Date: 20020725
Docket: 2000-2779-IT-G,
2000-2787-GST-G
BETWEEN:
CAROLYN MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Lamarre, J.T.C.C.
[1] These are appeals against assessments made on March 30, 2000 by the Minister of National Revenue ("Minister") under the Income Tax Act ("ITA") for the appellant's 1995 and 1996 taxation years whereby the Minister disallowed all deductions for farm expenses ($70,018 in 1995 and $67,314 in 1996 as per Exhibit R-2) on the basis that the appellant did not have a reasonable expectation of profit from her farming activity in those years, and hence that the appellant was not operating a business in those years.[1] Correlatively, the Minister also disallowed all the input tax credits ("ITCs"), totalling $8,730 (as per Exhibit R-1, Tab 8), claimed by the appellant under the Excise Tax Act ("ETA") for the reporting periods from January 1, 1996 to December 31, 1997, by assessment number 00000001412, dated February 4, 1999, which was confirmed by a notice of decision dated May 3, 2000. The Minister disallowed the ITCs on the basis that the appellant did not have a commercial activity within the meaning of subsection 123(1) of the ETA. In the Minister's view, the farming activity was not carried on with the intention of making a profit or with a reasonable expectation of profit.
Facts
[2] The appellant is a medical researcher with a PhD who worked as a research scientist for Health and Welfare Canada and Environment Canada from 1976 to 1993. She retired in 1993 due to a permanent disability involving a sleep disorder. At that time she began to receive long-term disability benefits.
[3] The appellant lives on a farm located in the Township of North Plantagenet in Prescott County, near Ottawa. She began living there with her husband, also a scientist, in 1973. They bred and trained horses on the farm, where they also taught riding (dressage) skills. The appellant's husband died in 1988.
[4] Since 1994, the appellant has devoted all her attention and capital to her farm. Although the value of the land was appraised at $290,000 in 1994 (Exhibit A-2), the buildings and installations were in serious disrepair and needed to be fixed up. In 1994, the appellant completed a course in therapeutic riding for people with disabilities. Afterwards, she gave classes in therapeutic riding as an assistant instructor for one year under the supervision of a certified instructor. She obtained her certification as a therapeutic riding instructor from the Canadian Therapeutic Riding Association ("CANTRA") on November 27, 1995 and became one of its members.
[5] In 1995, the appellant set up a totally new farm operation complying with CANTRA standards, with the development of therapeutic riding activities, in partnership with Mr. Peter Cray under the name of Willowbank Farm.
[6] At first, Mr. Cray invested $16,000 and his physical labour in that new venture. The appellant remained the sole owner of the land and provided her management and teaching skills. They agreed that the shares of the appellant and Mr. Cray in the partnership would be 85 per cent and 15 per cent, respectively.
[7] In 1996, the appellant started to reinvest all her pension income in the farm and they changed the partners' shares in the partnership to 95 per cent for the appellant and 5 per cent for Mr. Cray.
[8] In 1995, the appellant developed a charitable organization under the name of the Passage Equitation Therapeutic Riding Association ("Passage Equitation"), of which she was a non-voting board member. Passage Equitation was an associate member of CANTRA. It was set up to create a therapeutic program for disabled people referred by their physicians, and to solicit volunteers to provide the training. The appellant filed a list of approximately 60 physicians and 20 health and education agencies that have referred their patients or students to Willowbank Farm for therapeutic riding (Exhibit A-8).
[9] In 1996, Passage Equitation entered into an agreement with Willowbank Farm whereby Passage Equitation would have access to horses and equipment for the purpose of carrying on its charitable undertaking of therapeutic riding programs. Passage Equitation was charged an amount of money to use all Willowbank Farm facilities. In 1996 and 1997, Willowbank Farm agreed to provide those facilities as a charitable donation and was provided with a receipt therefor by Passage Equitation. After an audit by Revenue Canada, as it was then called, they were told that this practice was not appropriate under the ITA. They were told that only a transfer of property (and not a contract of service) could give rise to a charitable donation under the ITA. The appellant, who had not been aware of this, said that they remedied the situation afterwards and did not follow that practice any more.
[10] In 1995, Willowbank Farm owned four horses as part of the therapeutic riding programs and had 17 students enrolled in those programs. In 1998, Willowbank Farm launched a new program directed at mature and senior riders, using techniques similar to those used for disabled people. The farm then had 11 horses trained to offer those special needs services (see newspaper and magazine coverage filed as Exhibit A-13). The appellant said that they now own 12 horses for that purpose. Willowbank Farm is now advertised extensively on television and in newspapers and magazines and is one attraction indicated on the map of the Lower Ottawa Valley (Prescott-Russell) (Exhibits A-9 and A-10). In addition, it received the top excellence award from Prescott and Russell's Business Development Corporation in two categories: recreation and tourism, and community service.
[11] The appellant also received business recovery assistance in 1998 and 1999 in relation to losses associated with the disaster period of the 1998 ice storm in eastern Ontario. She undertook three major cost-sharing projects through the Canada-Ontario Business Recovery Assistance ("COBRA") program. These projects related to marketing, beautification, networking and new product testing on her property. Under them, the appellant was required to match the COBRA grants and pay all labour costs herself.
[12] At that time, the appellant received help to revise her business plan. Willowbank Farm received support under a program delivered by the Farm Credit Corporation for Agriculture Canada whose purpose is to encourage agribusinesses to develop formal business plans. A projection of possible income was prepared and potential users of the appellant's services were also identified. The appellant was encouraged to set up a network including her business and, in a sense, took a risk that she would not have taken had the COBRA program not been implemented. Summer camps started in 2000 and year-round programs are now available. Teaching activities are carried on five or six days a week from about May to the end of October. This is reduced to two days a week during the rest of the year.
[13] The appellant also had sideline businesses, operated from the farm as complementary services offered in addition to the therapeutic riding activity. She converted a granary on the farm into accommodation with modern facilities suitable for residential clients. She also started an asparagus plantation and purchased breeding cattle and capons as part of her tourism business. However, all activities related to the asparagus plantation, breeding cattle and capons were terminated in 1997, as the appellant realized that they were both too costly and inappropriate in the circumstances (for example, the pesticide spray that had to be used for the asparagus plantation was not appropriate in light of the children attending the camps or the therapeutic riding program). She then decided to focus mainly on her therapeutic riding program and her tourism business.
[14] The appellant produced, as Exhibit A-17, a statement of gross income, profit and loss situation and expenses incurred in relation to her farm activities for the taxation years 1995 through 2000. This statement is reproduced below:
Gross Income Profit/Loss Expense
Data from Income Tax Returns
|
|
GROSS INCOME |
PROFIT/LOSS |
EXPENSE |
|
1995 |
$ 6,890 |
-$70,018 |
$76,908 |
|
1996 |
$16,062 |
-$67,315 |
$83,377 |
|
1997 |
$30,838 |
-$54,053 |
$84,891 |
|
1998 |
$34,221 |
-$38,099 |
$72,320 |
|
1999 |
$129,464 |
-$44,555 |
$174,019 |
|
2000 |
$71,833 |
$596 |
$71,237 |
[15] The appellant also filed a statement of repayment of long-term loans (Exhibit A-15). It shows a total debt reduction of $119,212 between 1995 and 2001 and an outstanding total of approximately $260,000 for the loans in 2001.
[16] The appellant received approximately $36,000 to $39,000 per year in pension income between 1995 and 2000, with the exception of 1998, when she received $57,000 in pension income.
[17] In addition, she withdrew approximately $36,800 from her registered retirement savings plan in the 1996 and 1997 taxation years that she reinvested in her farm activities.
[18] It was also put in evidence that the appellant claimed losses from the farm for the taxation years 1987 through 1994 (increasing from $15,000 in 1987 to $57,000 in 1994) (Exhibit R-2).
Appellant's Argument
[19] The appellant argued that her therapeutic riding and tourism activity was a new business that was started up in 1995 and that in the 1995 and 1996 taxation years, she certainly had a reasonable expectation to make a profit from that new business.
[20] Counsel for the appellant submitted that the respondent has admitted the fact stated in paragraph 8 of the Notice of Appeal, which reads as follows: "In 1995, the Appellant formed a totally new farm business partnership with Peter Cray." Counsel is of the view that the respondent is not, at this stage, in a position to argue that the appellant was operating the same horse riding activities in prior years and "that for approximately 20 years, the Appellant has been incurring repeated losses and more specifically [that], from 1987 to 1997, losses were reported as shown on Schedule 'A'". Counsel argued that the respondent has not established a history of 20 years of losses, as the Schedule A referred to in the Reply to the Notice of Appeal was never filed with the Reply.
[21] In counsel's view, the therapeutic riding business could not have been started up earlier than 1995. It was only in 1995 that the appellant became a certified therapeutic riding instructor by CANTRA. The clientele interested in this new business differed completely from the clientele that attended the regular horse riding lessons she used to give during her husband's lifetime. The appellant started up the new business with a new partner, Peter Cray. In counsel's view, all this is evidence that the appellant was starting a new business venture in those years. The appellant knew that the expenditures to be incurred in the new business would be greater in those years but that they would not last for more than a few years. Indeed, the major capital expenditures incurred to start up the therapeutic riding and tourism business have now been completed. Furthermore, the cost-sharing projects through COBRA benefited the appellant's business but at the same time entailed expenses that the appellant would probably not have incurred without the government's encouragement. Finally, the business's gross income has increased, as can be seen from the statement of income and losses from 1995 to 2000 (Exhibit A-17), which shows that income has increased over the years and losses have been reduced, with the result that there was even a small profit in 2000.
[22] The appellant also argued that no personal expenses have been deducted and that the respondent did not raise the reasonableness of the expenses within the meaning of section 67 of the ITA.
Respondent's Argument
[23] Counsel for the respondent began by stating that he could accept that the appellant had a reasonable expectation of profit from the therapeutic riding activity in the taxation years at issue. However, he submitted that only the expenses related directly to that activity should be accepted. In his view, all expenses relating to the sideline activities, such as the sale of beef cattle, capons and asparagus, should not be accepted, as those activities proved not to be profitable and were terminated in 1997. However, he admitted that the audit did not focus on the apportionment of expenses between the different activities on the farm.
[24] In his pleadings, counsel for the respondent argued only that the activity as a whole was not carried on with a reasonable expectation of profit and that consequently the losses claimed from the whole activity were not losses from a business or property. No attempt was made in the pleadings to argue that the therapeutic horse riding activity should be separated from the sideline activities.
[25] In the end, my understanding is that counsel for the respondent is arguing that if I consider the activities on the farm as a whole, the appellant has not shown that she had a reasonable expectation of profit in the years at issue. In counsel's view, the history of losses indicates a non-commercial intention and a lack of a realistic business plan for the future. He submitted that the appellant was given a reasonable number of years to demonstrate that the activity was viable. As for the admission of the allegation in paragraph 8 of the Notice of Appeal, counsel stated that what was admitted was the existence of the new partnership, but he reiterated that the previous context of losses could not be disregarded.
Analysis
[26] This case was argued before the decision in Stewart v. The Queen, 2002 DTC 6969, was rendered by the Supreme Court of Canada on May 23, 2002. The argument relied upon by the respondent is that the activity did not constitute a source of income within the meaning of sections 3 and 4 of the ITA on the basis that the appellant had no reasonable expectation of profit and therefore was not entitled to deduct losses relating to that activity under the ITA. Since the decision in Stewart, supra, this argument no longer prevails as a stand-alone source test. In that case, the Supreme Court of Canada said the following in paragraphs 4 and 5:
[4] In our view, the reasonable expectation of profit analysis cannot be maintained as an independent source test. . . .
[5] . . . As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence. The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to a profit, the activity is commercial, and the taxpayer's pursuit of profit is established. However, where there is a suspicion that the taxpayer's activity is a hobby or personal endeavour rather than a business, the taxpayer's so-called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.
[27] In order for the appellant to deduct losses from her therapeutic horse riding and tourism activity pursuant to subsection 9(2) of the ITA, she had to show that this activity constituted a source of income. To that effect, the Supreme Court stated in paragraphs 52 and 54:
. . . where the nature of a taxpayer's venture contains elements which suggest that it could be considered a hobby or other personal pursuit, but the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the [ITA].
. . .
. . . This requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behaviour.
[28] Among these objective standards, the Supreme Court recognized the reasonable expectation of profit test as a factor to be considered at this stage, although it cannot be conclusive in itself. In paragraph 55, the Court stated:
. . . We would also emphasize that although the reasonable expectation of profit is a factor to be considered at this stage, it is not the only factor, nor is it conclusive. The overall assessment to be made is whether or not the taxpayer is carrying on the activity in a commercial manner. However, this assessment should not be used to second-guess the business judgment of the taxpayer. It is the commercial nature of the taxpayer's activity which must be evaluated, not his or her business acumen.
[29] Turning now to the right to claim ITCs under the ETA, it must be reminded that they may be claimed only in respect of tax paid on property or services acquired in the course of a commercial activity. A commercial activity is defined as follows in subsection 123(1) of the ETA:
"commercial activity" of a person means
(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply . . .
[30] Thus, the reasonable expectation of profit test is specifically included in the legislative provision that defines a commercial activity. A taxpayer must therefore demonstrate that he or she is carrying on a business other than a business carried on without a reasonable expectation of profit in order to claim that he or she is engaged in a commercial activity.
[31] In my view, the appellant has established that her predominant intention in the taxation years at issue was to make a profit from the therapeutic horse riding and tourism activity and that it was carried out in accordance with objective standards of businesslike behaviour. The expected profitability of the venture is one factor, but not the only one, to consider in assessing whether the appellant's activity evidenced a sufficient level of commerciality to be considered a business source of income.
[32] The appellant had the proper training to develop a therapeutic horse riding business. She devoted all her money and time to that activity and obtained all the necessary qualifications to operate such a business. This was a well-advertised and well-known therapeutic program recommended by many physicians and various agencies for their patients or clients. The appellant clearly established that her intended course of action was to develop a recreational centre revolving around her main interest, which is therapeutic riding for disabled people and their families. In my view, the sideline activities, namely the bed and breakfast, the sale of beef cattle, asparagus and capons, and the summer camps, were all part of a single business. It is my opinion that the appellant used her own business judgment to determine whether to activate or terminate those sideline activities. She was in the best position to know whether those sideline activities would be beneficial or detrimental to the business. She had valid business reasons for putting an end to the sale of beef cattle, asparagus and capons in 1997. The comments of Judge Bowman in Nichol v. The Queen, 93 DTC 1216 (T.C.C.), at page 1219, are apposite here:
[The taxpayer] 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. . . .
[33] With respect to the history of profits and losses, the respondent showed that the appellant had suffered losses since 1987. However, the respondent admitted that the appellant formed a totally new farm business partnership with Peter Cray in 1995. In my view, the clarification made by counsel for the respondent in his argument, namely that this admission does not imply that the losses incurred in the preceding years should be disregarded, does not alter the fact that the appellant started up a new business in 1995.
[34] The evidence revealed that the appellant has definitely devoted all her time to the farm since 1994. She took all the necessary courses and obtained her certification as a therapeutic riding instructor. She made all the capital outlays needed to start up the therapeutic riding business. She concluded an agreement with Peter Cray in 1995 with the firm intention of starting up that new business.
[35] In my view, most of the elements are present to show that the appellant started up a new business, revolving around therapeutic riding, in the years 1994 and 1995. It is therefore normal that the appellant incurred losses in those years. The evidence established that gross income increased and the losses were reduced over the years. The appellant has testified that most of the major expenses have now been completed. The activity even showed a small profit in 2000.
[36] I am therefore of the opinion that the appellant has shown that she undertook the therapeutic horse riding and tourism activity in a sufficiently commercial manner. She has also shown, in my view, that she had a reasonable expectation of profit from those activities on the farm during the years at issue. I therefore conclude that she definitely had a source of income and that she was carrying on a commercial activity in those years.
[37] With respect to the deductibility of the expenses, the respondent challenged, in her pleadings, the expenses incurred for the renovation of the house in 1995 on the basis that this was a non-income providing item (see paragraph 12(g) of the Reply to the Notice of Appeal). The appellant explained that her house was used as a guesthouse for clients. I have no reason to disbelieve her, as she appeared to me to be a credible witness. Although she made some mistakes, I am satisfied that she did her best to act in conformity with good business practices and with the law. I am therefore satisfied that the expenses in question were incurred in relation to the business. Furthermore, the respondent did not argue in her pleadings that the expenses were unreasonable and, therefore, restricted due to the application of section 67 of the ITA. Although counsel for the respondent filed a statement of adjustments to the expenses claimed (Exhibit R-1, Tab 8), it was not discussed at the hearing. The assumptions of fact relied on by the Minister in paragraph 12 of the Reply to the Notice of Appeal do not specify on what basis the expenses were adjusted. The auditor for the Canada Customs and Revenue Agency was not present at the hearing to explain why the expenses were so adjusted. The appellant specifically testified that she did not claim any personal expenditures. Furthermore, the few expenses that were challenged by counsel for the respondent in cross-examination were well explained by the appellant and there is no reason to disallow them. Counsel for the appellant mentioned that the depreciation of the opening inventory may need to be adjusted. However, no specific figures were consented to by either party. In the circumstances, it is difficult for me to support the Minister's view and bring any changes to the expenses as initially claimed by the appellant.
[38] In view of my conclusion that the appellant had a source of income, I am in a position to accept the deductibility of the losses relating to that source. The evidence before me does not establish that the losses claimed were not related to the appellant's farming business.
[39] For these reasons, the appeals are allowed, with costs.
Signed at Ottawa, Canada, this 25th day of July 2002.
|
"Lucie Lamarre" |
J.T.C.C.
COURT FILE NO.: 2000-2779(IT)G
2000-2787(GST)G
STYLE OF CAUSE: Carolyn Miller and
Her Majesty The Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: January 16, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Lucie Lamarre
DATE OF JUDGMENT: July 25, 2002
APPEARANCES:
Counsel for the Appellant: M. Anne Robinson
Counsel for the Respondent: Roger Leclaire
COUNSEL OF RECORD:
For the Appellant:
Name: M. Anne Robinson
Firm: Robinson Blokker
202-735 Wonderland Rd. N.
London, Ontario N6H 4L1
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-2779(IT)G
BETWEEN:
CAROLYN MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeal of Carolyn Miller 2000-2787(GST)G on January 16 and 17, 2002, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
Counsel for the Appellant: M. Anne Robinson
Counsel for the Respondent: Roger Leclaire
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant may deduct the claimed amounts of $59,515 and $63,949, being her share of business losses claimed for the 1995 and 1996 taxation years respectively.
Signed at Ottawa, Canada, this 25th day of July 2002.
|
"Lucie Lamarre" |
J.T.C.C.
2000-2787(GST)G
BETWEEN:
CAROLYN MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Carolyn Miller 2000-2779(IT)G on January 16 and 17, 2002, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
Counsel for the Appellant: M. Anne Robinson
Counsel for the Respondent: Roger Leclaire
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated February 4, 1999 and bears number 00000001412, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled to her share of input tax credits totalling $8,730 as claimed for the reporting periods from January 1, 1996 to December 31, 1997.
Signed at Ottawa, Canada, this 25th day of July 2002.
|
"Lucie Lamarre" |
J.TC.C.
[1] It must be said here that this case was argued before the recent decisions of the Supreme Court of Canada in Stewart v. The Queen, 2002 SCC 46 and The Queen v. Walls, 2002 SCC 47, where it was stated that reasonable expectation of profit should not be the test for determining whether there is a source of income under the ITA.