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Citation: 2004TCC691
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Date: 20041015
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Docket: 2001-2546(IT)G
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BETWEEN:
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ROBERT B. CLEMMER,
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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
Woods J.
[1] This appeal concerns the
deductibility of farming losses from a business of racing,
boarding and breeding racehorses. In the 1997 and 1998 taxation
years, the appellant deducted losses totalling $163,891 and
$153,723, respectively. Reassessments were issued applying the
restricted farm loss provisions in section 31 of the Income
Tax Act on the ground that farming was not the
appellant's chief source of income in the relevant years.
[2] In determining chief source of
income for purposes of section 31, courts have consistently
followed the guidelines set out by Mr. Justice Dickson (as he
then was) in Moldowan v. The Queen, 77 D.T.C. 5213
(S.C.C.). He described three categories of farmers that were
envisaged by the Act and stated that the applicable
category should be determined by considering, inter alia,
time spent, capital committed and profitability, actual or
potential. The question in this appeal is whether the appellant
was a category (1) farmer, who expected to earn his livelihood
from farming and whose losses would be fully deductible, or
whether he was a category (2) farmer who farmed as a sideline
business and whose losses would be restricted by section 31.
Facts
[3] The appellant, Robert Clemmer, was
the only witness at the hearing. His testimony was presented in a
straightforward manner and I found him to be credible.
[4] In 1994 at the age of 54, Mr.
Clemmer retired after working for Bell Canada for 37 years. At
the time of his retirement, he was vice president of operations,
a significant step up from his humble start as a mail clerk in
1958. At the time of his retirement, Mr. Clemmer was living in
Mississauga, Ontario.
[5] Neither racehorses nor farming
were a part of Mr. Clemmer's life until a few years before his
retirement. His daughter, Krista, had attended veterinarian
college and had been a groom at Woodbine racetrack in Toronto. In
1990, Krista rescued a racehorse that was about to be put down by
purchasing it with funds provided by her father. That purchase
turned out to be fortuitous not only for the horse but also for
the Clemmers because the horse had some success at the
track. Presumably that success buoyed the family's
enthusiasm and Mr. Clemmer purchased a few more racehorses over
the next few years. At first, Mr. Clemmer simply bankrolled the
operation but over time he became involved with taking care of
the horses and he would travel in his spare time to the
racetracks where the horses were kept. Eventually, Mr. Clemmer
became a registered groom and his daughter became a trainer.
[6] As Mr. Clemmer's involvement
with racehorses gradually increased, he began to consider the
venture from a business perspective. Not having any previous
experience, he tried to become as knowledgeable as he could by
attending seminars, reading and consulting experts. He came to
the view that there was potential in racing at Fort Erie because
a proposal to add gaming there would likely result in increased
purses. What he perhaps did not factor in sufficiently was that
the calibre of the horses, and hence the cost, would similarly
rise.
[7] Shortly after his retirement in
May 1994, Mr. Clemmer leased a farm property near the Fort Erie
racetrack where the horses could be stabled. The property was
purchased a year later. Because the farm was in a
considerable state of disrepair, Mr. Clemmer undertook extensive
renovations and expanded the horse stables, to 24 stalls in
total. Krista Clemmer lived at the farm and shared farm
duties with her father, who initially drove to the farm from
Mississauga on a daily basis. After three years of daily
commuting, Mr. Clemmer and his wife moved to a house in Fort
Erie, separate from the farm.
[8] The business operated under the
name Blu Bye U. What started out as a small venture limited to
racing horses for purse money was expanded over time to related
activities that Mr. Clemmer thought would have greater income
potential - boarding racehorses during the winter months
when the track was closed and breeding horses for sale.
[9] The business was described as a
family affair. Mr. Clemmer's wife had some involvement but it
appears that her role was minor. Krista and her father shared the
work equally, except for periods that Mr. Clemmer was out of the
country on consulting projects. While he was away, Mr. Clemmer
would call home several times a week to deal with farm matters.
In addition to employing his daughter, Mr. Clemmer hired various
other people at the farm and the racetrack on an as needed basis.
Since Krista lived at the farm, she took on greater
responsibilities there, such as the early morning and evening
feeds but this was balanced somewhat by Mr. Clemmer being
responsible for the afternoon feed at the racetrack.
[10] According to the testimony, Mr. Clemmer
put in a regular work day at the farm and racetrack, from about
8:00 until 4:00, and was also be responsible for the
administrative side of the business. He testified that he never
took vacation in the ten years that the farming operation was
carried on and estimated that he was engaged on farming business
of one sort or another for seven hours a day, seven days a week,
during racing season and about five hours a day during the off
season. Overall it appears that the operation was substantial in
terms of man hours required and that Mr. Clemmer was very
actively involved in all aspects.
[11] Notwithstanding Mr. Clemmer's
efforts, the business incurred substantial losses. Mr. Clemmer
explained his general business plan and his efforts to overcome
these losses. He viewed racing as the most speculative of the
three branches of the business. He had some success with racing
in the early years but this did not continue and he did not view
racing as being a source of predictable income. As for boarding,
he managed to trim expenses by a significant amount so that this
activity was helping the bottom line. Nevertheless, the boarding
income seemed relatively small in comparison with the expenses
incurred in the other activities. Consequently, the profitability
of the business depends in a large measure on the breeding
activity. It took Mr. Clemmer a period of years to manage the
expenses in breeding, similar to his experience with boarding.
Mr. Clemmer indicated that his costs were more under control in
years subsequent to the appeal period. For example, he stated
that he would not have suffered losses in 1999 and 2000 if he had
been able to sell two yearlings at market prices. He also
testified that it takes a period of four to five years between
the time a stallion contract is entered into before revenue is
generated by the sale of foals. The breeding business started in
1994 and so it had not really matured in the taxation years under
appeal.
[12] The losses that Mr. Clemmer incurred
amounted to over $800,000 and were financed by his savings, a
bank line of credit, a $180,000 retirement allowance, and
$450,000 in consulting fees. He also had to use part of his
$67,000 pension but this was also used for personal expenses.
Over the life of the business, Mr. Clemmer's net worth plummeted
from $500,000 to about $60,000. In the year 2000, Mr. Clemmer was
left with few financial resources beyond his pension, he was
being audited by the Canada Revenue Agency and his wife died. Not
surprisingly, soon thereafter Mr. Clemmer did not have the
inclination, let alone the means, to continue the business and it
was wound down over the next couple of years. Mr. Clemmer
testified that one more injury to a promising horse in 2000 was
the straw that broke the camel's back.
[13] I now turn to the consulting work that,
together with an annual pension of $67,000, was the major
competing source of income during the 1997 and 1998 taxation
years. In 1996, two years after his retirement, Mr. Clemmer was
approached by a former colleague at Bell Canada to assist on an
international project in India. The project would start in
October and Mr. Clemmer was assured that he would be home for
Christmas. It is not difficult to see why Mr. Clemmer accepted
the assignment. The racetrack was closed during these months and
he badly needed money for the farming operation. The project ran
into unforeseen problems, however, and Mr. Clemmer ended up
staying in India quite a bit longer than anticipated although he
managed to return to Fort Erie for most of the racing
season. In subsequent winters, he accepted additional
assignments in Mexico, Brazil and Venezuela. The Mexican project
also experienced unforeseen difficulties that required Mr.
Clemmer to be away much longer than anticipated. The projects in
Brazil and Venezuela, which took place in years that are not
under appeal, were finished on schedule.
[14] Mr. Clemmer testified that he had no
interest in pursuing the consulting work except as a means to
finance the farming losses. He indicated that the work conditions
in the foreign countries were difficult - the work days were
long, he was away from his family for long periods, and the
locations were not always safe.
[15] The following two charts compare the
farming and consulting businesses from the perspective of time
spent and income earned. It will be noted that the two years
under appeal, 1997 and 1998, were the most active for the
consulting business and also produced the highest farming losses.
In addition, the time chart, which is based on months, does not
reflect the significant difference in work hours which were far
greater in consulting than farming.
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Approximate Months Worked
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Farming
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Consulting
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1994
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6
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1995
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12
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--
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1996
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10
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2
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1997
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6
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6
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1998
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7
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5
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1999
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9
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3
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2000
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9
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3
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Total
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59
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Income/Loss
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Farming
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Consulting
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1994
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($90,117)
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--
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1995
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(74,555)
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--
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1996
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(130,000)
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$39,804
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1997
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(163,891)
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148,775
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1998
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(153,723)
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138,082
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1999
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(137,100)
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107,486
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2000
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( 82,195)
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27,500
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Analysis
[16] The essential question is whether
farming was pursued as a livelihood or as a sideline business.
This will be considered from the perspective of time spent,
capital committed and potential profitability.
[17] As for time spent, Mr. Clemmer was
clearly devoted to the farming operation, working the equivalent
of a regular work day, not taking vacation, and being away from
the farm only to earn consulting fees to support the farming
operation. The Crown submits that the testimony with respect to
time spent was questionable because Mr. Clemmer's daughter
lived at the farm and it was not credible to believe that Mr.
Clemmer would not take a day off now and again. While Mr. Clemmer
presumably did take an occasional day off, I find his testimony
credible with respect to his work routine. There would have been
considerable administrative work involved in managing the racing,
boarding and breeding activities, there were regular daily chores
at the farm, and at the track during racing season, and there
were other tasks such as transporting horses and attending horse
sales.
[18] Although during the taxation years in
question Mr. Clemmer was out of the country for several months on
consulting projects, it is significant that Mr. Clemmer was away
much longer than he had contracted for. He had intended to spend
about nine months a year on farming and three months on the
consulting projects. In effect, the extra months in India and
Mexico were beyond Mr. Clemmer's control and in my opinion do
not significantly impact on whether Mr. Clemmer was looking to
farming as a livelihood. The Crown suggests that since the
consulting work paid handsomely that it is not credible to
believe that Mr. Clemmer would not want to maximize his revenue
from it. I disagree. Mr. Clemmer had moved on from his successful
career at Bell Canada and I can well imagine that these tough
international projects were something that he undertook
reluctantly.
[19] In terms of capital committed, Mr.
Clemmer put almost his entire life savings into the venture. He
could hardly have been more committed. The Crown suggests that
one should not look at the entire $800,000 of losses as capital
committed but instead one should only look at capital
expenditures as that term is used for purposes of the Income
Tax Act. In this case, the majority of the farming expenses
appear to be current expenditures. The Crown's approach seems
unduly restrictive and is not generally accepted in other cases
(for example, The Queen v. Donnelly, 97 D.T.C. 5499
(F.C.A.)). When considering capital committed to the business,
the focus should be on the entire monetary contribution to the
business, not simply expenditures in the nature of capital. There
is no question that Mr. Clemmer made a large financial sacrifice
for this business.
[20] As for profitability, counsel for Mr.
Clemmer suggests that the business likely would have earned
substantial profits if it had not run into a string of bad luck.
Bad luck no doubt played a big part in the outcome. It also
appears that inexperience took its toll in the earlier years as
Mr. Clemmer was learning to bring costs under control, first with
boarding and then with breeding. There is no question that Mr.
Clemmer pursued farming as a serious business venture. From his
testimony it is evident that the bottom line was foremost in his
mind and he was very committed to making the business profitable.
I am satisfied that Mr. Clemmer had a reasonable prospect of
substantial profits if not in the taxation years under appeal,
then in the years immediately following. He had managed to
bring the costs under control and, assuming that not all his
promising horses would collapse just before the finish line or be
injured coming up to the sale block, he presumably was in a good
position to start earning substantial profits. That is how
Mr. Clemmer viewed the situation and in my opinion it was
reasonable.
[21] Counsel for the Crown referred to the
Donnelly case which suggests that statements of subjective
intent with respect to profitability should be viewed with
caution and that a taxpayer should present objective evidence
such as profit projections. Counsel also suggests that it is not
sufficient for the taxpayer to establish potential profitability.
The potential profits have to be substantial relative to the
taxpayer's other sources of income. In the context of this
case, it is suggested that Mr. Clemmer has to establish potential
profits that are substantial relative to both the pension and the
consulting income.
[22] While it would be helpful to have
reliable profit projections, that is not always possible.1 Many people embark on
risky business ventures without them. Mr. Clemmer was an
experienced businessman who committed most of his financial
resources to this business in the belief that it would be a
source of additional income to augment his pension. I do not
think that it would be desirable for a court to second-guess his
business judgment. Reference may be made to the following comment
by Associate Chief Justice Bowman, cited with approval by the
Supreme Court of Canada in Stewart v. The Queen, 2002
D.T.C. 6969:
[The taxpayer] made what might, in retrospect, be seen as an
error in judgment but it was a matter of business judgment and it
was not one so patently unreasonable as to entitle this Court or
the Minister of National Revenue to substitute its or his
judgment for it, or penalize him for having made a judgment call
that, with the benefit of 20-20 hindsight, that Monday morning
quarterbacks always have, I or the Minister might not make today.
...
I would conclude that Mr. Clemmer's potential income from
farming was substantial relative to his other income sources.
After a reasonable start up phase, the business realistically
could have earned profits equivalent to the pension income, if it
had not been the victim of so much bad luck.
[23] In looking at the time, capital and
profitability of the farming operation, I am satisfied that Mr.
Clemmer pursued farming as a livelihood to augment his pension
income and not as a sideline business. In looking at the
circumstances of the consulting business, I am satisfied that it
was an auxiliary business, undertaken for a short period to time
to provide a temporary source of funding for the farming
business. I am also of the opinion that the pension income was an
auxiliary source of passive income that does not detract from
farming being Mr. Clemmer's intended livelihood.
[24] For the above reasons, I would conclude
that farming was Mr. Clemmer's chief source of income in the
relevant period. The appeal is allowed, with costs.
Signed at Ottawa, Canada this 15th day of October, 2004.
Woods J.
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