Date: 20010831
Docket: 2001-382-IT-I
BETWEEN:
JEAN-YVES POULIOT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] This is an appeal for the 1997 and 1998 taxation years.
[2] The issue is whether losses of $5,399 and $11,391 for 1997 and 1998 respectively are from economic activities whose primary purpose was to produce farming income; in other words, could the appellant realistically expect to make a profit in those two years from operating the Ranch El-Jyma farm?
[3] For his appeal, the appellant was represented by the person who does his accounting, Lucien Gagnon.
[4] The following facts were admitted at the start of the hearing:
[TRANSLATION]
(a) the appellant retired during the 1997 taxation year after working for Sûreté publique du Quebec as an emergency response worker for 24 years;
(b) the appellant was brought up on a farm and worked on the family farm until he was 22 years old;
(c) the appellant's farm was set up in successive stages:
(i) purchase of a first parcel of land in 1981 for $10,000 and construction of a 3,000-square-foot building,
(ii) construction of a 1,200-square-foot extension in 1985 for $6,000,
(iii) purchase of a second parcel of land in 1989 for $12,500,
(iv) purchase of a truck in 1992 for $19,642,
(v) construction of another, 4,400-square-foot, extension in 1995 for $35,000,
(vi) the appellant had a road built and had piles of rocks buried under it,
(vii) the appellant has acquired tillage implements since 1984,
(viii) over the years, the appellant has purchased mares as his means permitted,
(ix) in 1997, he started sowing part of the cultivable area;
(e) the farm is called Ranch El-Jyma, and during the 1997 and 1998 taxation years it encompassed 150 acres, 46 of which were cultivated;
(g) despite the fact that he was retired in 1997 and 1998 and despite the increasingly numerous hours he devoted to this activity, the appellant continued to claim losses for those years;
(h) the farm has not generated any profits since it was started up, and the losses claimed by the appellant for the period from 1987 to 1998 totalled $77,253;
[5] The following facts, on the other hand, were denied:
[TRANSLATION]
(d) a love of farming was what led to the lands being purchased and the farm buildings being built; no market research survey was done;
(f) for the period from 1987 to 1998, the farm was mainly a horse-breeding farm;
(i) during the taxation years at issue, the appellant did not hire any employees, and the main expenses he claimed were interest and maintenance expenses for the farm machinery and the truck;
(j) to make his farming activity profitable, the appellant began sheep farming in 1999 and is planning to substantially increase his sales of wood and to continue selling a few fillies every year;
(k) the Minister has analysed the farm's future prospects based on information obtained from the appellant and has concluded that, in the current context, it will always run a deficit;
(l) the appellant had no reasonable expectation of profit from operating the Ranch El-Jyma farm during the 1997 and 1998 taxation years;
(m) the expenses paid each year to operate the Ranch El-Jyma farm were personal or living expenses of the appellant and were not incurred by him for the purpose of gaining or producing farming income.
[6] The evidence showed that the appellant initially became interested in horses with the purchase of a riding horse in the late 1970s. He later purchased a small plot of land to keep his horse.
[7] He testified that his interest in horses gradually increased to such a degree that he decided to make them a second career after he retired from Sûreté publique du Québec in 1997.
[8] According to the evidence, the appellant purchased a first parcel of land in the early 1980s. He maintained that it was not until 1987 that he set up a real structure so that he could eventually make a profit. At least, that was when he started claiming losses. Over the years, his losses were as follows (Exhibit I-2):
Table showing the development of the business since 1992:
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
|
Gross income
|
$5,172 |
$5,902 |
$9,384 |
$10,636 |
$14,020 |
$11,960 |
$14,934 |
|
Operating expenses
|
* |
* |
* |
* |
$6,419 |
$17,359 |
$16,934 |
|
Loss before CCA
|
* |
* |
* |
* |
$2,399 |
$5,399 |
$2,911 |
|
Capital cost allowance
|
* |
* |
* |
* |
$1,779 |
$0 |
$9,380 |
|
Business loss
|
$5,565 |
$6,248 |
$6,907 |
$4,478 |
$4,178 |
$5,399 |
$11,391 |
[9] The appellant explained the course he followed and described his interest in horses. He was brought up on a farm, and he said that he has useful and relevant basic knowledge, which he has supplemented by studying, having discussions and consulting various professionals. He also consulted the Quebec Department of Agriculture, Fisheries and Food (Ministère de l'Agriculture, des Pêcheries et de l'Alimentation) (hereinafter "MAPAQ"), which organization supervised horse production and offered a service aimed at the purification of horse breeds. Thus, he said, MAPAQ's representatives guided him in choosing which horses to purchase and ranked them so that his production would meet strict quality criteria.
[10] The appellant also described the various problems and pitfalls he had had to deal with. He said as well that he had been unlucky with respect to the health of three breeding mares, and he admitted that he made a mistake in purchasing used machinery at first, since this created a number of problems, such as delays in work performance and substantial repair costs. Finally, he also said that his projections for sales of foals and semen turned out to be wrong.
[11] He stated that he always hoped the farm would be viable, although he set up and developed his facilities on a modest scale based on his ability to pay. In this regard, he said that he did the vast majority of the work himself and that he hired students when he was able to take advantage of a wage subsidy program. At such times, he got help in performing his various work, including the haying. He also specified that the tax refunds received as a result of the losses he claimed were reinvested totally in the improvement and development of his facilities.
[12] Although the appellant's activities always generated losses year after year, on a continuous basis, he never thought fit to stop to assess and analyse things and to define a business plan or formulate a scheme that would make it possible to increase income to a level exceeding his expenses.
[13] Rather, the evidence showed that the appellant's hopes were based much more on luck, chance or uncertain data when he made decisions.
[14] Thus, the appellant explained that he purchased a stallion from the Beauce region for $4,000, hoping-hoping, I stress-to sell semen at $300 a unit. The stallion, once acquired, produced semen, but practically no one ever bought any. Purchasers in the area did not want to pay more than $100 for the semen they needed. The appellant produced semen, but there were no buyers. A real businessperson would first have checked to see whether there was an actual market for $300 semen or have established a market development plan.
[15] None of that was done here, and the appellant basically acknowledged his failure.
[16] The same applies to the breeding of foals: no one wanted to pay what the appellant was asking. He thus explained that he made just one sale at his price, and it was to a purchaser from the Beauce region.
[17] This is a good example of the lack of planning and the failure to have a business plan. The appellant justified everything by saying that his was not a business like a store on a commercial street. Admittedly, there is a considerable difference between a farm and a conventional store, but the profit-related criteria and requirements are the same.
[18] Making a profit from the operation of any business implies a real determination to achieve that goal by putting together all the necessary ingredients: capital, work, a market that takes account of demand, and prices based on expectations.
[19] It is totally presumptuous to expect a profit on the basis of one's own methods established without considering good practice prevailing in the area of economic activity in which one decides to invest.
[20] Animal production is certainly not like running a tobacco shop, but it is an economic activity that is subject to the same supply and demand constraints. Each area of economic activity has its strengths, its weaknesses, its constraints and its distinctive and particular features. Success results from work, from having sufficient capital and from knowledge of the area of activity, to which must be added unforeseen events or imponderables that may be due to nature, the market, economic circumstances and so on.
[21] I do not think it reasonable to claim that one expects to make a profit eventually with a structure that is unable to generate income that is higher than expenses, unless the expenses are temporary and non-recurring, otherwise the task to be accomplished is an impossible one.
[22] In reviewing the appellant's file, the respondent asked him to complete a questionnaire concerning income from the business; he answered question 9 (Exhibit I-1) as follows:
[TRANSLATION]
What type of market research survey did you do before starting your business, and what were the income and expense forecasts when you started the business?
Answer: none.
[23] In the instant case, it seems obvious to me that the appellant did not invest time and money for the sole purpose of incurring losses. It is just as obvious that the appellant, who is an intelligent man, preferred to make profits. But is this a sufficient reason for concluding that there was an expectation of profit in 1997 and 1998? I do not think so.
[24] Rather, I think that the appellant wisely planned his retirement on the basis of his passion for the land and for horses. Since he wanted to create an agricultural asset base for himself, in keeping with his tastes, he invested time and energy in strengthening his knowledge and developed his assets over time using the opportunities that arose and his tax refunds. Everything was organized much more according to his intuitions than on the basis of inescapable economic realities.
[25] That is a valid and perhaps normal choice for someone who has a passion, who is active and whose ability to pay is limited or at least reduced. However, it is a personal choice, the consequences of which must all be personal as well.
[26] A person cannot play it both ways, claiming that a business is a genuine one in which the rules of the game are basically economic ones and in which profit must be a constant concern, while at the same time claiming that recurring losses are normal and always justifiable. It may happen that profits are not as high as anticipated, in which case the person involved must react and make adjustments to overcome obstacles that may be temporary or isolated.
[27] In the case at bar, the business was not a genuine one, since the evidence did not show that the appellant meticulously developed a plan that he adopted or adjusted following certain acknowledgements of failure. According to his accountant, he chose the slow method, that is, making small outlays based on financial limitations and constraints, with those outlays being supplemented by a total investment in terms of work and time. This was a method that was just as valid as the alternative, which may be called the quick method.
[28] However, the concept of profit must realistically and reasonably be present, whatever the speed at which one has chosen to move.
[29] A business plan and profitability-based planning imply that it is theoretically possible to earn income that exceeds expenses within a time frame of a few years. The first years may be and are for making adjustments, effecting changes in approach and discovering or taking note of various problems, but they are also for identifying aspects that are more positive than expected.
[30] Except in very exceptional cases arising from circumstances that are just as exceptional, a period of over 10 years with continuous losses in an area of activity that is based more on personal passion than on rational mathematics creates a very strong presumption that a reasonable expectation of profit was not what was behind the activities carried on.
[31] In this case, it was not shown on a balance of probabilities that the appellant took appropriate actions, made appropriate decisions or put in place the appropriate elements for gaining or producing farming income in 1997 and 1998.
[32] In Tonn v. Canada, [1996] 2 F.C. 73, Linden J.A. of the Federal Court of Appeal took a good nuanced approach to the question of personal motivation in stating at pages 103-04:
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.
[33] To succeed, the appellant in the case at bar would have had to demonstrate the existence of a real market or of outlets for the sale of his products or to show that he had established a market development plan.
[34] Once the potential was identified, it became fundamental to establish the business's ability to supply that market at acceptable prices, at the same time taking production costs into account.
[35] The evidence basically showed that the appellant dreamed of making his hobby profitable without considering the inescapable and fundamental realities of the situation. There was no evidence that he had the skills and capital necessary to change marketplace rules in such a way as to make the market compatible with his own development plan. His business plan also had to provide and allow for adjustment of his strategy at any time if surprise developments occurred.
[36] The appellant has not discharged his burden of proof in this regard and, accordingly, his appeal must be dismissed.
Signed at Ottawa, Canada, this 31st day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 31st day of May 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2001-382(IT)I
BETWEEN:
JEAN-YVES POULIOT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 8, 2001, at Rimouski, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Agent for the Appellant: Lucien Gagnon
Counsel for the Respondent: Annick Provencher
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 31st day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 31st day of May 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]