[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2000-4205(IT)G |
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BETWEEN: |
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LÉO PERRON, |
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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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Appeals heard on common evidence with the appeals of Jeannette Perron (2000-4208(IT)G) on May 20, 2004, at Montréal, Quebec
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Before: The Honourable Judge Louise Lamarre Proulx |
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Appearances: |
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Counsel for the Appellant: |
Christopher Mostovac |
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Counsel for the Respondent: |
Stéphanie Côté |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996, 1997 and 1998 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment, in accordance with the Reasons for Judgment attached hereto.
Signed at Ottawa, Canada, this 9th day of July 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
Certified true translation
Manon Boucher
[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2000-4208(IT)G |
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BETWEEN: |
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JEANNETTE PERRON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence with the appeals of Léo Perron (2000-4205(IT)G) on May 20, 2004, at Montréal, Quebec
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Before: The Honourable Judge Louise Lamarre Proulx |
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Appearances: |
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Counsel for the Appellant: |
Christopher Mostovac |
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Counsel for the Respondent: |
Stéphanie Côté |
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996, 1997 and 1998 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment, in accordance with the Reasons for Judgment attached hereto.
Signed at Ottawa, Canada, this 9th day of July 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
Certified true translation
Manon Boucher
[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC493 |
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Date: 20040709 |
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Dockets: 2000-4205(IT)G 2000-4208(IT)G |
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BETWEEN: |
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LÉO PERRON, JEANNETTE PERRON, |
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Appellants, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Lamarre Proulx, J.
[1] These appeals were heard on common evidence. They concern farming losses related to the operation of a racehorse breeding farm for 1995 and the lease of horseboxes for 1996, 1997 and 1998.
[2] The issue is whether the Appellants were class 1 or class 2 farmers. They were assessed as belonging to class 2. They would like to belong to class 1.
[3] The concept of farmer classes in application of the Income Tax Act (the "Act") was formulated by Dickson, J. of the Supreme Court of Canada in Moldowan v. Canada, [1978] 1 S.C.R. 480, at pages 487 and 488, as follows:
16 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 carries 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 carries 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.
[4] The abovementioned s. 13(1) is now s. 31(1) of the Act.
[5] The Appellants' witnesses were Charles Perron, Johanne Perron and the Appellants. The Auditor, Robert Larochelle, testified for the Respondent.
[6] Charles Perron stated that in 1968, his father, Léo Perron, partnered with another person to operate a wholesale company selling equipment, accessories and oil heating products under the name Chauffage Premier Inc. At the time, Mr. Perron owned 50% of the shares of the capital stock. In 1986, he bought out the shares of his associate who wanted to retire.
[7] Charles Perron began working for the company in 1984. He was 20 years old. After his father acquired the shares of his associate in 1986, Charles explains that it was he who was increasingly in charge of the company. He is now the manager. The company has between 150 and 175 clients and serves an area that extends from St-Jérôme to Ste-Hyacinthe.
[8] The witness stated that in 1988, his parents acquired horses and that his father began to come into the company offices less often. His father is still the majority shareholder. He holds 99% of the shares. He continued to act as administrator of the company but participated less and less in daily operations. On the administrative side, his father sometimes verified the accounts receivable and it was he who determined the salary amounts for 1995 and 1996 and the dividend amounts for 1997 and 1998.
[9] However, the two people who could sign the cheques were Charles and his sister Johanne.
[10] Charles Perron also stated that from 1986 to 1989, his mother, Jeannette Perron, did the bookkeeping up until it became necessary for the company to convert to computerized systems. Johanne Perron, the Appellants' daughter, who was very computer literate, then began to work for the company. She took over her mother's duties and performed many others. She worked for the company full time.
[11] In her testimony, the Appellant, Ms. Perron, stated that she and her husband had owned horses since 1988. In 1990, they bought a farm in Ste-Rosalie: a farm that had been unoccupied for five years but which had been a horse breeding farm. The house and buildings were fixed up and they moved there in 1991.
[12] Jeannette Perron confirmed that she did not return to work for the company after 1989. She helped her husband at the stable. They worked together. Their son Yves and another employee helped with the breeding and training of the horses until 1996.
[13] She stated that in the beginning, the Appellant, Mr. Perron, went to the company offices once or twice a week. Then, it was once or twice a month.
[14] The Appellants had a business plan. They pictured two horses racing each week and winning on average $1,000 in prize money per week. In 1988, one of their horses had won a $15,000 purse. The races take place during eight months of the year and there is an average of 25 races per year.
[15] However, things did not go as planned. Ms. Perron stated that the couple's savings were swallowed up in the operation of the farm including all of Mr. Perron's RRSPs and most of hers. She said that they were unlucky with their horses who suffered from diseases and lameness. They did not sell well at auction.
[16] The facts related by Johanne Perron were the same. She stated that when she took maternity leave in 1996 and 2000, the company hired someone to replace her. It was not her mother who replaced her.
[17] Léo Perron confirmed that Charles' role in the heating products venture had grown over the years. He explained that his day at the farm begins at 6:00 a.m. He has to groom the horses, train them, run the grader over the half-mile training track, repair the fences, etc. It is a seven-day-a-week job, with long days and countless hours. He could end up spending a night with a mare during delivery.
[18] In 1996, he began to take in boarders for $8 a day and some haying.
[19] Mr. Perron mentioned that the farm had just been sold to Yves St-Jacques, a former farm employee.
[20] There was not really any cross-examination on the Appellants' use of time. The cross-examination mainly dealt with the company's profit potential.
[21] Robert Larochelle, an Auditor, stated that he spent 3 days at the Appellants' farm from September 29, 1992. Mr. Perron allegedly told him that he was going to the offices of Chauffage Premier Inc. two or three times a week and that sometimes he made deliveries on the Rive-Sud.
[22] The witness said that he applied section 31 of the Act because the farm was not Mr. Perron's only use of time. He also considered the farm's lack of profitability, although for the purposes of section 31, he deemed that the company had a reasonable expectation of profit.
[23] Counsel for both parties referred to the Supreme Court decision in Moldowan in addition to some other decisions including the Federal Court of Appeal decision in Canada v. Donnelly, (C.A.) [1998] 1 F.C. 513 (Q.L.).
[24] I will refer to that decision in which parts of paragraphs 8, 9, 11, 12, 20 and 21 read as follows:
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. ...
9 In summary, the cumulative factors of capital committed, time spent and profitability will determine whether farming will be regarded as a "sideline business" to which the restricted farm loss provisions apply. ...
...
11 With respect to time spent, I am not persuaded that the taxpayer changed occupational direction in 1980 such that medicine became a sideline to his farming endeavour. ...
12 Any doubt as to whether the taxpayer's chief source of income is farming is resolved once consideration is given to the element of profitability. There is a difference between the type of evidence the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. In the latter case the taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a "reasonable expectation of profit" is not synonymous with an "expectation of reasonable profits". With respect to the section 31 profitability factor, however, quantum is relevant because it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. In other words, we are looking for evidence to support a finding of reasonable expectation of "substantial" profits from farming.
...
20 As is well known, section 31 of the Act is aimed at preventing "gentlemen" farmers who enjoy substantial income from claiming full farming losses: see Morrissey v. Canada, supra, at pages 420-423. More often than not it is invoked in circumstances where farmers are prepared to carry on with a blatant indifference toward the losses being incurred. The practical and legal reality is that these farmers are hobby farmers but the Minister allows them the limited deduction under section 31 of the Act. Such cases almost always involve horse farmers who are engaged in purchasing or breeding horses for racing. In truth, there is rarely even a reasonable expectation of profit in such endeavours much less the makings of a chief source of income.
21 It may well be that in tax law a distinction is to be drawn between the country person who goes to the city and the city person who goes to the country. In future, those insisting on obtaining tax relief in circumstances approaching those under consideration should do so through legislative channels and not through the Tax Court of Canada. The judicial system can no longer afford to encourage taxpayers or their counsel to pursue such litigation in the expectation that hope will triumph over experience.
[25] It is my opinion that the evidence has not shown that the Appellants were farmers who were prepared to carry on with an indifference toward the losses being incurred. From that point of view, they were not the "gentlemen-farmers" described in paragraph 20 of the above decision. Over the years, the Appellants changed the operation of the farm to try to reduce losses and achieve a certain degree of profitability.
[26] According to Donnelly, supra, three factors make it possible to determine whether a taxpayer's chief source of income is farming or a combination of farming and some other source of income within the meaning of subsection 31(1) of the Act. Those factors are the capital committed, the time spent farming in relation to the time spent on the other source of income and the actual or potential profitability of the farming activity.
[27] The Respondent did not question the importance of the capital committed. What the Respondent did question was the company's profitability. I believe however that this factor must be considered subsequently to the use of time.
[28] Contrary to what the evidence showed in Donnelly, supra, and described in paragraph 11 of that decision, the Appellants changed their occupational direction to the point where the breeding and horsebox leasing venture became their chief activity. The Appellants told the Auditor and stated at the hearing that almost all of their time was spent on farming activities.
[29] With respect to the profitability aspect over which counsel for the Respondent lingered, I refer to Dickson, J.'s analysis in Moldowan, supra, at pages 486 and 488 :
13 ... The distinguishing features "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 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 question of fact in the circumstances.
...
17 ... 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.
[30] I believe that the Appellants found themselves in that situation. They changed their occupational direction and committed their energies and capital to farming in expectation of significant income.
[31] I therefore find that the Appellants belong to the first class as described in Moldowan. Consequently, the appeals are allowed with costs.
Signed at Ottawa, Canada, this 9th day of July 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
Certified true translation
Manon Boucher
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REFERENCE: |
2004TCC493 |
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COURT FILE NOS.: |
2000-4205(IT)G 2000-4208(IT)G |
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STYLES OF CAUSE: |
Léo Perron v. Her Majesty the Queen Jeannette Perron v. Her Majesty the Queen |
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PLACE OF HEARING: |
Montréal, Quebec |
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DATE OF HEARING: |
May 20, 2004 |
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REASONS FOR JUDGEMNT BY: |
The Hon. Judge Louise Lamarre Proulx |
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DATE OF JUDGMENT: |
July 9, 2004 |
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APPEARANCES: |
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For the Appellants: |
Christopher Mostovac |
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For the Respondent: |
Stéphanie Côté |
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COUNSEL OF RECORD: |
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For the Appellants: |
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Name: |
Christopher Mostovac |
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Firm: |
Starnino Mostovac Montréal, Quebec |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |