Bigelow v. The Queen, 90 DTC 6262, [1990] 1 CTC 351 (FCTD)

MacKay, J.:—This case, heard in Saskatoon, concerns the deduction of restricted farm losses as provided for in subsection 31(1) of the Income Tax Act, S.C. 1970-71-72, c.63, as amended.

The plaintiff, Mr. Bigelow, deducted losses incurred in connection with his raising of thoroughbred race horses in 1977, 1978 and 1979 in calculating his income tax for those years. By notices of reassessment dated May 22,1981 the Minister of National Revenue disallowed the losses claimed. The plaintiff taxpayer filed notices of objection in August 1981, to which the Minister responded with a notice of confirmation dated January 12, 1982, affirming his decision to disallow the claimed farm loss deductions.

Bigelow appealed to the Tax Court of Canada. The Minister at that stage consented to allowing the appeal in relation to the 1977 tax year and the Tax Court referred the matter back to the Minister for reassessment on the basis that for that year the plaintiff was entitled to restricted farm losses pursuant to subsection 31(1) of the Act. The Tax Court dismissed the taxpayer's appeals in relation to the years 1978 and 1979.

When this case was heard on appeal from the decision of the Tax Court, counsel for the plaintiff clarified, as he had done at the hearing of the Tax Court, that the appeal was limited to the claim that losses for 1978 and 1979 be allowed as restricted farm losses within the limits provided by subsection 31(1) of the Income Tax Act. At trial a secondary issue arose in argument between counsel for the parties, concerning the relevance of evidence of income and expenses incurred in relation to the taxpayer's continuing activities in raising, training and racing horses in years subsequent to 1979. Counsel were invited to provide written argument on both of the issues before the Court following hearing of the matter, and this they did.

The plaintiff was born in 1917 and was raised by his grandparents on a farm in South Lorraine, Ontario. In 1937 he began working as a miner in Kirkland Lake, Ontario, a job he held until 1942, when he entered the army. After military service for some three years, he returned to mining. In 1963 he moved to Saskatchewan where he continued to work in mining until 1983, when he retired. In 1978 and 1979, the years in issue in this case, he was employed full- time in a supervisory capacity in the potash mines at Rocanville, and he also spent substantial time on his activities relating to horse raising and racing, including the purchase, sale, breeding, training and upkeep of his horses.

From his early boyhood years on a farm, Bigelow had a long-standing interest in horses. In the 1960s after moving to Saskatchewan he purchased two horses for riding and racing. In 1971 one of his horses ridden by his son was so successful that the son was named provincial junior champion. The plaintiff found that he had some talent in training horses. By the early 1970s he believed that he could make a small profit by raising, racing and selling thoroughbred horses. He rented an acreage near Esterhazy where he kept and raised horses. In addition, he helped to found the Esterhazy Riding Club, and among its objectives were to improve the calibre of horses in the area and to encourage people to take up riding.

Through the 1970s and until his retirement, the plaintiff was working, mainly on the day shift at Rocanville as underground superintendent and he managed to spend up to four or five hours on working days and most of his weekends, working on the property and with his horses near Esterhazy, some 35 miles away. For a time, in 1977 and 1978, the acreage he had originally rented near Esterhazy was unavailable. He moved his horses to another more distant location and was able to spend less time with them. Throughout much of the 1970s and early 1980s he was assisted by a trainer whom he retained to develop his horses for racing. He returned his horses to rented acreage near Esterhazy in the fall of 1978. In 1981 he acquired his own property in the area, to which he made significant improvements for the raising and training of his horses. From 1983, following his retirement from employment in the mines, the plaintiff has devoted his full time to raising and racing his horses, to his farm property and to their development.

In the late 1970s his inventory of horses grew to as many as nine and as few as seven including two brood mares, in 1978. He bought and sold horses from time to time. He sought by selective breeding of his mares to improve the thoroughbred blood lines of his horses, especially for racing. He continued efforts to improve his stock and to increase his inventory after the years in question here.

Over the years Mr. Bigelow entered his best horses in several thoroughbred racing events, sometimes at Winnipeg and more or less consistently at meets in Saskatoon and Regina. He experienced mixed success. Raising and racing thoroughbred horses can be a difficult and risky activity. Not every horse turns out to be well-suited for racing, much less to winning races. Sometimes his horses did well, placing second in races. Other times horses he expected to do well suffered unfortunate physical ailments or injuries which precluded them from further racing. Injuries to one of his horses, and limited success with others resulted in Bigelow’s race winnings in 1978 totalling only $672, lower than his receipts from winnings in the previous year or in any subsequent year.

It is useful to consider the financial situation of the plaintiff and the significance of his claim in the general context of his overall financial situation as gleaned from his tax returns filed as exhibits at trial. The following table is my compilation of farm income and expenses, farm loss, and, while not directly relevant, his income from employment in mining where available, for the years 1977 to 1986, with all figures rounded except for the two years here in issue, 1978 and 1979.

In considering the plaintiff's position over the years included in the above table, one should note that in March 1983 he retired from employment in mining. His farm income shows a marked increase in the last few years, mainly because from 1984 on this income is calculated by including an adjustment for livestock inventory calculated under section 28 of the Income Tax Act, an adjustment not included in farm income for the previous years. The table indicates that in every year except 1985, six years after the years in issue here, the plaintiff experienced losses in his farm operations, the raising and racing of horses. If the livestock inventory adjustments included in farm income in the later years are ignored, the table would indicate a continuing loss position for the farm operations of the taxpayer throughout the period.

The table does include evidence tendered at trial of the plaintiff's financial situation in years following 1978 and 1979, the years at issue in this appeal. It was tendered to demonstrate the commitment of Bigelow to his horse raising and racing activities and thus his genuineness or sincerity and his long-range expectation of ultimately achieving a profit. As noted earlier, counsel for the defendant questioned the admissibility on grounds of relevance of evidence relating to years after 1979, a secondary issue in this case.

There is no question here that the activities of Mr. Bigelow in raising and racing horses fall within the definition of “farming” under subsection 248(1) of the Income Tax Act, which provided for the years in question:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

The question of substance is whether his activities fall within subsection 31(1) of the Act as the activities of what is sometimes described as a sideline farmer, for which he is entitled under the Act to claim restricted farm losses, up to $5,000 in accordance with that section. The section as applicable to 1978 and 1979 provided in part:

31. (1) Loss from farming where chief source of income not arming. — Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be . . .

then follows a somewhat complex formula the result of which is to provide a maximum limit of $5,000.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, Dickson, J., as he then was, speaking for the Supreme Court interpreted the predecessor of subsection 31(1) (then subsection 13(1)) in the following terms (at pages 313-314 and page 315 C.T.C. (D.T.C. 5215 and 5216)):

Although originally disputed, it is now accepted that in order to have a "source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. MNR, [1972] CTC 151; 72 DTC 6131. See also paragraph 139(1 )(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking. The Queen v. Matthews, [1974]; CTC 230; 74 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) A taxpayer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of subsection 13(1) in those years in which he sustains a farming loss.

(2) The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

(3) The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

Since Moldowan, cases concerning claims for farm losses to be deducted from income for tax purposes have involved determination of the appropriate classification of the taxpayer's farming activities, as a full-time farmer entitled to claim the full extent of losses allowable under the Act, as a sideline farmer entitled to claim restricted losses under subsection 31(1), or as a hobby farmer who is not entitled to claim any losses.

Whether Bigelow’s activities are appropriately classified for 1978 and 1979 in the second category as he claims and as the Minister’s decision to concede the original appeal in this matter for 1977 implicitly acknowledged for that year, or whether as the Minister contends and as the Tax Court found for 1978 and 1979 they fall within the third class, is the issue in this appeal.

In his written submission following trial, counsel for the defendant agreed with counsel for the plaintiff that evidence of the financial circumstances of the taxpayer in relation to his activities in raising and racing horses for years subsequent to the tax years in issue is admissible in this case. That is clearly consistent with the jurisprudence and the practice of the Courts dealing with this issue. This is demonstrated by cases involving determination of whether the taxpayer's activities are within the first or the second class identified by Mr. Justice Dickson in Moldowan, for example, in Graham v. The Queen, [1983] C.T.C. 370; 83 D.T.C. 5399 (F.C.T.D.) where Mr. Justice Cattanach received and considered evidence of later years, and said (at page 375 C.T.C. (D.T.C. 5403)):

I fully appreciate that some of this evidence is subsequent to the taxation years in question but that evidence is properly admissible as illustrative and confirmatory of the plaintiff's course of conduct and intention in those antecedent years.

See also: Kozinski v. M.N.R., [1984] C.T.C. 2743 ; 84 D.T.C. 1600 (T.C.C.); Kerr et al. v. M.N.R., [1984] C.T.C. 2071; 84 D.T.C. 1094 (T.C.C.); Juravinski v. M.N.R., [1986] 1 C.T.C. 2429; 86 D.T.C. 1274 (T.C.C.). Evidence of years other than the tax years in question has also been considered in cases where the determination relates to classifying farming activities within the second or third classes identified by Dickson, J. (See for example: Croutch v. The Queen, [1986] 2 C.T.C. 246; 86 D.T.C. 6453 (F.C.T.D.); The Queen v. Gorjup, [1987] 2 C.T.C. 129; 87 D.T.C. 5348 (F.C.T.D.); Magee v. The Queen, [1987] 2 C.T.C. 17; 87 D.T.C. 5282 (F.C.T.D.); Demers v. M.N.R., [1987] 2 C.T.C. 2247; 87 D.T.C. 537 (T.C.C.); Armstrong v. M.N.R., [1988] 1 C.T.C. 2198; 88 D.T.C. 1122 (T.C.C.).)

If we consider the evidence tendered of the financial circumstances of the plaintiff over the ten years from 1977 to 1986, summarized in the table earlier, in only one year, 1985, is there any evidence of profit from farming operations. As pointed out earlier, profit in that year arose from accounting procedures, consistent with the Income Tax Act under section 28, which were different from those followed by the plaintiff in 1978 and 1979, and all of the years prior to 1984. That accounting change, including in farm income an allowance for inventory appreciation, was coincidental with the plaintiff's retirement from his employment in mining after which his activities may be considered to have been devoted exclusively to his raising and racing horses.

The profit in 1985 is not in itself a very stable base for finding a reasonable expectation of profit in the years in issue, 1978 and 1979. If the year 1985 were accounted for on a cash basis as all of the years up to 1983 were, the plaintiff would again have experienced a loss in his operations in that year, as in all others in the decade to 1986.

Perhaps more persuasive in the plaintiff's case is his experience in relation to racing activities. While the evidence is not precise, it appears from his testimony and from his imcome tax returns for the years after 1981 when he acquired property of his own, he invested considerably more money in the operation and certainly after his retirement he invested more time, in improving buildings and equipment, providing basic services such as a well, and in the raising and training of his horses. Moreover, his returns from successful racing activities increased, and reflecting this the value of his inventory improved, all in years after 1981. While the evidence presented does not provide a clear measure of improvement, it is generally supportive of the plaintiff's position that his operations were somewhat more successful towards the end of the decade to 1986.

Some cases referred to by counsel in written submissions concerned the determination of whether the taxpayer's farming operations fell within the first or the second class of farmers for income tax purposes. In those cases it was conceded by the Minister that the taxpayer had a source of income from farming or from farming and other activities. Those cases are not particularly helpful, except in so far as they reflect the factors to be considered in determining whether there was a reasonable expectation of profit, and thus, a source of income from farming operations, essential to qualify for any farming loss deduction under either classification.

Factors identified in cases concerned with determining whether a reasonable expectation of profit is established include the following: profit and loss experienced in past years (and, as we have seen in practice, in subsequent years), the taxpayer's training or experience in relation to the activities carried on, the capability of the venture as capitalized to show a profit after charging capital cost allowances, and the taxpayer's intended course of action (see per Dickson, J. in Moldowan, supra). The taxpayer's intended course of action has been described in other cases as his plans or planning to make a profit (see Croutch, Demers, Gorjup, Magee and Armstrong, supra) and in Demers, Gorjup, and Armstrong this factor was a key finding in the holding of the Court concerned that the activities there considered constituted sideline farming warranting a claim to restricted losses under subsection 31(1). The absence of such a plan or of reasonable planning was a major factor in decisions in Croutch and Magee that the activities there concerned, involving the raising and racing of horses, did not qualify as operations for which restricted losses should be allowed. The time spent by the taxpayer, or by the taxpayer and his family, on the operations and the genuineness of the taxpayer's expectation of profit have also been factors considered in assessing whether or not there is a reasonable expectation of profit, and thus a source of income from farming operations. (See, for example Croutch and Gorjup.) Standards for determining a reasonable expectation of profit in an agricultural business may be less than in other businesses, and they may well differ among particular agricultural businesses, as Jerome, A.C.J. acknowledged in Gorjup.

In every case of appeal by a taxpayer from the decision of the Minister, or the decision of the Tax Court, the burden is upon the taxpayer to persuade the Court concerned that his case ought to be upheld and the previous decision ought to be reversed, on a preponderance of the evidence. In all cases, considering the basis for a reasonable expectation of profit ultimately depends on an assessment of all of the factors brought to the attention of the Court.

In this case I have no doubt that Mr. Bigelow was genuine in his interests in raising and racing horses and that he maintained an optimistic outlook on the situation and had every hope that over time he would improve his income from farming and his profit and loss situation. It may be that full review of the evidence related to his activities after he acquired his own property and after he retired from mining employment would lead to a different conclusion but, for the years 1978 and 1979, after carefully considering the evidence presented to me, I am not persuaded that his activities in those years can be characterized as sideline farming. My conclusion is that under the Income Tax Act these activities must be considered as hobby farming. The circumstances here are analogous to those found in Croutch and Gorjup. In these circumstances, Mr. Bigelow is not entitled to claim restricted farm losses under subsection 31(1) of the Act.

My assessment of several factors leading to this conclusion is as follows. His profit and loss experience in previous years and indeed in years subsequent to the tax years in question does not support a conclusion that an expectation of profit was reasonable in 1978 and 1979. While his experience with horses was significant, he had no formal training, either as an apprentice or otherwise, under supervision of a trainer or with the breeding of horses. In the years in question he was still employed full-time in mining, and though he devoted considerable time to his horses he did then, and he apparently still does, rely upon other known trainers to assist in bringing his horses to competitive standards for racing.

Mr. Bigelow obviously had a dream which he pursued through a general course of action. Over the years he must have had considerable satisfaction as his interest in horses developed and his efforts demonstrated improvements to his facilities and in the racing performance of his horses. Yet here there was no evidence presented to the Court about any planning that would lead to confidence about the existence of a reasonable expectation of profit, on any objective basis, in 1978 and 1979. Indeed, there was a dearth of any records of activities in those or other years except for the income tax returns filed as exhibits. Thus, even viewed retrospectively, evidence that would support a conclusion that there was any planning for the farming operations in the years in question was not provided to the Court.

Despite the devotion and work the taxpayer has put into his farming operations and his long interest and experience in raising horses, I am not persuaded that for the years 1978 and 1979 his operations can be classed as other than those of a hobby farmer. Of course, my conclusion ought not to be read as having significance for later years when, by reason of changed circumstances, for example, the acquisition of and investment in his own property or his commitment on a full-time basis following retirement from mining employment, he might be able to claim either full or restricted farm loss deductions. In Kerr v. MNR, supra, at page 2074 C.T.C. (D.T.C. 1097), Christie, C.J.T.C. said:

Finally, by way of general observation, it is noted that, if a person who gets involved in farming cannot initially be regarded as being engaged in a business, that can mutate by reason of changed circumstances. A taxpayer could change from hobby farmer to businessman farmer and directly into a position of being able to lawfully claim deductions for the full amount of his farming losses. On the other hand, he might only move into a position of being able to claim restricted deductions and then, possibly, later on, to full deductions. These shifts in the position of a taxpayer vis-a-vis farming losses will depend on changed relevant facts. The various movements in the direction of favouring deductions are, of course, reversible by reason of changed circumstances.

For the foregoing reasons the plaintiff's action is dismissed with costs.

Appeal dismissed.