Living Friends Case - In Living Friends Tree Farm (2016 TCC 116), the central issue was whether the taxpayer’s expenses in respect to preparation for a Christmas tree farm were incurred in relation to commercial activity.  The TCC held for the Minister, noting that it was impossible to determine how much of the alleged commercial venture was genuinely commercial and how much reflected the registrant’s personal lifestyle desires.

On the facts, Living Friends Tree Farm (“LFTF”) was a partnership of Mr. and Mrs. Dahl. In 2009 LFTF bought 160 acres, 10 of which it planned to use as a Christmas tree farm. LFTF spent a lot of money preparing the land, incurring expenses related to constructing roads, purchasing equipment, drilling wells, building a barn, testing soil, and addressing building deficiencies. In addition, there were costly and time consuming legal matters related to problems associated with the construction of the barn. LFTF claimed an ITC in relation all of these expenses.

Mrs. Dahl testified that due to the legal actions, only 50 tree saplings were planted in the spring of 2010, and 30 to 50 had been planted each subsequent year, except for 2014 when no saplings were planted. Mrs. Dahl further testified that it was LFTF’s intention to leave most of the 160 acres unfarmed, retaining the existing bushes in order to provide shelter for wildlife.

The Minister disallowed the ITC on the grounds that LFTF was not engaged in commercial activity in the relevant period because there was no active pursuit of profit. LFTF argued that all of the work undertaken was preparatory and that in this type of agricultural activity profit could not be immediately expected.

Mrs. Dahl was an economist working full time for a German banking conglomerate and Mr. Dahl was a doctor of naturopathic medicine.  Based on this, the Minister submitted that neither of the Dahls had experience running a farm, and that the farm was not a genuine business activity.

The TCC analysed the case with respect to the commercial activity requirement, noting that only 5 of the 160 acres purchased for the farm were planted with saplings, and that between 2009 and 2015 only 150 saplings were planted.

The TCC considered the ETA’s definition of commercial activity and the reasonable expectation of profit test set to conclude that LFTF had not formulated clear positive steps in establishing the future path of the tree-growing operation as a potentially viable commercial endeavor

The TCC dismissed the appeal on the grounds that even though the business was in its infancy and profits could not yet be expected, there was no clear intention to commence a commercial enterprise. Moreover, the Dahl’s intentions with respect to the tree farm were “co-mingled” with personal objectives making it impossible to distinguish the business operations of LFTF from the personal lifestyle choices of its owners, who wanted to live on a large property surrounded by trees, nature and wildlife.

The TCC reiterated its position in Land & Sea Enterprises Ltd v The Queen (2011 TCC 101) emphasizing that “the eligibility of expenses that give rise to ITCs in the start-up phase of any business will require that a tax payer show not only a clear intention to commence a commercial enterprise but also evidence of the steps taken in support of that stated intention.”

This cases marks the importance of a clear link between inputs on which ITCs are claimed, and real commercial activities and commercial supplies making use of those inputs.  This case also serves as a reminder that commercial activity should be founded on a reasonable expectation of profit and should include clear steps towards profit making goals. 

Kathryn Walker & Robert G. Kreklewetz

A version of this article appeared in the September 2016 issue of GST & Commodity Tax