Date: 20020123
Docket: 2001-1179-IT-I
BETWEEN:
GERALD MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Miller, J.T.C.C.
[1] Gerald Martin appeals the Minister's disallowance of his farm losses for the years 1996, 1997 and 1998, using the Informal procedure. The Minister disallowed such losses on the basis that Mr. Martin did not have any reasonable expectation of profit from his orchard in Naramata, British Columbia.
[2] Mr. Martin moved to the Okanagan Valley in 1975. He indicated that notwithstanding his position as an RCMP officer, he had a long-standing desire to return to the soil, and consequently took a keen interest in the orchard industry in the Okanagan region. From 1978 on into the early 1980's he helped others in the business, learning as much as he could, leading to his own acquisition of approximately four acres of property in 1981. He also acquired used equipment being a tractor, sprayer, mower and a mechanical picker, the latter of which was replaced after twelve years. Mr. Martin continued as a full-time RCMP officer up until 1987 when he retired. The last year and a half in that position he was stationed in Burnaby, British Columbia, where he had an apartment: he commuted to and from the Okanagan.
[3] Mr. Martin took a six-week orcharding course and also indicated that over the years he and his wife attended local seminars. Mr. Martin did not present any plan for the early years and indeed presented no plan for any time of the orchard's existence.
[4] Mr. Martin took great pains to describe all the hazards and pitfalls of a farming operation. These included low and unpredictable fruit prices, expensive equipment, expensive and harmful spraying, bad advice from packing houses, weak marketing systems, high cost of alternate means of marketing, hail, high cost and consequently non-viable replanting alternatives, bi-annual crops, destruction of crops by wildlife, cost of fencing, early freezes and the list went on and on. After listening to Mr. Martin's list of reasons why an orchard operation could fail, I certainly had no difficulty in appreciating why over 20 years he had never shown a profit. Indeed, I was convinced that it must be virtually impossible for anyone with just a few acres to survive. Throughout the 1990's Mr. Martin's gross annual income from the orchard averaged approximately $4,500, while his expenses averaged approximately $23,000. The income, expenses and losses for 1996, 1997 and 1998 were as follows:
|
Year |
Gross Income |
Expenses |
(Loss) |
|
1996 |
$6,622 |
$29,956 |
($23,334) |
|
1997 |
$3,891 |
$25,669 |
($21,778) |
|
1998 |
$4,643 |
$25,644 |
($21,001) |
[5] Mr. Martin had to cope with what he described as "tired, though still functional, equipment". He clearly worked hard at his orchard operation, as apart from when he was unwell, he handled the entire operation himself.
[6] Mr. Martin owned approximately 4.3 acres though only 3.3 acres were fruit producing. Mr. Martin considered replanting another acre but determined instead to go for quality as opposed to quantity. This basic principle appears to be the extent of Mr. Martin's business plan in the past two or three years. He explained with some pride that he had the best pear crop in the country in 1999, yet he still suffered a loss of approximately $10,000.
[7] Mr. Martin presented an income projection for the next few years, showing a steady increase in income and a steady decrease in expenses. It appears this projection was prepared for this case, as opposed to being part of an actual business plan. Mr. Martin acknowledged that he has been unable to increase borrowings as banks are loathe to lend to someone over 65 years of age. He did not provide copies of any information he might have presented to a bank.
[8] The overall impression left by Mr. Martin was of a man with high hopes and dreams of being a successful orchardist yet the vagaries of the industry have to date made economic success unachievable. I do not doubt however that the ability to have a lifestyle of working on the land is a success that Mr. Martin values dearly. The question is whether this passion for the overall orchard operation is a business or a hobby.
[9] Before the parties argued this point, there was a preliminary issue raised by the Appellant's agent. The Appellant's agent argued that the waiver which Mr. Martin signed for the 1996 taxation year was invalid as it referred only to farm business income and expenses, while Canada Customs and Revenue Agency investigated personal expenses which were outside the ambit of the waiver. I do not accept this argument. In notifying the Appellant that farm income and expenses were at issue, the Respondent was not precluded from determining that certain expenditures did not pertain to the farming operation. Although Mr. Martin revoked his waiver, the Minister still raised the assessment within the six month period permitted by section 152(4.1) of the Income Tax Act (the "Act").
[10] Returning to the primary issue of whether Mr. Martin's operation constituted a business or a hobby, it is helpful to repeat Chief Justice Dickson's description of the three classes of farmer as set out in Moldowan v. Her Majesty the Queen, 77 DTC 5213 (S.C.C.) as follows:
In my opinion, the Income Tax Act as a whole envisages three classes of farmers:
(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.
(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.
(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.
[11] In effect a full-time farmer, a part-time farmer carrying on a sideline business, or a hobby farmer. Associate Chief Judge Bowman put it this way in Kaye v. Her Majesty the Queen, 98 DTC 1659 at p. 1660:
... 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 extreme 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.
[12] While Mr. Martin is devoted to his orchard, I do not view the operation as a serious commercially-motivated farming operation. Mr. Martin acknowledged that he cannot see a profit arising from a continued relationship with the packing houses, yet the alternative of establishing his own fruit stands he claimed was prohibitively expensive. As Mr. Martin's agent indicated in argument Mr. Martin is caught in a conundrum, effectively trapped into a losing proposition. While their are some indices of a business, such as some minimal training, some investment in capital and a contractual arrangement with a packing house, they are insufficient to overcome the overall view of these 3.3 acres representing more of a hobby to Mr. Martin than a business. He did spend considerable time in his retirement on his orchard. However the capital committed, primarily in aging equipment, just could not support any expectation of a return. As Justice Strayer stated in Mohl v. Minister of National Revenue, [1989] F.C.J. No. 307:
It now appears clear from the Supreme Court decision in Moldowan, Ibid, as recently interpreted by the Federal Court of Appeal in Her Majesty the Queen v Morrissey, (1988) 89 D.T.C. 5080, that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term "significantly profitable" because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a "sideline business" to which the restriction on losses will apply in accordance with subsection 31(1).
[13] Mr. Martin never showed a profit and the income projections presented for purposes of this trial cannot support any expectation of significant profits, based on the reality of the orchard. It is a small operation relying on worn-out equipment in a risky and uncertain market. Projections of decreased expenditures and increased revenue do not jive with the facts. Again, as Associate Chief Judge Bowman indicated in Kaye:
If you want to be treated as carrying on a business, you should act like a businessman.
Mr. Martin's lack of plan, unrealistic projections, continued economic losses, apparent unpreparedness for the inherent risks of orchard farming, combined with the small size of the orchard itself suggest an unbusiness-like approach to farming. There was nothing concrete from Mr. Martin indicating that a 3.3 acre orchard could ever operate profitably. Indeed, as indicated earlier, his evidence supported a finding that a profit was unobtainable. Mr. Martin was fulfilling his ambition to "return to the soil"; he was not carrying on a business and therefore cannot deduct business losses.
[14] I dismiss these appeals.
Signed at Ottawa, Canada, this 23rd day of January, 2002.
"Campbell J. Miller"
J.T.C.C.
COURT FILE NO.: 2001-1179(IT)I
STYLE OF CAUSE: Gerald Martin v. The Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: January 14, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: January 23, 2002
APPEARANCES:
Agent for the Appellant: Robert Reisig
Counsel for the Respondent: Jasmine Sidhu
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1179(IT)I
BETWEEN:
GERALD MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 14, 2002 at Kelowna, British Columbia, by
the Honourable Judge Campbell J. Miller
Appearances
Agent for the Appellant: Robert Reisig
Counsel for the Respondent: Jasmine Sidhu
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 23rd day of January, 2002.
|
"Campbell J. Miller" |
J.T.C.C.