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Citation: 2005TCC286
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Date: 20050422
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Docket: 2002-3914(IT)G
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BETWEEN:
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DONALD M. ROSS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] In computing income for the 1996,
1997 and 1998 taxation years, the Appellant claimed the amounts
of $51,103.99, $37,504.45 and $40,332.60, respectively, as
expenses fully deductible against his business income. The
Minister of National Revenue treated these expenses as
representing farm losses and reassessed to restrict their
deduction to the amount of $8,750 in each of the respective
years.
[2] At all relevant times, the
Appellant was a salesman, market maker, president and a
substantial owner of Jones, Gable & Company Limited based in
Toronto. With respect to his role as a security salesman he said
it was necessary to attract people who are in the market. This is
done through contacts, knowledge and positions in various
securities which enable one to deal as a principal. In time, he
earned a reputation as a "supporter of companies which
initially go public, smaller companies" and of being a good
trader of securities with the ability to put prices on trades
and/or take a position one way or the other to facilitate the
completion of the trade. As well he had his own trading terminal
and was able to execute orders directly. His client base during
the years in issue included seven or eight
"institutional-type" clients, i.e. individuals
who trade regularly and who often traded under a variety of names
or companies. He also had a large number of retail clients who
permitted him to speculate on their behalf on a limited basis
with respect to junior companies and in this context, made
specific reference to companies that required 200 shareholders to
become public and his ability to provide a list of "real
names to effect the listing requirements".
[3] The Appellant maintains that there
is a direct link between his activities with respect to
thoroughbred racehorses and the development and maintenance of
his client base. He grew up in rural Ontario and was not "in
Toronto financial circles" when he first began his career in
the brokerage business. In addition to developing the skills
necessary to be a good broker, he believed it was important to
meet and actually deal with people "who controlled companies
or were financially likely clients". At some point of time,
he acquired "a passing interest" in thoroughbreds and
decided to use it "as one way to develop clients". With
this purpose in mind in the early 1960s, he began to entertain
people at the races and, on the odd occasion, agreed to be
involved in a syndicate to "follow a promising animal
... and that was just another way of getting to be known
... as well as attracting people to deal with me". The
Appellant made reference to the substantial number of people that
he met in this way who were interested in speculative stocks and
observed that:
Well, everything from numbers of people who are interested in
speculative stocks, and there are naturally a myriad of those on
the backstretch and in the functions end of the racing business.
Dealing in penny stocks is almost, to some of them, as exciting
as - - as standing about the windows. You know, there's action
and it's -- it's sometimes exaggerated. So I was able to
get numbers of clients that way. Apart from that, as I said
before, amongst the people who owned thoroughbreds and
everything, I was exposed to people who ran companies or who were
monied people generally, which let to - - well, dealing in
various ways.
[4] The Appellant testified that a
very substantial portion of his income as a salesman comes from
commissions and that there was a definite link between the
thoroughbred activities and the development and continuation of
his client base. He made reference to a list of current clients
all of whom were related to his thoroughbred activities in
various ways.[1] He
stated:
Well, starting at the bottom, the three names, Cavendish,
GooseLake, and Harvest Fund, are Richard Bonnycastle in Calgary
with whom I, you know, developed an original friendship through a
partnership dating back to 1970 in horses. Lincluden is Ian
Jamieson who - - well, wives have been partners and I've been
partners with him; I suppose brought him into the racing game and
kept a friendship that way. Bob Krembil of Trimark, I tried for
probably twenty years to get him interested and I'd continually
go to the track with him and he was the very successful manager
of Trimark Investments who - - he and Labatt cashed out, what,
three, four years ago, but - - but they were - - Krembil was very
helpful to me in keeping aware of what was going on in markets
possibly other than what I dealt in but invaluable as a
background. He was their main money manager in their very
successful days.
He also specifically noted that:
... There are probably fifteen who are, you know, very
directly related. George Bodnar and Penelope Explorations in
Montreal were almost entirely - - the association was kept up
through the interest. Ken Burgess was Dick Bonnycastle's
brother-in-law. Cardella was one of the fellows in the barn, you
know, just one of the names we used. Charalambous is a trainer
and his mother's account are those two. David Clark's a jockey
that rides for us fairly often, has a bit of money and is willing
to play. Rob Cudney is - - oh, we're major partners in - - in all
sorts of things besides the odd horse and is a good part of my
commission income now, the companies that he's involved with.
Bernard Girault's a trainer, and he brought me other names
from the - -you know, from the track to fill out the hand
where we needed names. Dr. Allen Green Bonaventure is entirely a
contact that came from the track, and he's - - he's a very
keen stock trader as well as a person who deals with a great
number of firms and whose information flow is very valuable as a
client. Nick Harris is a partner that came entirely from there.
Bob Heather's a lawyer who I got to know entirely through the
track. Larry Heisey that was head of Harlequin is - - has been a
partner with horses. That's where that connection was solidified.
The Howards, one of them's a trainer. Jake Howard was Chair of
the Jockey Club and that sort of thing. His family, those four
names, came from there. Or five, actually, with the children's
trust. Jamieson I've explained via Lincluden beneath. Penelope
Bodnar, I'd mention. Brett Peters is one of Cudney's people
and you know, very keen that way and the connection keeps up that
way. He's - - he's Cudney's money man. Trevor Swan's
a trainer who's left money with me. So is Jim Begg who's very
successful - - what do you call it? - - Shopping centre developer
and he's put money. Zweig is one of the people that work in
the back stretch, that type of thing. And various others are all
people who, at one time or another, have - - have, you know, been
with us to the track or had a connection that way.
The Appellant further testified that of the $1,200,000 in
commission income earned in 1996, it was reasonable to say that
approximately 50% was related to the thoroughbred activities. His
expenses with respect thereto for that year had been $93,900 and
revenues amounted to $42,800 for a net loss of $51,103.99.
Appellant's submissions
[5] The issue before the Court
requires a finding of fact that the thoroughbred activities were
an integral part of the Appellant's business as a broker.
Absent that finding, the Appellant would concede that section 31
of the Income Tax Act applies. The thoroughbred activities
give rise to deductible expenses by virtue of paragraph
8(1)(f) of the Act. There are four conditions
precedent to the application of this paragraph:
(i) The taxpayer must be
ordinarily required to carry on the duties of employment away
from the employer's place of business. In the present case, the
evidence is that in practical terms, albeit not necessarily by
virtue of contract, the Appellant was required to carry on
employment duties away from the place of business. In order to
generate business and in particular, to generate the client base,
the Appellant had to be away from the office and in fact often
was;
(ii) Under the contract of
employment, the taxpayer must be required to pay the taxpayer's
own expenses;
(iii) The taxpayer must be remunerated
all or in part by commissions or other amounts fixed by reference
to the volume of sales; and
(iv)
The taxpayer must not have been in receipt of an allowance for
travel expenses.
There is no dispute as to these conditions being met in the
present case.
[6] Counsel further argued that case
law clearly indicates that if an activity is part of the earning
process of a business, then expenses related to that activity are
incurred for the purpose of earning income and are allowable
pursuant to paragraph 8(1)(f). This paragraph
essentially imports into the employment category a profit or
business approach because commissions are in the nature of
business income much more than employment income. Reference was
also made to Frappier v. The Queen,[2] a decision which dealt with a
financial advisor employed by a brokerage firm who had a business
approach of reimbursing her clients for losses suffered as a
consequence of following her investment strategy. The issue was
whether these reimbursements were valid business expenses. Bowman
J. (as he then was) held that they were, as Frappier's business
was largely built on referrals and for this reason, it was
necessary that her reputation be maintained.
[7] In Olympia Floor & Wall
Tile (Quebec) Ltd. v. M.N.R.,[3] Jackett J. held that even though outlays in that
case took the form of contributions to charitable organizations,
they were not gifts within the meaning of that word in
paragraph 27(1)(a) of the Act, but rather were
made for the purpose of earning income. Jackett J. also
stated:
It is quite possible that a portion of these contributions or
all of it, for that matter, may have been made for reasons other
than pure business reasons but these reasons would have been
subordinate, in my estimation, to the purpose alleged by the
appellant and which was confirmed by the evidence.
In the present case, while the Appellant certainly enjoyed his
thoroughbred activities, this was subordinate to the fact that
they were carried on for the purpose of developing business and
earning commission therefrom. Counsel submits that the modern
approach taken by the Supreme Court of Canada with respect to the
deduction of expenses pursuant to paragraph 18(1)(a) of
the Act in Symes v. Canada[4] is applicable, and says that the
question to be asked in the present appeals is, what was the
purpose of the expenditure? Here, the purpose of the thoroughbred
activities was to generate commission income and for that reason,
the Minister's assessments were wrong.
Respondent's submissions
[8] The Respondent contends that for a
number of years, the Appellant was buying and breeding horses for
racing and thus, participated in farming as defined pursuant to
subsection 248(1) of the Act. However, his chief source of
income throughout this period was not farming or a combination of
farming and some other income, but rather was the result of his
brokerage activities as a salesman and market maker. Accordingly,
the Appellant's losses were properly restricted in accordance
with section 31 of the Act. The expenditures in question
are clearly related to farming - veterinarian fees, blacksmith
fees, stable fees, trainer fees, the cost of purchasing horses
and section 31 of the Act was specifically enacted to deal
with situations such as this. Counsel referred to the comments of
Robertson J.A. in The Queen v. Donnelly:[5]
As is well known, section 31 of the Act is aimed at
preventing "gentlemen" farmers who enjoy substantial income from
claiming full farming losses: ...
and referring to The Queen v. Morrissey,[6] Robertson J.A. also
noted that:
... The practical and legal reality is that these farmers are
hobby farmers but the Minister allows them the limited deduction
under section 31 of the Act. Such cases almost always
involve horse-farmers who are engaged in purchasing or breeding
horses for racing. In truth, there is rarely even a reasonable
expectation of profit in such endeavours much less the makings of
a chief source of income.
[9] The Respondent's position is
that section 8 of the Act does not apply in this case. The
expenses envisioned by that section deal generally with expenses
relating to meals, requirements to be away from the office,
promotion and entertainment. The expenses sought to be deducted
in the present appeals do not fall within that category.
Deductions for veterinarian and stable fees as well as the cost
of transportation of horses cannot be considered employment
deductions under section 8 of the Act.
[10] Counsel made reference to H.J.
O'Connell Limited v. M.N.R.[7] In that case, the taxpayer carried on
a contracting business and owned a farm on which it raised prize
cattle, show and racehorses. The taxpayer argued that farming was
a means of advertising and accordingly was deductible pursuant to
the provisions of paragraph 12(1)(a) of the Act.[8] The Tax Appeal
Board rejected the taxpayer's submission that farming was a
means of advertising, stating:
... But can a form of income as farming, a business in
itself, be construed solely as a form of advertising? ... It
is an activity in itself, liable to produce an income and cannot
be considered in any way whatsoever as a means of promotion or
advertising. Such farming activity was autonomous by its
very nature and if it helped to increase the good-will of the
appellant in its construction business, it was only incidental
and too remotely connected, while it rather increased the
goodwill of its farming business. ...
In the case under review, it is far-fetched to use a farming
operation, an expensive asset, as a means of advertising.
... The Minister ... must draw a line between
advertising costs directly with actual promotion and
profit-making of business and other expenditures incurred in too
remote a way for that purpose. ...
[11] In Romain Audet v. M.N.R.,[9] the taxpayer was
an accountant who also had a farming activity and was allowed
restricted farming losses. He tried to claim the remainder under
paragraph 18(1)(a) on the basis that he obtained clients
as a result of these farming activities. The appeal was dismissed
on the basis that the farm was a separate activity to be computed
on a source basis. The Court stated:
It is quite clear that if the appellant incurred expenses
(such as invitations, meals, gifts and so forth) in the course of
his farming activities with the purpose of attracting clients to
his professional firm, such expenses, if proven, may be included
in computing his professional income. However, it is clear
that expenses such as veterinary fees, blacksmith fees or the
purchase price of horses may not be applied against his
professional income.
Specific reference was also made by counsel to the fact that
the Appellant conceded that there was a profit motive in respect
of his thoroughbred activities and that in the past he had been
permitted restricted farm losses. In so doing, the Minister
accepted that there was a business for purposes of allowing that
provision. Furthermore, section 31 is a self-contained code and a
taxpayer who is permitted to deduct restricted farming losses
cannot deduct any amount over the restricted amount pursuant to
another provision of the Income Tax Act.
Statutory Provisions
[12] Paragraph 8(1)(f), section 67
and subsections 31(1) and 248(1) read as follows:
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, there may be deducted such of the following amounts
as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded applicable
thereto:
(a) ...
(f) where the
taxpayer was employed in the year in connection with the selling
of property or negotiating of contracts for the taxpayer's
employer, and
(i) under the
contract of employment was required to pay the taxpayer's own
expenses,
(ii) was ordinarily
required to carry on the duties of the employment away from the
employer's place of business,
(iii) was remunerated in
whole or part by commissions or other similar amounts fixed by
reference to the volume of the sales made or the contracts
negotiated, and
(iv) was not in receipt of
an allowance for travel expenses in respect of the taxation year
that was, by virtue of subparagraph 6(1)(b)(v), not
included in computing the taxpayer's income,
amounts expended by the taxpayer in the year for the purpose
of earning the income from the employment (not exceeding the
commissions or other similar amounts referred to in subparagraph
(iii) and received by the taxpayer in the year) to the extent
that those amounts were not
(v) outlays, losses
or replacements of capital or payments on account of capital,
except as described in paragraph (j),
(vi) outlays or expenses
that would, by virtue of paragraph 18(1)(l), not be
deductible in computing the taxpayer's income for the year if
the employment were a business carried on by the taxpayer, or
(vii) amounts the payment of which
reduced the amount that would otherwise be included in computing
the taxpayer's income for the year because of paragraph
6(1)(e);
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 the taxpayer's loss, if any, for the year
from all farming businesses carried on by the taxpayer shall be
deemed to be the total of
(a) the
lesser of
(i) the amount
by which the total of the taxpayer's losses for the year,
determined without reference to this section and before making
any deduction under section 37 or 37.1, from all farming
businesses carried on by the taxpayer exceeds the total of the
taxpayer's incomes for the year, so determined from all such
businesses, and
(ii) $2,500 plus the
lesser of
(A) 1/2 of the amount by
which the amount determined under subparagraph (i) exceeds
$2,500, and
(B) $6,250, and
(b) the
amount, if any, by which
(i) the amount
that would be determined under subparagraph (a)(i) if it
were read as though the words "and before making any
deduction under section 37 or 37.1" were deleted,
exceeds
(ii) the amount
determined under subparagraph (a)(i).
67 In computing
income, no deduction shall be made in respect of an outlay or
expense in respect of which any amount is otherwise deductible
under this Act, except to the extent that the outlay or
expense was reasonable in the circumstances.
248(1) In this Act,
"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;
Conclusion
[13] The Respondent's assessments are
based on two propositions. First, the range of deductibility of
expenses permitted by paragraph 8(1)(f) is
specifically circumscribed and does not permit deductions for the
type of expenses claimed by the Appellant as exemplified by items
such as veterinary fees, transportation of horses, stable fees,
etc. More specifically, the expenses envisioned by
paragraph 8(1)(f) were not intended to include
anything more than items such as "meals, dealing with
requirements to be away from the office, dealing with promotion
and entertainment" and the expenses in this particular case
do not fall into those categories.
[14] The deductions from employment income
that are permitted by the Act are set out in subsection
8(1). Section 67 requires that the deductions must be reasonable
in the circumstances while subsection 8(2) makes it clear that no
other deductions are allowed. More specifically, subsection 8(1)
contains provisions regarding deductions from employment income
in a number of varied and disparate situations, e.g. expenses
relating to a clergyman's residence, volunteers' deductions,
teacher's exchange fund contributions, railway employee expenses,
travel and motor vehicle expenses and even Canada Pension
Plan contributions. It is reasonable to conclude that each
category is intended to meet the requirements of a particular
type of employment and that the permissible deductions with
respect to each is limited by the very nature of that particular
paragraph. A quick review suggests that items such as the cost of
equipment, supplies, conferences, entertainment and promotion
are, as a general rule, not deductible from employment income.
One exception to the foregoing relates to an employee who comes
within the scope of paragraph 8(1)(f) and "was
employed in the year in connection with the selling of property
or negotiating of contracts for the taxpayer's employer
..." and was required to pay his own expenses, was
ordinarily required to carry on the duties of employment away
from the employer's place of business and was remunerated by
commissions fixed by reference to the volume of sales made or the
contracts negotiated. Such an employee is entitled to deduct
amounts expended by him for "the purpose of earning the income
from the employment not exceeding the commissions ...
received by the taxpayer in the year". Two points must be
made. First, no other paragraph in subsection 8(1) provides for
as wide a range of deductions and, second, there is a marked
similarity between paragraph 8(1)(f) which permits the
deduction of expenditures reasonably related to the production of
employment income and subsection 18(1) of the Act which
makes the same provision with respect to the production of income
from a business.
[15] In support of the Appellant's
position, counsel made reference to what he described as the
"modern approach to the deduction principle" with
respect to paragraph 18(1)(a) of the Act which was
considered by the Supreme Court of Canada in Symes. In
that case, Iacobucci J. stated:
... In considering the extent to which a purpose test is
appropriate, I wish to make note of the decision of Wilson J. in
Mattabi Mines Ltd. v. Ontario(Minister of
Revenue). Therein, Wilson J. considered a taxation provision
substantially similar to section 18(1)(a), she examined
the jurisprudence on section 18(1)(a), and she came to the
following conclusion:
The only thing that matters is that the expenditures were a
legitimate expense made in the ordinary course of business with
the intention that the company could generate the taxable income
sometime in the
future.
[Emphasis added]
and later added:
Upon reflection, therefore, no test has been proposed which
improves upon or which substantially modifies a test derived
directly from the language of s. 18(1)(a). The
analytical trail leads back to its source, and I simply ask the
following: did the appellant incur child care expenses for the
purpose of gaining or producing income from a business?
[Emphasis added]
There is no logical reason why this approach cannot be
considered with respect to paragraph 8(1)(f). Although
viewed in isolation, an expenditure for veterinary fees or for
the transportation of a racehorse might not appear to be a
permissible deduction under section 8 of the Act, the fact
is that paragraph 8(1)(f) was specifically enacted for the
purposes of commission employees, the clear intent of which was
to provide a realistically broader scope for deductibility
similar to that which exists for business expenses in section 18
of the Act. The question that was considered in
Symes may appropriately be asked with respect to the
provisions of paragraph 8(1)(f), i.e. did the Appellant
incur the expenses in issue for the purpose of gaining or
producing commission income in the ordinary course of his
employment?
[16] Counsel for the Respondent referred to
the Appellant's concession that a personal interest existed
in his thoroughbred activities and suggested that he would have
been involved to the same extent even if it had a marginal impact
in developing and increasing his client base. Counsel also
submitted that no direct link had been established between the
activity and the commissions earned in the years in issue. With
respect to the first point, the Appellant agreed but also noted
that he would not have gone "to the extent to which I have",
and that, particularly with respect to the owning of horses and
the entering into various syndicates he would not have done that.
The existence of a personal interest in similar circumstances was
considered by Rip J. in Matt Harris & Son Ltd. v.
Canada.[10] In that case, the Appellant operated a wood
contracting and construction business and for that purpose,
incurred a substantial portion of its advertising expenses in
relation to stock car and snowmobile racing. It owned both a
stock car and a snowmobile, both driven by Harris, the
Appellant's sole shareholder and president. Racing expenses
less prize money were claimed in the taxation years in issue and
were denied by the Minister on the basis that they were personal
and too remote from the business. In Harris, reference was
also made to the decisions in Ace Salvage Alberta Ltd. v.
M.N.R.[11] and H.J. O'Connell, supra, in
respect of which Rip J. stated:
51 A business may
opt to advertise an activity in which its owner (or principal
shareholder of the corporation owning the business) has a keen
interest or a degree of personal satisfaction. There is no reason
why the expense of a particular form of advertising should be
disallowed by the fisc solely because of the owner's
interest, satisfaction or, as in the appeal at bar, participation
in the advertising or remoteness from its business. The fact that
an owner of a business (or a director of a corporation) may
experience a vicarious satisfaction from the form of
advertisement does not necessarily lead to the conclusion that
the cost of the advertisement should be disallowed. If the
expense of the advertisement, whatever it is, is incurred by the
taxpayer for the purpose of gaining or producing income from its
business and the expense is reasonable in the circumstances, the
expense ought to be deductible in computing income. This is
what the Act dictates.
[Emphasis added]
Rip J. also observed that these cases:
... were based in no small degree on a finding that the
expense was too remote from the business. The concept of
remoteness is nowhere found in the Act. Any
outlay or expense, to qualify as a deduction in computing income,
must be made or incurred for the purpose of gaining or producing
income from the business. The outlay or expense, of course, must
be reasonable in the circumstances.
[Emphasis added]
I appreciate that Rip J. was dealing with the provisions of
paragraph 18(1)(a) of the Act, but I see no
reason to apply a different standard with respect to the
provisions of paragraph 8(1)(f).
[17] There is another reason why the
Respondent's reliance on the O'Connell decision is
somewhat misplaced. The expenses in that case were found to have
been incurred for the "purpose" of producing income
from a farming operation which included ownership of the farm
land on which that Appellant raised prize cattle, show and
racehorses and "for no other purpose". The Board member
specifically noted that there was virtually no evidence as to the
extent "advertising, and its many and diversified forms,
will bring results" and that it was "farfetched to use
a farming operation, an expensive asset, as a means of
advertising". This contrasts sharply with the
Appellant's testimony that a substantial number of his
clients had been attracted through the racing activities, many of
whom were established to be more than casual players in the
market. Of his total 1996 customer base of 400-500,
approximately 100 had become and remained clients as a result of
contacts made through his involvement in racing.[12] When asked how much of
his 1996 commission income of some $1,082,000 was reasonably
related to his thoroughbred activities, he estimated that it
would "be plus or minus 50%, that sort of thing? I would
guess so, and it may be a fair bit more. It would depend on, you
know, how many small company issues I did and the mix of the
commission business at that time". On the whole, the
Appellant's testimony establishes that there was a direct
relationship between the commission income earned in that
taxation year and his thoroughbred involvement. Furthermore, the
Appellant has not denied that he has a personal interest in
horseracing, but the evidence also supports his assertion that
the primary purpose behind his continuation of these activities
was for the purpose of earning income from his employment.
[18] The Respondent also contends that the
losses in issue were properly restricted in accordance with
section 31 because the expenditures were related to farming which
is defined as "... maintaining of horses for
racing". Thus if the activity is one described in the
definition, it means that an individual may not treat it as
anything other than "farming" even though the evidence
clearly establishes that it was primarily intended to be and, in
this case, was a direct means of access to potential investors
for the purpose of earning commission income.
[19] Counsel for the Respondent referred to
the fact that the Appellant previously claimed farm losses which
were denied and thus, he was precluded from claiming such losses
under any other head.[13]In that earlier case, Bowman J. observed that the
Appellant did not have counsel and that the evidence tendered in
respect of many of the six or seven issues was insufficient to
enable the Court to rule in his favour. In dismissing the appeal
related to farming losses, he stated:
For the 1980, 1981 and 1983 taxation years, the Appellant
suffered farming losses of $24,161.00, $39,451.38 and $22,923.51.
These losses evidently arose from the Appellant's purchase of
racing horses or interest therein and his interest in a vineyard
in California. He did not own a farm. The Minister restricted his
deductible losses in those years to $5,000 under section 31 of
the Income Tax Act on the basis that his chief source of
income was neither farming nor a combination of farming and some
other source. The Appellant did not seriously suggest - nor could
he - that his chief source of income was farming or a combination
of farming and some other source, but argued that the farming
losses were in essence a form of expense of his business as
security salesman in that it was a way of meeting customers. It
was not established that his investment in horses or a vineyard
had any significant connection with his securities business and,
in any event, Section 31 of the Income Tax Act on the
facts clearly applies. Neither farming nor farming and another
source of income was his chief source of income. The application
of Section 31 of the Act is not suspended merely because
his main objective may, through the contacts which he hoped to
make by his investment in horses, have been to attract
customers.
Given the absence of a transcript of the evidence or of a
summary thereof, it is not possible to determine the nature
and/or the amount of expenses in issue and, although it appears
that the Appellant had raised the issue in a general way, whether
the issue of deductibility pursuant to paragraph 8(1)(f)
was specifically canvassed. Furthermore, as contrasted to the
present appeals, the Appellant had not established any
significant connection between his thoroughbred involvement and
his securities business. It should also be noted that in the
course of his testimony, the Appellant was asked why he listed
the expenses in issue in his return in the line captioned
"alimony or maintenance paid" to which he added
"thoroughbred expense". He responded "I was told
by Judge Bowman at a previous tax hearing that - - when I
explained the nature of the thoroughbred activity that I should
not file it under "farming", and "that it should
not be included under farming, as my contention was that it was a
business expense". So "I chose that as the blank spot
which could be used for the purpose". I do not share the
Respondent's concern regarding the manner in which the
Appellant chose to show that the expenses in issue were not
related to a farming operation. I should also note that it was
brought to my attention that this Judgment was appealed to the
Federal Court, Trial Division and prior to trial, a settlement
was reached. Counsel for the Appellant submitted that neither the
decision nor the settlement should be considered in these
appeals. While I am not prepared to do so entirely, the brief
decision and the absence of a summary of the facts in respect of
which it was given provides little assistance to either party in
the present appeals.
[20] I have concluded that the appeals
should be allowed on the basis that expenses were incurred by the
Appellant for the purpose of earning the income from his
employment. I am not, however, prepared to accept the amounts
claimed in the three years in issue. I make specific reference to
the Appellant's Exhibit A-3, a handwritten list of
the expenses and income related to the horseracing activities in
respect of which I understood him to say that at least several of
the items in the income column related to the disposition of a
racehorse. With respect to the expense column, these, he
testified, reflected "training fees, association
memberships, boarding bills, entry fees, etc". I note,
however, that there are several fairly substantial amounts which
may reflect the cost of his portion of a syndicate purchase or a
purchase by him directly of a racehorse. If this is so, I must
note my concern with respect to the inclusion of such amounts
since subparagraph 8(1)(f)(v) does not permit the
deduction of outlays, losses or replacements of capital or
payments on account of capital, except as described in paragraph
(j). Paragraph (j) has no relevance to the present
appeals. Although counsel for the Appellant, in the course of his
submission, indicated that the amount of the expenses was not in
issue, Respondent's counsel noted that while there had been some
substantiation of the 1996 expenses, the amounts in issue have
not been audited by the Minister nor had the amount of farming
losses been audited with respect to 1997 and 1998. Counsel for
the Appellant conceded that was the case and proposed that if the
appeals are allowed on the principle that the certain expenses
related to the thoroughbred activities are deductible under
paragraph 8(1)(f), the matter be referred back to the
Minister for reconsideration and reassessment on that basis. Both
counsel agreed to this procedure subject to the understanding
that if the parties cannot agree on the mechanism, the matter
will be brought back before the Court.
[21] One further matter needs to be dealt
with. The Respondent also disallowed certain amounts in the
computation of the Appellant's business income. The parties
advised the Court that a settlement has been reached and that
with respect to the 1997 and 1998 taxation years, the amounts
allowable as expenses are agreed to be $4,135 and $6,247,
respectively.
[22] The appeals are allowed and referred
back to the Minister for reconsideration and reassessment, with
costs to the Appellant.
Signed at Ottawa, Canada, this 22nd day of April, 2005.
Sarchuk J.
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