be said to demonstrate an equally unbusinesslike approach to farming.

[14]          Counsel for the Respondent argued that the pursuit of a hobby was a primary motivating factor in the Appellant's activities and should be taken into account. Although there is no question that the two farm properties were used by the Appellant and his family for the maintenance of the riding horses, these facts were not relied upon by the Minister in assessing. Accordingly, I am not prepared to give them the weight which counsel sought to have attributed to them. On the other hand, I cannot ignore the fact that the Appellant's testimony in response to the questions put to him by counsel in this context raised some question with respect to his credibility as a whole.

[15]          I am on balance unable to accept the Appellant's assertion that a viable sheep-raising business was being carried on in 1996. On the evidence adduced it is not possible to conclude that there was a reasonable expectation of profit. I emphasize that my conclusion is based on the fact that the Appellant's venture in 1996 was not structured, planned and financed in a manner conducive to a conclusion that it was reasonably capable of yielding a profit within the reasonably foreseeable future. Accordingly, the appeal is dismissed.

Signed at Toronto, Ontario, this 4th day of December, 2000.

"A.A. Sarchuk"

J.T.C.C.

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