Harald Apfelbaum v. Minister of National Revenue, [1991] 1 CTC 2599, 91 DTC 800

Christie, A.C.J.T.C.:—The years under review are 1983, 1984 and 1985. The sequence of events leading to this appeal is that by notices of reassessment dated June 23, 1987, the respondent disallowed the full farming losses deducted in the appellant's returns of income for those years and limited the deductions to $5,000 in each year, which is the minimum allowable under subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the"Act"). The appellant objected to the reassessments by notices dated September 18, 1987. The respondent confirmed them for 1983 and 1984 in a notice from which the date was inadvertently omitted. The notice of confirmation for the reassessment regarding 1985 is dated January 11, 1990. There are two notices of appeal. The one pertaining to 1983 and 1984 is dated December 22, 1989. The other relating to 1985 is dated February 22, 1990.

At the outset of the hearing, counsel for the appellant referred to the issue raised in paragraph 16 of the notice of appeal respecting 1983 and 1984, and in paragraph 13 of the notice of appeal for 1985. The substance of what is said in paragraphs 13 and 16 is that the confirmations of the reassessments following upon the notices of objection are invalid because they were not issued with all due dispatch as required by paragraph 165(3)(a). It provides:

165.(3) Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment [1] and vacate, confirm or vary the assessment or reassess,

and he shall thereupon notify the taxpayer of his action by registered mail.

The notices of appeal say that ” some twenty-four months and three weeks" passed between the delivering of the notices of objection and the issue of the notices of confirmation. The Court chose not to hear evidence about the circumstances surrounding the sending of the notices of confirmation.

It is the contention of counsel for the appellant that because of the lapse of time the reassessments should be vacated. In the course of his argument he cited J. Stollar Construction Ltd. v. M.N.R., [1989] 1 C.T.C. 2171; 89 D.T.C. 134. That case was concerned with subsection 152(1) of the Act. At the time relevant to that appeal it read:

152.(1) The Minister shall, with all due dispatch, examine each return of income, assess the tax for the taxation year, the interest and penalties, if any, payable and determine the amount of refund, if any, to which a taxpayer may be entitled by virtue of sections 129, 131, 132 or 133 for the year.

The subsection has since been amended, but not in a manner that in any way affects what is said in Stollar.

The question was whether the respondent had assessed with all due dispatch. Six years and five months had elapsed between the appellant filing its return of income for its 1976 taxation year and the issue of the assessment in that regard. All that was offered by counsel for the respondent in explanation was that the matter "seems to have slipped through the cracks." Bonner, T.C.]. held that the period allowed by the words "all due dispatch” had expired long before the assessment was made. It was vacated.

I believe that dissimilar considerations apply to the case at hand. The facts in Stollar, supra, relate to only a part of the legislative scheme applicable to this appeal. That larger scheme is this: a taxpayer is obligated to file a return of income within a stipulated time and on receipt of it the respondent is required under subsection 152(1) to examine the return with all due dispatch and assess the tax, interest and penalties payable, and do other things that need not be spelled out here. This first assessment may be followed by a reassessment. A taxpayer who is dissatisfied with either may object under subsection 165(1) by serving a notice on the respondent within 90 days from the day of mailing of the notice of assessment or reassessment. Next is the requirement already referred to under paragraph 165(3)(a) that the respondent shall, upon receipt of the notice of objection, reconsider the assessment or reassessment with all due dispatch and vacate, confirm or vary it or reassess. The final step for present purposes is embodied in section 169. It reads:

169. Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Court of Canada to have the assessment vacated or varied after either

(a) the Minister has confirmed the assessment or reassessed, or

(b) 90 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that he has vacated or confirmed the assessment or reassessed;

but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed.

In my opinion the correct view is that when paragraph 165(3)(a) and section 169 are read together, as they must be, Parliament has in effect prescribed 90 days after service of the notice of objection as the time for reconsidering the assessment or reassessment with all due dispatch and notifying the taxpayer of this. If the respondent has not acted within that time the taxpayer can bring the matter to a head by appealing to this Court under paragraph 169(b).

Appealing under paragraph 169(b) is an alternative to confirming or reassessing under paragraph 169(a) and when it is invoked the latter ceases to have any operative effect. If the respondent purported to move under paragraph 169(a) after an appeal has been instituted under paragraph 169(b) it would be a redundant act.

I conclude that the remedy and the only remedy that a taxpayer has if the respondent fails to discharge his duty under paragraph 165(3)(a) is to appeal under paragraph 169(b). Failure of the respondent to act under paragraph 165(3)(a) does not make a reassessment that has been objected to liable to be vacated by this Court regardless of the lapse of time since the service of the notice of objection. The application to vacate the reassessments is refused.

I shall now deal with the substance of the appeal. The appellant emigrated from Germany to Canada in 1959. He was trained as a butcher and on arrival went to work for Dominion Stores in London where he worked for 17 years as a meat cutter and manager. He became involved with race horses for the first

time in October 1967 when he purchased Miss Dixie Dee, a four-year-old mare, from Mr. John Frailie for $1,500. She won $10,000 to $12,000 in purses before the appellant sold her back to Frailie for the purchase price. It had been the appellant's original intention to breed the mare, but he could not afford to do so. At that time he was earning $100 per week and he said that four or five years plus an expenditure of about $25,000 was necessary before the first foal could be sold as a two- or three-year-old. Expenses would include stud fees, boarding the animals, paying a trainer, etc.

The next acquisition was in 1971 or 1972 when Hello Judge was purchased for

$5,000. He was kept for nine years and earned about $30,000. The horse died of natural causes and had stopped racing some five years earlier.

At the commencement of 1980 the appellant bought John’s Delicatessen in the Covent Garden Market, London. It is now John's Deli London Limited. This business featured fresh meat. Initially there were eight employees and the appellant spent 50 to 60 hours a week working there. At the date of the hearing the number of employees had grown to 15 on average, some of whom were part-time. The business prospered and in 1981 he decided to get involved in the breeding and selling of race horses. Before doing this he inspected 15 or 20 breeding farms in Ontario, Kentucky, Florida and Germany.

The appellant borrowed $20,000 from a bank and with this he purchased a colt named Cole Wave. He explained that although his intention was to get involved in a brood mare operation he bought a colt for the purpose of generating cash flow. Cole Wave was described as a big success and is said to have won 20 to 25 races. By 1989 he was too old to earn money and was given to someone who agreed to take care of him. In 1981 the appellant also acquired Highland Patrol. The purchase price was $9,500 and he was taken in a claiming race for $11,500. In the meantime he had won 10 to 25 races which is a rather uncertain measure.

After Cole Wave and Highland Patrol were acquired the appellant estimated that he spent ten hours at the delicatessen. This was then qualified to indicate that he was involved with horses from about 7 a.m. until 12 or 1 p.m. and at the delicatessen for three hours in the afternoon. This was further changed to his being there until 6 p.m. unless it was necessary for him to be absent transporting the horses to race tracks, in which case he might not attend at the delicatessen at all on particular days. The horses raced once a week on average. Weekends were devoted to the horses. The testimony then reverted to ten hours per week in total being taken up with the delicatessen business. This, notwithstanding that the horses were kept under a boarding arrangement and their training was under the supervision of a licensed trainer. Boarding and the employment of licensed trainers when training was necessary was the general routine followed in respect of all of the appellant's horses. At no time was a farm established for the purpose of the breeding, raising or training race horses.

In the appellant's absence, the delicatessen was under the supervision of the appellant's senior manager who had also worked at Dominion Stores and who joined the appellant when the business was purchased by him.

In September 1983 a broodmare named Miss Kelly Rose was purchased for $22,500. She was selected over seven or eight other mares that were inspected during a period of six or seven weeks. It was intended to have her bred at the Armstrong Brothers Breeding Farm at Brampton, one of the largest and best of its kind. This was to have been done in April 1984 and in the meantime Miss Kelly Rose ran in races of which she won at least ten. The amount of the purses is not in evidence. Early in March she slipped on an icy ramp and was so severely injured that she had to be put down. This was a severe setback for the appellant.

He then made brief mention of having purchased two other horses in 1984. Nothing was said about their names, gender, purchase price or performance. After searching for a year he found another mare called Skipper's Ship with an excellent bloodline. She was purchased sometime in 1985 for $22,500. When Skipper's Ship was acquired she had a good record as a racehorse that was much improved upon by the appellant and his trainer. She is said to have earned $12,000 or $15,000.

At this point in his evidence the appellant said that in 1986 he had eight racing horses and the broodmare Skipper's Ship. That number of horses is not reflected in his prior testimony. It only referred to seven horses, two of which—Hello Judge and Miss Kelly Rose—died; Miss Dixie Dee, who was sold back to the vendor and Highland Patrol, who was disposed of in a claiming race. This leaves only Cole Wave and the two unnamed and undescribed horses plus Skipper's Ship. This evidence is followed by a terse reference to a horse called Sulles that was purchased for $12,000 and which produced a profit of $41,000. Just how this profit was made is not described.

The evidence then reverts to 1985 when a stallion, K.M. Dynamic, was bought in that year. It won the Ontario Sire Stakes, a coveted award. He was placed with a breeding stable and the appellant received a percentage of the stud fees. In 1986 Hi-Land Nero was acquired in a claiming race for $25,000. That horse was described as one of the best that ever came out of Ontario. It won the Horse of the Year Award from the Western Fare Raceways and set five or six track records in Ontario. It was dealt with in the same way as K.M. Dynamic. Both have produced progeny.

In 1986 Skipper's Ship produced Sipping Connoisseur. The foal was sired by an Armstrong Brothers stallion. The horse's trainer told the appellant that it had an attitudinal problem and advised him to sell it, which he did. This was bad advice because the selling price was $1,000 and the purchaser in turn sold the animal for $35,000.

The next foal of Skipper's Ship was born in 1989 and named Weinstein. Again the sire was owned by Armstrong Brothers. A booklet published in 1991 about their stallions is an exhibit. Weinstein was sold in Florida in 1990 for $90,000. Stud fees for Weinstein and Sipping Connoisseur were about $5,000 each.

At the date of the hearing of this appeal the appellant had entirely given up the racing of horses and was concentrating on breeding and selling. He had three horses at that time: Hi-Land Nero, K.M. Dynamic and Skipper's Ship, who was expecting another foal. The appellant made reference to one more horse, Curleys Choice. No dates were mentioned in this regard. The purchase price was $35,000 and he was sold two years later for $16,500. He raced very well at the beginning, but soon badly deteriorated. This was because of severe abuse by a trainer endeavouring to make him run faster.

The appellant added that he invested all of his profits from the delicatessen

in his horse farming business. This completes the review of the examination-in- chief.

In cross-examination the appellant agreed that the "whole premise" of his farming operation was that the horses would be boarded and other matters relating to them would be handled under contracts. He acted as overseer. In 1981 boarding a horse with a trainer cost about $300 or $400 per month. That figure is now double. As previously mentioned the appellant would sometimes transport horses to the track, but normally this would also be done under contract.

Paul W. Percival, C.A., testified on behalf of the appellant. He is employed by a firm of accountants that include among their clients the appellant and the delicatessen business. From information in the appellant's files with the firm the witness prepared a document entitled Extracts from T1 1981 to 1990”. It reads:

S. 28 adjustment (net) 36,623 3,098 15,547 34,497 Tax 1

		(51,518)	(25,743)	(33,844)	(19,792)	(18,395)	(36,732)			(6,098)	(12,597)		(22,997)	81,603
S. 28 adjustment (net)							36,623			3,098		15,547	34,497
Farm income (loss)		($ 51,518)	($25,743)	($ 33,844)	($19,792)	($18,395)	($	109)	($	3,000)	$	2,950	$ 11,500	$ 81,603
Notes
1.	Information from T1 1981, 1982, 1986-1989
2.	Information from reassessment of June 1987 for 1983, 1984, 1985
3.	Information from taxpayer for 1990
4. 1987 T4 amount includes $85,000 actual dividend (taxable amount $113,333)

Another schedule put together by Mr, Percival was placed in evidence. In reporting his income the appellant prepared his farming statements of income and expenses on the cash basis method. This second schedule compares that result with an accrual basis statement of income and expenses. It is unnecessary for the purposes of these reasons to reproduce that document, It is sufficient to note that the net accrual income (loss) line shows: 1981—(5,028), 1982— (22,986), 1983—(45,343), 1984—15,209,1985—5,355, 1986— (26,732), 1987— (34,598), 1988—(12,597), 1989—(35,496) and 1990—81,603.

With respect to the law, I refer to three cases: Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.); Morrissey v. The Queen, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 (F.C.A.) and Mohl v. The Queen, [1989] 1 C.T.C. 425; 89 D.T.C. 5236 (F.C.T.D.). In Moldowan Mr. Justice Dickson (later Chief Justice) in delivering the judgment of the Court said at page 315 (D.T.C. 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 subsection 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 subsection 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.

The reference in subsection 13(1) (now subsection 31(1)) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of'"chief source" [2] to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.

In Morrissey, supra, Mr. Justice Mahoney, speaking for the Court, said at page 242 (D.T.C. 5084):

The appellant has admitted that the respondent was farming with a reasonable expectation of profit. That means he was farming as a business and is conclusive that he was not a class 3 farmer. It also implies that farming was a potential source of income and calls for an enquiry whether it was potentially a chief source of income either alone or in combination with another source. In considering subsection 31(1),it seems to me that potentiality, rather than actuality, is the question in all cases since the provision applies only where there is a loss in a taxation year. This is not, of course, to say that actual profitability in other years may not be evidence of the potential for profit in years of losses.

On a proper application of the test propounded in Moldowan [to determine whether a taxpayer is in the first class of farmers], when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

In Mohl, supra, Strayer, J. said at page 428 (D.T.C. 5238-39):

It now appears clear from the Supreme Court decision in Moldowan as recently interpreted by the Federal Court of Appeal in Canada v. Morrissey, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, that, for a person to claim that farming is a chief source of income, he must show not only a substantial commitment to it in terms of the time he spends and the capital invested, but also must demonstrate that there is a reasonable expectation of it being significantly profitable. I use the term "significantly profitable” because it appears from the Morrissey decision that the quantum of expected profit cannot be ignored and I take this to mean that one must have regard to the relative amounts expected to be earned from farming and from other sources. Unless the amount reasonably expected to be earned from farming is substantial in relation to other sources of income then farming will at best be regarded as a“ "sideline business” to which the restriction on losses will apply in accordance with subsection 31(1).

The appellant testified about the history and performance of his horses. In some respects this evidence is sketchy. In my experience, when evidence of that kind is to be led in cases about the deductibility of farming losses pertaining to the horse racing industry, it is helpful to all directly concerned with the conduct of the trial if a document is prepared in that regard before the hearing and entered as an exhibit if the number of horses warrants this procedure. This observation is not to be construed, however, as suggesting that the disposition of this appeal in any way turns on the failure to do that.

As for the appellant's commitment to farming in terms of time spent, I have difficulty with his evidence in that regard. It strains even credulity that his dedication to the delicatessen business would plummet from 50 or 60 hours per week to ten hours per week after the acquisition of Cole Wave and Highland Patrol, especially bearing in mind that the day-to-day care of these horses was to a very considerable extent in the hands of others. Further, the delicatessen was the basic source of the appellant's livelihood and without the revenue from it the farming undertaking could not have been sustained.

A few words and figures about capital investment. Apart from what was said about the appellant's farming operation being basically organized around the boarding of the horses and contracting out of the other work regarding them, the table entered in evidence through Mr. Percival, which is reproduced in these reasons, sheds light in this regard. During the nine years 1981 to 1989 no capital cost allowance was claimed in 1981 and 1987. The highest amount deducted in the remaining seven years was $248 and the lowest $53. The total deducted during the nine years was $844 or an average of $94 per year.

Finally a most important consideration is the inferences to be drawn from the results achieved by each of the sources of revenue involved. Losses were in fact reported with respect to farming for seven consecutive years, from 1981 to 1987. These losses ranged from a high of $51,518 to a low of $109. The total of the losses is $152,401 or an average of $21,771 per year. There is a profit of $2,950 and $11,500 for 1988 and 1989. There is a projected, but to date unreported, profit of $81,603 for 1990. That, as I understand the evidence, is primarily founded on the sale of Weinstein for $90,000. Also revenue for 1990 from the delicatessen is said to be $26,000. Again this is not a reported fact. In weighing the evidence I am assigning greater credence to the pre-1990 figures, During the period 1981 to 1989 revenue received by the appellant from the delicatessen was in total $591,470. It ranges from $26,000 to $114,407 per year, with $65,719 being the average. When the profit from farming is compared to revenue from the delicatessen in 1988 and 1989 the former is 11 and 44 per cent respectively of the latter. Further, the $26,000 in revenue received in those two years is the smallest amount received in any year from the delicatessen.

It has not been shown that in the years under review there was a reasonable expectation of the appellants farming activities being "significantly profitable” in the sense that phrase is used in Mohl supra. In this regard it is important to note that Mr. Justice Strayer states that: ”. . . one must have regard to the relevant amounts expected to be earned from farming and other sources.”

The appeal is dismissed.

Appeal dismissed.