Herwig Glander v. Minister of National Revenue, [1972] CTC 2165, 72 DTC 1151

J O Weldon:—This appeal with respect to the appellant’s 1967, 1968 and 1969 taxation years was heard at Toronto, Ontario on December 9, 1971 under the Tax Appeal Board as it was then constituted. The parties were represented by counsel as follows: J G Ware, Esq, for the appellant and F A A Baker, Esq, for the Minister.

The matters in dispute herein arose out of the disallowance by the Minister of alleged farming losses of $2,652.77, $4,084.57 and $3,060.46 claimed by the appellant as deductions from his income in his 1967, 1968 and 1969 taxation years, respectively. It is the Minister’s contention: that the taxpayer incurred the expenses which gave rise to the aforesaid losses in the said taxation years as personal or living expenses in connection with the maintenance and upkeep of his 72.40- acre farm property situated in the vicinity of Orangeville, Ontario, for the use or benefit of himself, his wife and children; that personal or living expenses are not allowed as a deduction in computing income under paragraph 12(1)(h) of the Income Tax Act, RSC 1952, c 148 as amended: that, pursuant to paragraph 139(1)(ae) of the said Act, “personal or living expenses” include the expenses of a property maintained by a taxpayer for the use or benefit of himself, his wife and children and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit, and that, since the present taxpayer’s above-mentioned farm property was not maintained in connection with a business of the type outlined above, the said alleged farming losses had been properly disallowed in the taxation years specified.

The taxpayer was first employed by the Potash Company of Canada Limited under a 3-year contract which ran from May 1, 1959 to May 1, 1962. That contract was then renewed for two further 3-year terms expiring April 30, 1968. However, his services were retained until some time in November 1968. From that time until about the middle of the following year 1969, some 6 or 7 months, the taxpayer carried on a consulting business in Orangeville occupying himself with one main client, namely, Potash Imports and Chemicals Corporation — “the subject of this consulting period was particularly the dumping of potash in the United States”. Having completed the above assignment about the middle of 1969, the taxpayer, apparently, then obtained his present employment in Ogden, Utah, as sales manager with Great Salt Lake Minerals and Chemicals Corporation. That company was engaged at the time in a new $30 million potash development which “has now come up to about a $40 million project”. From the middle of 1969 to October 31, 1971 the taxpayer has been commuting from his farm near Orangeville to Ogden, Utah, and his wife has been managing the farm. The taxpayer’s present salary is substantially larger than his former salary with the Potash Company of Canada Limited.

The following table sets out the relevant particulars of the appellant’s income from his earnings as a salaried employee of the Potash Company of Canada Limited covering all of 1967 and 11 to 12 months of 1968, from his earnings as a self-employed consultant covering the first half of 1969, and from his earnings as a salaried employee of Great Salt Lake Minerals and Chemicals Corporation in the 1967, 1968 and 1969 taxation years now under appeal:

To round out the picture, the taxpayer suffered a further alleged farming loss in 1970 — this time it was about $6,100 — and has, since the middle of 1969 to date been carrying out his duties as a high- salaried technical man in the potash industry in Ogden, Utah.

Towards the end of April 1967, the appellant (now 44) took possession of the 72.40-acre farm property in question in this appeal which he “thought had a potential for a good horse farm”. His main purposes were, first, to provide a residence in the country for his wife and four young children, and secondly, to develop a thoroughbred broodfarm, a purpose for which he was highly qualified from a practical, technical and academic standpoint. According to the taxpayer, the farm had been rented for years and was in a terribly rundown condition. He stated:

The fences were rundown, just a couple of strings of wire, barbed wire, to keep the cattle in. The barn was dilapidated. It had a good foundation, it has a good sound frame, but the boards of the roof were definitely in poor shape. For another thing I found out that the barn had not been cleaned out for about eight years, so we had a certain amount of manure in the barn.

In his evidence, the taxpayer painted a very pleasant picture of the farm-house as it now stands on the above property. It was built about the turn of the century and is a very large, comfortable L-shaped house. Taking into account an addition thereto which is completely separate from the main house, there are 13 rooms including a new kitchen, a studio, a large office, two new bathrooms, and so on. The cost of the farm property was $39,915 of which the sum of $26,264 was allocated to the house described above. Extensive renovations of the above house were carried out costing $14,976 as of October 23, 1967 according to the taxpayer’s 1967 return. Such renovations included a new ceiling in the living room, the closing of four or five doors, a new heating system, new plumbing, re-wiring, painting, decorating, and so on and on. So, the overall cost of the taxpayer’s country home located on Pt E 1/2 Lot 7 Con 2 W Mono Twp amounted to over $41,000 excluding the cost of the land used in connection therewith. The taxpayer said that he financed his project with a $40,000 mortgage and $15,000 of his own assets.

While living and working in Ogden, Utah, the appellant filed two Notices of Appeal, the first with respect to his 1967 and 1968 taxation years, dated April 26, 1971, and the second with respect to his 1969 taxation year dated August 10, 1971. According to the Minister’s Replies to the above Notices of Appeal, he acted upon similar assumptions in preparing all three assessments now under appeal. Since the Minister’s assumptions referred to above set out very concisely the situation which obtains in this appeal, and since they do not appear to have been disproved by the appellant in any material matter at the hearing of the appeal, the said assumptions will now be quoted in full:

(a) the Appellant is an agronomist and at all material times was employed as a representative of the Potash Company of Canada Limited, a chemical fertilizer firm;

(b) in January, 1967, the Appellant was transferred to the Toronto office of the Potash Company of Canada Limited;

(c) in March of 1967 the Appellant purchased a farm at Orangeville, Ontario;

(d) in August of 1967 the Appellant moved his family to the farm in Orangeville;

(e) at all times material to this appeal the Appellant’s office was in Toronto, he was employed on a full-time basis, his duties required constant travel, and at no time was his work carried on near the farm property at Orangeville, except when he was working at Guelph for a brief period of time;

(f) the cost of the aforesaid farm was $39,915.00 allocated as follows:

Barn	$ 7,391.00
House	26,264.00
Land	5,760.00
Garage	250.00
Tack house	250.00
	TOTAL $39,915.00

(g) the farm land was not suitable for growing grain or hay, and in fact, yielded only about one-half ton of hay per acre which is an uneconomical crop;

(h) the fields on the farm did not have adequate fences and accordingly were not good for grazing cattle;

(i) at present the only part of the farm under cultivation are small parcels rented to other farmers in the hope that their efforts and fertilizer supplied by the Appellant might improve the land;

(j) the Appellant began breeding horses on a very small scale, which was commercially unfeasible, and used only about 20 acres of his farm for pasture;

(k) the Appellant spent in excess of $20,000 renovating the farm-house, whereas very little money was spent improving the farming portion of the property;

(l) the farm property was maintained by the Appellant for the use and the benefit of himself and his wife and children and was not maintained in connection with a business carried on for profit or with a reasonable expectation of profit; in fact, the Appellant’s constant absence from the aforesaid farm property left little time for him to devote to the farm.

On the basis of the appellant’s evidence herein and the material filed for the information of the Board, there should be three findings, namely, first, that the expenses claimed by the appellant in each of the 1967, 1968 and 1969 taxation years were under the peculiar cir- cumstances of the matter either capital outlays, or personal or living expenses of the appellant and his family; secondly, that the appellant has failed to show that the above-quoted assumptions made by the Minister in preparing the disputed assessments are incorrect in any material respect, and thirdly, that the appellant’s farm was not maintained in connection with a business carried on for. profit or with a reasonable expectation of profit within the meaning of paragraph 139(1)(ae) of the Act. Accordingly, the appeal in respect of the three taxation years mentioned above should be dismissed and the relevant assessments confirmed.

Several of the reasons which prompted me to reach the above conclusion are as follows:

1. While the appellant was, admittedly, engaged in some farming activities in his 1967, 1968 and 1969 taxation years, he completely failed to convince me that he was seriously engaged in a farming business carried on for profit or with a reasonable expectation of profit within the meaning of paragraph 139(1)(ae) of the Act.

2. Since the Minister is directed by subsection 46(1) of the Act to examine each return of income, with all due despatch, and assess the tax for the taxation year in question, it follows that, where a taxpayer is alleging the existence of a business, the Minister has no alternative but to decide as of the end of such taxation year whether or not that business should be recognized as such having in mind the above-mentioned test contained in paragraph 139(1)(ae). Thus, it seems to be perfectly clear that the Minister, in making an assessment under the above circumstances, is bound to decide — whether or not a business is being carried on for profit or with a reasonable expectation of profit — on the basis of the facts and figures immediately available to him and pertinent to the taxation year being assessed. In other words, the Minister is not required under the Act to predict the prospects of the said business in future taxation years, and it would, obviously, be unsound for him to attempt to do so.

3. The figures as to the appellant’s farming losses set out earlier herein speak for themselves. Nobody but a high-salaried taxpayer could afford the luxury of such an unprofitable business.

4. The business of farming for the down-to-earth purpose of making a profit — so far as the ordinary individual taxpayer is concerned — is usually regarded as a serious, full-time occupation. In the present appeal, I was not satisfied that the appellant did, in fact, spend sufficient time on his farm property to make a profit therefrom as a thoroughbred brood-farm. That type of business strikes me as being very specialized requiring not only experience and good judgment in horse breeding which the appellant undoubtedly has in good measure but also requiring public recognition as a horse breeder which the appellant probably does not have simply because he has not had the opportunity to get around and become known in the trade as a breeder of fine horses.

5. Most new businesses necessitate the investment of some capital therein. In the present case involving the operation of a thoroughbred brood-farm, the appellant should clearly have expected to use some of his capital to put the stables, fences and other facilities on the farm in a good state of repair as a first step in launching his business. However, he seems to have the erroneous notion that the original cost of putting his farm property in a good state of repair and making it usable was an income expense and, therefore, chargeable against income — which in this case was his salaried earnings. In that regard, reference should be had to Kunkel v MNR, [1971] Tax ABC 453 and McDonald v MNR, 1 Tax ABC 357.

6. Since the appellant specifically pleaded the “hobby farm” subsection 13(1) of the Act, reference should be had to paragraph numbered 4 of the Kunkel case (supra) which makes it clear that, before a taxpayer can bring himself within that provision, he must be able to establish that his farm property was maintained by him “in connection with a business carried on for profit or with a reasonable expectation of profit” within the meaning of paragraph 139(1)(ae) of the Act.

7. It may well be that the taxpayer has now laid the foundation for a business involving the operation of a thoroughbred brood-farm which could possibly be recognizable as such under the Act sometime in the future. Whether or not he succeeds in due course in so establishing his proprietorship business is something that only time can tell.

In the result, as already indicated, the appeal with respect to the 1967, 1968 and 1969 taxation years should be dismissed and the relevant assessments confirmed.

Appeal dismissed.