|
Citation: 2003TCC152
|
|
Date: 20030321
|
|
Dockets: 2002-3672(IT)I
2002-3673(IT)I
|
|
BETWEEN:
|
|
CHARLES JOHNSON,
DAROL N. JOHNSON,
|
|
Appellants,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] The appeals were heard on March 4,
2003 in Edmonton, Alberta on common evidence.
[2] The Appellant, Charles Johnson
("Charles") testified that he has been active in
thoroughbred horse racing for a number of years.
[3] In 1982 Charles purchased a
thoroughbred racehorse in a claiming race.
[4] In 1984-85 each of the Appellants
owned a one-quarter per cent interest in a racehorse and two
other individuals owned the remaining 50% interest in the
racehorse.
[5] In 1986 each of the Appellants
acquired a 50% interest in a racehorse by the name of "Gold
Too". Gold Too ran in a number of races over the years.
Gold Too gave birth to the following:
|
Date
|
Name
|
Sex
|
|
1996
|
Golden Starlette
|
Female
|
|
1998
|
Golden Mist
|
Female
|
|
1999
|
Native Navigator
|
Male (Gelding)
|
[6] Charles said that the horse racing
activity is operated as a partnership by Cee and Dee Holding Co.
(the "Partnership") with his son Darol Johnson. Each
partner holds a 50% interest in the Partnership.
[7] Charles said that the horse racing
activity may be summarized as follows:
(a) Gold Too ran in a number of
races over the years and was disposed of in 1999;
(b) Golden Starlette's first race
was in September 2000. However she developed a knee problem and
was unable to compete in any other race;
(c) Golden Mist's first race was
in 2001; and
(d) Native Navigator's first race
was in 2002.
[8] Each of the above horses won money
at various races. However, in most cases the purses were not that
large. Charles said that the Partnership no longer owns a
racehorse. Charles also said that unless he and his son are
allowed to deduct their losses they will not own race horses in
the future.
[9] From 1987 to 2000 the Appellants
reported the following income or losses from the horse racing
activity:
|
Taxation Year
|
Income
from horse racing
|
Charles Johnson
|
Darol Johnson
|
|
1987
|
($3,226)
|
($1,613)
|
($1,613)
|
|
1988
|
($5,720)
|
($2,860)
|
($2,860)
|
|
1989
|
$1,184
|
$ 592
|
$ 592
|
|
1990
|
($3,050)
|
($1,525)
|
($1,525)
|
|
1991
|
($13,262)
|
($6,631)
|
($6,631)
|
|
1992
|
($7,508)
|
($3,754)
|
($3,754)
|
|
1993
|
($6,562)
|
($3,281)
|
($3,281)
|
|
1994
|
($6,138)
|
($3,069)
|
($3,069)
|
|
1995
|
($4,996)
|
($2,498)
|
($2,498)
|
|
1996
|
($10,682)
|
($5,341)
|
($5,341)
|
|
1997
|
($10,258)
|
($5,129)
|
($5,129)
|
|
1998
|
($8,956)
|
($4,478)
|
($4,478)
|
|
1999
|
($20,684)
|
($10,342)
|
($10,342)
|
|
2000
|
($18,349)
|
($ 9,175)
|
($ 9,175)
|
|
|
($118,207)
|
($59,104)
|
($59,104)
|
(Note: Total losses suffered over the years amounted to
$119,391 and income received in 1989 was $1,184.)
[10] The Partnership does not own a farm
where the horses are boarded in a stable.
[11] The Partnership does not have any
capital invested in equipment or buildings other than a Dodge
Caravan.
[12] The Partnership does not train the
horses but trainers are hired.
[13] The Minister of National Revenue (the
"Minister") did not reassess the income tax returns of
either of the Appellants for the 1987 - 1998 taxation years.
[14] By Notices of Reassessment dated the
7th day of March 2002 the Minister reassessed the Appellants'
1999 and 2000 taxation years to disallow the following
losses:
|
|
Charles Johnson
|
Darol Johnson
|
|
1999
|
$10,342
|
$10,342
|
|
2000
|
$ 9,175
|
$ 9,175
|
B. ISSUE
[15] The issue is whether each of the
Appellants should be entitled to claim the losses suffered from
the horse racing activity in determining their income for the
1999 and 2000 taxation years.
C. ANALYSIS
[16] In order to determine whether the horse
racing activity constituted a source of income for the Appellants
I have reviewed the decision of the Supreme Court of Canada in
Moldowan v. The Queen, 77 DTC 5213. In that case Dickson
J. (as he then was) referred to the definition of
"farming" in section 139(1)(p) of the Income
Tax Act and said at page 5215:
In maintaining horses for racing, the appellant was
"farming" for the purposes of the Act.
Mr. Justice Dickson said at page 5216:
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 carried 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 carried 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.
[17] I also refer to a recent unreported
decision of the Federal Court of Appeal in Clarita Jarquio v.
The Queen. In that case Mr. Justice Sexton, speaking for the
Court, said at page 3:
... In Stewart v. Canada, 2002 DTC 6969 the Supreme
Court modified the test set out in Moldowan v. The Queen
[1978] 1 S.C.R. 480. In Stewart the Supreme Court said at
paragraph 60:
In summary the issue of whether or not the taxpayer has a
source of income is to be determined by looking at the
commerciality of the activity in question. Where the activity
could be classified as a personal pursuit, then it must be
determined whether or not the activity is being carried on in a
sufficiently commercial manner to constitute a source of
income.
[7] The Court, in
Stewart, held that in determining whether there was a
sufficient degree of commerciality in situations where a personal
element is involved, the Court can take into account the factors
set out in Moldowan such as profit and loss experience in
past years, the taxpayer's training, the taxpayer's
intended course of action, the capabilities of the venture to
show a profit, and the reasonable expectation of profit.
[8] The Tax Court
judge found that the Applicant derived personal benefit from the
ownership of the property by having her family live on the
premises with her. The evidence supports this conclusion.
[9] It was therefore
proper for him to consider then, whether the Applicant had a
reasonable expectation of profit, along with other factors
mentioned in Moldowan. ...
[18] Charles testified that he has always
been interested in attending horse races as a hobby even before
he purchased his first racehorse in 1982. Charles said that his
son Darol frequently attends horse races. This interest in horse
racing would meet the test of a personal element or hobby.
[19] I will now examine the other tests as
outlined in Moldowan.
A. Profit and Loss Expenses
in Past Years
As
noted above, the Appellants suffered a loss in each year from
1987 to 2000 except for the year 1989 where they each realized a
profit of $592. From 1987 to 2000 each of the Appellants claimed
losses of $59,104 and reported income of $592 in 1989. A
reasonable person would not operate a business where losses were
suffered consistently over 14 years (with the exception of 1989
when a small profit of $592 was realized by each Appellant).
B. The Taxpayers'
Training
Charles
said that he worked in the building supply business for over 27
years and he worked for 13 years with the Department of
Education. There was no evidence presented to indicate that
either taxpayer had any specific training in horse racing or in
horse breeding other than the general knowledge that someone
would acquire over the years.
C. The Taxpayers'
Intended Course of Action
Charles
said that he and his son were attempting to develop a
"winning" stable of racehorses.
Charles said that in his opinion it takes "luck" in
order to succeed in the horse racing activity. In this situation
he said that he and his son were not that lucky. Charles referred
to horse racing and said "At the end of the day horse racing
is a gamble".
D. The Capability of the
Venture to Show a Profit (or reasonable expectation of
profit)
As is
noted above the horse racing activity generated losses of
$119,391 from 1987 to 2000 and income of only $1,184 in 1989. I
am not satisfied from the evidence that was presented to me that
the venture could ever produce a profit.
[20] I have concluded that the Appellants
were pursuing a personal hobby in their horse racing activity and
the activity was not undertaken with a reasonable expectation of
profit.
[21] The appeals for the 1999 and 2000
taxation years are dismissed.
Signed at Vancouver, British Columbia, this 21st day of March
2003.
J.T.C.C.
Email this Content