REASONS
FOR JUDGMENT
Boyle J.
[1]
In this Informal Procedure appeal, Mr. Rasmussen
has appealed to the Court in respect of the denial by Canada Revenue Agency (“CRA”) of input tax credits (“ITCs”) in respect of his racehorse farming activities for the periods
beginning October 1, 2007 and ending September 30, 2011. It is the Respondent’s
position that Mr. Rasmussen did not qualify for ITCs because he was not engaged
in commercial activities. Specifically, it is the Respondent’s position that
Mr. Rasmussen’s activities did not have a reasonable expectation of profit or “REOP”. The taxpayer agrees that the issue to be
determined is whether his activities were commercial activities. It is the
taxpayer’s position that his activities constituted a business carried on by
him with a REOP.
Facts
[2]
Mr. Rasmussen testified as the only witness. He
began his farming activities in 1991. On the evidence before the Court at the
hearing, I find that from the outset, or at least from very early on, this was
comprised of both standardbred horse breeding and standardbred horse racing
activities. In most of the years preceding the years in issue, horse breeding
was the primary farming activity and horse racing the secondary.
[3]
The horse breeding activities involved the
purchase of brood mares that Mr. Rasmussen felt were promising and attractive,
their impregnation, and the sale of their yearlings at auction.
[4]
The horse racing activities involved the buying
of yearlings (or an interest in a yearling) that Mr. Rasmussen felt were
promising and attractive at auction, having them trained, and having them race
at racetracks for purses. It does not appear that any of the yearlings bred by
him were trained and raced by him. Over the years, Mr. Rasmussen usually owned
or had interests in between one and four race horses.
[5]
Both parties agree that Mr. Rasmussen lost money
each year between 1991 and 2010 at an average rate of about $20,000 annually.
Mr. Rasmussen ended his breeding activities altogether in 2004 or 2005. About
that time race track purses in Ontario had been significantly enhanced. He
chose then to focus solely on horse racing. His losses from 2004 increased
through 2010. Neither his losses, nor his increase in losses beginning in 2004,
appear to result from horses being purchased and deducted on a cash basis as is
allowed for farmers in computing income for tax purposes.
[6]
Mr. Rasmussen had no previous farming experience,
including in respect of horse breeding or horse racing. Mr. Rasmussen began his
activities about the same time he retired from his career in the federal public
service. Once he started horse breeding he established the appropriate and
needed relationships with trainers, veterinarians, ferriers et cetera. He also
acquired memberships in a number of related equine organizations.
[7]
Mr. Rasmussen’s tracking of his expenses and
revenues, by the nature of the item and separately for each horse is
insufficient to constitute a plan or a course of action to attain
profitability. The fact he changed his focus to horse racing in order to make
money, and remained confident he would attain profitability is insufficient.
Similarly, the fact that he took the best care of his horses’ health and
training in the hope of maximizing his likelihood of winning the utmost purse
monies is insufficient. His evidence of his plans and course of action does not
rise to the needed level of commerciality.
[8]
Mr. Rasmussen put in some select evidence that
supported his position that he had some profitable quarters in the years after
2010. This did not include any tax returns, financial statements or profit and
loss statements. This evidence certainly did not rise to the level required to
even prima facie challenge assumption 12(a) in the Respondent’s Reply that Mr.
Rasmussen claimed a $9,007 loss in his 2011 income tax return. The testimony
about post-2011 profitable quarters is of dubious value; there was little or no
supporting GST/HST returns, income tax returns or similar written evidence for
most if not all of them. There is no evidence his own numbers or backup documents
were ever provided to or reviewed by CRA, nor of the current status of any
filings.
[9]
I must also observe that Mr. Rasmussen was very
determined to stick to his view of things to the point of being difficult at
times. He tended to be evasive in answering the difficult key questions. For
example, he was very slow to acknowledge that racing horses, in addition to
breeding horses, had been an integral, albeit perhaps the secondary, part of
his pre-2004 farming activities. He avoided correcting his counsel’s confusion
on this point, and only finally clearly answered in response to a request for
clarification from the judge. I have little doubt that Mr. Rasmussen did this
in order to be better able to argue that racing horses was a new business and
to try isolating it from the first dozen or more years’ consistent losses. These
aspects of his testimony leave me looking for more corroborating evidence of
key parts of his oral testimony than I might have otherwise.
Law
[10]
Paragraph 123(1)(a) of the HST/GST
legislation defines “commercial activity” as:
|
123.(1) Definitions – In Section 121, this Part and
Schedules V to X,
“commercial activity” of a person means”
|
123.(1) Définitions – Les définitions qui suivent
s’appliquent à l’article 121, à la présent partie et aux annexes V à X.
« activité commerciale » constituent des
activités commerciales exercées par une personne :
|
|
(a) a business carried on by the person (other than a business
carried on without a reasonable expectation of profit by an individual, a
personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the business involves the making
of exem pt supplied by the person.
|
a) l’exploitation d’une entreprise (à l’exception
d’une entreprise exploitée sans attente raisonnable de profit par un
particulier, une fiducie personnelle ou une société de personnes dont
l’ensemble des associés sont des particuliers), sauf dans la mesure où
l’entreprise comporte la réalisation par la personne de fournitures
exonérées.
|
[11]
The REOP requirement in HST/GST matters
is a statutory test that forms part of the definition of “commercial
activity” in the GST/HST legislation. The REOP test was considered by the Supreme
Court of Canada in Moldowan v. Canada, [1978] 1 S.C.R. 480. The Supreme
Court of Canada’s comments in Moldowan on REOP remain relevant in
GST/HST cases notwithstanding the Supreme Court of Canada’s decision on REOP in
Stewart v. Canada, 2002 SCC 46 for purposes of the Income Tax Act.
Moldowan says that in considering REOP:
There is a vast case literature on what reason-able [sic]
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.
[12]
The Courts’ reasoning and analysis in Craig v.
Canada, [2010] 3 C.T.C. 2341, [2011] 2 F.C.R. 436, [2012] S.C.R. 489 do not
address the issue of REOP in determining whether there was either a commercial
activity or a business. It is clear from Justice Hershfield’s reasons that the
Crown had conceded Mr. Craig’s horse farming activities constituted a business.
It was the Crown’s position that Mr. Craig’s seeming indifference to its lack
of profitability indicated it was not his primary source of income for purposes
of the section 31 restricted farm loss rules.
[13]
On the evidence before the Court, the Appellant
has not satisfied it on a balance of probabilities that his horse racing
activities constituted a commercial activity in the periods in question through
to 2011. Given the few or weak indicia of commerciality and a 20 plus year
history of losses, it appears Mr. Rasmussen was, on a personal level, enjoying
gambling on the sport of kings in his breeding and training activities instead
of at a betting window.
[14]
The appeal is dismissed.
Signed at Ottawa, Canada, this 11th day of February 2015.
“Patrick Boyle”
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