REASONS
FOR JUDGMENT
C. Miller J.
[1]
Ms. Gibb appeals the assessment by the Minister
of National Revenue (the “Minister”) pursuant
to the Excise Tax Act (the “ETA”)
for the reporting periods of 2010 and 2011. The Minister denied Ms. Gibb’s
claims for Input Tax Credits (“ITC’s”) on the
basis she was not engaged in a commercial activity.
[2]
Commercial activity is defined in section 123(1)
of the ETA as a business carried on by the person “other than a business carried on without a reasonable
expectation of profit by an individual.” What is implicit in this
definition is that there can be two types of businesses: one with a reasonable
expectation of profit and one without, the latter being precluded from claiming
ITC’s. To be clear, this is not a matter of whether Ms. Gibb was or was not in
a business, but a matter of whether it was a business with or without a
reasonable expectation of profit. This is not an income tax case where the
issue might be framed as a distinction between business and hobby, but a GST
case where the legislation specifically excludes from commercial activity a
business without a reasonable expectation of profit. The case thus revolves
around the reasonable expectation of profit test described by the Supreme Court
of Canada in the case of Moldowan v HMTQ:
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: The Queen v. Matthews. One would not expect a farmer who purchased
a productive going [sic] operation to suffer the same start-up losses as the
man who begins a tree farm on raw land.
[3]
I will address Ms. Gibb’s endeavour in line with
the factors enumerated by the Supreme Court of Canada.
I. Past
Profit and Loss
[4]
Ms. Gibb claims to have been in the horse
breeding and horse racing business for 30 years, starting in school when her
husband-to-be introduced her to the horse domain. It was when she and her
husband moved to Lethbridge in 1993 the operation started to grow. It is only,
however, for the years 2000 forward for which I had evidence of profits and
losses. Ms. Gibb reported losses in her personal returns for the years 2000,
2001, 2002, 2004, 2005, 2007, 2009, 2010, 2011 and 2012. In 2003, she reported
net farming income of $1,250 and in 2008 she reported nil net farming income.
In 2013, Ms. Gibb testified that the operation shifted into a corporation. The
profit and loss track record is not supportive of any future expectation of
profit, reasonable or otherwise.
[5]
In the years in question, Ms. Gibb reported
expenses of $144,000 in 2010 and $216,000 in 2011, with income in the latter
year of $108,000 (approximately $92,000 from horse sales, $10,000 from race
earnings and $5,000 in a breeder’s bonus). These results arose from a stable of
between 20 and 30 horses. Ms. Gibb properly pointed out that there are no
guarantees in the horse racing business. This struck me as an admission that
the expectation for profit, if any, was not going to arise from horse breeding
and sales, but only with success at the racetrack. And that this could be a
long time coming. Ms. Gibb suggested it takes many years to develop a
successful, profitable horse breeding and racing business. Yet, she has been in
the business many many years and there is no sign yet.
[6]
I find Ms. Gibb is passionate about her horse
business even to the point of acknowledging she would carry on even if there
was no profit, which appears to be exactly the situation. This all suggests to
me her expectation can best be described as a faint hope, a wish perhaps, but
hardly a reasonable expectation of profit based solely on the numbers. Do the
other factors suggested by the Supreme Court of Canada overcome this clear
conclusion based on profit and loss history?
II. Training
[7]
Ms. Gibb has been in the horse business for
three decades. She has family involved in similar businesses. She has a clear
passion for the work. Though she has had no personal education, she described
in detail the work she personally undertook in dealing with foals, feeding,
haying, arranging trainers, arranging vets, shipping horses to the United
States of America and researching lineage; indeed, every element of the
business. She knows the business, though that did not translate into knowing
how to effectively run a business. She presented no financial statements, no
budgets, no formal plan. Her stated goal was to improve the quality of her
stable as well as the quantity, but she provided me with no breakdown of an
optimal balance between broodmares and race horses, any calculation of numbers
of possible breakeven points, even a conservative estimate of race earning
results. It all seemed something of a wing and a prayer.
[8]
Yes, she had some years’ experience or training,
but I am not convinced that equipped her to create and manage a profitable
business.
III. Ms.
Gibb’s intended cause of action
[9]
As mentioned, Ms. Gibb intended to increase the
inventory of horses and the quality of those horses. She spent considerable
time researching matches of studs for her broodmares. She testified that today
she has horses that could fetch $20,000 to $50,000 each. But, again, she did
not provide me with projections to illustrate how this might now turn into a
profit, nor any evidence of sales of this ilk. She intended, and did, improve
the farm environment by installing lighting to ensure some consistency and
timing of breeding. She also intended to, and did, hire a full-time farmhand.
[10]
These actions do support a finding she was
carrying on business, but do they assist in proving possible profitability?
Somewhat. The help of a farmhand and the efficiency of consistent breeding time
encouraged by improved lighting, while causing an increase in costs, could also
cut down on other costs, such as having to send the mares elsewhere. This
course of action is some support for improved efficiency and therefore
expectation of profitability.
IV. Capability
of Venture as Capitalized to Show a Profit
[11]
How was this venture capitalized? Again, Ms.
Gibb showed me no financial statement to help me in this regard. She testified,
however, that her husband, a physician who operated a clinic, financially
supported the venture, whether this was by way of loan, gift or whatever was
not made clear. Certainly, however the venture was structured financially, it
had not managed to achieve profitability.
[12]
Ms. Gibb presumably also invested some of her
$45,000 annual employment income, from her husband’s clinic, amounts earned for
keeping the books (though interestingly she claims to rely on an accountant to
keep books for the horse business). I have little evidence to fully assess this
factor but do not find that relying on family finances is an indication of any
capability to produce a profit as capitalized.
V. Any
Other Factors
[13]
The determination of a reasonable expectation of
profit must be done objectively. Stepping back and appraising Ms. Gibb’s
business dispassionately, rather than from Ms. Gibb’s clear passionate view of
the business, I conclude that on balance there are not sufficient indicia
supporting a reasonable expectation of profit. Ms. Gibb’s training and her
intended course of actions do speak to the operation of a business, but frankly
not a business with a reasonable expectation of profit. On balance, I do not
weigh these other factors to overcome the stark reality of a business
chronically losing money with no reasonable expectation of profit in the
foreseeable future. Until Ms. Gibb comes up with a plan of how this operation,
as capitalized, can ultimately turn the corner it is difficult to conclude that
she was in a business with a reasonable expectation of profit. Therefore, for
purposes of the ETA she cannot be considered to be in a commercial
activity and consequently not entitled to ITC’s.
[14]
The Appeal is dismissed.
Signed at Ottawa, Canada,
this 3rd day of November 2016.
“Campbell J. Miller”
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