Mohl v. The Queen, 89 DTC 5236, [1989] 1 CTC 425 (FCTD)

Strayer J.: —

Relief Requested

This is an appeal from a decision of the Tax Court of Canada in which that Court upheld the reassessments by the Minister of National Revenue of the plaintiff's income in respect of 1978, 1979, 1980, 1981and 1982. In his reassessment the Minister restricted the losses from farming operations deductible by the plaintiff as provided in subsection 31(1) of the Income Tax Act on the basis that farming was not a “chief source of income" for the plaintiff.

Facts

The plaintiff was born in 1911. From 1931 until 1978 he was actively engaged in a variety of business and farming activities, mostly in the area of Eden- wold, Saskatchewan. Much of this activity was carried out through a company, Mohl Brothers Limited of which he was president, the other shareholders including his brothers and his father. He and the company at one time or another operated a general store, a dairy, a feed lot, a substantial farm of over 2,000 acres, a farm equipment business, several hotels in Saskatchewan towns, and a “family pub and restaurant" in Regina called the Jolly Roger. The plaintiff appears to have been actively involved in the management and operation of all of these ventures, his last major active involvement being with the operation of the Jolly Roger which the company owned from 1972 until May, 1978. It appears that most of these ventures were highly successful.

While operating the Jolly Roger, the plaintiff developed a strong interest in horse breeding and racing as he came to know people involved in those activities. In 1977 he bought two horses which earned him some $13,000 in purses and which he resold the same year, with a net profit reported of $4,327. This encouraged him to pursue horse breeding and racing more seriously, especially as a decision had been taken by the family to sell the Jolly Roger when the opportunity arose. That opportunity came in 1978, the restaurant being sold in May of that year. In 1978 the plaintiff acquired six horses for himself and another four horses in an equal partnership arrangement with two of his brothers. From then until the mid-1980's the plaintiff owned varying numbers of horses which he used for breeding, racing, and resale. During the taxation years in question, the number of horses he owned at the end of each year varied from four horses to ten horses. As I understand the evidence, very few foals were produced, two having been kept for racing and resale and another three or four having been sold shortly after birth.

The plaintiff has testified that in 1977 when he was planning his horse venture he expected to invest about $50,000 in it. He expected only minor profits in the first four or five years but after that expected that he might earn about $20,000 a year net income from this activity. He produced no written evidence of any financial plan to this effect nor could he explain the basis of his calculations.

The plaintiff invested some $20,000 in equipment, and at one time in 1978 it appears that he might have invested in excess of $40,000 of his own money in horses. A substantial amount of this investment was recovered in the resale of horses, and later purchases did not involve nearly as much money. He owned no buildings or land for use in connection with the farming activity of breeding and racing horses.

As I understand it, in the early years of this farming operation, the plaintiff devoted more than half of his year to it. In particular in 1979-80 he spent the winter in the United States with his horses at various racing locations. Later he was essentially involved only during the racing season, from April to October. At all times he employed a trainer although during the racing season he took a major part in looking after the horses. By May of 1978 when the Jolly Roger was sold he was free of most of his other business responsibilities and apart from occasional work to assist members of his family his involvement with the company consisted essentially of attending meetings. At the time the Jolly Roger was sold and he was able to devote much of his time to his horses, he was 67 years old. While thereafter most of his working time was spent on the horses, he was not obliged to work much at other tasks because he had a substantial income from other sources.

Following is a table showing, for the years in question, the plaintiff's gross farm income (calculated without regard to artificial income normally attributed to cattle inventory for purposes of income tax calculation), his farming losses as calculated for income tax purposes, and his income from other sources. The latter included investment income and employment income in the form of accrued wages for past service to the family company which did not involve performance of work during the taxation years in question.

Gross Farm

Income Net of

	Livestock	Farming Losses
Year	Inventory	Claimed	Other Income
1978	$ 28,472	$ 18,511	$ 65,147
1979	34,304	38,691	61,242
1980	31,391	31,076	63,251
1981	6,912	23,275	54,181
1982	3,000	33,694	135,547

With respect to each of the years in question, the Minister restricted the amount of farm losses which the plaintiff could deduct from other income in accordance with subsection 31(1) of the Income Tax Act. That subsection provides in part as follows:

31(1) 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. . . .

There then follows a formula which in effect means that in such a case the deductible losses are restricted to $5,000.

Issues

The question then is whether the plaintiff's farming income can be regarded as a "chief source of income" whether alone or in combination with some other source of income. If not, only the restricted losses permitted by subsection 31(1) can be deducted. To use the language of the Supreme Court of Canada, if farming was only a "sideline business" [1] for the plaintiff then he cannot deduct his full losses.

Conclusion

It now appears clear from the Supreme Court decision in Moldowan as recently interpreted by the Federal Court of Appeal in Canada v. Morrissey, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term "significantly profitable” because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a sideline business to which the restriction on losses will apply in accordance with subsection 31(1).

I have come to the same conclusion as the learned judge of the Tax Court that not only was there no profit experienced in the years in question but there could also be no realistic expectation of a substantial profit of the sort which would constitute a chief source of income. The test of whether there is a reasonable expectation of profit is an objective one. While the plaintiff has asserted that he believed when he went into this business that he would be making a slight profit the first few years and a modest profit thereafter, he has not demonstrated any reasonable basis for this belief. The onus was on him to do so. Even if he had had much better fortune than he apparently did, it appears unlikely that the profits would have been other than very modest in comparison to the other income which he was receiving during this period. At the very best his horse breeding and racing operation was, and could only be reasonably expected to be, a sideline business.

I am therefore dismissing the appeal with costs.

Appeal dismissed.