Alvin Halbgewachs v. Her Majesty the Queen, [1993] 1 CTC 4

Strayer, J.:—This is an appeal from a decision of the Tax Court of Canada of June 11, 1990 with respect to the 1984, 1985 and 1986 taxation years of the plaintiff. In that decision the Tax Court dismissed the plaintiff's appeal against notices of reassessment dated March 28, 1988 in which the Minister disallowed the deduction from income of losses from a horse racing and horse breeding operation amounting to $21,660.53, $10,494.59 and $1,797.98 respectively in relation to the taxation years in question. The plaintiff had claimed limited deductibility pursuant to subsection 31(1) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") but the Minister rejected any deductibility on the basis that these were not losses from a business but were personal expenses.

Facts

In the mid 1970s the plaintiff was operating a business in Regina and had a farm in the vicinity of Bethune, Saskatchewan, some 50 kilometres from Regina. He had been raised on a farm and had some experience with horses. He said that he was an enthusiast of horse races and attended as many as he could. In his testimony his recollection of dates was very imprecise but in about 1975 he acquired one race horse. He obtained a horse trainer's certificate and became a member of the Saskatchewan Standardbred Horsemen's Association. This association is obviously something to which he attached a great deal of importance. He soon became a director of the association and later its president and now serves in the association as a past president.

Between 1975 and 1984 the plaintiff acquired a few more horses. The"horse inventory” submitted by him in evidence shows that by the end of 1984 he owned six horses, two of which were described as within the "brood operation" and the remainder described as racing horses. At the end of 1985 he had five horses, four of which were listed under the "brood operation". At the end of 1986 he had only four horses, three of which were listed as "brood operation".

While, again, the plaintiff's evidence tended to be very vague and general on most matters, it appears that typically during the years in question those horses engaged in racing were kept at the exhibition grounds in Regina during the racing season from May 1 to November 1. They might also be there for three or four months prior to the opening of the season and they might spend two or more months at the farm. Other horses not being raced would be pastured at the farm. All the horses were pastured with cattle, of which the plaintiff had 80 to 100 head. The plaintiff employed staff to care for and train the horses. He says that he supervised this operation and sometimes did some of the training himself. His business in Regina was within one-half mile of the Exhibition grounds and he could readily go there. But his evidence was so imprecise that I cannot conclude from it that he devoted any substantial amount of personal time or effort to the horse operation.

Nor did he make any substantial investment in that operation. He has not demonstrated that the Minister was wrong in assuming that directly related capital assets were valued at $4,250 and that the value of total capital committed, including horses, did not exceed $27,000 in any year. The most expensive horse ever purchased by him was “ Garryo Breeze" bought in 1984 for $5,793. This was purportedly in a "business" in which, according to the plaintiff, good horses would sell for $30,000 to $40,000. It is true that the plaintiff made use of his farm land (during the period in question he was operating some 15 one- quarter sections for hay and pasture) and of his farm buildings in part for the horses. No attempt was made to allocate any of this investment to the horse operation. It appears that on average there would have been very few horses using the farm pasture and buildings. According to his inventory, during the years in question the cost and fair market value of his horses also declined.

The plaintiff has not demonstrated that there was any reasonable expectation of profit from the horse operation. It is not in dispute that from the time when he started this operation, about 1975, through the tax years in question and the years immediately following on which there was any evidence, no profits were ever earned from the horse operation. In his testimony the plaintiff said that in 1984 (sometimes he seemed to attribute this decision to other years) he had formed a plan in his mind to make the business profitable by breeding rather than buying race horses. But he said that he had never drawn up any business plan on paper nor could he really demonstrate that he had any specific calculations in mind as to how the“ business” could become profitable. In my view he has not met the burden of proof, which is on him, to show that by some objective standard (as compared to wishful thinking) there was any reasonable prospect of this operation producing any net income.

The plaintiff objects to the Minister’s refusal to recognize the horse operation as a business and therefore to allow limited loss deductibility under subsection 31(1) of the Act. Further, he contends that the horse losses were part of his general farming losses and that the Minister erred in treating his general farming business as something separate and distinct from the horse operation. The learned Tax Court judge rejected both of these contentions.

Issues

It is agreed that the issues are as follows:

(1) Was the horse operation a separate business or part of the farming activities of the plaintiff?

(2) If not, was the horse operation still a farming business within the meaning of subsection 31(1) of the Income Tax Act?

Conclusions

Part of the General Farming Activities?

It is true that the "maintaining of horses for racing" is within the definition of "farming" in subsection 248(1) of the Income Tax Act. However, I have concluded that there was no "business" involved in the horse operation. A "business" must imply some reasonable prospect for net income and as I have already concluded, there was no reasonable prospect of this operation producing a net income. Further, I respectfully agree with the learned Tax Court judge that there is no basis for assuming that every activity carried on by an individual which might come within the definition of "farming" in subsection 248(1) necessarily must be regarded as part of the same business. In the present case by the plaintiff's own evidence the majority of the activities of the horse operation were carried on away from the farm, in Regina, by separate employees. Much of the gross income of the operation was expected to come from successful competition at the horse races: either directly through race winnings or indirectly through the sale of horses from the brooding operation whose value would be enhanced by the race successes of their blood lines.

Was the Horse Operation Within Subsection 31(1)?

It is now well established that agricultural operations may fall within one of three categories as defined by the Supreme Court of Canada in Moldowan v. M.N.R., [1978] 1S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 at page 487 (C.T.C. 315, D.T.C. 5217). Those categories are as follows:

1. Where there is a reasonable prospect of significant profit from farming, these can be treated as the chief source or a chief source of income, and losses in any year are fully deductible from other sources of income.

2. Where there is some reasonable prospect of net income, even though perhaps insignificant, the operation can be treated as a side-line business and losses in any one year may be deductible from other income to the limited extent permitted in subsection 31(1).

3. Where there is no reasonable prospect of any net income then the activity must be regarded as a personal hobby and any losses must be treated as personal expenses not deductible from other income.

The legal limitations on the scope of category (2) have become somewhat obscured because in many cases the Minister of National Revenue has conceded that agriculturally-related operations came within that category, while refusing to treat them as coming within category (1). (See e.g., The Queen v. Morrissey, [1989] 1 C.T.C. 235, 89 D.T.C. 5080 (F.C.A.); Mohl v. Canada, [1989] 1 C.T.C. 425, 89 D.T.C. 5236 (F.C.T.D.).) In the present case it is the plaintiff who insists that his horse operations come within category (2) and the Minister denies this, insisting that they come within category (3). While the facts of the present case do not perhaps differ markedly from the facts in some cases where the Minister has for whatever reason conceded the operation to come within category (2), as a matter of law I am satisfied that the operation in question here comes within category (3). This again is because there was no reasonable prospect of any net income from this business, as indicated above. Prior to the years in question the plaintiff had not succeeded in making any net income from his horse operation nor did he produce any within the years in question. Further, he has not demonstrated to me that he had any reasonable prospects of ever making any money from it. His hopes for making it profitable are unsupported by any specific calculations or plan to do so. The only new documentary evidence presented in this Court that was apparently not presented in the Tax Court were Exhibits P-1 and P-2. The former was a “horse inventory” of the plaintiff from 1983 to 1988. This inventory divides up the horses between“ brood operation” and "racing horses". I take it this was done to demonstrate some change in emphasis for the brood operation after 1984. Exhibit P-2 purports to demonstrate, inter alia, through a breakdown of income and expenses attributable to the brood operation and the racing horses that the racing horses actually showed a profit by 1986. The plaintiff had some difficulty explaining this exhibit and indeed some of the assumptions upon which it is based were never explained. These documents appear to me to be ex post facto justifications to accord with the theory that there had been a deliberate change of emphasis toward the brood operation and that there was not only a reasonable expectation of profit but actual profits realized in respect of racing. I am therefore not prepared to give these documents much weight as evidence.

There being no reasonable expectation of even a small net profit from the horse operation, I believe it must fall within category (3) as defined in Mol- dowan, and not category (2): that is, the horse operation must be viewed as a hobby and its losses considered as personal expenses.

Disposition

The appeal is therefore dismissed with costs.

Appeal dismissed.