T-759-75
Lyle A. Meredith (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Cattanach J.—North Bay, Septem-
ber 12; Ottawa, October 10, 1975.
Income tax—Deductions—Plaintiff discontinuing busi-
ness—Maintaining property in order to keep it marketable—
Selling property in 1971—Minister disallowing deductions—
Whether expenditures incurred to produce income—Whether
made on account of capital—Whether personal and living
expenses—Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1)(c)(i),
12(1)(a), (b), (h), 20(6)(a) and 139(1)(ae)(i).
In late 1968, plaintiff's fishing ponds operation ceased to be
profitable; from 1967 no income was produced. In 1967 and
1968, the property may have been informally leased. However,
from 1969 on, plaintiff endeavoured to dispose of the property,
maintaining it only so as to render it saleable. It was sold in
1971. The Minister disallowed deductions claimed for 1969,
1970 and 1971, maintaining that (1) plaintiff did not expend
the sums to gain or produce income, and deduction is prohib
ited under section 12(1)(a); (2) plaintiff expended amounts to
maintain property in marketable condition, thereby obtaining a
capital gain, and amounts are therefore not deductible under
section 12(1)(b); and (3) expenditures were personal or living
expenses in that they were expenses of a non-business property
in accordance with sections I2(1)(h) and 139(1)(ae)(i).
Held, dismissing the appeal, there was, for the 1969 taxation
year, a change in use of the property. The business was
abandoned. While deductions claimed are usual business relat
ed expenses, and as such, legitimate deductions, no business
was being carried on. The claim for depreciation is precluded
by section 20(6)(a). Nor are claims for maintenance, taxes,
hydro and insurance proper deductions if not expended in the
operation of a business, or the production of income. Under
section 11(1)(c), deduction of interest is also precluded. The
only business that might be implied would be the selling of the
property, in which case, expenses would be deductible, but the
gain would be taxable as income. The property, however, was
acquired as a capital asset with no'alternative intention. The
category of the asset did not change, and it did not become
inventory.
Moluch v. M.N.R. [1967] 2 Ex. C. R. 158, considered.
INCOME tax appeal.
COUNSEL:
L. A. Meredith for plaintiff.
C. H. Fryers for defendant.
SOLICITORS:
L. A. Meredith, Monetville, Ontario, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
CATTANACH J.: These are appeals from the
assessments to income tax by the Minister of
National Revenue whereby the Minister disal
lowed claims for deductions from income made by
the plaintiff in his 1969, 1970 and 1971 taxation
years in the respective amounts of $2,112.68,
$1,991.01 and $1,556.87.
In 1963 or thereabouts the plaintiff conceived
the idea of operating fishing ponds in the immedi
ate vicinity of Tilbury, Ontario, no doubt inspired
by discussions with Mr. Wayne Taylor and from
his observations of a similar operation in the
United States of America. The concept of a fishing
pond is comparatively simple. Natural or created
depressions in the land are filled with water, there
by resulting in a pond or small lake, the pond is
then stocked with fish caught elsewhere (they do
not reproduce in the pond), pumping facilities are
installed to change the water to sustain the fish,
then customers are invited to catch the fish for a
fee. It is closely akin to fishing in a barrel or like a
fish pond at a church bazaar where for a fee a
prize of doubtful value is obtained.
As I have said the plaintiff had seen these fish
ponds in operation in Indiana and Ohio possibly
with some success. The fish to stock those ponds
were obtained from Lake St. Clair, the shores of
which lake were a few scant miles from Tilbury.
The plaintiff had seen fish being caught and .trans-
ported in tank trucks to the fish ponds in the
United States.
The plaintiff was active in business. He had
operated an automobile dealership from 1940 to
1956. In 1952 he acquired the Tilbury Hotel which
became the principal source of his income.
Wayne Taylor was a young married man who
had experience in operating a private fishing lodge
as a recreational facility for a steel company.
Accordingly the plaintiff and Taylor formed a
partnership under the firm name and style of
Tilbury Fishing Lakes. The plaintiff furnished the
capital and Taylor furnished the experience to
exploit the idea of a fishing pond in Canada.
A 10-acre parcel of land, at the juncture of
highways No. 401 and No. 2, just outside Tilbury,
was acquired from a farmer at a cost of $3,000.
There was a large hole on the property to form the
nucleus of a fishing pond. Apparently the plaintiff
was encouraged in this endeavour by the provincial
departments of Lands and Forests, Highways and
Tourism, all three of which seemed anxious to
have this business started in Canada.
The plaintiff acquired an additional 12 odd
acres, abutting the 10 acres previously acquired,
from the Department of Highways at a public
auction, making a total of 22 acres.
Three fishing ponds were constructed, each
about one acre t in size. A well was drilled to
furnish water. A pump was installed and a build
ing constructed to house the pump. Another build
ing was constructed to accommodate a small res
taurant and wash rooms. Scales, a butcher's ice
box, a refrigerator and racks for fishing equipment
were supplied for use of customers. Three large
holding tanks for the fish were constructed. Bait
and fishing tackle were kept for sale. Picnic tables
and outdoor fireplaces were constructed on the
property. Electricity was brought to the premises
and poles erected for outdoor lighting so fishing
could be done at night.
If my recollection of the evidence is correct, an
amount of approximately $22,500 was expended
by the plaintiff to acquire and improve the prop
erty. To finance this the plaintiff borrowed
$18,000 from a bank.
The partnership obtained two seine net licences,
one of 300 yards and the second of 100 yards, to
catch fish in Lake St. Clair with which to stock the
pond and additional fish were bought from fisher
men on that lake.
Tilbury Fishing Lakes began its operation for
the summer season of 1963. with limited success,
the customers for the most part being weekend
visitors. The customers were expected from the
large metropolitan population of Detroit, Michi-
gan, some 42 miles distant. Advertising was mini
mal, mostly by word of mouth, with some free
advertising in the local press and an article in a
Detroit newspaper by the editor who was a friend
of the plaintiff. The principal advertisement was a
large billboard facing highway No. 2, the legend
reading "FISH FOR $3.00 NO LICENCE
REQUIRED". The plaintiff repeatedly emphasized
that the fact there was no requirement for a
fishing licence was the most important element to
the success of the enterprise.
In 1965 the provincial government made it man
datory that a fishing licence was required and this
despite numerous representations by the plaintiff
to the appropriate government officials. In the
plaintiff's view, this governmental action was
directed specifically at Tilbury Fishing Lakes and
he repeated, in evidence, that this action sounded
the death knell of the enterprise.
The operation was met with a series of misfor
tunes from its inception.
In 1966 Mr. Taylor was killed in an automobile
accident leaving a widow and small children. To
relieve the widow in these tragic circumstances,
the plaintiff assumed full ownership of the part
nership enterprise and sole responsibility for its
obligations, but the plaintiff, who was advancing in
years and looking forward to a life of retirement,
had no intention whatsoever of attempting to oper
ate the fishing pond himself.
In view of the governmental action in making
fishing licences mandatory the billboard advertis
ing the premises was removed, not only because
fishing licences were required but also because the
sign had been defaced by racial slurs painted in
red upon it. Obviously some of the local residents
resented and resisted the customers attracted by
the fishing pond.
The plaintiff indicated that it cost $1,700 to
provide the service for a customer if licences were
required and the return per customer was $1,000.
In 1967 the plaintiff entered into an informal
verbal arrangement with an employee of the hotel
to operate the lakes. He did so in the forlorn hope
of realizing some return to meet the interest on the
bank loan and property taxes. The essence of the
arrangement was that the employee should
attempt to operate the lakes, take a reasonable
wage for himself and any balance would be divided
between the employee and the plaintiff.
The employee attempted the operation for about
6 weeks and gave up. The plaintiff candidly admit
ted he didn't think the employee would make a go
of it and that if he did he would need to be a
magician to do so.
In 1967 the plaintiff sought to sell the property
to a group from Detroit and to the Department of
Highways, both of whom had expressed some in
terest in the property but those overtures came to
nought. In 1968 the plaintiff sold the Tilbury
Hotel and began his retirement. He travelled
extensively in Europe and elsewhere.
In that year the plaintiff also entered into a
similar arrangement, as he had done with an
employee in 1967, with another person with the
same results. And in 1968 the plaintiff listed the
property with a real estate agent with instructions
to get rid of it by any means, that is by sale or
lease, with the full knowledge that no one was
likely to buy the property for fishing. He also
acknowledged that as for the operation of a fishing
business the business was a lost cause, that the
only possible use the property could be put to was
a trailer camp, but that he, because he had retired,
had no intention whatsoever of embarking upon
that business with the attendant expense of install
ing the necessary facilities to convert the property
to a trailer camp.
While in 1965 the death knell to the business
had been sounded by the action of the provincial
government in requiring fishing licences by the
plaintiff's customers, the death blow was adminis
tered in 1969. Lake St. Clair, the source of the fish
to stock the fishing lakes, was found to be polluted
with mercury. The provincial government banned
all taking of fish from Lake St. Clair. What the
plaintiff termed a "mercury scare" was apparently
well founded because the ban has not been lifted
and persists to this day and all indications are that
it is inevitable that the ban will be maintained.
The plaintiff was frank to admit that from 1969
forward the fishing lakes "as a business matter
was a lost cause".
In 1969 the plaintiff engaged a neighbour to the
fishing lakes to cut the grass with a tractor, eradi
cate the weeds and generally look after the routine
maintenance of the property and prevent vandal
ism. This was done to keep the property from
becoming run down to facilitate a sale.
The plaintiff conceded, 'without equivocation,
that his only possible hope for the sale of the
property was to a purchaser who would use the
property as a trailer camp and, as I have previous
ly mentioned, the plaintiff had no intention of
engaging in that business himself. The land could
not be farmed, it was low lying marsh land, munic
ipal regulations and zoning prohibited its use as a
housing, industrial or resort development. Swim
ming in the lakes was not feasible.
The plaintiff in his returns of income for his
1969, 1970 and 1971 taxation years claimed
deductions from income of the following amounts:
1969 1970 1971
Interest on Bank loan $568.00 $575.00 $431.00
Property taxes 319.84 360.50 269.01
Equipment maintenance 118.00 121.21 91.75
Yard maintenance and
weed control 245.00 228.00 244.00
Licence 40.00
Crane rental 20.00
Hydro 55.27 44.90 34.60
Insurance % 170.80 170.80 170.80
Depreciation 575.77 490.60 315.71
$2,112.68 $1,991.01 $1,556.87
From 1967 forward there was no income what
soever from the business but in 1967 and 1968 the
Minister allowed as deductions from the plaintiffs
income like expenditures to those listed above . for
the next three ensuing years. This was done
because in those years the property may have been
leased under the very informal arrangements
described above with the persons also mentioned
above. However the Minister disallowed the
deductions claimed by the plaintiff as have been
listed in the plaintiffs subsequent taxation years.
In October 1971 the plaintiff sold the property
to a purchaser for use as a trailer camp for
$38,000, thereby realizing a gain in the approxi
mate amount of $15,500. This the Minister did not
seek to tax in the plaintiff's 1971 taxation year
having considered the gain to have been realized
on the sale of a capital asset, the plaintiff having
considered it expedient to sell.
In assessing the plaintiff as he did by disallow
ing the deductions listed above and claimed by the
plaintiff as such the Minister did so on the follow
ing assumptions:
(1) the expenditures were not made or incurred
for the purpose of gaining or producing income;
(2) the expenditures were expended or incurred
on account of capital; and
(3) the expenditures were personal or living
expenses.
The onus of demolishing these assumptions falls
on the plaintiff.
The contentions on behalf of the Minister may
be summarized as follows:
1. The plaintiff did not expend the sums in his
1969, 1970 and 1971 taxation years for the pur
pose of gaining or producing income either from a
business or property and accordingly is prohibited
from claiming those sums as deductions by virtue
of section 12(1)(a) of the Income Tax Act which
reads:
12. (1) In computing income, no deduction shall be made in
respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of gaining
or producing income from property or a business of the
taxpayer,
2. The plaintiff expended the amounts in ques
tion for the purpose of maintaining the property in
a condition to, sell it thereby obtaining a capita]
gain and as such the amounts were incurred or
expended on account of capital and are prohibited
from being claimed as deductions by virtue of
section 12(1)(b) of the Income Tax Act which
reads:
12. (1) In computing income, no deduction shall be made in
respect of
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by
this Part,
3. The expenditures were personal or living
expenses in that they were expenses of property
not maintained in connection with a business car
ried on for profit or with a reasonable expectation
of profit in accordance with sections 12(1)(h) and
139(1)(ae)(i) of the Income Tax Act which sec
tions read:
12. (1) In computing income, no deduction shall be made in
respect of
(h) personal or living expenses of the taxpayer ... [exception
not applicable].
139. (1) In this Act
(ae) "personal or living expenses" include
(i) the expenses of properties maintained by any person
for the use or benefit of the taxpayer... and not main
tained in connection with a business carried on for profit or
with a reasonable expectation of profit,
4. With respect to the claim for depreciation
section 20(6)(a) of the Income Tax Act reads:
20. (6) For the purpose of this section and regulations made
under paragraph (a) of subsection (1) of section 11, the follow
ing rules apply:
(a) where a taxpayer, having acquired property for the
purpose of gaining or producing income therefrom or for the
purpose of gaining or producing income from a business, has
commenced at a later time to use it for some other purpose,
he shall be deemed to have disposed of it at that later time at
its fair market value at that time;
The Minister contends that there was a change of
use of the property, that the property was acquired
for the purpose of producing income from the
business of operating fishing lakes, that that busi
ness came to an end at the end of the 1968
taxation year, that the property was maintained
for its sale, which is a change of use. The property
was sold in October 1971 for $38,000 and accord
ingly it is deemed to have been sold at the end of
1968 at its fair market value which I would
assume to be $38,000. That being so no deprecia
tion is allowable on property deemed to have been
sold at the end of the 1968 taxation year in the
taxpayer's 1969, 1970 and 1971 taxation years.
5. With respect to the claims for the deduction
of interest, section 11(1)(c)(i) provides:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a taxation
year:
(c) an amount paid in the year ... pursuant to a legal
obligation to pay interest on
(i) borrowed money used for the purpose of earning
income from a business or property ....
These contentions on behalf of the Minister flow
from the premise, accepted by him as the basis of
his assumption, that in late 1968 and for the 1969
taxation year there was a change in the use of the
property, that is to say, at that time the business of
operating fishing lakes had come to an end and
from that time forward the property was being
maintained by the plaintiff for the sole purpose of
keeping it in a condition to sell it.
On the facts as outlined, there is no question
that the business of operating fishing lakes was
definitely abandoned. All reasonable expectation
of profit therefrom may well have ended in 1965
when the plaintiff stated that the death knell to the
business was sounded by the provincial department
responsible for such matters in requiring that fish
ing licences be obtained by the customers of the
business to fish in those artificially created lakes,
privately owned and stocked with fish. However,
the plaintiff struggled on for a further three years
against this adversity entertaining the hope that
the business would survive. After his partner was
killed in 1966, the plaintiff did not intend to
attempt to operate the business himself but he did
attempt to carry on the business by entering into
what may be termed leasing arrangements with
two persons who would operate the fishing pond.
These efforts were not successful but because these
efforts were made the Minister allowed the deduc
tions from income claimed by the plaintiff in his
1967 and 1968 taxation years.
In 1969, however, the ban on taking mercury
polluted fish from Lake St. Clair, which was the
source of fish for the plaintiff's lakes, definitely
ended the business.
The property could not be put to any use other
than for use as a trailer camp. The plaintiff was
not prepared to assume the outlay to convert the
property to that use. He acknowledged that the
possibility of leasing the property was so remote as
to be non-existent. Accordingly the only possible
way the plaintiff could salvage his expenditure was
by sale of the property and, in my opinion, based
on the facts as outlined and the logical inferences
to be drawn from these facts, that is precisely what
the plaintiff did.
The plaintiff did say that he entertained the
hope that the fishing lake business could be resus
citated. He put forward the analogy of a 98 year
old man with one foot on a banana peel to point
out that the man was not dead but a spark of life
remained. The analogy is not apt. The plaintiff
overlooked the fact that under the life expectation
tables the most a 98 year old male could expect to
live would be 1.75 years (a very low percentage)
before the certainty of death, whereas the plain
tiffs business had expired at the end of 1968 and
no reasonable expectation could be entertained for
its revival.
Accordingly it cannot be said that the assump
tions upon which the Minister based his assess
ments were not well founded. Put another way, the
plaintiff has not discharged the onus cast upon him
to demolish those assumptions. That being so, a
careful examination of the sections of the Income
Tax Act upon which the Minister relies for the
contentions advanced by him indicates that these
contentions follow logically from the premise that
the business of the operation of the fishing ponds
by the plaintiff had come to an end at the end of
the 1968 taxation year, which I have found to be
the case.
The deductions from income for the taxation
years in question claimed by the plaintiff are usual
expenses normally incurred in the conduct of a
business and as such are legitimate deductions.
The difference in the present appeals is that a
business was not being conducted.
The claim for depreciation is effectively preclud
ed by section 20(6)(a) of the Income Tax Act
which has been reproduced above when construed
in the light of the facts as I have found them to be
in the present appeals.
The claims for maintenance of the property,
property taxes, hydro charges and insurance are
charges which follow from the ownership of prop
erty. They are not deductible if they were not
expended in the operation of a business in which
the property is used nor unless the property is itself
used for the purpose of producing income there
from. The fact is that these expenses were paid by
the plaintiff for the purpose of maintaining the
property with the view to its sale. The plaintiff is
an intelligent business man. His venture into the
business of operating these fishing lakes, while
attractive at the outset, was from its initial opera
tion so beset with misfortune and adversity as to be
disastrous and doomed to failure. The only sensible
course, and the one adopted by the plaintiff, as a
sensible business man, was to salvage what he
could from this misadventure by the sale of the
property, which he was successful in doing in
October 1971. These facts conform with the
assumption of the Minister in assessing the plain
tiff as he did that the expenses were incurred on
account of capital.
With respect to the deduction of the interest
paid by the plaintiff on the bank loan, the money
was borrowed by the plaintiff to acquire the prop
erty, to create the ponds and to instal the equip
ment necessary to operate the business. He was
under a legal obligation to repay the principal and
to pay the interest thereon. However a cardinal
rule of interpretation of a statute is that the statute
speaks from the present unless the context requires
otherwise. Section 11(1) (c) (i) of the Income Tax
Act quoted above permits the deduction in com-
puting income for a particular year of an amount
paid in the year pursuant to a binding legal obliga
tion to pay interest on "borrowed money used for
the purpose of earning income from a business or
property". Income tax is an annual affair. While
the obligation to pay the interest on the loan
continued throughout the plaintiff's 1969 taxation
year, the money borrowed was not being used in
that year for the purpose of producing income
from a business in that year. With reluctance,
therefore, I conclude that consequent upon section
11(1) (c) the deduction of the interest is also
precluded.
I cannot refrain from pointing out that the
plaintiff's submission that the deductions claimed
by him are proper is susceptible of being construed
as an admission that they were expenditures laid
out for the purpose of producing income from a
business. The business of operating the fishing
ponds had come to an end. The question would
then arise as to what the business was and that
could only be a business of selling the property. In
that event the property would no longer be a
capital asset but stock-in-trade. If this is so, then
the expenses would be deductible as claimed by the
plaintiff, but the gain realized upon the sale of the
property would be income and taxable as such.
While I have not made the mathematical compu
tations, it would appear, off hand, that the finan
cial advantage to the plaintiff would lie in forego
ing the claim for the deductions from income
rather than accept the risk of an assessment of tax
on the gain realized upon the sale of the property.
The Minister has been consistent in assessing
the plaintiff as he did. In the 1967 and 1968
taxation years there was a faint spark of life in the
business of operating the fishing ponds. He
allowed the deductions from income in those years.
In the 1969 taxation year that faint spark of life of
that business was extinguished. Therefore the
Minister disallowed the deductions claimed in the
subsequent years.
On the sale of the property in 1971, the Minister
did not seek to tax the gain realized thereon as
income and in my view he was right in not doing
so. When the property was acquired it was
acquired exclusively as a capital asset without the
alternative intention of turning the property to
account by other means including its sale.
It is possible that the category of a capital asset
may be changed and it may become inventory.
Such was the circumstance in Moluch v. M.N.R.'.
That circumstance does not prevail in these
appeals and the only reason I have mentioned this
possibility is that the claim for deductions made by
the plaintiff might be susceptible of lending cre
dence to that possibility although the principal
thrust of the plaintiffs submission was that there
was still life in the business in the 1969 taxation
year which, for the reasons I have expressed, is
contrary to the preponderance of evidence, but in
so submitting the plaintiff must be taken as main
taining that the property was a capital asset and
not stock-in-trade in the business of selling the
property in which latter event the deductions
claimed would be proper but the gain on the sale
would be taxable.
The plaintiff acted as his own counsel and he
was ill-advised.
Under the Income Tax Act a taxpayer who
objects to an assessment may appeal that assess
ment to the Tax Review Board or to the Federal
Court of Canada.
The Tax Review Board was established for the
purpose of affording a dissatisfied taxpayer a
quick, informal and inexpensive forum in which to
appeal the assessment. There are no formalities
such as examination for discovery and the like.
The total fee payable by the taxpayer was $15.00
on the filing of the notice of appeal and that fee
was repaid to the taxpayer if he was successful in
the ultimate disposition of the appeal. Costs are
not awarded by the Board. As a result of subse
quent legislation there is now no fee whatsoever
paid on the filing of the notice of appeal.
The plaintiff was aware of the choice of forum
available to him. He chose to launch his appeal in
the Federal Court of Canada rather than to the
Tax Review Board where there would be no fees
payable and no costs awarded. In exercising his
choice as he did I think the plaintiff was ill-advised
[19671 2 Ex.C.R. 158.
but the exercise of that choice was the absolute
right of the plaintiff.
For the reasons expressed the appeals are
dismissed.
Rule 344 provides that the costs of and inciden
tal to all proceedings in this Court shall follow the
event unless otherwise ordered. There are no cir
cumstances present in these appeals which require
that I should exercise my discretion contrary to the
well established rule that costs follow the event.
Accordingly Her Majesty is entitled to Her tax
able costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.