Date: 19990208
Docket: 98-925-IT-I
BETWEEN:
JAGRUP S. RAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bowman, J.T.C.C.
[1] These appeals are from assessments for the appellant's
1993, 1994 and 1995 taxation years. The issue is whether the
appellant is entitled to deduct losses claimed by him in those
years from maintaining and racing horses under the name of J. Rai
Stables. His principal occupation in the years in question was as
a sawmill operator with Coast Mountain Hardwood.
[2] The respondent's position is that there was no
business within the meaning of section 9 of the Income Tax
Act because there was no reasonable expectation of profit,
that the expenses were not laid out for the purposes of gaining
or producing income from a business or property within the
meaning of paragraph 18(1)(a) and that in any event the
expenses claimed were unreasonable within the meaning of section
67.
[3] In 1986, Mr. Rai started going to the racetrack and
betting on horses. In 1988 he, together with a partner, purchased
his first horse. Apart from whatever he may have learned from
betting on horses in 1986 to 1987 he had no experience with
racehorses.
[4] The evidence is somewhat unsatisfactory but the following
appear to be the horses that he purchased:
1988 Michael Jones $2,500 (appellant's share $1,250)
1989 Delta Eddy $2,500 (appellant's share $1,250)
1990 My Buddy Dicky $5,000 (appellant's share $2,500)
1990-91 Hot Fat $12,500 (appellant's share
$6,250)
1992 Salow Midwest $4,500 (no partner)
1992-93 Hec With Walley $5,000 (no partner)
1993 J.R. Gingersnap $3,300 approx. (no partner)
1993 J.R. Jimmy $4,000 (no partner)
1994 or 95 (uncertain of name) $1,400 (partner)
1994 or 95 Eesa Angles $5,000 perhaps (uncertain whether
there was a partner).
[5] By 1996, he had stopped the horse racing activity that he
had carried on over the period 1988 to 1995, and had disposed of
his horses, either because they had broken down, or did not
perform.
[6] He mentioned having sold at least three horses for $500
each. However in a questionnaire signed by him, he stated that he
sold one horse in 1993 for $2,500 and another in 1995 for $2,500.
For some reason these sales seem not to have been reported in his
return of income.
[7] From 1988 to 1995, he reported losses from the activity as
follows:
TAXATION GROSS NET
YEARINCOME INCOME (LOSS)
*
1988 $ 1,100 $ (2,530)
1989 $ 5,810 $ (7,630)
1990 $15,425 $ (37,336)
1991 $17,246 $ (6,112)
1992 $ 5,500 $ (16,636)
1993 $ 7,984 $ (18,758)
1994 $ 5,500 $ (21,287)
1995 $ 1,200 $ (26,222)
1996 N/A N/A
______ _ ________
$59,765 $(136,511)
[8] The losses from 1988 to 1992 were allowed by the
Department of National Revenue. The financial statements for 1988
to 1992 were not put in evidence, but those for the years in
question, 1993, 1994 and 1995, show expenses as follows:
1993 $26,741
1994 $20,382
1995 $27,422
[9] A very substantial portion of the expenses related to the
truck or car that he operated:
1993: repairs and insurance $2,231
gas $6,990
CCA $1,275
1994: motor vehicle expenses $ 7,942
CCA $ 893
1995: travel expenses $ 4,080
other expenses $17,666
The gross income in 1995 was $1,200.
[10] I do not question that Mr. Rai hoped to make money from
racehorses. Most people who engage in inherently risky
enterprises do. Subjective intention is, however, not the only
criterion. As I observed in Kaye v. R., [1998] 3 C.T.C.
2248 at pages 2249 and 2250:
I do not find the ritual repetition of the phrase [reasonable
expectation of profit] particularly helpful in cases of this
type, and I prefer to put the matter on the basis "Is there
or is there not truly a business?" This is a broader but, I
believe, a more meaningful question and one that, for me at
least, leads to a more fruitful line of enquiry. No doubt it
subsumes the question of the objective reasonableness of the
taxpayer's expectation of profit, but there is more to it
than that. How can it be said that a driller of wildcat oil wells
has a reasonable expectation of profit and is therefore
conducting a business given the extremely low success rate? Yet
no one questions that such companies are carrying on a business.
It is the inherent commerciality of the enterprise, revealed in
its organization, that makes it a business. Subjective intention
to make money, while a factor, is not determinative, although its
absence may militate against the assertion that an activity is a
business
One cannot view the reasonableness of the expectation of
profit in isolation. One must ask "Would a reasonable
person, looking at a particular activity and applying ordinary
standards of commercial common sense, say 'yes, this is a
business'?" In answering this question the hypothetical
reasonable person would look at such things as capitalization,
knowledge of the participant and time spent. He or she would also
consider whether the person claiming to be in business has gone
about it in an orderly, businesslike way and in the way that a
business person would normally be expected to do.
This leads to a further consideration — that of
reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it
does not exist in a watertight compartment. Section 67 operates
within the context of a business and assumes the existence of a
business. It is also a component in the question whether a
particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would
spend $1,000,000 if all that could reasonably be expected to be
earned was $1,000.
Ultimately, it boils down to a common sense appreciation of
all of the factors, in which each is assigned its appropriate
weight in the overall context. One must of course not discount
entrepreneurial vision and imagination, but they are hard to
evaluate at the outset. Simply put, if you want to be treated as
carrying on a business, you should act like a businessman.
[11] Does this activity have sufficient of the indicia of
inherent commerciality, revealed in its organization, to make it
a business? Would a reasonable person, looking at the activity
and applying ordinary standards of commercial common sense, say
"yes, this is a business".
[12] I think the answer to both questions is in the negative.
The activity did not have the indicia of commerciality. Rather,
it seems to have developed as an extension of the appellant's
two years of betting on horses. As the appellant is alleged to
have stated in the memorandum signed by him whether he makes a
profit is a gamble and is dependent on luck. I place little
weight on this memorandum. It was filled out by an income tax
assessor at an interview with the appellant and seems to have
been a paraphrase of what the assessor thought the appellant said
to the assessor. It seems unlikely that the assessor understood
the appellant or vice versa. Such a document is wholly
unsatisfactory, either as evidence in court or as a basis for
assessing. Nonetheless, the observation remains true that this
enterprise seems not to have been operated in a businesslike way.
Record keeping was haphazard and the expenses were not
substantiated with even a modicum of precision. It is unclear
just how such large expenses were claimed or even arrived at, or
indeed what the sources of income were — whether they were
solely racetrack winnings or whether they included proceeds from
the sale of horses.
[13] For these reasons, then, I have concluded that there was
no business:
(a) the lack of any business organization and the haphazard
method of keeping records;
(b) the fact that the chances of earning any profit were more
in the nature of a gamble than of the prospective result of a
concerted business enterprise;
(c) the unreasonable disproportion between the expenses
claimed and the revenues generated.
[14] I need not refer to the series of decisions that are
routinely quoted in these cases: Moldowan v. The Queen, 77
DTC 5213; Tonn et al. v. The Queen, 96 DTC 6001;
A.G. of Canada v. Mastri et al., 97 DTC 5420; Mohammad
v. The Queen, 97 DTC 5503. They all represent approaches to
the problem of determining where one draws the line between what
is a business and what is not.
[15] I would have had no difficulty in dismissing the appeal
based on the evidence and the cases I have cited above, as well
as the many other cases that have been decided in this area of
the law. Nonetheless, the recent decision of the Federal Court of
Appeal (Décary, Létourneau, JJ.A. and Chevalier,
D.J.A.) in Kuhlmann et al. v. The Queen, 98 DTC 6652 could
arguably be taken as overruling all previous decisions of all
courts on the question of reasonable expectation of profit. The
Federal Court of Appeal stated at page 6656 that:
Both counsel agreed that for an expectation of profit to be
reasonable, it had to be not "irrational, absurd and
ridiculous". In the case at bar, the burden was on the
Minister to establish on a balance of probability that the
expectation of profit was irrational, absurd or ridiculous.
Clearly, in our view, the Minister did not succeed and the Tax
Court Judge could not have found otherwise had he applied the
proper legal principles.
[16] In that case two medical persons who had extremely high
incomes claimed enormous losses from the horse business. Mogan J.
had held that the respondent (who bore the onus of proof because
of a change of approach taken at trial) had met the onus of proof
and established a prima facie case that the activity had
no reasonable expectation of profit, and was operated for
personal satisfaction rather than for profit.
[17] The Federal Court of Appeal in an oral judgment from the
bench allowed the appeal.
[18] The decision essentially overruled a finding of fact made
by the trial judge based on his appreciation of the evidence.[1]
[19] If it is now a principle of law, following
Kuhlmann, that a taxpayer can establish that he or she, in
carrying out what purports to be a commercial activity, had a
"reasonable expectation of profit", and therefore a
business, by simply showing that the expectation was "not
irrational, absurd and ridiculous" I would have to allow
this appeal, because Mr. Rai's expectation of earning profits
was neither irrational, absurd nor ridiculous. It is not unheard
of for people to make money raising and racing horses. Depending
on the circumstances, the chances of earning a profit may be, I
should think, easily as good as they are in many other risky
enterprises such as drilling wildcat wells, or prospecting for
gold. Nonetheless, I think that for a business to exist there has
to be something more than an absence of irrational, absurd and
ridiculous expectations. I do not read the Kuhlmann
decision as suggesting otherwise.
[20] I would prefer to read the passage quoted from the
Federal Court of Appeal decision as reflecting the possibly hasty
adoption of a proposition agreed to by counsel and therefore not
thoroughly explored in argument rather than the enunciation of a
new principle that in effect overrules over twenty years of
jurisprudence.
[21] The appeals are dismissed.
Signed at Ottawa, Canada, this 8th day of February 1999.
J.T.C.C.
COURT FILE NO.: 98-925(IT)I
STYLE OF CAUSE: Between Jagrup S. Rai and
Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: January 28, 1999
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
DATE OF REASONS
FOR JUDGMENT: February 8, 1999
APPEARANCES:
Agent for the Appellant: Chitranjan S. Mangat
Counsel for the Respondent: Bill Basran, Esq.
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