Date: 19980615
Docket: 96-1065-IT-G
BETWEEN:
LES ENTREPRISES L. CLANCY INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These are appeals from reassessments made by the Minister
of National Revenue (the “Minister”) respecting the
appellant’s 1991, 1992 and 1993 taxation years.
[2] The issue is whether the appellant’s chief source of
income is a combination of farming and some other activity,
namely, the production and sale of a food product, for the
purpose of subsection 31(1) of the Income Tax Act
(the “Act”), which stipulates that where a
taxpayer’s chief source of income is neither farming nor a
combination of farming and some other source of income, his loss
from the farming business is restricted to the amount specified
in that subsection.
[3] The facts of this case are not really in dispute. However,
since their interpretation will determine the outcome of the
appeals, it is important that these facts be stated. The
following facts are set out in paragraphs 1 to 20 of the
Notice of Appeal:
[TRANSLATION]
(1)
Before 1989, Mr. Louis Limoges, the appellant’s
sole shareholder, who had considerable knowledge of racehorses,
carried on a business which involved selling and running
racehorses, entrusting the animals’ care and training to
professionals. In 1988, Mr. Louis Limoges earned
$79,071 in purses through his business operations.
(2)
In 1989, Mr. Limoges decided to restructure his business and
invested in the appellant so that the latter could take over his
inventory of horses.
(3)
On July 1, 1989, the appellant, having legal capacity
similar to that of an individual, acquired at fair market value
the 17 (seventeen) race horses along with the goodwill of
Mr. Limoges’s racehorse selling and running business,
intending to pursue operations on its own.
(4)
In developing its business plan, the appellant structured its
business so as to draw income from two sources, namely:
(i) purses awarded to wining racehorses; and
(ii) racehorse foal sales.
(5)
The appellant carried on its business from 1989 to 1994. Its
operations can be divided in two distinct periods, that is:
(i) the initial phase with breeding mares, colts, fillies and
a stallion, which phase was mainly supervised by
Mr. Henri Côté;
(ii) a subsequent phase under the supervision of
Mr. Raymond Gingras, in which the breeding mares and
the stallion were replaced by finer horses.
(6)
On top of colts and fillies born of breeding mares, the appellant
replaced, purchased and sold colts and fillies for as long as its
business was in operation.
(7)
Since the appellant did not own a farm and had not hired any
staff, it entered into contracts with arm's-length third
parties for services involving the care and training of its
horses, most notably with the trainer Mr. Gingras.
(8)
After a few years, it became obvious that the company’s
potential was not developing as it should and so the appellant
decided to entrust the training of its horses to
Mr. Gingras, to replace its main breeding mares with better
quality mares, to mate these with better stallions and to consult
with Mr. Gingras with a view to updating its business plan
and identifying the better quality horses it should acquire.
(9)
As one of Quebec’s most experienced trainers,
Mr. Gingras was able to ensure the company’s success
in the medium term.
(10)
From 1989 to 1994, the appellant invested the following amounts
to acquire horses, paid the following boarding, care and training
costs and earned the following amounts from horse sales and race
purses:
|
|
1989
(6 months)
|
1990
|
1991
|
1992
|
1993
|
1994
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Investments
|
|
|
|
|
|
|
|
Horse Purchases
|
242,000
|
53,000
|
22,500
|
109,000
|
1,500
|
0
|
|
Expenditures
|
|
|
|
|
|
|
|
Boarding and Training
|
83,877
|
138,505
|
129,133
|
159,297
|
103,323
|
101,938
|
|
Income
|
|
|
|
|
|
|
|
Race Purses:
|
19,624
|
35,972
|
21,888
|
113,280
|
22,608
|
37,123
|
|
Horse Sales:
|
0
|
13,240
|
25,308
|
20,350
|
4,400
|
57,050
|
(11)
Colts “Vitesse de nuit” and “Speedy
Dora”, both born of “Speedy Midnight” earned
substantial purses in 1992 and 1993, thus demonstrating the
potential of the business as carried on with
Mr. Raymond Gingras’s assistance.
(12)
In December 1994, the appellant’s shareholder,
Mr. Limoges, decided to put an end to the company’s
operations and accordingly sold his inventory of horses,
including “Vitesse de nuit”, “Speedy
Dora” and “Speedy Midnight” for a total
consideration of over $35,000.
(13)
By notices of reassessment dated January 2, 1996, which
are being appealed, the Minister of National Revenue determined
that the appellant had carried on its business with a reasonable
expectation of profit over the relevant period and consequently
the appellant’s business of selling and running racehorses
constituted a source of income for it, but it was not the
appellant’s chief source of income, either alone or
combined with some other source.
THE FLAVOUR CRYSTALS BUSINESS
(14)
In 1991, the appellant started up another business involving the
sale of flavour crystals.
(15)
To this end, the appellant made an agreement with a manufacturer
of crystals, with which it had a partnership, for the
distribution and sale, mainly to food wholesalers, on the
appellant's own behalf, of the crystals produced by the
manufacturer.
(16)
The appellant also made an agreement with the said manufacturer
to use the latter’s human resources to do all sales related
work so that the appellant did not hire any staff to sell the
crystals.
(17)
Since the appellant’s business consisted of distributing
and selling manufactured products through a subcontractor, it
made no substantial financial investment in the flavour crystal
sales business.
(18)
From 1991 to 1994, the appellant invested the following amounts,
paid the following subcontract amounts and made the following
flavour crystal sales:
|
|
1991
|
1992
|
1993
|
1994
|
|
|
$
|
$
|
$
|
$
|
|
Investments
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
Expenditures
|
|
|
|
|
|
Supply Costs:
|
320,456
|
338,042
|
234,987
|
217,339
|
|
|
|
|
|
|
|
Subcontracts:
|
28,373
|
13,898
|
6,551
|
7,406
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Crystal Sales:
|
544,649
|
530,235
|
366,908
|
300,174
|
OTHER
(14)
Over the relevant period the appellant did not hire any staff to
carry on its racehorse and flavour crystal businesses as it
subcontracted all work related thereto.
(15)
Over the relevant period the appellant used no stable or
warehouse in carrying on its racehorse and flavour crystal
businesses because the subcontractors handled all physical
aspects of the operations.
[4] With regard to paragraph 10 of the Notice of Appeal
above, counsel for the appellant changed several figures during
the hearing to make them consistent with the final version of the
financial statements, which he did not have in hand when the
Notice of Appeal was written. It is the corrected version that
has been reproduced above. The Respondent had denied this
paragraph in the Reply, referring in so doing to the financial
statements. I therefore now consider this paragraph to have been
admitted.
[5] In its Reply to the Notice of Appeal the respondent admits
the first sentence of paragraph 1, paragraphs 2, 4
to 7, paragraph 11 up to "1993",
paragraphs 14 to 17, paragraph 18 as regards the
years 1991 to 1993, and paragraphs 19 and 20 of the
Notice of Appeal.
[6] The facts on which the Minister based his assessment are
set out in paragraph 17 of the Reply to the Notice of Appeal
(the “Reply”) as follows:
[TRANSLATION]
(a)
The facts admitted above;
(b)
Before 1988, Mr. Louis Limoges carried on a racehorse
business in his own name;
(c)
In 1988, the Minister subjected Mr. Louis Limoges to a
tax audit which resulted in an adjustment of his tax liability
with a view to limiting Mr. Limoges’s eligible losses
from the racehorse business, pursuant to section 31 of the
Income Tax Act;
(d)
Mr. Limoges never made any profit from this business and in
the five (5) years before it ceased operating, namely on
June 30, 1989, Mr. Limoges had incurred operating
losses of about $432,467;
(e)
On January 26, 1989, Mr. Limoges incorporated
2628-6526 Québec Inc., which later became
Les Entreprises L. Clancy Inc.;
(f)
On July 1, 1989, in a rollover pursuant to
subsection 85(1) of the Income Tax Act,
Mr. Limoges turned his horses over to the appellant at their
fair market value in exchange for $214,000 worth of shares in the
appellant’s capital stock.
(g)
In 1990, Pied-Mont Dora Inc., a company controlled by
Mr. Louis Limoges, began dealing in a new product, i.e.
flavour crystals used in preparing food products;
(h)
Starting in 1991, any income from the sale of crystals was
declared by the appellant and not by Pied-Mont Dora Inc.,
even though all activities connected with the operation of this
business were carried on by Pied-Mont Dora Inc.;
(i)
Pied-Mont Dora Inc. is the owner of the trademarks used in
connection with the above-mentioned flavour crystals;
(j)
Net income generated by the appellant’s crystals business
was $185,184, $147,249 and $121,102 for taxation years 1991, 1992
and 1993 respectively;
(k)
Net losses incurred in the racehorse business and claimed by the
appellant were $160,750, $70,522 and $193,229 for taxation years
1991, 1992 and 1993 respectively;
(l)
The appellant deducted the losses suffered in the racehorse
business from the income generated by the sale of crystals;
(m)
The operation of the appellant’s racehorse business from
July 1, 1989 to December 31, 1993 never
generated any profits; rather it generated operating losses of
about $651,195;
(n)
In the years at issue, the appellant’s chief source of
income was neither a farming activity nor a combination of
farming and some other source.
[7] In his Reply the Respondent however added
paragraphs 18 and 19 as follows:
[TRANSLATION]
18. The appellant’s racehorse business was not carried
on with reasonable expectation of profit.
19. Expenses incurred by the appellant in the racehorse
business were personal or living expenses.
[8] Counsel for the appellant filed as Exhibit A-1 a book of
documents with 27 index tabs. Counsel for the respondent
filed as Exhibit I-1 a book of documents having
15 index tabs.
[9] Louis Limoges, the appellant’s sole
shareholder, Constant Cadieux, the appellant’s
financial advisor and in-house accountant since 1989, and
Raymond Gingras, driver and racehorse trainer, all testified
at the request of counsel for the appellant. John Kamio, tax
auditor, testified at the request of counsel for the
respondent.
[10] Mr. Limoges is a businessman. In 1956, after
completing his studies, he started working for the family
business, Pied-Mont Dora Inc. In 1980, he became its
director and sole shareholder. At that time, the company’s
turnover was $300,000. In 1991, it had reached $7,000,000. A new
factory was built. The company had about fifty employees. It
produced jams, spreads and table syrups. It only sold to a few
wholesalers that owned supermarkets.
[11] In 1990, Pied-Mont Dora Inc. tried a few
experiments with flavour crystals and started selling them near
the end of that year. The production of flavour crystals required
at the most two employees. It is this production that was
transferred to the appellant in 1991.
[12] Mr. Limoges has always been interested in horse
racing. He first got involved in the sixties when he owned a
racehorse. He enjoyed going to the racetrack a few times a week.
By 1985 he owned ten horses; a few of them were for racing and
were kept at the racetrack stables and trained by a certain
Yvon Pelchat; others were for breeding and kept at the farm
of a Mr. Henri Côté.
Mr. Limoges’s aim had been all along to produce a
champion. In 1989, he entrusted Mr. Raymond Gingras
with all of his racing and breeding activities.
Mr. Gingras’s farm is located in Sorel. In the years
at issue Mr. Limoges would have gone to the racetrack three
or four times a month. He apparently rarely went to
Mr. Gingras’s farm although he would seem to have
spoken with him by telephone almost every day. In 1994, after
selling his horses to Mr. Gingras, Mr. Limoges apparently
stopped going to the races.
[13] In 1988 and 1989, Mr. Louis Limoges’s
income tax returns and those of the corporations of which he was
the principal shareholder were reviewed by the Minister’s
officers; this led to reassessments. According to
Mr. Cadieux, the in-house accountant,
Mr. Limoges’s business ran into trouble due to
excessively rapid growth which the accounting system wasn’t
able to keep up with. It was this situation that led to
Mr. Cadieux being hired on the advice of the company’s
outside accounting firm.
[14] During the review, the Minister had allowed
Mr. Limoges the amounts of $20,000, $60,000 and $120,000 in
farm losses for the years 1985, 1986 and 1987 respectively, as
may be seen at tab 9 of Exhibit I-1. It is based
on this document that Mr. John Kamio, officer of the
Minister, testified to explain paragraph 17(d) of the
Reply, which states that in the five years before
June 30, 1989, Mr. Limoges suffered total losses
of $432,467 from his racehorse business. Again during the same
review, conducted in 1988 and 1989, the Minister apparently
informed Mr. Limoges that in future he would be subject to
section 31 of the Act and would only be eligible for
a reduced amount of losses. In 1988 he was assessed on this
basis.
[15] On July 1, 1989, the appellant acquired
Mr. Limoges’s inventory of horses as stated in
paragraph 17(f) of the Reply. In 1989 and 1990, the
appellant’s only activity was the racehorse business. It
incurred substantial losses in each of these years. On request,
the appellant received a notice of determination of loss for each
of these years, see tabs 10 and 11 of
Exhibit A-1. These notices indicated no amount of
losses; rather, each of the boxes was marked n/a. Thus, the
“non-capital loss”, “restricted farm
loss” and “farm loss” boxes, among others, are
only marked n/a. These determinations are under appeal according
to information from counsel for the appellant.
[16] In 1991, as pointed out in the Notice of Appeal and the
Reply, the business of selling flavour crystals, first
experimented with by Pied-Mont Dora Inc., was turned over
to the appellant. Mr. Constant Cadieux informed the
Court that it was he who had suggested this plan. The product
being new, the outcome was uncertain. It was better to isolate it
in a corporation separate from the main business. He was also the
one who had advised Mr. Limoges to transfer the racehorse
business to a corporation, i.e. the appellant. Although
paragraphs 17(h) and 17(i) of the Reply seem to
indicate the contrary, the respondent does not dispute the fact
that any income from flavour crystal sales rightfully belong to
the appellant.
[17] Mr. Raymond Gingras began working for his
father, a driver and racehorse trainer at the Blue Bonnets
racetrack, at the age of 13. When he was 24, Raymond
Gingras set up his own business. In 1981, he bought a farm which
he called “Ferme Yana-Moray”. In 1981, he won
the drivers' championship at the Montreal racetrack. He met
Mr. Limoges at the racetrack paddock. He said that in 1989
the race industry began a downslide for reasons having to do with
the way racetracks were run. Caring for and training the
appellant’s horses accounted for 75% of his business's
turnover. He did not have complete control in managing the
horses. He provided advice but also took directions from
Mr. Limoges as regards managing the stable. In 1994, after
he purchased Mr. Limoges’s horses, he disposed of some
of them, bred others and, according to his testimony, managed to
win substantial purses.
Argument and Findings
[18] Counsel for the appellant submitted that farming was the
appellant’s chief activity and that the production of
crystals was a secondary activity, so that the appellant drew its
income from a combination of farming and another source of
income. He argued that according to the criteria developed in the
case law, to determine whether a business undertaking is chiefly
a farming operation, one must look at the amount of capital and
time that is invested as well as the possibility of profit. He
further argued that the amount of capital invested in this case
was almost identical to that invested in the other activity, that
the amount of time invested was greater than in the other
activity, and that, in looking at the possibility of profit, one
must consider the many purses won by the horses while and after
the appellant was in business.
[19] Counsel for the respondent referred to the same case law
criteria and arrived at conclusions contrary to those of his
confrere on each point.
[20] Subsection 31(1) of the Act reads as
follows:
31(1) Loss from farming where chief source of income not
farming — 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 . . .
(Emphasis added.)
[21] The leading case on farm losses remains that of the
Supreme Court of Canada in Moldowan v. The Queen,
[1978] 1 S.C.R. 480. It was recently applied again
by the Federal Court of Appeal in The Queen v.
Andrew Donnelly, 97 DTC 5499, and even more
fully clarified. Both of these cases, just as the present case,
involved racehorses. Yet the appellants were individuals in both
previous cases whereas, in this case, the appellant is a
corporation. I will address the corporate aspect further on. For
the moment, I shall refer to Dickson J.’s analysis in the
Moldowan case. To better understand that analysis, one
should bear in mind that what is now section 31 was then
section 13. I quote from pages 486 to 489:
There has been difference of opinion on whether the word
“combination” in s. 13(1) requires some
“connection” by way of physical relationship or
integration or inter-connection between farming and the
subordinate activity which provides another source of
income. . . .
It is clear that “combination” in s. 13
cannot mean simple addition of two sources of income for any
taxpayer. That would lead to the result that a taxpayer could
combine his farming loss with his most important other source of
income, thereby constituting his chief source. I do not think
s. 13(1) can be properly so construed. Such a construction
would mean that the limitation of the section would never apply
and, in every case, the taxpayer could deduct the full amount of
farming losses.
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 s. 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 carries on farming as a sideline business. Such a taxpayer is
entitled to the deductions spelled out in s. 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 carries 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.
The reference in s. 13(1) to a taxpayer whose source of
income is a combination of farming and some other source of
income is a reference to class (1). It contemplates a man
whose major preoccupation is farming. But it recognizes that such
a man may have other pecuniary interests as well, such as income
from investments, or income from a sideline employment or
business. The section provides that these subsidiary interests
will not place the taxpayer in class (2) and thereby limit
the deductibility of any loss which may be suffered to $5,000.
While a quantum measurement of farming income is relevant, it is
not alone decisive. The test is again both relative and
objective, and one may employ the criteria indicative of
“chief source” to distinguish whether or not the
interest is auxiliary. A man who has farmed all of his life does
not become disentitled to class (1) classification simply
because he comes into an inheritance. On the other hand, a man
who changes occupational direction and commits his energies and
capital to farming as a main expectation of income is not
disentitled to deduct the full impact of start-up
costs.
In the instant case, it is common ground that the appellant
was farming and that his farming constituted a source of income.
There are concurrent findings below that farming was not his
chief source of income. I would not disturb those findings.
Additionally, I do not think it can fairly be said that appellant
was a person whose chief source of income was a combination of
farming and some other source of income in the sense I have
indicated. He devoted considerable effort towards launching new
ventures. Horse-racing consumed only several hours of his day and
that for part of the year only. His commitment of capital was
cautious. The nature of the enterprise is risky. It is difficult
reasonably to plan to devote energies to it principally in the
expectation of a steady living. He suffered constant and
increasing losses with the exception of two years in which minor
profits were made. Although none of the above is alone
determinative, together they suggest only one business venture of
several, with nothing distinguishing in the way of “a chief
source of income.”
[22] As Dickson J. explains in Moldowan (supra),
it is not a matter of adding up sources of income to determine
whether an individual's chief source of income is a
combination of farming and some other source of income because
that would render section 31 of the Act nugatory. It
must be determined whether the farming activity is the chief
source of income, possibly in combination with another source. In
other words, the question is whether the taxpayer carries on
mainly a farming activity.
[23] A person who carries on mainly a farming business is
someone whose major concern is farming, for whom farming
constitutes his way of life. In actual fact, we are dealing in
such a case with a genuine farmer or farming business. A genuine
farming business, like a genuine farmer, is concerned with being
profitable. A farming business may not be profitable some years
or over a number of years. For those years, a genuine farming
business is entitled to deduct all its losses. A genuine farmer
can be identified by the fact that he will generally have been
raised on a farm and/or will have taken courses directly related
to farming and that he devotes himself entirely to farming in the
hope of earning his living therefrom. Should his activity not be
sufficiently profitable, he may augment his farming income
through other economic activities.
[24] Sometimes, people whose major occupational concern is not
farming will be nevertheless be sufficiently interested in
farming and invest enough effort and financial resources for
their farming business to be considered a business for restricted
farm loss purposes. I say may be considered a business for
restricted farm loss purposes because such an operation will only
rarely be classified as a business for the purposes of
sections 3 and 9 and paragraph 18(1)(a) of the
Act. Since it is not the chief work activity, such
business's profitability is not the primary objective and
losses are usually substantial.
[25] The last category consists of farming businesses that are
carried on without regard to standard agricultural practice,
without the knowledge required to carry on farming or without
hiring people qualified in that particular field.
[26] In Donnelly (supra), the Federal Court of
Appeal, speaking through Robertson J.A., again applied
Moldowan, explaining it afresh and adding thereto certain
analysis points developed through case law over the years:
. . . According to Moldowan, the taxpayer must satisfy
two tests in order to succeed. First, he must establish that the
farming operation gave rise to a “reasonable expectation of
profit” and, second, that his “chief source of
income” is farming (the so-called
“full-time” farmer). If the taxpayer is unable to
satisfy the first test no losses are deductible (the
so-called “hobby” farmer). If he satisfies the
first test but not the second then a restricted farm loss of
$5,000 (now ($8,500) is imposed under section 31 of the
Income Tax Act (the so-called
“part-time” farmer). . . .
A determination as to whether farming is a taxpayer’s
chief source of income requires a favourable comparison of that
occupational endeavour with the taxpayer’s other income
source in terms of capital committed, time spent and
profitability, actual or potential. The test is both a
relative and objective one. It is not a pure quantum measurement.
All three factors must be weighed with no one factor being
decisive. Yet there can be no doubt that the profitability
factor poses the greatest obstacle to taxpayers seeking to
persuade the courts that farming is their chief source of income.
This is so because the evidential burden is on taxpayers to
establish that the net income that could reasonably be expected
to be earned from farming is substantial in relation to their
other income source . . . .
There is no question in this case that the taxpayer committed
significant capital investment to the horse-farming activity. As
noted earlier his losses were approaching the $2 million
mark. This factor is in his favour. It is the two remaining
elements of time spent and profitability which are more
problematic for the taxpayer. . . .
. . . the taxpayer acknowledged that he required his
medical income to live off and fund the purchase of new horses
and other aspects of the horse operations . . . .
Any doubt as to whether the taxpayer’s chief source
of income is farming is resolved once consideration is given to
the element of profitability. There is a difference between
the type of evidence the taxpayer must adduce concerning
profitability under section 31 of the Act, as opposed to
that relevant to the reasonable expectation of profit test. In
the latter case the taxpayer need only show that there is or was
an expectation of profit, be it $1 or $1 million. It is well
recognized in tax law that a “reasonable expectation of
profit” is not synonymous with an “expectation of
reasonable profits”. With respect to the section 31
profitability factor, however, quantum is relevant because it
provides a basis on which to compare potential farm income with
that actually received by the taxpayer from the competing
occupation. In other words, we are looking for evidence to
support a finding of reasonable expectation of
“substantial” profits from farming. . . .
As is well known, section 31 of the Act is aimed at
preventing “gentlemen” farmers who enjoy substantial
income from claiming full farming losses: see The Queen v.
Morrissey, supra at 5081-82. More often than not it is
invoked in circumstances where farmers are prepared to carry on
with a blatant indifference toward the losses being incurred. 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.
(Emphasis added.)
[27] The case law seems to leave no doubt that the fact the
appellant is a corporation makes no difference in how the
application criteria developed by the Supreme Court of Canada in
Moldowan are applied. I specifically refer to two
decisions: that of Judge Rip of this Court in Gestion
S.A.P. Inc. v. M.N.R, 94 DTC 1349, at
page 1353, and that of Teitelbaum J. of the Federal Court
Trial Division in Buchanan Forest Products Limited v.
M.N.R., 86 DTC 6282, at page 6292. The same
principles apply.
[28] I shall now analyze the evidence based on the criteria
applied in Donnelly (supra). As regards capital
invested, I accept that such investment was almost identical in
both the farming and industrial activities. However, with respect
to the investment of time, counsel for the appellant argued that
the appellant devoted much more time to the farming activity
since the time of the person who kept and trained the horses
should be taken into account. Counsel for the respondent
maintained that only the time of the director or the actual
employees of the appellant should be taken into account. In my
view this is how the principle should be applied since it is
necessary to determine what is the appellant’s major
concern. It is possible that the director spent a little more of
his time on the farming activity than on the activities related
to the manufacture and sale of the food product in question, but
not significantly more.
[29] As for the farming business’s profitability, this
activity was personally carried on by the appellant’s
director and sole shareholder for several years before it was
turned over to the appellant. The profitability of that activity
since 1985 is accordingly relevant as are also profit figures
since 1989, the year in which the operation was transferred to
the appellant. Referring then to the allegations in
paragraphs 17(d) and 17(k) of the Reply, which
allegations have been proven and were in fact not disputed, one
can readily conclude that it is unreasonable to claim that there
was an expectation of reasonable profit from this activity, which
is the criterion set out in Donnelly (supra).
[30] There was no expectation of reasonable profit from the
appellant’s farming activity. It is even doubtful that
there was a reasonable expectation of profit. However, Parliament
has provided for the possibility of deducting a certain amount of
losses from farming activities which have certain attributes of a
business given the scope and quality of the work done, but with
regard to which there is little concern for profitability since
this is not the primary reason for their being carried on. Based
on the evidence in the instant case, the appellant’s
farming activity falls under this category. The Minister has
therefore properly assessed the appellant, both in fact and in
law.
[31] The appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 15th day of
June 1998.
“Louise Lamarre Proulx”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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