Jim S. Twigg v. Minister of National Revenue, [1991] 2 CTC 2112, 91 DTC 1059

Margeson, T.CJ.: —In the case at bar, the appellant was an accountant by profession, who in the years 1981 to 1985 had claimed full farm losses from a thoroughbred horse operation known as "River Ridge Farms".

The Minister of National Revenue classified the appellant as one entitled to claim restricted farm losses (so-called) under the provisions of subsection 31(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). It is not argued that there was not a reasonable expectation of profit from the operation so as to enable the appellant to claim such restricted losses under the above-mentioned section, but the Minister alleges that the appellant's chief source of income during the relevant years was not farming or farming and some other source and therefore, he is restricted to claiming only those losses allowable under subsection 31(1).

Facts

There was introduced into evidence through the appellant the following attached schedules [not reproduced]: Schedule "A" which was a breakdown of farming income (loss) of the appellant from 1976 to 1986; Schedule "B", an income analysis and comparison of the appellant's income from farming and from his accounting business from 1976 to 1987; Schedule "C", a schedule of income and expense, and Schedule "D", an historical acquisition of livestock list. At the beginning of the evidence, it was pointed out by the appellant that the total expense figure for the year 1984 should have read $132,091.31 instead of $13,209.31 as shown on the document.

The appellant is 47 years old, lives four miles south of Saskatoon at a place he calls "River Ridge Farms" where he and his family have lived since 1974. He grew up in Saskatoon and graduated from university there in 1969 in Commerce. Later he earned his C.A. and practiced his profession.

The appellant did not come from a farm background but was always interested in animals. He said he spent a lot of time in the country. He worked on a farm and a riding academy. He was a hockey prospect with the Montreal Canadiens organization, attended the training camp and did a stint in the minors but did not graduate to the National Hockey League. He returned to Saskatoon somewhere between 1963 and 1965 and went to University.

The appellant described his wife as a sophisticated horse person and one who even owned her own horse. They cared for a Palomino stallion in Saskatoon and also rode him. They always talked about some agricultural endeavour and viewed various parcels of land but they were too expensive for them to buy. Finally, they bought a parcel of land of 80 acres with his family members and called it "River Ridge Farms". They also bought a horse. The appellant intended to develop the land and to live in the country. He considered a cattle operation but again found it to be too expensive. He got his C.A. in 1974 and worked with Touche Ross.

The appellant, his wife and some of her family started to develop the farm and at first had to clear it off. They also started planking the farm. Even while working at Touche Ross he considered he was there only as a source of income. He did not even, from the beginning, consider himself as a career accountant, he did his job and ran his farm. In October of 1976, he left Touche Ross and went into business with another person who had a clientele. He said he was not willing to commit himself to accounting and this new accounting venture with another person gave him the flexibility that he needed to be able to operate his farm. The firm was known as Robinson, Twigg, & Ketilson and in the first six months, he made only $5,000, whereas his partner made $19,000. He was spending a lot of time even then at the farm stating that he basically did a supervisory job as an accountant and he viewed the work of others and delegated work. He went in around 11:30 a.m. having worked on the farm up until that time. He devoted twice as much time to the farm as to the accounting practice between 1980 and 1985. They kept their own fees and shared expenses. He developed a very qualified staff himself while Mr. Robinson did all his own work as a career accountant. The firm had discussions with Touche Ross about merging but the appellant's position was that he would have nothing to do with it because, at that time, he was more deeply involved in horses and the merger would not allow him the flexibility he needed and wanted. On July 31, 1988, he left with nothing but his files. He started his own firm and said he lost $15,000 to $16,000 in his first year.

Mr. Larry Safinuk testified that he was a chartered accountant and graduated from the University of Saskatchewan in 1981. He went to Coopers and Lybrand in Edmonton and Saskatoon and left to join the Robinson and Ketilson firm. Mr. Myra also worked for the appellant. Mr. Safinuk worked exclusively on the appellant's accounts and still does.

He confirmed the appellant’s evidence that he was not in the office all that much. Mr. Safinuk completed the assignments and reported to the client. The appellant reviewed them. Also, Mr. Myra took on a lot of review duties for the appellant. Mr. Myra left around February of 1984. According to Mr. Safinuk, he put in 2,400 to 2,500 hours per year. The appellant's hours were basically 11:00 a.m. to 4:00 p.m. for most of the year, but during the racing season he might not be in until noon or after and left after lunch or earlier to go back to the track. Some days he did not come in at all, or some times for an hour or two. He would go over the events on the active files and get updated. The majority of his files were worked on by Mr. Safinuk.

The appellant paid all the salaries. The fees were billed at the accountant's rates and when the appellant did work, it was billed at his rate. There were certain shared items of cost as well. He did not participate in professional development courses, his focus was on the farm and the horse operation. The office was computerized and he could not even operate the computers but the rest of the accountants could.

During the busy season in March and April, Mr. Safinuk worked very extensive hours, double standard time as he called it and got paid over-time by the appellant. Often times during the foaling season, the appellant often dropped what he was doing in the middle of a job and went to the farm. After 1985 the same arrangement was in effect. According to Mr. Safinuk, the appellant’s forte was in public relations, and he attracted a lot of clients. In cross-examination he said sometimes the appellant was only there one hour per day from the end of April to October, and some days he was not there at all.

Insofar as the plant part of his farm operation was concerned, the appellant was involved in every aspect of it including working on the fences, barns, the house, the paddocks. As far back as 1975 he indicated that he was going to get very involved in racehorses. They bought three horses in 1974-75 plus two ponies. They spent a lot of time at racetracks. In 1976, three other horses were □ought for racing. His idea was to raise a thoroughbred from his own operation and finally have it racing at the Downs in Saskatchewan. That was the end product. His operation got involved in all aspects of the process.

It is interesting to note that the appellant reported his operation on the basis of a restricted farm loss under section 31 of tne Income Tax Act until 1979. His evidence was that in 1978 he and his wife sat down and decided how to develop the farm into a complete racing complex, including all facilities, barns, paddocks and even their own racetracks for training. They travelled to California, British Columbia and Alberta and viewed facilities and racetracks.

The appellant became involved in various syndicates to acquire horses, got a full time trainer, got equipment for him including a trailer for him to live in. The horses ran at racetracks in Winnipeg, Saskatoon, Regina, Edmonton and Calgary and showed a certain amount of success, one even set a track record at Marquis-Downs. They expanded the operation to 17 stables, living quarters, a tack room, developed medication facilities, a saddle area, storage facilities and office space. They also developed their own paddocks, raised their own foals, acquired a custom-built horse trailer, got a heavier truck and developed the farm in steps as he got more money. He also borrowed substantial money from banks and $15,000 from his father. He said he knew at the beginning that to develop a successful operation it would take a long time. His evidence is that from 1976 to 1987 he was involved in 34 thoroughbreds through his own operation and through syndicates. Some of these horses had very fine breed lines including Aurora Lads who was a granddaughter of Northern Dancer.

He had some significant purse successes, according to his evidence, and some significant foal crops. They purchased some, sold some others. They took steps to upgrade their stock by buying in California for some significant prices. One of their horses reached the magic $50,000 in earnings category which was an exceptional milestone for a broodmare.

The appellant's evidence was that he became involved in various organizations so as to assist in marketing their product and to create an interest in racing including a race called the “Rainbow of Roses" which also involves a horse sale for their product. He says that he has had a lot of success in his operation and he has not finished. He describes his operation as the most practical with all the facilities. He continues to be involved in different committees regarding horse racing and horse rearing.

With regards to accounting organization he says that he is not involved with any organizations in any meaningful way. However, he is involved in the H.B.P.A. which is the governing body of horse racing and which body also negotiates contracts with the racetracks. He was Treasurer, on the Negotiating Committee, the Classic Committee, the Futuristic Racehorse Sales Incorporation, which was established to promote the breeding, racing and sale of racehorses in Saskatchewan. He was one of the founders in 1984 and is still involved. He was involved in every aspect of the horse racing business according to his evidence.

The appellant's evidence was that he expected his operation to be profitable. There is money to be made, is the way he put it. Many horses make $100,000 he says and one in Alberta made $200,000. He felt that he is almost there, it takes patience and he now has it. He says he would have been there before now except for some high interest rate periods, some problems with some very good horses which, if they had not occurred would have made his horses valuable winners.

In cross-examination, the appellant admitted that he did not initially intend to get into thoroughbreds or racing them. He split his farm losses with his wife in 1974 under section 31 of the Income Tax Act as he was in the farm business as a sideline. He admitted he took no courses on thoroughbreds before buying them but went to seminars starting in 1980. He felt he would turn a profit faster than he did. He read articles on profitability of raising horses and did analyses constantly on what horses earned. In response to a question put to him by the respondent, he produced an analysis in this regard although he did not know when it was prepared but he thought it was probably done for a bank. He further indicated that he obtained information about race purses from historical documents, had a statement of projected income from horse racing, from horse sales and from boarding of horses. He also estimated his costs of straw, hay, supplies, oats and other expenses. He took into account contingencies that one would expect in this type of operation.

In 1978 to 1979, the appellant got involved in the horse racing business fully. He expected to make a profit right away. His wife was very knowledgeable, he had been involved since 1974, ne had experience, he had talked to people involved: jockeys, trainers, racetrack people, was aware of and considered contingencies and understood risks. He prepared a budget in 1978-79. From then on, it was a sole proprietorship.

The appellant was asked about his income as referred to in the exhibits and the times spent on accounting and the farm and he said it was 50/50. In 1980, he said his income was the third highest in the firm and he had rental income. He said that he spent more time on the farm than in the office practice. He was asked why his practice income increased and he said it was because of the good staff he had. He did less work and made more money. As his staff grew, he was able to delegate more work. He kept his staff very busy.

When asked about the number of horses he had an interest in in 1984, he said it was 18 thoroughbreds plus pony horses and a Palomino.

In cross-examination, the appellant said that by 1984 he had a whole farm operation. He said he stood to make $200,000 in one year and it could have happened at any time. He says he actually had a net farm income in 1986 of $22,113, but for his section 28 election.

When pressed about what constituted a good operation to be profitable, the appellant said you have to have brooding facilities, purses from races, horse sales, boarding and training facilities. He says he had all of these. He said he would expect to earn $100,000 from two good horses, $25,000 to $50,000 from one other, one sale of $10,000 and one sale of $5,000 and boarding income of approximately $15,000. He said that this takes into account injuries to horses at time of falling and otherwise. He said his horses were insured. River Ridge Farms right now is profitable, he said, at the time of the giving of the evidence and it had good banking results and will make a profit in 1991.

Counsel for the respondent introduced a letter from River Ridge Farms to the Minister dated January 3, 1985, in which the appellant states that he expects to be profitable in six to seven years. The appellant says the letter meant six to seven years from 1985 and he is on target.

Appellant's Position

Counsel for the appellant argues that the appellant has demonstrated that he had a genuine and real commitment to the farm operation; that he had a high degree of expertise; a good plan and that he structured his accounting practice around his farm operations or at least since 1979. He contended that the appellant had the chance of making a lot of money at it and that his chief source of income was farming and remains that way today.

Counsel for the appellant points out that there are cases going both ways and we must look to the particular factual situation. He cites Bernard Gray v. M.N.R., [1988] 2 C.T.C. 2123; 88 D.T.C. 1520, for the proposition that even where the appellant made a significant income otherwise, his primary efforts were directed to farming and there was a projection of profit. He distinguishes John W. Rose v. M.N.R., [1988] 2 C.T.C. 2246; 88 D.T.C. 1559, where the physician spent twice as much time on his profession as in farming and there was no change of direction. Likewise, he distinguishes Charles Roney v. M.N.R., [1984] C.T.C. 2701; 84 D.T.C. 1431. In the case at bar he says it is two to one for farm work as opposed to the accounting operation and this is supported by the evidence. Further, he says that the appellant contributed a great deal of capital and time to farming and had a reasonable expectation of profit. He says that the facts disclosed that in 1985 there were gross fees in his accounting operation of $290,000 whereas the appellant only had $50,000 net, less than 20 per cent of the firm's income which shows he was not earning much from the firm. Further, he says that between 1982 and 1983 his net income in the profession went up by only $2,000. He further relies upon the case of The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256, which he says assists him in his argument.

Respondent's Position

Counsel for the Minister agrees that there was a reasonable expectation of profit from the farm operation as is shown by her position that it is a restricted farm loss situation. She cites Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 at 315 (D.T.C. 5215-16) and argues that all the factors set out therein must be met by the appellant for him to be considered as having farming as his chief source of income. She argues that the evidence does not disclose that there was an actual or potential profit possibility such as to make it his chief source of income. She says that because the Minister has conceded that there is a reasonable expectation of profit, that does not satisfy the requirements in this case. Relying upon Molaowan, supra, Raymond Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080 and Mohl v. Canada, [1989] 1 C.T.C. 425; 89 D.T.C. 5236, she takes the position that there is a further requirement and that is "profitability". From all her arguments I conclude that she is saying that profitability must be such that the appellant can expect to look to farming as is chief means of support or livelihood. She says there must be a significant profitability possibility in light of other income streams. She says that Beeline Enterprises Inc. v. M.N.R., [1990] 2 C.T.C. 2479; 90 D.T.C. 1904, also supports this requirement.

The respondent refers to The Queen v. J. Peter Connell, [1988] 1 C.T.C. 247; 88 D.T.C. 6166 and Masson v. M.N.R., [1987] 2 C.T.C. 2186; 87 D.T.C. 515, in support of her thesis that in the case at bar, there is no concrete evidence or detailed analysis as to when the appellant would break even or even make a profit.

Further, counsel for the respondent says that the appellant had no formal training in this business but learned it along the way. The appellant spent a lot of time at it she says but there was no change of occupational direction, he still had his accounting business to fall back upon. Except for 1986, she says there was an unbroken stream of losses. Counsel for the respondent stated that the Roney case, supra, is different than this one as there was an occupational direction change in that case and she argues there is not so in the one at bar. The Queen v. Paul E. Graham, supra, she puts forward for the proposition that the Federal Court of Appeal confirmed the findings of the trial court that the appellant was involved in farming as his chief source of income as the evidence disclosed that the appellant could expect the bulk of his income to come from farming. Her position in finality is that the appellant here has not shown that his chief source of income is from farming and therefore, the appeal should be dismissed.

Analysis and Decision

As I indicated recently in a decision in John Gunderson v. M.N.R., [1991] 1 C.T.C. 2616; 91 D.T.C. 523, the reported cases dealing with the definition of chief source of income and how it should be determined have not followed a consistent pattern. It is a question of fact to be decided by the court on all the evidence.

As Moldowan, supra, indicates, the answer must come from the consideration of all relevant factors including gross income, net income, capital investment, cash flow, personal involvement and other factors. The Molaowan case, like the case at bar, was a horse operation case but the Court concluded that the appellant there devoted a considerable amount of time to his other income-earning activities. His horse racing activities commanded only a few hours per day and he never seriously expected that his farming activities would yield an income of significant importance. This is certainly far different from the factual situation which presents itself here and is clearly distinguishable.

Unlike Moldowan, supra, I find that the appellant devoted the vast majority of his energy to his horse racing operation and over the relevant years a very large proportion of his time and during a large part of the year much more than he devoted to the accounting business. Unlike Moldowan, supra, the appellant seriously expected his farm operation to be profitable, expected to earn a profit almost immediately, indeed, did succeed in that in one year and I conclude that but for extraordinary occurrences with some of his animals he might well have shown a serious profit many years before he actually will.

I have carefully read Moldowan, Morrissey and Graham, supra, in light of Moldowan and have carefully considered the appellant's argument as to the requirement of significant profitability referred to in the Morrissey case. After having carefully considered the facts and the evidence of the appellant which basically stands unrebutted, I am unable to conclude that the appellant might not reasonably expect his farm operations "to provide the bulk of income" and it certainly was "the center of his work routine".

The case of Mohl v. The Queen, supra, is dissimilar from this case because there farming was nothing more than a sideline business and profits even if realized would at best be very modest in comparison to other sources of income.

I reject the respondent's argument that as in The Queen v. Peter Connell, supra, and Masson, supra, that there is no concrete evidence or detailed analysis of when the appellant would expect to make a profit. In answer to a question directed by the respondent to the appellant, he clearly stated that he continually did projections in a detailed way and indeed apart from actually showing a profit from farming in 1986, he said his farming operation would show an actual profit in 1991 and his earlier projections were to show a profit in his first year, although due to contingencies that did not materialize. Further, the Exhibit letter R-15 introduced by the counsel for the respondent leads me to conclude that as far back as 1985, the appellant was projecting a profit in approximately six years and it appears that these predictions were accurate.

With respect to the respondent's argument that the appellant had no formal training in the farming business, I must conclude that that argument pales in light of the abundance of evidence of the rather extensive, detailed and practical knowledge and skills that the appellant possessed about this operation. One could not help but be impressed by the professional manner in which he proceeded at every stage of the project and even though that type of business is full of perils, I find that the appellant took those into account, and considering all the contingencies, I find that his expectation of profit was a reasonable one, that there was "profitability", and this business formed the center of his attention, his activity and his expenditure and that just because he still had his accounting business to fall back on, did not preclude him from having farming as his chief source of income as that term has been interpreted.

In addition to what I have said above, if you compare on a strict numerical basis his income from farming to his income from his profession over the ten- year period as shown in the exhibits, the amount of income derived from the farm operation was substantial.

Further, I find that there was an occupational change for the appellant in 1978/79 and he directed his chief energies to the farm operation from that point on. I find that the period of time it would take to make the farm operation significantly profitable is not unreasonable having due regard to the type of operation, the detailed manner in which it was planned, the contingencies involved both expected and unexpected, and indeed apart from some extraordinary problems that developed with regard to some of the stock, I find that there was every likelihood that it would have met the profitability test many years earlier.

The appeal is hereby allowed, with costs, and the matter referred back to the respondent for reconsideration and reassessment based upon the above findings.

Appeal allowed.