Hugh P Barr v. Minister of National Revenue, [1972] CTC 2023, 72 DTC 1053

W O Davis:—This appeal was heard at Penticton, BC, in the first week of May 1970 in conjunction with the appeals of five fellow members of The R B White Clinic, including Dr William H White, and, for the reasons given and to the extent indicated in my reasons for judgment in the appeal of William H White v MNR issued this day (p. 2033), the instant appeal is allowed in part with respect to car operating expenses, capital cost allowances and telephone charges, and the matter is referred back to the Minister for reassessment accordingly.

In his notice of appeal, Dr Barr also objected to the disallowance of a deduction claimed by him in respect of a loss of $885.43 which he allegedly sustained in the year 1965 in connection with an orchard which he operated.

It appears that the taxpayer grew up in the Penticton area and, during his high school years, had always worked in an orchard in his spare time: in fact his parents had owned and operated an orchard during the latter part of his secondary school education.

Early in his testimony, Dr Barr said he had practised medicine in Penticton from 1945 onward. In 1949 he acquired a 5 /2-acre orchard in the town of Naramata, some short distance away from Penticton. When he bought it, the orchard was set out in young fruit trees: apples, pears, apricots and peaches, one row of cherry trees, and some Italian prunes. The trees had been planted possibly five years before he had acquired the orchard and, at that time, had not yet reached the production stage. He harvested his first crop of soft fruits some three years later, while the remaining varieties had come into production shortly thereafter.

In approximately 1950, Dr Barr acquired another orchard, this time in Penticton and known as the “Home Orchard”. This property consisted of 17 acres, nine of which were planted with much the same variety of fruits as his first orchard. Thus, at one and the same time, Dr Barr was operating two orchards, namely, the one at Naramata and the Home Orchard at Penticton. The Naramata orchard was sold in 1966 and the Home Orchard in 1967, after having been operated for between fifteen and sixteen years.

Dr Barr said the Naramata orchard was sold because the distance between his two orchards made it very difficult for him to operate them both with any degree of success, as he was also encountering acute labour difficulties at the time.

The Home Orchard was disposed of in 1967 because of continuing labour difficulties. Also, due to an injury suffered by Mrs Barr, the appellant’s wife, she then found the house on the Home Orchard, where the Barrs had established their residence, too large for her to continue to look after and maintain. Dr Barr said that since he sold the orchard in 1967 he has made his home in the nearby community of Summerland.

In his evidence, the appellant said he had always regarded his activities in respect of his orchards as a possible source of income at some time in the future when he might not be able to continue his practice. He employed a foreman who supervised the hired help and carried on the general management of the orchard, while Dr Barr and his wife looked after the business records and made the decisions with regard to plantings. For the first few years a man was steadily employed on the Home Orchard until increasing costs made it economically impossible to keep him on a year-round basis. Later, help was employed only as and when required. Very often university or high school students were employed to look after the irrigation and sprinkler systems throughout the orchard and to attend to the necessary spraying. During the picking season, as many as fifteen to eighteen pickers would be employed in a good crop year.

In 1951 the gross income from the two orchards was in excess of $2,600 with a resulting loss of about $1,600. The next year’s operation showed a gross income of almost $11,000, with a profit of approximately $9,000. However, from then on, the orchard showed a continuous decrease in net income. Due to severe winter damage to trees, extensive replanting had to be undertake^ in 1953 and 1955, resulting in substantially reduced revenues and increased operational costs. As a result of frost damage in 1953, almost the entire peach section of the orchard had had to be replaced and, in 1960, just when these trees were beginning to produce a satisfactory crop, frost and hail damage again struck the peach trees and wiped them out, and once more the whole peach section had to be replanted.

This form of setback experienced in 1953, 1955, 1960 and 1963 was also experienced in 1965, when apple and pear trees were damaged, and such damage brought about the almost continuous replacement of older trees already in the production stage with young trees which had not yet reached that stage of maturity. In 1965, in addition to these other factors, not only did the gross revenue from the orchard decrease to $2,626.21 but the cooperative packing house through which the crop was marketed collapsed, necessitating the recording of a loss of over $3,000 for the year’s operations. Because of this almost continuous series of misfortunes, the doctor decided to dispose of both orchards, and sold one in 1966 and the other in 1967.

Dr Barr stated that he had done very little actual cultivation on the Naramata property and had been active chiefly in a supervisory way in connection with the Home Orchard where he and his family lived.

As already indicated, for the 1965 taxation year Dr Barr suffered an operating, loss of $3,178.62 on his two orchards, of which amount $885 was disallowed by the Minister on the ground that it represented personal or living expenses of the taxpayer within the meaning of paragraph (h) of subsection (1) of section 12 and paragraph (ae) of subsection (1) of section 139 of the Income Tax Act.

It is apparent from the evidence that the main problem that contributed to the recurring losses suffered by Dr Barr on his orchard operation was the forced necessity of repeatedly replacing productive trees with young immature trees, due to repeated frost and hail damage to the older-established trees. Each time a section of orchard was so replanted, there was an inescapable delay before a crop could be harvested from that section while waiting for these new trees to mature.

I find it difficult to avoid a conclusion that Dr Barr’s orchard activity was no more than a pleasant diversion from his busy life as a medical practitioner, and that he would have continued to regard it as such had it not occasioned such a constant drain on his resources to keep it going. It is apparent that by 1967 he had reached the point where he felt he could no longer continue to indulge himself in this pleasant way of life and, having divested himself of the last of his orchard properties, proceeded to take up residence at Summerland, BC.

In the circumstances, I have concluded that, as the orchard operation failed to hold forth any reasonable expectation of profit in the year 1965, the amount of $885.43 disallowed by the Minister in respect of the total loss of $3,178.62 claimed by Dr Barr in respect of his alleged fruit-farming operation must be viewed to have represented a personal or living expense of the taxpayer within the meaning of paragraph 12(1)(h) of the Income Tax Act, and that, related as it was to the upkeep of his residence on the Home Orchard property, this amount was therefore not deductible from his income from other sources.

A recent decision of the Tax Appeal Board, wherein my colleague Maurice Boisvert, QC reviewed the jurisprudence applicable to marginal farming activities, is that of Graham R Leadbetter v MNR, [1971] Tax ABC 1086, to which useful reference may be made.

The appeal in this respect must therefore be dismissed.

As already indicated, the appeal is allowed in part, to the extent outlined in my reasons for judgment in the appeal of William H White v MNR issued concurrently herewith, in respect of expenses related directly to the appellant’s practice as a participating member of The R B White Clinic, and the matter is referred back to the Minister for reassessment accordingly.

Appeal allowed in part.

THOMAS N F TODD, Appellant,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (W O Davis, QC), December 22, 1971.

Medical practitioner’s automobile and telephone expenses — Farming losses.

The appellant was one of the partners referred to in the appeal of White v MNR, reported concurrently, and the question of automobile and telephone expenses raised in that appeal were also in issue here.

In 1965 appellant suffered an operating loss of $2,939 in connection with an orchard he operated on the property surrounding his residence, of which $2,416 was designated by the Minister as being personal or living expenses and non-deductible.

HELD:

The evidence with respect to appellant’s operations as an orchardist failed to establish any sound reason for disturbing the Minister’s assessment. The appeal in this respect was dismissed.

L P Salley for the Appellant.

T E Jackson for the Respondent.

W O Davis:—This appeal was heard at Penticton, BC during the first week of May 1970 before the Tax Appeal Board, in conjunction with the appeals of William H White and four other members of The R B White Clinic in that city; and for the reasons given, and to the extent indicated, in my reasons for judgment in the appeal of William H White v MNR issued this day (p. 2033), the instant appeal is allowed in part with respect to car operating expenses, capital cost allowances thereon, and telephone charges paid on behalf of the appellant anaesthesiologist by the Clinic, and the matter is referred back to the Minister of National Revenue for reassessment accordingly.

In his notice of appeal, in addition to the items mentioned above Dr Todd objected to the disallowance as a deduction from his income of $2,416.40 of the loss which he claimed to have sustained in the year 1965 in connection with a 4.7-acre orchard which he operated on the property surrounding his residence. The total operating loss allegedly suffered in connection with this orchard was $2,939.67, of which $2,416.40 was designated by the Minister of National Revenue, in the assessment appealed against, as having been laid out in respect of personal or living expenses of the doctor and his family.

In making the said assessment, the Minister took the position that the said $2,416.40 of the loss claimed was laid out in respect of a property maintained for the use or benefit of the appellant and not in connection with a business carried on for profit “or with a reasonable expectation of profit”.

Dr Todd, having left British Columbia to take up residence in California, did not appear in person before the Board at the hearing of his appeal, but one Peaker, administrative officer of The R B White Clinic — and himself an orchardist — testified that he had been requested by Dr Todd to review and assess the prospects of the farm before the appellant acquired it in 1964. The farm consisted of 4.7 acres, of which 4.2 acres was under cultivation. Nearly one-half of the orchard was at that time planted in cherry trees of a mature age, and about half of the remaining acreage was in old apple and pear trees, the pear trees being in a very poor state, while the apple trees, though not so old as the pears, were no longer very productive. In addition, there were in the orchard some apricot trees, a small number of peach trees, and a few trees of a new variety of apple.

Because Mr Peaker had not seen the orchard since Dr Todd’s departure for California in 1967, he was unable to say anything with regard to the present production from the orchard. He did say, however, that Dr Todd had purchased the orchard subject to the proviso that the vendor could take the crop for the year of sale. Thus, for the year 1964, Dr Todd had received no income from the orchard. In 1965, as a result of a very severe frost, there was practically no crop worth picking, due to early bud damage. In 1966 there was a relatively light crop of cherries, a few peaches and a few apples. The reason for this was, according to Mr Peaker, that the rather ancient pear trees were suffering from a decline and were incapable of producing a commercial crop, the apple trees (other than those of the new variety) were past their prime and not in a state to produce a saleable crop, the peach trees had been frozen out, and the apricots, while still in good condition and capable of producing a commercial crop, were not capable of producing a profit because of a sharp decline in market price. Acting on Mr Peaker’s advice, at the end of that year Dr Todd removed all the old apple, pear, peach and apricot trees and replanted to a new controlled root-stock apple tree on a density planting basis, adding also a number of new peach trees on the speculation that they might be successful in spite of the risk of severe frosts.

Mr Peaker was quite definite in stating his opinion that when the orchard was purchased in 1964 it appeared to be a viable undertaking. He said that he considered there were sufficient cherry trees in the orchard to more than cover the costs of operation, cherries being a high-income-producing type of fruit. The witness added that, in his opinion, the orchard would, in time, have been capable of producing gross income in excess of ten thousand dollars a year, or a net income of about five thousand dollars, from a combined crop of apples and cherries, once the high-density apple plantings had had time to come into production and providing that the orchard suffered no excessive misfortunes from the weather. He knew that Dr Todd looked after his orchard personally and, when necessary, hired custom workers and equipment. It was for this reason that the doctor had had very little orchard equipment of his own.

During the period between Dr Todd’s purchase of the orchard in 1964 and his departure from the area in 1967, he had not had enough time to make a profit from his orchard.

A statement filed as Exhibit R-2 discloses the treatment accorded the loss claimed as a deduction by Dr Todd to have been as follows:

Thus the total of $504.33 allowed was said to relate to wages and tree-removal costs and other matters directly related to the orchard, and bore a definite relation to the earning of such income as the orchard had been able to produce. The items disallowed are taken to relate to the personal residence of Dr Todd, which happened to be located on the orchard property, and are therefore deemed to be in the nature of personal or living expenses for the upkeep and maintenance of the said residence and for general family transportation.

As already indicated, the witness Peaker was unable to speak with any certainty concerning the productivity of the orchard property subsequent to Dr Todd’s departure in 1967.

The evidence was that Dr Todd, who had only had his orchard for the relatively brief period of three years, had reported an operating loss for all three years, the amount claimed for 1965 having been in excess of the amount of $2,416.40 actually disallowed by the Minister. All but $504.33 of the total loss claimed was disallowed on the ground that the expenses represented outlays for personal or living expenses within the terms of paragraph 12(1)(h) of the Income Tax Act.

I find that the evidence with respect to Dr Todd’s operations as an orchardist has failed to establish any sound reason for disturbing the Minister’s assessment with respect to the disallowance of $2,416.40 of the orchard loss claimed. The appeal with respect to this phase of the matter therefore fails and must be dismissed.

In the result, as indicated at the beginning of these reasons, the appeal is allowed in part to the extent indicated in my reasons for judgment in William H White v MNR issued concurrently herewith, and the matter is referred back to the Minister for reassessment accordingly.

Appeal allowed in part.