Date: 20010905
Docket: 2001-524-IT-I
BETWEEN:
MARGARET LYNNE VANLAARHOVEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Teskey, J.
[1] The Appellant, in her Notice of Appeal wherein she purported to appeal her assessments of income tax for the years 1994, 1995, 1996, 1997 and 1998, elected the informal procedure.
[2] The evidence indicated that the assessment for 1998 was a nil assessment and, therefore, the 1998 appeal is quashed following long-established precedent.
Issues
[3] There are four issues before the Court namely:
(i) the interest and penalties assessed in 1994 and 1995;
(ii) with regard to 1996 and 1997, was the Appellant a farmer operating a business with a reasonable expectation of profit;
and if so,
(iii) was the Appellant entitled to write off all losses or only restricted losses as per section 31 of the Income Tax Act (the "Act");
and if so,
(iv) were some of the claimed expenses capital in nature as opposed to current expenses.
First Issue
[4] The Appellant admits that her 1994 T1 tax return was not filed until the summer of 1995, when it should have been filed on or before April 30th, 1995, and that when she filed her 1995 T1 tax return in April of 1996, she did not send any money with the return even though money was owing.
[5] The Minister of National Revenue (the "Minister") claims that these returns were not filed and issued Demand to File notices (TX14D) on April 11, 1996 and November 13, 1997 for 1994 and 1995, respectively, and arbitrarily assessed the Appellant for these years on March 18, 1999.
[6] I found the Appellant to be a credible witness and I accept her testimony as being truthful and honest. Her own testimony destroys any valid reason to eliminate the penalties imposed and interest is not an appealable issue as it follows pursuant to the Act. Therefore, the 1994 and 1995 appeals are dismissed.
Second Issue
[7] The Appellant grew up on a farm which she left when she turned 18 years of age. Her now husband was also raised on a farm.
[8] I find the Appellant to be knowledgeable on raising and operating a sheep operation. The Appellant's testimony concerning costs and operating procedures and potential income from a sheep operation is unchallenged.
[9] Neither the auditor nor the appeals officer had any knowledge of operating a sheep farm. The year 1996 was the first year of operation of what could be described as a business. In that year, she operated with a partner and during that year, she also had a full-time job.
[10] In 1997, the partnership was dissolved and the Appellant purchased a five-acre property for $326,000. She valued the land at $240,000, the house located thereon at $50,000 and the barns and outbuildings at $11,000. These values are not challenged. A large portion of the purchase price was financed with a first mortgage. She says the land today is worth $750,000.
[11] From the evidence before me, I am satisfied that the sheep operation, in the year 2005, after capital cost allowance, will produce a net profit before income tax of approximately $6,000 and in 2006, this should be in the $45,000 to $50,000 range.
[12] For all intents and purposes, this will be the Appellant's only income.
The Law
[13] The premier authority is the Supreme Court of Canada's decision in Moldowan v. The Queen, 77 DTC 5213. Dickson, J., as he then was, said at page 5216:
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.
The reference in s. 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of "chief source" to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.
He also said at page 5215:
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 capital cost allowance. ...
[14] The Moldowan decision was dealt with at length by the Federal Court of Appeal in The Queen v. Morrissey, 89 DTC 5080. Mahoney, J. said at page 5084:
On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.
[15] Strayer, J., as he then was, in Mohl v. The Queen, 89 DTC 5236, after citing both Moldowan and Morrissey, said at page 5238:
... 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 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).
[16] In 1991, in the decision of The Queen v. Roney, 91 DTC 5148, the Federal Court of Appeal reviewed the decisions in Moldowan (supra), Morrissey (supra) and The Queen v. Graham, 85 DTC 5256. Desjardins, J.A. said at page 5155:
Start-up costs, contrary to what the trial judge said, cannot be considered as the basis for an alternative ground of decision. The permissible amount to be deducted depends on the class the taxpayer finds himself in. ...
In her view, when Dickson, J., said in Moldowan: "... On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.", he was referring to a Class (1) farmer.
[17] Based on these principles and the evidence before me, I am satisfied that the planned operation will be profitable in 2005 and in the circumstances herein, I do not find the start-up period to be excessive.
[18] Thus, I find that the Appellant was in business in both the 1995 and 1996 years.
Third Issue
[19] Based on the evidence before me and in view of the Appellant's full-time job in 1996, I find that the provisions of subsection 31(1) of the Act apply and the Appellant is entitled to only restricted losses in that year.
[20] However, with regard to 1997, the Appellant changed occupational direction and was devoting almost all of her time, efforts and capital to the farming operation and any other income-producing activity was minimal. Thus, she became a Class 1 farmer and entitled to write off against income in that year all current expenses. The sheep operation in 1997 and thereafter, was the centre of her work routine and will be her major source of all income.
Fourth Issue
[21] Having decided that for the 1996 year the Appellant is entitled to only restricted losses pursuant to subsection 31(1) of the Act, I do not have to determine what portion of the claimed expenses in that year were capital expenses or current expenses as the Minister acknowledged that the current expenses exceeded the restricted amount.
[22] The Minister determined for the 1997 year that $30,406 of the claimed expenses of $56,630 were capital in nature and that $8,137 claimed for business use of the home was not allowable, as home office expenses can only be deducted from profit from a business and the remaining expenses in the amount of $17,487 were disallowed.
[23] Clearly, the claimed expenses of $8,275 for building and farm repairs and $1,667 for clearing and levelling land are capital expenses. This leaves only $20,464 claimed for custom contract and current labour. I am not convinced that the categorizing of this expense as capital in nature is wrong. The money had to be spent in order to operate the sheep operation on the property and, therefore, is capital. The Appellant will recapture the $30,406 when she sells the property, since the value of the land has more than doubled since the purchase and this amount will be part of her adjusted cost base.
[24] There will be a judgment issued quashing the 1998 appeal and dismissing the 1994 and 1995 appeals. The 1996 appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to only restricted farm losses in that year pursuant to subsection 31(1) of the Act.
[25] The 1997 appeal is allowed, with costs, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled in that year to write off against income all her current farm expenses in the amount of $17,487.
Signed at Ottawa, Canada, this 5th day of September, 2001.
"Gordon Teskey"
J.T.C.C.
COURT FILE NO.: 2001-524(IT)I
STYLE OF CAUSE: Margaret Lynne Vanlaarhoven
and Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: July 26, 2001
REASONS FOR JUDGMENT BY: The Honorable Judge Gordon Teskey
DATE OF JUDGMENT: September 5, 2001
APPEARANCES:
For the Appellant: The Appellant herself
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
2001-524(IT)I
BETWEEN:
MARGARET LYNNE VANLAARHOVEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 26, 2001 at Vancouver, British Columbia by
the Honourable Judge Gordon Teskey
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Jasmine Sidhu
JUDGMENT
The appeals from the assessments made under the Income Tax Act (the "Act") for the 1994 and 1995 taxation years are dismissed;
The appeals from the assessments made under the Act for the 1996 and 1997 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and in reassessment, in accordance with the attached Reasons for Judgment;
The appeal from the assessment made under the Act for the 1998 taxation year is quashed.
Signed at Ottawa, Canada, this 5th day of September, 2001.
|
"Gordon Teskey" |
J.T.C.C.