Watkins v. The Queen, 90 DTC 6432, [1990] 2 CTC 205 (FCTD)

McNair, J.:—This action is an appeal by the plaintiff from the Minister's reassessment of her income for the 1982 taxation year, whereby she was assessed for a taxable capital gain of $11,850 attributable to the sale of her standardbred racing horse, "JR's Bandit”.

At issue is the Minister’s allowance of only $1,000 as the adjusted cost base of the horse, characterized as personal-use property, and his rejection of the plaintiff's claim for adding to such adjusted cost base her expenses of maintaining the horse incurred during the years 1979, 1980, 1981 and 1982. These expenses included the costs of boarding and training, veterinary services, shoeing, stake payments, trucking and the like, and totalled $13,599. The defendant makes reference to these expenses in paragraph 4(e) of the defence and gives a specific breakdown thereof, but alleges that they were personal or living expenses incurred in respect of personal-use property. Paragraph 7 of the defence goes on to make the following specific denial:

7. The Defendant further submits the Plaintiff was not entitled to add amounts referred to in paragraph 4(e) herein to the adjusted cost base of the personal use property as those amounts were personal or living expenses of the Plaintiff.

The facts can be summarized briefly. The plaintiff is a school teacher by profession who resides with her husband at Tumble Wind Farms near Shub- enacadie, Nova Scotia. In 1978 she took up the hobby farm business of breeding and raising standardbred racing horses. Her husband has been engaged for thirty years in the business of training, boarding and driving standardbred horses.

On November 2, 1982 the plaintiff sold JR's Bandit in Massachusetts for $20,000 (U.S.), the proceeds of disposition in equivalent Canadian currency being $24,700. In her 1982 income tax return, the plaintiff included the amount of $24,700 in farming income and claimed offsetting expenses equal to the total farming income declared. Forming part of these expenses were disallowed farming losses for the 1978, 1979 and 1980 taxation years amounting to $11,717.

By notice of reassessment dated April 30, 1985, the Minister assessed a taxable capital gain of $11,850 to the plaintiff on the basis that:

(a) JR’s Bandit was personal-use property of the plaintiff;

(b) the adjusted cost base of such personal-use property was $1,000;

(c) in 1982 the plaintiff disposed of JR's Bandit for proceeds of disposition of $24,700; and

(d) in so doing the plaintiff realized a capital gain of $23,700, of which $11,850 represented a taxable capital gain.

In a notice of objection dated May 24, 1985, the plaintiff objected to the adjusted cost base of $1,000, contending that "the A.C.B. of this horse was at least equal to the Sale Price”. However, by notice of confirmation dated July 12, 1985 the Minister confirmed the reassessment for the following reasons:

The taxable capital gain realized from the disposition of the horse known as JR's Bandit has been properly determined and taken into account in computing the taxpayer's income in accordance with the provisions of sections 3, 53 and 54, and paragraphs 38(a), 39(1)(a) and 40(1)(a) of the Act.

As indicated, the plaintiff takes the position that the adjusted cost base of JR's Bandit should include all of the expenses which she incurred in maintaining the horse from the time of his foaling in April of 1979 until the time of sale in November of 1982. It is the defendant's position that the adjusted cost base of JR's Bandit is correctly determined to be in the sum of $1,000 in as much as the horse was personal-use property as defined by paragraph 54(f) of the Income Tax Act, that is, property owned by the taxpayer that was “used primarily for [her] personal use or enjoyment".

By way of background, I should note that the matter of the maintenance expenses of the plaintiff's horse in earlier years had been previously addressed by the Tax Review Board. In his 1983 judgment dismissing the plaintiff's appeal with respect to expenses claimed for the 1978, 1979 and 1980 taxation years, Mr. St.-Onge (now the Honourable Judge St.-Onge of the Tax Court of Canada) confirmed, without written reasons, the Minister's disallowance of these expenses on the basis that the plaintiff did not have a reasonable expectation of profit from her horse farming activity and that any expenses incurred were personal or living expenses within the meaning of subsection 248(1) of the Income Tax Act and thus were not deductible from other income in accordance with paragraph 18(1)(h). Expenses claimed by the plaintiff in her 1981 taxation year were similarly disallowed, and the plaintiff filed no notice of objection for that year. Defendant's counsel, if I apprehend her argument correctly, would have me conclude from the plaintiff's apparent acceptance of the determination of her expenses as personal or living expenses that she cannot now argue that those same expenses could be added to the adjusted cost base of JR's Bandit. I am not at all convinced that any such conclusion can be drawn. In any event, I propose to dispose of the case on the basis on which it was pleaded and argued, namely, the proper determination of the adjusted cost base of the plaintiff's standardbred gelding, JR’s Bandit.

Subparagraph 40(1)(a)(i) of the Income Tax Act states the following general rule for the realization of a capital gain:

40.(1) Except as otherwise expressly provided in this Part

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, . . .

Nowhere does the plaintiff challenge the Minister's assumption that JR's Bandit was personal-use property. Indeed, paragraph 4(a) of the plaintiff's statement of claim would seem to admit this fact, by pleading the following allegation:

(a) the Minister has erred in his decision by failing to properly apply the provisions of Section 46(1) of the Income Tax Act;

Consequently, I have no reason to question the correctness of the Minister's characterization of JR’s Bandit as personal-use property within the meaning of paragraph 54(4) of the Act, and find accordingly. The special tax scheme provided by subsection 46(1) of the Act applies in the present case, which reads:

46.(1) Where a taxpayer has disposed of any personal-use property of the taxpayer, for the purposes of this subdivision

(a) the adjusted cost base to him of the property immediately before the disposition shall be deemed to be the greater of $1,000 and the amount otherwise determined to be its adjusted cost base to him at that time; and

(b) his proceeds of disposition of the property shall be deemed to be the greater of $1,000 and his proceeds of disposition of the property otherwise determined.

According to paragraph 54(h), the term "proceeds of disposition” includes the sale price of property which has been sold. There appears to be no dispute in the present case that, by virtue of paragraph 46(1)(b), the proceeds of disposition must be deemed to be represented by the greater sum of $24,700, being the sale price of JR's Bandit.

The only contentious issue, as it seems to me, is whether the Minister erred in limiting the adjusted cost base of JR’s Bandit to $1,000 pursuant to paragraph 46(1)(a), and in rejecting the plaintiff's claim for expenses incurred in keeping and maintaining the horse until his sale in November of 1982.

Subparagraph 54(a)(ii) provides the following definition of "adjusted cost base” of property, other than depreciable property, and reads:

54. In this subdivision,

(a) "adjusted cost base” to a taxpayer of any property at any time means, except as otherwise provided,

(ii) in any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53, . . .

Section 53 of the Act sets out by elaborate formulae the ways and means, and what must be added and taken away, in computing the adjusted cost base of a taxpayer's property, none of which apply in the present case. Thus, the question becomes simply this: What was the "cost to the taxpayer" of JR's Bandit?

In The Queen v. Stirling, [1985] 1 F.C. 342; [1985] 1 C.T.C. 275; 85 D.T.C. 5199 (F.C.A.), Pratte, J.A., rendering the judgment of the court from the bench, gave the following lucid and penetrating interpretation of the word "cost" in relation to the computation of capital gains (page 276 ((D.T.C. 5200)):

The only issue on this appeal is whether the Trial Division was right in holding that, in computing his capital gain from the disposition of gold bullion, the respondent could deduct, as part of his cost, interest on the unpaid portion of the price of the bullion and safe keeping charges that he had incurred in respect of the period during which he had held the bullion.

In deciding that those interest and charges could be deducted, the learned trial judge did not rely on any provision of the Income Tax Act but rather on what, in his view, would have been the intention of Parliament had it given consideration to that question. We cannot agree with that approach.

In trying to support that judgment, counsel for the respondent argued in substance that capital gain should be computed according to the same rules as income from a business or property. That argument, while attractive, does not find any support in the Income Tax Act which provides special rules for the computation of capital gain. Under those rules, as they are found in subparagraph 40(1)(c)(i) [sic] and section 54, the interest and safe keeping charges here in question could be deductible only if they were part of the cost of the bullion. In our opinion, they were not. As we understand it, the word “cost” in those sections means the price that the taxpayer gave up in order to get the asset; it does not include any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards.

[Emphasis added.]

On the evidence, the only price I see which the plaintiff gave up in order to get JR's Bandit was the stud fee of $1,000 paid for having the horse's dam bred to the stallion, Tarport Ervin. In the letter of February 18, 1985 from Town & Country Bookkeeping Service Ltd. to Revenue Canada, Taxation challenging the proposed reassessment for the 1982 taxation year, there is reference to "the cost of boarding, trucking, vet etc., on top of this”. However, none of these costs were specifically itemized. I am therefore bound to conclude that the stud fee of $1,000 was the only price the plaintiff gave up in order to obtain her standardbred horse. In my view, the expenses she incurred in keeping and maintaining JR's Bandit during the years 1979, 1980, 1981 and 1982, on the authority of the Stirling case, clearly are not part of the cost to her of that personal-use asset. I conclude therefore that the plaintiff has failed to meet the burden of proving that the Minister's assessment was erroneous.

In the result, the plaintiff's appeal must be dismissed with costs, if demanded.

Appeal dismissed.