Canada v. Ichi Canada
T-787-88
Joyal J.
18/5/95
14 pp.
Appeal from Tax Court decision holding Act, s. 31(1) limitative provisions not applying to defendant for taxation year in question-Defendant husband-and-wife-owned company, in business of importing and selling pulp and paper equipment, receiving notice of termination of distributorship arrangement with supplier and thus changing centre of activity to horseracing and horse-breeding operations-Defendant purchasing ten-acre farm on designated agricultural land and planning construction of horse stables-In first year of operations, company reporting net loss of $182,000-Minister's reassessment restricting farm loss to $5,000 pursuant to Act, s. 31(1) on basis farming not chief source of income-Act, s. 31(1) reasonable expectation of profits test, as set out in Moldowan v. The Queen, [1978] 1 S.C.R. 480, applied-Availability of deductions from other sources of incomes to offset new venture losses not providing taxpayer with free ride as deductions limiting but not eliminating risks associated with new venture-Positive finding of strong proof of change in corporate structure required to apply Moldowan rules to corporation (Buchanan Forest Products Limited v. The Queen (1986), 86 DTC 6282 (F.C.T.D.))-Application of s. 31(1) with respect to first year's operation overlooking element of start-up costs; reasonable expectation of profit test difficult to apply to first year of operation-Crown's contention defendant's chief source of income not farming going against realities of any new venture involving farming, i.e. initial investments may reasonably result in early losses-As S. 31(1) interpreted in light of market conditions, new operation not necessarily constituting taxpayer's chief source of income so long as meeting test of reasonable expectation of profits-As some delays in developing profitable operations unavoidable, s. 31(1) assessments usually issued when deficit performance measurable objectively without regard to more subjective intentions advanced by taxpayer-Indicia rebutting s. 31(1) assumptions herein including: (1) business circumstances provoking change in direction; (2) experience of principle owner including (a) management skills, and (b) knowledge of horse-racing and horse-breeding business; (3) amount of time and effort devoted to operation's development; (4) amount of capital expended during year in question; and (5) amount of revenue venture yielded in first year of operation-Losses for year in question allowed-Appeal dismissed-Income Tax Act, S.C. 1970-71-72, c. 63, s. 31(1).