Hay v. The Queen, docket 97-3550-IT-G

Date: 19991223

Dockets: 97-3550-IT-G; 97-3554-IT-G

BETWEEN:

DALLAS IAN HAY, CATHERINE ROSE HAY,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent

Reasons for Judgment

O'Connor, J.T.C.C.

[1] These appeals were heard on common evidence at Victoria, British Columbia.

[2] Testimony was given by several representatives of Revenue Canada and by the Appellants. Numerous exhibits were filed.

Issues

[3] The issues are whether, for Mr. Hay, in the 1993, 1994 and 1995 taxation years, he is entitled to deduct certain losses from a kennel operation, losses from a farming operation (not 1993) and losses from a taxidermy/writing operation. For Mrs. Hay only the years 1994 and 1995 are in question for losses from the farming operation and only 1995 for the kennel operation.

Facts

[4] The material facts are as follows:

1. In computing income for 1993, 1994 and 1995 Mr. Hay claimed the following amounts as business losses in respect of farming activities (the "Farm Activity"), kennel activities (the "Kennel Activity") and the taxidermy/writing activities (the "Taxidermy/Writing Activity"):

	1993	1994	1995
Kennel Losses	$4,818.	$4,360.	$17,752.03
Farming Losses	-	5,592.	3,140.84
Taxidermy/Writing Losses	19,580.	3,107.	1,055.00*

* Taxidermy only

Mr. Hay subsequently attempted to reduce the loss from the Farming Activity claimed in 1994 to $3,371.35.

2. For Mrs. Hay, the losses claimed for the Kennel Activity were nil in 1994 and $17,752.03 in 1995 and the losses with respect to the Farming Activity were $3,371.35 in 1994 and $3,140.84 in 1995.

3. Mrs. Hay (formerly Cathie Caze) met Mr. Hay in 1993 and they were subsequently married.

4. In July or August, 1994 Mr. and Mrs. Hay purchased a property located at 883 Kangaroo Road in Victoria, British Columbia (the "Property"). The Property consisted of approximately 5 to 6 acres of land, a residence, a barn and a makeshift pen for pigeons. The Property was fenced, had fields for training dogs and an abundant supply of water. Another pen was built in 1995. There were three creeks on the Property and some fruit trees. The animals comprised 30 ducks, 30 pigeons, 15 guinea fowl, 6 goats, some chickens and a horse. The purpose of the horse and the goats was to keep the weeds and grass low and some goats were sold. The Property was in terrible shape and the Appellants spent much time cleaning it up. Further bird pens were built in 1997 and 1998. (See Exhibits A-11-5, A-11-6 and A-11-7. The number of dogs on the Property varied from time to time. In 1999 there were approximately 20, including five to eight females to be kept for breedings and two titled studs. The remainder was to be sold as hunting dogs. Mr. Hay testified that the Property was ideal for the breeding and training of hunting dogs.

The purchase price was $325,000 and the Appellants laid out approximately $15,000 as a down payment and to cover land transfer taxes. The Property was mortgaged to the extent of $312,000. The Appellants have resided on the Property since the time of the purchase and at all material times since the purchase the residence on the Property was their principal residence.

5. In 1994 and 1995 100% of the mortgage interest on the Property, being $11,105, in 1994 and $25,207 in 1995, was claimed as an expense. In 1994 the full $11,105 was allocated to the Farm Activity and in 1995 $5,041.36 was allocated to the Farm Activity and $20,165.78 was allocated to the Kennel Activity.

6. In 1994 and 1995 100% of the utility bills for the Property, being $2,374 for electricity in 1994 and $908 for utilities in 1995 was claimed as a Farm Activity expense.

7. Throughout 1993, 1994 and 1995, Mr. Hay was employed full time by the Department of National Defence. Mr. Hay explained that he was essentially on a contract basis and his employment could be terminated on 30 day notice. During 1994 and 1995 Mrs. Hay was employed as a lab technician for a veterinary hospital. Mr. Hay's employment income was just under $50,000 in each of the years 1993, 1994 and 1995. Mrs. Hay's income was approximately $24,600 in 1994 and $26,300 in 1995. The hours per week devoted by Mr. Hay to the Kennel Activity were 63, to the Farm Activity 18; for Mrs. Hay the hours devoted to those activities, especially the Kennel Activity, were 30. Their employment hours per week were approximately 35 to 40 for Mr. Hay and approximately 32 for Mrs. Hay.

8. In the 1980 to 1986 years Mr. Hay claimed the following income and expenses from both the Farm and Kennel Activities combined:

	Gross Sales	Total Expenses	Net Loss	Restricted Farm Loss
1986	$10,835.00	$18,749.00	(7,914.00)	0.00
1985	$14,214.00	28,974.00	(14,760.00)	10,963.00
1984	4,653.00	42,400.00	(37,747.00)	0.00
1983	1,658.00	10,008.00	(8,350.00)	0.00
1982	2,350.00	9,085.00	(6,735.00)	0.00
1981	85.00	9,364.00	(9,279.00)	0.00
1980	58.00	3,161.00	(3,103.00)	0.00
Totals	$33,853.00	$121,741.00	($87,888.00	$10,963.00

9. The Kennel Activity consisted of breeding Labrador Retrievers, selling some pups from those breedings, training others (including dogs owned by third parties) to be hunters and selling trained hunting dogs. The training process, which was elaborately described by Mr. Hay, and to a certain extent by Mrs. Hay, was extensive. The average time for training a dog would be approximately one to three years. As to revenues from sales and training, the evidence was that a puppy would sell for $500 and trained dogs for $1,200 U.S. to $2,800 U.S. Training for third parties in 1999 would bring in $325 Canadian per month per dog (approximately $300 in the years in question).

10. Approximately 20 dogs trained by the Hays over the years have received 43 titles. Titles are given at different stages as the training of the dog advances. A dog can receive up to five titles but generally a dog with three titles is well trained. Mr. Hay testified that his breeding/training operation was top-class and would be in the top 10 of such facilities in Canada.

11. Mrs. Hay testified as follows:

The other thing is too, is the amount of Labradors that are registered, I think if anybody has checked with CKC, that the Labrador Retriever is the number one selling dog in North America. That is the line that we do produce and we produce them clear of any hereditary defects. We give guarantees and our reputation has built significantly over the last four to five years.

What else can I tell you, other than the popularity of the Labrador and also another, I guess, facet of where these Labradors go is there's the American Kennel Club which produces trials in Washington. There's the United Kennel Club starting up from Washington now moving into Canada and all these are open markets for our product. Not only puppies but trained dogs. And that is also starting just to occur this year, so the market is getting bigger and better. And the demand for people wanting their dogs trained and running into problems and sending them in for training occurred twice as much this year as last year and next year, hopefully, it will be twice as much again.

Mr. Hay testified as follows:

Further to qualify myself, I am a qualified hunt/test judge with the Canadian Kennel Club and empowered to judge up to the maximum level, which is the top level. I am also appointed in the United States with the United Kennel Club, and both those organizations have seen fit to empower me with that responsibility on my knowledge about dogs.

For the UKC I had to write an examination, and be supported by an American club, which I was. So I, when I’m talking about dogs, retrievers working in the field, I’ve been empowered to know what I’m talking about and have proven it.

...

We do not breed dogs under the age of two to generate a profit, until the hips are certified by the Orthopedic Foundation of America, and the eyes are cleared by a certified optomologists, so those dogs are clear of any hereditary defects which may be passed onto the pups. We are responsible breeders. I have been in a breeding program for about 20 years and I have yet, I have yet to have a first dog returned to me for hip displacia or an eye problem. I’m a responsible breeder.

...

This over last three, three and a half years, represents, let me hesitate a guess, 2,000 inquiries into pups, trained dogs, or seeking advice on training matters, or a reputable kennel to go purchase a Labrador Retriever from, which Truline may not have on the ground at that time. Since we are on the topic of the Internet, I would like to submit this to the court, not to impress the court, but to look at the number of hits at the bottom of that page, that Truline Kennel webpage has had received since that date. May I pass that, see if the judge will accept that.

MR. BASRAN: No, Your Honour, I think he can just tell the court how many hits there have been.

A Yes, appreciate it. At the bottom of this page, says this page was last updated as of 09/30/98, this page has been accessed 3,312 times since July 13, 1998. What this and this will prove to the court there is a market out there for the product produced by Truline Kennels. Through evidence yesterday, Revenue Canada has shown that we have the dogs to produce the product, I have now shown we now have the market.

...

Now, I’d like to go into the training aspect of Truline Kennels. We started in 1994. Our kennel and it has not been disproven, has more hunt/test and working certificate titles to its credit than any other kennel in Canada. It has not been discredited. It will be among the top ten at the very least.

HIS HONOUR: Top ten what?

A Kennels for attaining the titles on the dogs. We have 43 field titles on dogs owned by us, or by the kennel, or clients’ dogs. Other professional trainers of retrievers in Canada probably cannot boast that. To protect myself I’ll say, I’ll guarantee we’re in the top ten.

12. In the latter half of 1994 and in 1995 the various dogs, when not outside, were kept in the basement of the Hays' residence. Mr. Hay's testimony, however, was to the effect that the dogs had free run of the entire house and that Mrs. Hay spent an awful lot of time "socializing" the dogs, making them better accustomed to be with human beings.

13. In late 1996 and early 1997 a kennel was constructed on the property. Mr. Hay's contention however was that for all years in question there was always a kennel operation carried on, even though the dogs resided in the basement of the residence. This was explained by Mr. Hay's indication that he was licensed by the Canadian Kennel Club during all of the years in question. In other words, it wasn't necessary to have a separate dog kennel to have a kennel operation.

14. Mrs. Hay described herself as a professional dog trainer and a professional dog breeder as well as a lab technician. She further testified that they purchased the Property with the idea in mind that both their jobs were coming to an end, Mr. Hay being on a 30 day contract basis and Mrs. Hay being aged 47 in an employment position were the general age is about 25. She concluded that they needed to secure an income for future years and they opted to purchase the Property and to operate the Kennel and Farming Activities.

15. She further testified that the Kennel Activity is at present thriving. As to the Farming Activity, from 1996 onward they changed directions. What had been going on in 1995 and prior years was not working. In 1996 they got into meat birds and raising ducks which are sold to dog clubs. Further, some birds and ducks would be used for training the dogs to hunt. Mrs. Hay further testified that she started her interest in dogs as early as 1973 when she bred dogs as a breeder and trained them and helped other people train as well.

16. It should be observed that Mrs. Hay has no interest in the Taxidermy/Writing Activity and was only involved as a 50/50 partner in the Kennel Activity and the Farming Activity and that only since the purchase of the Property in 1994. She did not claim for Kennel Activity losses in 1994 stating that the operation only got going late in 1994.

17. Mrs. Hay further stated as follows:

A. Yes. I guess my assets towards our business is that because I have worked with veterinarians for the last, almost 18 years, our vet bills are almost null and void. I handle most medical problems myself, without problem. I'm also very lucky to work for a veterinarian, that if I do need help with my dogs that it's done at minimum cost. so our expenses that way towards Revenue Canada is practically null and void.

As far as birthing dogs, I do all the whelping, I do the removal of, what they call, the dew claws, which is an amputation done at day two of birth, they're like bones on people. And it's required for hunting dogs because it's save injury later in life.

I do my own vaccinations, just about anything that comes up medically is handled at home.

18. Mr. Hay also submitted a Business Projection Plan, Part of Exhibit A-7 which projected a profit in 1998 and 1999. The projections are optimistic but at least support the intentions of the Appellants.

19. The Farming Activity in 1995 and prior years consisted principally of the growing of vegetables, keeping poultry (guinea fowl, ducks, pigeons and laying chickens) and selling fruit, vegetables and eggs. Sales were mainly to co-employees.

20. With respect to the change in direction, Mr. Hay stated:

... Approximately 1995, or the early part of 1996, we saw that we were getting nowhere. We thought that the goats would sell, they did not, they did not really and the auditor's report will show we had nine goats that were a result of an abortion by different mothers, ...

And in 1996 we decided to swing the farming into the raising of birds, pheasants, and ducks, for use for sale to the various dog clubs, whether that be the hunt/test clubs or the field trial clubs.

21. As to the Taxidermy/Writing Activity, from 1989 to 1995 Mr. Hay claimed the following amounts:

	Gross Sales	Total Expenses	Net Loss	CCA claim	Business use of House
1995d	$0.00	$1,055.87	($1,055.87)	$1,019.87	$0.00
1994	27.52	3,134.13	(3,106.61)	1,447.13	2,533.81
1993	153.21	19,733.54	(19,580.33)	758.61	2,352.99
1992	1,606.00	12,198.00	(25,405.00)	0.00	0.00
1991	250.00	9,991.00	(19,264.00	0.00	0.00
1990	1.00	5,475.00	(5,474.00)	0.00	0.00
1989	0.00	5,228.00	(5,288.00)	0.00	0.00
Totals	$2,037.73	$56,815.54	($54,777.81)	$2,467.00	$4,886.80

^d In 1995, only taxidermy activities were reported. In all other years the taxidermy and writing activities were combined.

In 1994 Mr. Hay was audited with respect to the 1991 and 1992 taxation years and as a result the losses for 1991 and 1992 from the Taxidermy/Writing Activity were reduced to $9,741 and $10,592. Because of this treatment Mr. Hay decided to terminate the Activity.

Mr. Hay, in Exhibit A-7 which at the hearing he swore to be true, stated as follows:

WRITING

I started writing in outdoor (hunting) articles and had my first submission printed in The Canadian Hunting Annual. This led to a unique problem within the writer's world. In the United States you submit your articles to numerous magazines. Should one of them be interested in purchasing one of them, they make contact with the author to purchase first rights. The taxpayer submitted an article on whitetail deer hunting to magazines in both Canada and the United States. He was totally shocked when he observed his article appearing in the Canadian Hunting Annual, especially when he had just sold it to the Western Sportsman magazine. This caused quite a bit of concern, not only on the part of the author, but the Western Sportsman's editor. The next negative incident was when that same article appeared in the Canadian Hunting & Shooting Magazine, a couple of months later. It must be understood that there were no rules, at that time, in Canada concerning first right agreements. I had other articles out in the "writing community" and found out that no magazine would touch my articles in case there was another on [sic], in possession of my work, going to print it. An explanation is in order at this time. In Canada you are supposed to submit your article to only one magazine at a time. They were not obligated to purchase it at time of receipt and could hold it indefinitely. The writer does not receive payment for the article until it has been published. Unlike the United States where multiple submissions are the accepted way of life, Canada (the hunting magazines anyway) did not conform to this way of conducting business. I was somewhat "blacklisted" in the Hunting article world. I still have articles out there that I have absolutely no control over when they, and even if they, will be published.

The taxpayer has received letters stating the level of his writing was what the magazines were looking for (Canadian only). It took a number of years before the "smoke" settled and I had to sell the next article at a reduced rate, just in order to try to gain the confidence of the "writing world" once again.

With the audit of West Coast Taxidermy (1991 & 92) it became apparent that claims for the hunts were not going to be accepted for future years. Therefore the outdoor (hunting) articles would not be written after the completion of that audit and the resulting decisions made by Revenue Canada. The taxpayer still has articles on disk from those pre-audit years. As there did not seem to be a future in article writing (hunting), the taxpayer devoted his writing career to producing a book on the training of retrievers. This manuscript is in the process of being compiled as all of the information has been gathered.

Mr. Hay also filed as Exhibit A-12 three magazines containing articles written by him. Those are the Winter 91 issue of "Hunting & Shooting", the September 1991 issue of "Canadian Hunting Annual" and the September 15, 1993 issue of "Western Sportsman". The two articles in 1991 describe the same hunt, but at least there is tangible evidence that Mr. Hay published articles.

22. The Hays did not file returns for 1996, 1997 and 1998 stating they were awaiting the outcome of these appeals.

Submissions of the Appellants

[5] Mr. Hay submits that he always had a reasonable expectation of profit from the three activities and was in essence treated wrongly by Revenue Canada for not allowing start-up periods. He stated further that all sources of revenue and losses should be considered as one because it was all related to himself. In other words, consider the total income and expenses as essentially one activity, include rental income, employment income and other miscellaneous bits of income and deduct the losses from the three activities to see the whole picture. He further submitted that the extensive history and training experience with respect to the breeding and training of dogs of both Mrs. Hay and himself, the time spent, the immense assistance and cost savings contributed by Mrs. Hay should lead to a conclusion that there was a reasonable expectation of profit. He stated that the gross income in 1996 was approximately $7,600 from the Kennel and Farm Activity but no details of expenses were provided.

[6] Mrs. Hay submits that she was given no start-up period whatsoever considering that she only started in mid-1994. She also pointed out that the Kennel Activity was improving from year to year starting in 1996.

Submissions of the Respondent

[7] Counsel for the Respondent submitted the usual authorities on reasonable expectation of profit and analyzed those. He reminded the Court as follows:

The farm loss/kennel loss, from 1980 to 1986 was a net loss for those years of $87,888.00, that's sales of $33,853.00 and total expenses of $121,000.00, a factor of four to one. So, where the Appellant wasn't even close from '80 to '86 in making a profit. Now there isn't any evidence before the court on '87 and '88 because the Appellant can't recall, but he does remember that he was operating a kennel and he does recall reporting something, he just can't remember what.

For 1989 and 1990, there was no income whatsoever from the farming activity, none. That's contained in the tax returns. There were expenses of $5,633.00 and $2,175.00, no income, but we continue to have expenses. And then in '91, '92 and '93 there's no reporting for farm purposes, but in '94 and '95, in '94 there's a huge loss of $17,369.00 which consists primarily of the mortgage interest. They purchased this property in August of 1994, the interest is calculated on $312,000.00 out of a total purchase price of $325,000.00 so they're heavily, heavily leveraged on this property.

The interest payments alone would be fairly debilitating in light of the revenue that the farm has earned and may earn in the future. In '94 the income was $827.00 and that's when the mortgage interest was over $11,000.00. No chance of profit in '94. In 1995, income was close to $3,000.00 but expenses are at $10,500.00, so again, $7,500.00 loss.

Your Honour, I think we have to be very, very careful with how you deal with '96, '97 and '98. To the extent that the Appellant says he had a down period or he had a change in plans and a change in focus, that's fine, I accept that he could have changed his focus in those subsequent years. But the issue before the court is what about '93, '94 and '95, during those years was there a reasonable expectation of profit. There is absolutely no financial data before this court to suggest that he was going to make any money from farming or from the kennel business in '96, '97 and '98.

Exhibit A-13 which details the gross sales for 1996 is not instructive at all, $7,600.00 of gross sales is an amount of money that he says it's not, it hasn't been submitted to Revenue Canada, it hasn't been audited, it hasn't been put up to the light of review. He's just telling us that that's what happened. I don't have any reason to doubt that he sold puppies or dogs for an amount such as that, but it doesn't add anything to the discussion if we don't know what his expenses were in that year.

Counsel submitted further that there was a heavy personal element involved in all of the activities of Mr. Hay.

[8] With respect to the Taxidermy/Writing Activity, Respondent submits as follows:

Taxidermy and writing, I don't think we need to spend a great deal of time on. In '94 and '95 he wasn't spending any time on it, there's no source of income, there was no business. It's absolutely clear that there's no reasonable expectation of profit, he's not putting any time into it, he's not putting any effort into it. And just because he happens to have a few assets, that he says continued to depreciate, that doesn't make the deduction of that CCA permissible. He wasn't putting any effort into it.

So that leaves us then with 1993, in 1993 we know that he again sustained significant loss from taxidermy and writing. The sales from '89 to '95 were $2,600.00, the expenses were $56,000.00 for those seven years, six years. The loss is $55,000.00. I mean the numbers are staggering. And in my submission that should create a very, very strong presumption right at the outset that there's no reasonable expectation of profit.

Analysis and Decision

[9] The "reasonable expectation of profit" test originates from the extended definition of "personal or living expenses" found in section 248 of the Act.

"personal or living expenses" includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit, ...

[10] This extended definition has been cited by the courts, for more than 40 years, to disallow taxpayer losses in a wide range of activities, originally in reliance on what are now paragraphs 18(1)(a) and18(1)(h) of the Income Tax Act ("Act") which provide that no deduction may be made in respect of personal or living expenses of the taxpayer or which do not relate to producing income from a business or property..

[11] In Moldowan v. M.N.R., 77 DTC 5203, the Supreme Court of Canada articulated a number of factors to consider in determining whether a taxpayer has a reasonable expectation of profit in connection with an activity:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking.

[12] Since the Moldowan case, several cases in the Federal Court of Appeal afford considerable guidance in this area. In Tonn et al. v. The Queen, 96 D.T.C. 6001. Mr. Justice Linden, speaking for the court, said at page 6008:

The Moldowan test is stricter that the business purpose tests set out in subsection 9(1) and paragraph 18(1)(a). As mentioned above, these tests stipulate that a taxpayer be subjectively motivated by profit when incurring an expenditure. The Moldowan test, however, also requires the presence of a profit motive, but, in addition, it must be objectively reasonable. In reality, in most situations, the objective Moldowan test and the subjective statutory tests will not yield many different results. A subjective intention is often determined by what may be reasonably inferred from the circumstances. Someone who claims a subjective intention that is foolish may not be believed. A taxpayer's intention to produce profit normally has to be reasonable before a Court will accept it.

At pages 6009 and 6010 he said:

A closer look at this jurisprudence will illustrate that this is the approach now taken in most of the cases. The cases in which the "reasonable expectation of profit" test is employed can be placed into two groups. One group is comprised of the cases where the impugned activity has a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Such activities have included horse farms, Hawaii and Florida condominium rentals, ski chalet rentals, yacht operations, dog kennel operations, and so forth. Though these activities may in some ways be operated as businesses, the cases have generally found the main goal to be personal. Any desire for profit in such contexts is no more than a "pious wish" or "fanciful dream". It is only a secondary motive for having set out on the venture. What is really going on here is that the taxpayer is seeking a tax subsidy by deducting the cost of what, in reality, is a personal expenditure.

[13] Applying the foregoing principles, after, having considered all of the testimony, the exhibits and the submissions, I conclude that there was no reasonable expectation of profit from the Taxidermy/Writing Activity as in essence nothing was done in that activity during the years 1994 and 1995 and for 1993, very little was done. I also am influenced by the decisions of the Federal Court of Appeal as to the impact of a personal element and the difficulty a taxpayer has to prove a reasonable expectation of profit when there have been so many years of losses. The evidence, in my view, points to this Activity being a hobby as opposed to a business.

[14] Mr. Hay relies heavily on Information Bulletin IT-504R2. However, Information Bulletins are not law. Nor can they overrule the decided cases. In any event, the Information Bulletin makes a distinction between a business and a hobby and in my opinion, this activity was a hobby.

[15] Moreover, I must conclude that for the years in question there was no reasonable expectation of profit from the Farm Activity. In the years prior to 1996, there were constant losses and it was only in 1996 that the Appellants changed direction to engage in the meat birds activity which produces regular sales. They may well have had a reasonable expectation of profit in the years 1996 and following but I do not know this as no returns were filed and I do not have details of revenues and expenses, but they did not have a reasonable expectation of profit in the years in question.

[16] The gross sales, an important factor in the decided cases were negligible and losses have continued over many years. The operation was too small. Sales were mainly to co-employees. Time spent was mainly devoted to the Kennel Activity. The Appellants themselves terminated the previous farming operation in 1995 or 1996 considering it not viable. How can I conclude there was a reasonable expectation of profit in the years under appeal?

[17] The submissions of Mr. Hay that all sources of income should be considered together is not tenable. Each source is to be considered separately. Combining employment income with the farming operation only operates in determining whether farming is a chief source of income. This was not in issue.

[18] Further, in my opinion, the Appellants did have a reasonable expectation of profit from the Kennel Activity. For Mrs. Hay this applies only to the 1995 year. For Mr. Hay I consider it reasonable to apply this conclusion to all the years in question, 1993, 1994 and 1995.

[19] My reasons are based on the factors of experience and training skills, the improvements in the Activity over time, the time spent by both Appellants, a reasonable start-up period commencing with 1993 when Mr. and Mrs. Hay teamed up and a more business-like approach began and continuing at least through 1995. Also the capital committed, although highly leveraged was significant. The evidence also establishes the efforts of the Appellants, the marketability of the product and the intention of the Appellants to rely on this Activity as a source of income after retirement. At first blush the keeping of dogs in the basement does not favour a finding that there was a Kennel but I have accepted the explanations of Mr. Hay on this point.

[20] However, the expenses related to the Kennel Activity are to be adjusted as follows for the following reasons.

[21] The interest expense in 1994 is to be 50% of $25 (amount claimed) + $11,105.10 or $5,565.05 and the interest expense in 1995 is to be 50% of $20,165.78 (amount claimed) + $5,041.36 or $12,603.57 for the following reasons. Considering all the evidence especially as to the use of the residence by the dogs and the spaces they used for the Kennel Activity and the use of a large portion of the land in training, I conclude that 50% is reasonable. Moreover, since the Farming Activity has been determined not to be a source of income in 1994 and 1995 it is reasonable to increase the interest by the interest amounts allotted to the Farming Activity, namely $11,105.10 in 1994 and $5,041.36 in 1995. I do not believe the same reasons apply to the utility expenses charged to the Farm Activity as the evidence does not provide a basis for allocation to the Kennel Activity.

[22] The management and administration fees in 1995 are to be $197.97 ($1,201.97 - $1,004) as the Appellants did not prove the amount of $1,004. As to training aids of $205, I am satisfied that the Appellants incurred that expense.

[23] The capital cost allowance of $558.59 claimed in the 1995 year is to be nil as the related asset had been disposed of.

[24] In my opinion subsection 18(12) of the Act is not applicable as the residence was the principal place of business for the Kennel Activity.

[25] The results of the foregoing adjustments are that the allowable losses for Mr. Hay are $3,877.95 for 1994 and $13,656.91 for 1995 and for Mrs. Hay are $13,656.94 for 1995. The loss for 1993, $4,818.00 remains the same.

[26] Consequently, the appeals with respect to the Farming Activity and the Taxidermy/Writing Activity are dismissed but the appeals related to the Kennel Activity are allowed with the result that the losses from the Kennel Activity adjusted as aforesaid are deductible; and the matter is referred to the Minister of National Revenue for reconsideration and reassessment on these bases. Considering the mixed outcome of these appeals, there shall be no costs.

Signed at Ottawa, Canada this 23^rd day of December 1999.

"T.P. O'Connor"

J.T.C.C.