Walters v. The Queen, docket 96-2342-IT-G

Date: 19981028

Docket: 96-2342-IT-G

BETWEEN:

KENNETH C. WALTERS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1] These appeals are from reassessment of the Minister of National Revenue (the "Minister") for the years 1987, 1989, 1990 and 1991, notices of which were dated July 30th, 1993. By the reassessments, the Minister restricted the Appellant's farming losses in accordance with subsection 31(1) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) as amended (the "Act"), to $8,750 in respect of the Appellant's 1989, 1990 and 1991 taxation years and disallowed the loss carry back of $51,640 in respect of the Appellant's 1987 taxation year. The reassessment of the 1990 taxation year is a nil assessment and the appeal in this regard was abandoned at the opening of the trial, consequently that year is relevant only with respect to the loss carry back.

Facts:

[2] Kenneth C. Walters testified that he was a dentist practicing in Langley, British Columbia. He was also involved in horse breeding and the operation of a horse business. He commenced horse farming in 1975. His father had owned a small stable where he worked as a teenager and he also worked at the track. He also worked at a guest ranch, performing work relative to horses and at the Blue Bonnets raceway in Montreal, while he was attending McGill University.

[3] In the year 1975 he owned approximately 1¼-acres off MacDonald Drive, in Vancouver, British Columbia. One-half of the property was used for the business with respect to horses and one-half was used as residential property. He started off his business with two Thoroughbreds, one brood mare and one other. He was also involved in racing itself and in the early years, he won his first race. In 1982, he purchased a property of 12 acres in Langley, British Columbia. This consisted of five acres but was insufficient for his purposes. He looked for another property and purchased 25 acres, of which 85 to 90 percent was used for the horse operation.

[4] While he owned the MacDonald Drive property, it was expanded and they built stalls on the property. They raced a modest stable in the early days. In 1978, they were involved in major races but had an accident with one of their horses.

[5] They started obtaining breeding stock as well. Some of the stock had track wins. In 1980, a horse named "Happy Feet" was their stock mare. She is now 21 years of age and has a yearling and a foal.

[6] It was his position that buyers are anxious to obtain foals from horses that have track winnings. That is why they bought "Happy Feet". It was a major stake winner at the age of three and raced until the age of five. She was then sent to Kentucky to breed but this was unsuccessful. She was brought back to this area and she was raced.

[7] He selected a stallion to suit her. She was a top brood mare. Ninety-five percent of the horses from her foals were winners. One was sold as a show horse. Between 1975 and 1983, the brood mare stock was increased from 20 to 23. During that period, he also increased his involvement in racing by attending seminars. He described his position as being "engrossed in racing".

[8] He described the Langley property as prime agricultural land. A 20-stall barn was installed with moveable partitions. This property was close to Vancouver, it was close to the freeway and it was only 35 minutes from the racetrack to the farm. The purchase price was $310,000 and a picture of the same was included in Exhibit A-1, at Tab 12, which was introduced by consent. This reflected the structure as of 1995.

[9] In 1983, he extended the existing barn, crossed-fenced the property, and installed safety fencing. In the year 1984 or later, they built a 20-stall barn for breeding stock. This allowed the horses to get out of the heat and the rain. It was designed to allow entrance to the building to attend to the horses without going through the paddocks. It also contained a maintenance shed. It is considered to be "one of the nicest farm in the valley." Most of the work was completed by 1991.

[10] The breeding barn included good ventilation, stall frames and was considered to be safe to prevent the horses from escaping and injuring themselves. It contained a spot for hay storage, a waste area, it was away from the barn and there was a tack room. The buildings were kept in immaculate condition.

[11] The witness said that Thoroughbreds required good facilities. One must try to prevent injuries to the horses, to prevent the escape of the horses causing injury to themselves and to persons. The barn also had clay floors to prevent injuries to the horses. It possessed high-tech equipment, including a video camera to allow the foaling to be observed.

[12] The farm also raised 1,500 bails of hay from their premises although it was supplemented from time to time with feed and alfalfa. In the year 1994 the Appellant moved to the farm and used it as his residence since it was less stressful there.

[13] Exhibits A-1 and A-2 were introduced by consent. Exhibit A-1 contained a number of documents relative to the operation in question and Exhibit A-2 was a summary of the profit and loss situation for M & K Stables from 1975 to 1992. Exhibit A-2 also referred to the owner's investment in the business and showed a total investment of $2,512,119 by the Appellant in the farm business. At the present time the farm has four to five brood mares, three to four yearlings and 16 horses being trained at Hastings Park.

[14] The Appellant admitted that the expenses of the farming operation were not covered by its earnings and operating expenses over and above the earnings were paid out of monies earned by the Appellant as a dentist.

[15] He described his daily routine during the years in question. He rose at 3:30 a.m., drove to the farm, (which took about 40 minutes) and checked the horses. Between 9:00 and 9:30 a.m. he left the farm for his office. He worked until 5:00 or 5:15 p.m at the office. He drove one hour to the farm, arriving there at approximately 6:00 p.m. He did the chores, stayed there until 9:00 p.m. and returned home around 10:00 p.m. On weekends, he put in 12 hours per day at the farm and stayed overnight. The Appellant has not taken a holiday since 1986 and the above routine has persisted since 1990. His daughter also helped out on the farm as well as his wife. Both persons worked without pay. His daughter helped train the horses and between 1989 and 1991, his wife did stall work, kept records of vaccinations and the son also helped out. He also had a friend who worked there as well. He said that his wife spent six to seven hours a day at the farm, seven days per week. His trainer was a person by the name of George Cummings.

[16] His general position was that between 1989 and 1991, he spent 50 to 60 hours at the farm, doing farm related work and spent 30 to 35 hours at dentistry. His dentist business is down 58 percent, due in some measure to the area in which he practices. He now has two part-time associates in the dentist business and he spends approximately five hours a day practicing dentistry. He said that between 1989 and 1991 he expected to have a profit of approximately $25,000 to $50,000 per year from the horse operations. This was based partly upon the fact that he was familiar with two or three breeding operations in existence in the area, which at the time were both doing well. He talked to the persons who ran them and they told him that they were doing very well. They were winning races and he felt confident that he could run a profitable operation.

[17] To accomplish this end he intended to obtain a good brood mare and to do research on what stallion to use, although they could not afford to use the top studs. They tried to obtain the son of a top stud and build from there. He fashioned his horse business off of a hockey team. He expected to continually replace some of the older horses with newer ones and at the same time to have the older ones help carry the younger stock. It was his position that the success of horses at the track will carry a lot of the expenses in the operation. He did research on pedigrees and attended sales in order to determine how various stock was performing. He also attended seminars and obtained information with respect to the proper nutrition for the stock.

[18] His system of "claiming" also played an important part in his financial plans. They might have as many as 15 or 16 claimers in the low, medium and high claimer areas. Between 1989 and 1991, he had bred some mares to some outstanding sires.

[19] It was his position that in 1989 the foundation was set to enable him to operate a profitable business. They had the physical plant, nice yearlings, nice two-year olds and he was able to sense that they should be good. In 1989 he had a good knowledge of the business. He was also able to provide some of the medical care for the horses without calling upon the veterinarians and in that way could save some costs.

[20] The Appellant identified the financial statements contained in Exhibit A-1 and indicated that in the year 1991 there were high training fees which might have been reflective partly of the fact that he had sent some of his horses to California during that year. Further, in the year 1992, the racing fees increased dramatically due to the fact that the Appellant's horses were running well. They believed that they were on the right track at this time and their breeder bonuses were very substantial in that year.

[21] It was his position that by the year 1992 they realized a profit of $77,497 because the business had reached a stage where it was finally able to support itself. Further, in the year 1993, there was a profit of $27,401 and in 1994, there was a profit of $20,209. However, in the years 1995 to 1997 losses were sustained again and part of the explanation by the Appellant was that some of their track horses were much older. It was the position of the Appellant that they were in a "retooling phase", they had some nice stock coming up and he believed that the business was coming back. There were a lot of positives.

[22] He also indicated that training expenses are a very high component of the business and that he is attempting to reduce this cost by taking on more of the training himself of his own stock. He is now doing 100 percent of the work but he has a licensed trainer on standby.

[23] The Appellant was questioned with respect to his dentist business. He said that he was involved in what he referred to as "socialized dentistry". His clientele was chiefly composed of social welfare patients, aboriginal patients and business people. However, about approximately 80 percent of his business was involved in looking after people in the community. Some of his clients came through the Salvation Army, through clinics and through the geriatric hospital. All of his clients are wanting in dental care, do not have proper dental equipment such as toothbrushes and are often suffering from gum diseases. He considered himself to be in the general practice of dentistry and does a lot of denture work. He finds that this is less stressful to his person.

[24] He started practicing in 1969 in the month of April in Vancouver. In 1990, he started a practice in Bella as well. He obtained an associate who looked after this practice. This was completed last year.

[25] He also had a clinic in Pemberton, where he worked one day per week. He would work at the clinic until up to 6:00 p.m. and drive back to Vancouver. On November 30, 1998, this practice will be terminated. In the years 1990 and 1991, he possibly put in one day per month at that practice.

[26] He is able to schedule his own days in the office, so that he can get away when it is necessary to look after his horses and in an emergency situation when needed. He was referred to Exhibit A-1 again, which contained a statement of earnings from his dental practice. Tab 7 of Exhibit A-1 contained a statement of earnings for the year 1988 showing a net income of $155,206, with gross professional fees of $626,988. It was the witness' position that at this time, 40 percent of the professional fees were earned by him and 60 percent were attributable to the work of his associates.

[27] In the year 1989 the statement showed a net income of $161,827, with gross professional fees of $705,485. During that year the witness said that they had one associate who worked full time. He attributed 40 to 45 percent of the fees to his work and the rest to the work of his associates. His evidence was that "it appeared to be that way". In the year 1990, for some unknown reason, the dentistry business showed a net loss of $10,370, in spite of the fact that there were gross professional fees of $663,016. At that time there were two full-time dentists working with the Appellant and his position was that 40 percent of the fees were through his work.

[28] In the year 1991 there were gross professional fees of $1,038,435, with net earnings of $212,617. At that time the Appellant used the services of one associate full-time and attributed 50 percent of the professional fees to his work.

[29] He further explained that in 1991 he did a lot of expensive procedures, such as root canal treatments and crowns for aboriginal people, which services were allowable under a government plan. During that period of time there was a high fee structure in place which was acceptable to the government.

[30] In general, the Appellant said that his long term ideal was to spend more time at the farm but he always planned to continue to go to the office. However, he still considers his general practice to be more or less of a hobby.

[31] During cross-examination he indicated that Exhibit A-2, the summary of his losses between 1975 and 1992, was prepared by his accountants. He was not too familiar with it. He did not know the source of the numbers. He assumed that they represented the operating losses from the financial statements. He did indicate that the losses were claimed in the years in question.

[32] The year 1989 was the first year that the Minister attempted to limit his losses. He indicated that he used the proceeds from his earlier property to purchase the present property. Between 1987 and 1991 he had two properties in operation and had to travel to the farm from his office and from his home. He described his daily routine that was in effect between 1989 to 1991, as being the same as now, but indicated that perhaps he arrived at the office a little earlier. When he was at the track or away from the farm the maintenance man would attend to his horses. He would be at the track on a regular basis during the racing season, which commenced in mid-April. At the track the training hours were from 5:30 a.m. to 10:00 a.m. He fed the horses himself after the training was over. During eighty percent of the time he watched the horses run in races. Normally they had at least a couple of horses a week running at the track. Until 1994 no one lived in the house at the farm on a permanent basis. His wife would cover for him when he was unavailable.

[33] He did not change his dental hours during the off-season and his hours were very standard. He worked six to seven hours a day and considered that to be a normal dentist's practice hours. He was carrying on a full dental practice and if some time the patient failed to arrive for an appointment, his scheduling was such that he could leave to go to the farm and look after the dental matter the next day. In the type of dentistry that he practiced, he was assured of his money and did not have to worry about bad debts.

[34] He indicated that Dr. Wan became an associate of his in 1983 and stayed with him for 13 years. The associates are paid a commission. Dr. Wan received 50 percent of the fee. Others are paid 40 percent of the monies actually received. When he gave evidence regarding the amount of work and income earned by himself and his associates, he was relying upon their daybooks, his daybook and the cash books. However, this was still an estimate.

[35] Counsel referred the witness to Exhibit A-1 at Tab 7, particularly the statement of earnings for 1988 and pointed out that in that year, his associates fees would be approximately $117,000. He agreed with the suggestion that his billings would have been equal to those of his associates or a little better. This was different from the 40 percent that he had indicated in his direct testimony.

[36] He was referred further to the statement of earnings for 1989 and indicated that Dr. Wan was associate for the full 12-month period and that Dr. Stuart was an associate for 9 to 10 months full-time. These dentists worked approximately 9:00 to 5:00 each day. Again, when referred to the figures, he agreed with the suggestion that he would have done about 50 percent of the work. In his direct testimony he had said that he would have performed 40 to 45 percent of the work.

[37] With respect to the year 1990 he agreed that he would have done 50 percent of the work and not 40 percent as earlier indicated. In the year 1991, again he said that he would have done about 50 percent of the work.

[38] In the year 1992, during the first part of the year, he did more than 50 percent of the work. In the second part, the transitional period, he would have done more than 50 percent as well. He testified that cost of each operatory (treatment room) would have been about $6,000. With respect to the satellite office in Bella Bella, the equipment was already there. In Pemberton, he put in the equipment himself and invested approximately $25,000 commencing in 1990. He confirmed that the cost of opening up a dental practice at the present time is much greater than that which he incurred initially. With respect to the farm business, he stated that he started using Mr. Cummins as a trainer in 1976 and used him until 1996, but the "claiming" was done by him. He would discuss it with Mr. Cummins.

[39] He was referred again to the year 1989 with respect to the business and indicated that they purchased many horses at great expense and had high training fees as well during that year. Horse sales in the year were low. There was no specific explanation of this.

[40] In 1990, he agreed that he purchased a couple of horses from Kentucky for between $22,000 and $25,000. He was primarily into breeding for racing purposes. When referred to particular aspects of the financial statement such as which horses were purchased, how much was paid for them, what horses were purchased in any one year, he could not be too specific. In the year 1992 there were considerable earnings from racing fees, this was partly explained by the fact that one of his horses, "Overtime Victory", won over $190,000. This was a horse bred by his stables. He still has one horse that he bred that is still running and he is receiving royalties from that horse. Possibly the reason why they had such a great year in 1992 was the fact that there were a considerable number of "claimers" that were bred by his farm.

[41] With respect to "claiming", he said that the claiming aspect relates to approximately 60 percent of the horses in a race. "It is a nice way to make money".

[42] When referred to the years 1995, 1996 and 1997, he could not explain why there were losses in those years. He did admit that he could not have continued with his business without the income from his dental practice. He had no payments on the farm and lands as they were paid off the day of the purchase.

Argument on behalf of the Appellant

[43] Counsel for the Appellant took the position that in the years in issue, from 1989 to 1991, the question to be asked is whether or not, alone or in combination, the income of the Appellant from the farm operation was a chief source of income. There is no argument as to whether or not it was a business with a reasonable expectation of profit because the Minister has accepted that it was, in light of allowing limited losses under the provisions of subsection 31(1) of the Act. During the years in question, the Appellant had as a chief source of income, his farming business.

[44] In Moldowan v. The Queen, 77 DTC 5213 (S.C.C.), the Court said, at pp. 5215-5216:

"The distinguishing features of 'chief source' are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances."

[45] Counsel took the position that the Appellant was a Class (1) farmer, as referred to in that case.[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."

[46] Counsel also referred to the case of Hover v. M.N.R., 93 DTC 98 (T.C.C.), where the Court found that farming was not incidental to the Appellant's chief source of income nor merely a sideline. Counsel's position was that the facts and actual situation in that case were similar to the one at bar. The Court, at page 107, discussed The Queen v. Roney, 91 DTC 5148, at page 5155, where Desjardins, J.A., speaking for the Court, stated:

In light of the evidence before us, I do not think that the respondent was a person whose major preoccupation was farming. He was someone who was testing the water, so to speak. For him, farming was a sideline.

[47] In Hover, the Court said:

"The same cannot be said of Dr. Hover. Farming was for him no sideline nor was he merely testing the water. He had plunged fully and without reservation into the water. As early as 1984, and increasingly thereafter, it was for him a major preoccupation. If Class II farmers are those who carry on farming as a sideline business, as Moldowan and Roney suggest, I cannot conclude that Dr. Hover falls into that category. His commitment of time, capital, energy and dedication to farming precludes such a finding."

[48] It was interesting to note that at page 108 of the Hover case, the Court said:

"In this case the Appellant’s dedication to farming, the time that he spent, although possibly less than that which he was obliged to spend in his dental practice, and his commitment of capital all lead to the conclusion that farming was not a sideline business but rather the central focus of his life. To achieve that end the practice of dentistry was an essential adjunct but one which while not subordinate in terms of the generation of cash was nonetheless subordinated to Dr. Hover’s overall objective. ."

[49] The case went on further to distinguish the statement of Dickson, J. in Moldowan, supra.

[50] Further, in the case of Felicella et al. v. The Queen, 95 DTC 402 (T.C.C.), at page 406, Bowman, J., said as follows:

"... it cannot be said that the Appellants were testing the water. They exclusively and wholeheartedly devoted their time, efforts, capital and talent, to the horse racing operations. The restaurant and investment income allowed them to become 'soaking wet' in the horse racing venture. If anything, the investments and restaurant might be said to be the sideline, notwithstanding that it provided the funds for the horse racing operations. Racing was assuredly not a sideline."

[51] As in the case of Jacobsen v. M.N.R., 97 DTC 358 (T.C.C.), the Appellant's dominant economic concern, as the Appellant in the case at bar, was his farm business. The majority of his working time was devoted to farming. He spent 60 to 65 hours per week on the farm and only 30 to 35 hours per week at his dental practice. He took no holidays but instead worked at his farm. His wife and his daughter worked there. He also employed a trainer. His dental operation contained a flexibility which allowed him to attend to his farm business as his prime concern. He had retained associate dentists in order to free up his time to spend on the farm.

[52] He had invested substantial capital into the farm operation. His horse inventory had increased up to 1991. He had invested about $2.5 million of his own money into the business. The capital was in place to make the operation profitable. As in Jacobsen, supra, the Appellant had put into place the required elements and the foundation to make farming a chief source of income in combination with his employment income for the years in question.

Profitability

[53] There was a substantial increase in his gross income during the years in issue. He was putting into place the basic requirements to create profitability. During the years in question, he had an excellent brood mare, an excellent sire, some of the younger horses which were bred on the farm were coming on and beginning to produce. He also had gained considerable experience in claiming horses and by 1992, it had all come to fruition. He had a plan in place and it worked. In the years 1993 and 1994, it also produced a profit. During the years in question, farming was his dominant concern and his major preoccupation. Clearly, this was not a sideline business. He did not consider it to be a hobby or an auxiliary business.

[54] The facts in this case are much stronger than those in Hover, supra, in that the Appellant here spent more time in the business, invested more capital and there was actual profitability.

[55] The appeal should be allowed with costs and the Minister's assessment varied to allow the full deductions.

Argument on behalf of the Respondent

[56] Counsel agreed that in the present case, the issue was whether or not the farming income was the chief source of income alone, or in conjunction with the other source of income, which was the dental business.

[57] Counsel referred to Moldowan, supra, at page 5216, and said that there need be a change in direction from dentistry to farming. This was not shown in the case at bar. He continued to spend the same amount of time at his dentistry business.

[58] It may be that the Appellant spent more time at the farm between 1983 and 1994 because he lived some distance away from the farm and track and had to travel to the farm and track daily.

[59] Counsel referred to the case of The Queen v. Raymond Morrissey, 89 DTC 5080 (F.C.A.), at page 5084, where the Court stated:

"The Appellant has admitted that the Respondent was farming with a reasonable expectation of profit. That means he was farming as a business and is conclusive that he was not a class 3 farmer. It also implies that farming was a potential source of income and calls for an enquiry whether it was potentially a chief source of income either alone or in combination with another source. In considering s. 31(1), it seems to me that potentiality, rather than actuality, is the question in all cases since the provision applies only where there is a loss in a taxation year. That is not, of course, to say that actual profitability in other years may not be evidence of the potential for profit in years of losses."

[60] Counsel compared the case at bar to the case of The Queen v. Andrew Donnelly, 97 DTC 5499 (F.C.A.) and put forward that in the case at bar, the Appellant continued to practice dentistry at the same level as he had always done, with basically the same hours devoted to the dental practice. If there is no change of direction, it cannot be a chief source of income, according to this argument.

[61] The Appellant could not point to any reason why he did not have a profit in years 1989 to 1991, the years in issue. In 1992 they had substantial horses on their farm, they obtained considerable breeding bonuses as a result of the stock bred on their own farms and they also had considerable success in the claiming business. However, in the years in issue, the Appellant could produce no facts from which he could reasonably expect a substantial profit from farming as compared to the dentistry business.

[62] Counsel indicated that this test of profitability is an onerous test. It is not enough to show that it was the centre of the Appellant's life or that he spent a lot of money on the business, but he must show that there was a reasonable expectation of substantial profits in the years in issue.

[63] It was counsel's contention that Donnelly was decided after Felicella, and Hover, supra, and that if the learned trial judges in those cases had the benefit of the reasoning of Robertson, J.A., in Donnelly, supra, their decisions would have been otherwise. Further, counsel contended that the decision in Donnelly indicates a new direction in the interpretation of Moldowan, supra.

[64] Counsel argued that the appeal should be dismissed with costs and the Minister's assessment confirmed.

[65] In rebuttal, counsel for the Appellant reiterated that there was clearly a change of direction by Dr. Walters and he spent more time on the farming business than the dentistry business during the years in issue.

[66] Substantial is just something measurable. In the case at bar, in the years 1992, 1993 and 1994, evidence showed that the business was profitable. What the taxpayer need show is that there was a reasonable expectation of substantial profitability within a reasonable period of time of the years in issue.

Analysis and Decision

[67] In the case of The Queen v. Andrew Donnelly, supra, it is made clear that there is a distinction between the test to be applied when determining whether farming is a taxpayer's chief source of income and the test to be applied when determining whether or not there is a reasonable expectation of profit. On the basis of the reasoning of Robertson, J.A., one can see the rationale of the Minister in conceding that there may have been a reasonable expectation of profit and yet concluding that farming was not the chief source of income for the Appellant. As Roberston, J.A., pointed out:

"... the legal test for establishing farming as a chief source of income is, on an evidential level, a more onerous one."

[68] The facts in the Donnelly case are remarkably similar to the facts in the case at bar and that case requires the Court to apply careful scrutiny in determining the case at bar. In Donnelly, at the trial level, the learned judge had concluded that there was a change in direction from the taxpayer’s medical practice to the horse farming business. He had further concluded that the taxpayer had committed all of his capital to the horse farming business and that the practice of medicine had become a sideline to the farming business. Further, the Tax Court Judge had concluded that but for setbacks suffered by the taxpayer, the horse breeding operation would have provided the bulk of his income for the taxation years in question. However, in spite of those conclusions, the Tax Court decision was overturned.

[69] In discussing the principles of law involved in a case such as that before this Court, Robertson, J. indicated that in order to make the determination as to whether farming is a taxpayer's chief source of income, there must be:

"a favourable comparison of that occupational endeavour with the taxpayer's other income sources 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: - ..."

[70] There can be no doubt that the Court repeated the cumulative factors that have to be considered in any case where the decision has to be in regard to whether or not farming will be regarded as a sideline business to which the restricted farm losses provisions apply. The Court referred to the line of cases from which those principles flow, including Moldowan, supra. The cumulative factors are capital committed, time spent and profitability.

[71] As in the Donnelly case, this Court is satisfied that there is no question that the taxpayer committed significant capital investment to the horse farming activity. As noted in his evidence, his financial commitment was in the nature of $2,512,119 as of December 31, 1991. But as in Donnelly, the two remaining elements of time spent and profitability are more problematic with the taxpayer in the case at bar.

[72] Counsel for the Appellant argued that there was clear evidence that the Appellant had changed his occupational direction so that the practice of dentistry was really a sideline to his farming endeavour. But the Court is satisfied that the evidence disclosed that the Appellant continued to practice dentistry to about the same extent as he had practiced throughout his career. He stated that six to seven hours a day was a normal dentist's practice. His own evidence, after cross-examination, disclosed that the amounts of income that were produced in the practice of dentistry were substantial throughout. The Court is not satisfied that there was any reduction in the income that he earned from his practice in the years in question, let alone any that would indicate that there was a real change in his life.

[73] Indeed, his own evidence indicated that in the year 1988, net earnings from the dental practice were $155,206 and that about 50 percent of the work was performed by him. In the year 1989, in spite of the fact that he had two associates working with him, his net income from the practicing of dentistry was $161,827 and he would have performed about 50 percent of the work. In the year 1990, his evidence was that there was a net loss of $10,370 from the dental practice in spite of gross earnings of $663,016, but at the same time, his evidence after cross-examination was to the effect that he did about 50 percent of the work. In 1991, the net income from the dental practice was $212,617. He performed about 50 percent of the work. In 1992, he performed more than 50 percent of the work.

[74] It is true that he indicated that his long term ideal was to spend more time at the farm, but he always intended to continue the practice of dentistry and the Court is satisfied that in the years in issue, he certainly had not reduced his dental practice to a hobby, even if that were his future intention.

[75] As in the Donnelly case, supra, the Court is not satisfied here that there was any occupational change in the taxpayer's dental practice. Further, as in Donnelly, the Appellant conceded that he needed his medical income to live off and to fund the farming operation. As in Donnelly, it is difficult for the Court to see how under those circumstances, he could be seen to have changed his occupational direction.

[76] As in Donnelly, there was a significant amount of time and money devoted to the horse farming business, but, "this quantitative factor alone does not accurately reflect the reality of the fact that the taxpayer was financially dependent upon his medical practice and primary income earning occupation." (In the case at bar, his dental practice.)

[77] Another important factor is the test of profitability. Here, the Court must recognize that Donnelly points out that there is a difference between the type of evidence that the taxpayer must adduce concerning profitability under section 31 of the Act, as opposed to that relevant to the reasonable expectation of profit test. That Court said that in the reasonable expectation of profit test, the taxpayer need only show that there was an expectation of profit. He need not show that there was an expectation of reasonable profit. However, with respect to a section 31 profitability factor, the actual quantum is relevant and it provides a basis on which to compare potential farm income with that actually received by the taxpayer from the competing occupation. The Court said, "in other words, we are looking for evidence to support a finding of reasonable expectation of substantial profit" from farming.

[78] In the present case, the taxpayer was asked if he could point to any specific setbacks which gave rise to the loss and he was unable to do so. Even if there were any such explanation, there was no evidence on which the Court could conclude that without those setbacks, the taxpayer would have earned the bulk of his income from farming in the three taxation years in question. Consequently, there was no evidence presented from which the Court could conclude what profit the taxpayer might have earned had those events not occurred and whether the amount would have been considered substantial when compared to his professional income, as one must do.

[79] As in Donnelly, "it was not enough for the taxpayer to claim that he might have earned the profit. He should have provided sufficient evidence to enable the Court to estimate quantitatively what that profit might have been", then the Court could have concluded whether or not the amount would have been considered substantial when compared to his professional income. That is what the Court must do when giving consideration to the element of profitability.

[80] It is true that the evidence of the Appellant was to the effect that the business had indeed showed a profit in the years 1992, 1993 and 1994. But that does not of itself satisfy the profitability test as outlined above.

[81] The financial statement show that the profit in 1992 was $77,497, in 1993, $13,633, and in 1994 it was $5,686. None of these amounts could be considered to be substantial profits from farming compared to the competing income from dentistry.

[82] The Court is satisfied that the cases of Hover v. M.N.R., supra, and Felicella et al. v. The Queen can be distinguished. The Court was satisfied in Hover that the Appellant had subordinated the dental practice to that of farming and that farming had become the central focus of the taxpayers’ life. The Court has not reached such a conclusion in the case at bar.

[83] Further, in Felicella, supra, the Court had no doubt that with respect to time spent, the taxpayers had devoted the bulk of their time to the horse racing operations and had all but abandoned their restaurant business. That was not so here. Further, the learned trial judge was satisfied that the evidence indicated potential profitability. The Court is not so satisfied in the case at bar.

[84] The appeals are dismissed, with costs, and the Minister's assessments are confirmed.

Signed at Ottawa, Canada, this 28th day of October 1998.

"T.E. Margeson"

J.T.C.C.

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