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Docket: 2004-41(IT)I |
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BETWEEN: |
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ROBERT D. PARTRIDGE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on June 17, 2004, at Kingston, Ontario.
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Before: The Honourable D.G.H. Bowman, Associate Chief Justice |
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Appearances: |
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For the Appellant: |
The appellant himself |
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Counsel for the Respondent: |
Jennifer Neill |
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JUDGMENT
It is ordered that the appeal from the assessment made under the Income Tax Act for the 1999 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to permit the appellant to deduct farming losses of $26,142.
The appellant is entitled to such costs, if any, as may be provided by the tariff.
Signed at Ottawa, Canada, this 28th day of July 2004.
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"D.G.H. Bowman" |
Bowman, A.C.J.
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Citation: 2004TCC471 |
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Date: 20040728 |
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Docket: 2004-41(IT)I |
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BETWEEN: |
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ROBERT D. PARTRIDGE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment for the appellant's 1999 taxation year.
[2] In that year he claimed a loss of $26,142 from farming. This claim was denied on the basis that the appellant had no reasonable expectation of profit ("REOP").
[3] The appellant is 73 years of age. He started farming in 1978 when he retired from the military and farming has been his full-time occupation since that time. By "full-time occupation" I do not mean that it is his chief source of income. That point is not before me and I make no finding on it. I mean merely that farming is the activity at which he spends all of his working time. He initially farmed 110 acres in Quebec. In 1983, he moved to Delta, Ontario, where he purchased 365 acres which he used in a mixed farming operation where he raised, among other things, Hereford cattle and Morgan horses. He sold the 365 acres in 1997 due to ill health. In 1995, he bought an additional 67 acres. This property has about 35 acres of pasture, 10 acres of pine forest, 15 acres of sugar bush, 5 acres of waterfront and 2 acres for the house and barn.
[4] The appellant and his wife work as a team and his wife has been very supportive of him in his farming operation. Paragraphs (e), (f), (g), (k), (l), (m), (n), (o) and (p) of the Reply to the Notice of Appeal read
(e) when purchase[d], the Second Property had not been farmed for 10 years and required "considerable" work to be used for farming. Land had to be cleared for pasture, buildings had to be repaired and a fence had to be installed. Also, a right of way permitting people access divided the farm, thus reducing its use as a farm. Most of the required work was still not done in 1999.
(f) The Appellant confirmed that things he attempted to do, stated in paragraph "e" of this Reply, that something went wrong each time.
(g) the Appellant and his spouse reside on the Second Property;
. . .
(k) during the period under appeal, the Appellant had 12 to 15 head of cattle, 20 sheep, 10 goats, 3 deer, 30 chickens, 2 horses, 2 donkeys, 6 ducks, 2 dogs and cats.
(l) the Appellant bought a used backhoe for $20,000 to clear more pastureland, he sold the backhoe in January 2003;
(m) the Appellant produced a business plan to make the farming operation profitable. The main idea in his business plan was to establish a fence line and to tried to stop right of ways so people would not be able to cross his property freely and he would pasture more livestock and to be able to increase the size of his land. The Appellant was unsuccessful in court to remove the right of way;
(n) the Appellant produced a business plan, but did not have any financial information and did not include any income and expenses projections or an analysis of cash flow;
(o) based on an audit of 1997 and 1998, the Appellant admitted he didn't realize he had to operate with profit in mind until the audit was done in 2000, The 1999 review confirmed that no change in the Activity took place;
(p) the Appellant did not have a reasonable expectation of profit from the Activity in the 1999 taxation year.
[5] Many of the allegations pleaded as assumptions are not so much assumptions of fact as they are attempts to put forward in the guise of assumptions evidence that is prejudicial to the appellant. This sort of unfair practice is particularly deplorable when the appellant is self-represented. To quote or paraphrase as assumptions what the Crown conceives to be admissions against interest made by the appellant is improper. If an appellant has made an admission that the Crown wants to use against him or her it should be put to the appellant in cross-examination. What the respondent has done here is a misuse of the practice of pleading assumptions. I appreciate that counsel for the respondent did not draft the Reply to the Notice of Appeal. It was drafted by an employee of the Canada Customs and Revenue Agency.
[6] It was not pleaded as an assumption or as a separate allegation that there was any personal element in Mr. Partridge's carrying on of the farming business. It is true, he has not made a profit from farming. He nonetheless generates farming income each year. In 1999 his gross farming income was $12,634. A significant portion of his expenses consists of capital cost allowance - in 1999, $17,698.
[7] His claim to deduct losses in 1997 and 1998 was denied and his appeal to this court was dismissed by Justice Rip ([2001] T.C.J. No. 579). An appeal from his decision was dismissed by the Federal Court of Appeal.
[8] Paragraphs 11 to 21 of Justice Rip's judgment read
[11] Mr. Partridge declared that he operated the farm not to make a profit but to contribute to the community. The farms, he said, were to provide him with a "livelihood", a "living not a profit", permitting him to consume the products he grew. And, during the years in appeal, he and his wife did consume vegetables and meat produced on the farm.
[12] Unlike taxpayers in cases cited by respondent's counsel [See Note 1 below], Mr. Partridge noted that he does no other work except work on the farm. He has no other income from business or employment. Thus, he concluded these cases are irrelevant.
Note 1: For example, Moldowan v. The Queen, 77 D.T.C. 5213 (S.C.C.), Tonn et al. v. The Queen, 96 D.T.C. 6001, A.G. of Canada v. Mastri et al., 97 D.T.C. 5420, R. v. Donnelly, [1997] F.C.J. No. 1351, 1997 CarswellNat 1562, Spence v. R., [2000] T.C.J. No. 203 2000 CarswellNat 612.
[13] Mr. Partridge took great comfort in Dickson J.'s (as he then was) description of a class (1) farmer in Moldowan, [See Note 2 below]:
Note 2: Supra, p. 5216.
(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.
[14] It is Mr. Partridge's main submission, if I understand him correctly, that farming was "the centre of his work routine" and, therefore, he is a class (1) farmer, notwithstanding farming provides him with no net income.
[15] The words "the centre of work routine" and "ordinary mode and habit of work" used by Dickson J. in Moldowan must mean the centre of a person's economic work routine or habit of work, where a person is working for his livelihood. The word "livelihood" is defined in The Canadian Oxford Dictionary as "a way of earning a living; an occupation". It does not mean efforts to provide one's self with subsistence only, as the appellant contemplates, or an activity that creates some revenue, but not a profit, but at which the taxpayer devotes all of his mental and physical energies.
[16] Indeed, in Tonn [See Note 3 below] and Mastri [See Note 4 below] the Federal Court of Appeal considered the personal element of expenses in considering whether the expenses were incurred to produce income from a business or property. In the appeal at bar, as the appellant stated on several occasions, the purpose of his farming activity was not necessarily to earn a profit but to provide food for his table. Profit was, I gather, a secondary intent.
Note 3: Supra, pp. 6009-10.
Note 4: Supra, p. 5424.
[17] Nevertheless, if a person carries on the business of farming, expenses are deductible in computing income. A business requires an element of commerce or commercial activity. The activity, farming in the appeal at bar, must have some commercial flavour, at least, to a business.
[18] To be successful, Mr. Partridge must convince me that farming, or farming and some other source of income, is his chief source of income, not his income from pensions or investments. As Dickson J. stated in Moldowan: [See Note 5 below]:
Whether a source of income is a taxpayer's "chief source" of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of "chief source" are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.
[19] In R. v. Donnelly, [See Note 6 below] Robertson J.A. explained that:
8 A determination as to whether farming is a taxpayer's chief source of income requires a favourable comparison of that occupational endeavour with the taxpayer's other income source in terms of capital committed, time spent and profitability, actual or potential. The test is both a relative and objective one. It is not a pure quantum measurement. All three factors must be weighed with no one factor being decisive. Yet there can be no doubt that the profitability factor poses the greatest obstacle to taxpayers seeking to persuade the courts that farming is their chief source of income. This is so because the evidential burden is on taxpayers to establish that the net income that could reasonably be expected to be earned from farming is substantial in relation to their other income source: invariably, employment or professional income. Were the law otherwise there would be no basis on which the Tax Court could make a comparison between the relative amounts expected to be earned from farming and the other income source, as required by section 31 of the Act. . . .
[20] Unfortunately, I cannot agree with Mr. Partridge that he carried on the business of farming. He was preoccupied with farming. Farming was his life. However, at no time during the time he farmed in Portland did he carry on the business of farming. He did not expect the farm to provide the bulk of income although it was the centre of his daily work routine.
[21] The appeals are dismissed except for the deletion of penalties.
[9] His judgment was affirmed by the Federal Court of Appeal, 2003 DTC 5175 which said
[5] As the Tax Court Judge noted, the fact that farming is at the 'centre' of one's 'work routine' does not make it a business. The activity must go beyond mere subsistence (Reasons, paragraph 15).
[6] In this respect, the Tax Court Judge found that the applicant's activities lacked commercial flavour and that he was not engaged in farming activities to make a profit, but primarily to provide 'food for his table' (Reasons, paragraph 16). As such his activities did not amount to a business.
[7] I have not been persuaded that the Tax Court Judge committed any reviewable error in reaching this conclusion.
[10] No reference was made to the Supreme Court of Canada judgment in Stewart v. The Queen, 2002 DTC 6969, and Walls et al. v. The Queen, 2002 DTC 6960.
[11] It would, no doubt, be easy to dismiss the appeal of this tenacious and somewhat feisty senior citizen. It would not be difficult to find an excuse to decide a case of this sort in favour of the Crown. One could look at 1999 and say that Mr. Partridge is still losing money and by 2002 he has finally stopped trying to write off his farming losses. One could follow the safer road and dismiss the appeal, secure in the knowledge that Mr. Partridge would probably not appeal. However, I have to decide this case in accordance with the facts as they were presented to me, not on the facts as found by another judge for another year, however great may be my respect for that other judge. It would be unfair for me to use against Mr. Partridge admissions he made in the earlier case based upon his ill-conceived notion of what the case was about.
[12] Mr. Partridge referred at some length to Interpretation Bulletin IT 322-R, dated October 25, 1978. That bulletin deals with the restriction of farming losses under section 31 of the Income Tax Act. Mr. Partridge represented himself before Rip J. and the Federal Court of Appeal, as he did before me. I do not think he understood the significance of some of the things he was saying. It is obvious that he completely misconceived the issue and what he had to establish. Interpretation Bulletin IT 322-R reproduces largely what Dickson J. said about chief source of income in Moldowan v. The Queen, 77 DTC 5213. Section 31 was not applied in either the earlier years or in 1999. Mr. Partridge looked at the definition of a Category 1 farmer in paragraph 1(a) of the bulletin and argued that that was what he was. He noted that farming was "the centre of his work routine and his major preoccupation" and therefore he did not focus on the making of profit in his evidence in the earlier appeals.
[13] Neither in 1999 nor in the two years that were before the court previously, 1997 and 1998, was section 31 applied. Nonetheless, Mr. Partridge seemed to argue his earlier case on the basis that farming was his chief source of income. The question before me is not what his chief source of income was or whether he was a Category 1 or 2 farmer but whether he was carrying on a farming business. It is a matter of conjecture what the result might have been if the Minister had applied section 31 or Mr. Partridge had been represented by a competent tax counsel. Nonetheless the Minister chose to put all of his eggs in the REOP basket. The case is somewhat reminiscent of the decision in Kuhlmann et al. v. The Queen, 98 DTC 6652. In that case two physicians raised riding horses and lost money year after year. The Minister restricted their farming losses under section 31. At trial, however, the Crown abandoned the section 31 argument and argued that there was no reasonable expectation of profit. Mogan J. of this court agreed. The Federal Court of Appeal reversed his finding and held that for there to be no reasonable expectation of profit an expectation of profit had to be "irrational, absurd or ridiculous."
[14] There was certainly nothing irrational, absurd or ridiculous in Mr. Partridge's expectation of profit. The facts before me are not those that were before Rip J. For one thing, Rip J. states
"... as the appellant stated on several occasions, the purpose of his farming activity was not necessarily to earn a profit but to provide food for his table. Profit was, I gather, a secondary intent."
[15] Mr. Partridge was quite clear in saying that providing food for his table was not his purpose and I accept his evidence. He and his wife ate some eggs, a lamb and some vegetables. Farmers often do eat some of the produce that they grow. It does not turn a farming business into a mere quest for subsistence. Mr. Partridge and his wife's food is paid for from his pension and investment income.
[16] In 1999, Mr. Partridge produced a detailed business plan for a five-year period in which he anticipated a profit. It did not result in a profit but many business plans do not. This does not invalidate the plan or detract from the sincerity of the profit motive. One of the events that prevented his realizing his goal in the years after 1999 was a disastrous lawsuit he was involved in. There was a right-of-way across to his property that cottagers used. He tried to move it so that it would not interfere with the grazing of his cattle. The cottagers sued him. He testified that after a one-half day trial, Cosgrove J. of the Superior Court of Justice found against him and awarded $30,000 in costs plus $16,000 in damages. This did not occur in 1999 but it clearly had an adverse effect on his realizing his goal of earning a profit in later years.
[17] Counsel argued that the Stewart and Walls cases did not abolish REOP. REOP may continue to exist for some limited purposes but to base the denial of losses from what is obviously a commercial enterprise solely on REOP would be to ignore the binding authority of the Supreme Court of Canada. At page 6971 of the Stewart appeal, the Supreme Court of Canada said
[4] In our view, the reasonable expectation of profit analysis cannot be maintained as an independent source test. To do so would run contrary to the principle that courts should avoid judicial innovation and rule-making in tax law. Although the phrase "reasonable expectation of profit" is found in the Income Tax Act, S.C. 1970-71-72, c. 63, (the "Act"), its statutory use does not support the broad judicial application to which the phrase has been subjected. In addition, the reasonable expectation of profit test is imprecise, causing an unfortunate degree of uncertainty for taxpayers. As well, the nature of the test has encouraged a hindsight assessment of the business judgment of taxpayers in order to deny losses incurred in bona fide, albeit unsuccessful, commercial ventures.
[18] Nonetheless, REOP was the only basis put forward in the assumptions or the reasons for the disallowance and, as noted above, it was not pleaded as an assumption or as an additional reason that there was any personal element in his farming operation.
[19] I do not think that Mr. Partridge's farming operation was a hobby or was engaged in to satisfy purely personal as opposed to commercial goals. It was a commercially unsuccessful farming operation but it was unquestionably a farming business. I make no finding on whether the losses could be restricted under section 31 because the point is not before me.
[20] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reassessment and reconsideration to permit the deduction of the farming loss of $26,142 claimed in 1999.
[21] The appellant is entitled to such costs, if any, as may be provided by the tariff.
Signed at Ottawa, Canada, this 28th day of July 2004.
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"D.G.H. Bowman" |
Bowman, A.C.J.
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CITATION: |
2004TCC471 |
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COURT FILE NO.: |
2004-41(IT)I |
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STYLE OF CAUSE: |
Robert D. Partridge and Her Majesty The Queen |
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PLACE OF HEARING: |
Kingston, Ontario |
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DATE OF HEARING: |
June 17, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman, Associate Chief Justice |
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DATE OF JUDGMENT AND REASONS FOR JUDGMENT: |
July 28, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Jennifer Neill |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |