Matthew Epstein v. Minister of National Revenue, [1988] 1 CTC 2152, 88 DTC 1088

Taylor, T.C.J.:—These are appeals heard in Halifax, Nova Scotia, on May 29, 1987, with final submissions from the parties on November 5, 1987. The appeals were against income tax assessments for the years 1982 and 1983, in which the Minister of National Revenue in the first instance on December 31, 1984 had reassessed the taxpayer as follows, as it relates to these appeals:

The taxpayer filed notices of objection with regard to the above reassessments, and on December 9, 1985 the Minister further reassessed as follows:

1982 Deduct: Farm Loss

previously allowed	$ 4,993.28
Revised Farm Loss (A)	5,000.00	$	6.72
(A) Refer to attached schedule
Matthew Epstein
Revised Farm Loss - 1982
Farm Loss Previously Claimed		$ 7,486.55
Add:
Development costs "One More Time”		24,134.24
Revised Farm Loss		$31,620.79
Allowable Farm Loss	$ 5,000.00
Restricted Farm Loss	26,620.79
1983 Deduct: Farm Loss
previously allowed	$ 3,253.73
Revised Farm Loss (A)	5,000.00	$ 1,746.27
(A) Refer to attached
schedule
Matthew Epstein
Revised Farm Loss - 1983
Farm Loss previously claimed		$ 4,007.45
Add:
Sale of horse "One More Time"	$24,772.00
Cost of horse	19,857.00
Profit on sale of horse		4,915.00
Deduct:
Development Costs: The Axeman	$ 3,201.77
Grand Marnier	1,141.59
One More Time	5,676.96	10,020.32
Revised Farm Loss		$ 9,112.77
Farm loss allowed in 1983	$ 5,000.00
Restricted Farm Loss	$ 4,112.77

Obviously, that which is before the Court at the hearing are the reassessments dated December 9, 1985. However the significance of including the above information in this judgment is that the reference to "One More Time”, “Profit on Sale of Horse", "The Axeman”, and "Grand Marnier”, represent a restructuring by the Minister of National Revenue of the format used by the taxpayer in filing his income tax return for the relevant years. Mr.

Epstein (through his accountant) had separated the purchase costs, development costs, and sale of horses into a “capital account of horses" and listed it apart from the other costs of showing his horses, the latter of which he regarded as more "current operating costs". Both Mr. Epstein and a Mr. Peter Clement Petersen, Public Accountant, gave to the Court their views on the correctness of such separation — retaining certain costs as noted above to a form of capital account. This division of the operation into the two component parts, as seen by the appellant and his accountant, is a very intriguing proposition, and one which might be defended on principle, providing the subject of the capital account was indeed capital. The question of "form" or "substance", with respect to accounting presentations often arises in income tax appeals. As I see it, a similar matter was dealt with by the Federal Court in at least two judgments — Gerald Armstrong v. The Queen, [1985] 2 C.T.C. 179; 85 D.T.C. 5396 (F.C.T.D.) and Patrick J. Cullv. The Queen, [1987] 2 C.T.C. 63; 87 D.T.C. 5322 (F.C.T.D.). From Armstrong (supra) at page 182 (D.T.C. 5398) I would quote:

In the spring of 1981 he attended the offices of an accounting firm to have his 1980 taxation return prepared and filed. In one of the schedules attached to his declaration, Exhibit 1, there is a handwritten, crudely drafted statement indicating at the top “Race horse activities, farming income 1980 for George Armstrong". At the very top there are the words “Inventory — 1 horse Stone Manor, cost: $28,000 U.S.”. It then describes the purses won which amount to $230,708.15, expenses incurred $131,830.90, showing a net from the operation of $98,872.25. This last amount was reported as income. In his tax return for the taxation year 1981, Schedule 2 indicated the disposition of Stone Manor and declared a capital gain.

Both Mr. Armstrong's accountant and the plaintiff testified on the issue of the use of the word “inventory”. In cross-examination as well as in examination in chief they advised the Court that the word "inventory" was used for lack of a better expression.

The position of the plaintiff is that the sale of Stone Manor was a sale of a capital property producing proceeds of disposition which are only taxable as capital gains and not as income. He relies inter alia on sections 3, 38, 39(1)(a), 40(1)(a), 54(b) and 248(1) of the Income Tax Act. It is contended that there was never any intention ("primary" or "secondary") to enter into the business of trading in horses for profit.

The defendant on the other hand argues that the sale of Stone Manor resulted in a profit from a business or an adventure in the nature of trade which is fully taxable as income. The defendant relies, inter alia on sections 3, 9 and 248(1) of the Act. The phrase "adventure in the nature of trade" is drawn from the extended definition of “business” found in subsection 248(1). While admitting that Stone Manor was acquired to be kept and raced, the main contention of the defendant is that the plaintiff had a speculative intention of selling Stone Manor for a profit. This secondary intention is said to impart to the sale the characteristics of an adventure in the nature of trade making the proceeds fully taxable as income.

And from page 184 (D.T.C. 5399):

Upon evaluation of all of the evidence and circumstances I am not prepared to find that at the moment of purchase of Stone Manor, the possibility of resale for profit was an operating motivation of the plaintiff's acquisition. I am satisfied that there was no secondary intention in buying Stone Manor to sell him for a profit rather than keep him for racing. The evidence is to the contrary. He was carefully chosen as a good race horse, he was trained and in fact raced. A good income derived from the purses won. The sale was motivated by an unfortunate and unforeseeable leg injury which brought his racing career to an abrupt end. . .

And from page 186 (D.T.C. 5400):

The purchase and eventual sale of Stone Manor was neither a business nor an adventure in the nature of trade.

I would also note from Cull (supra) at 70 (D.T.C. 5327):

. . .The description of the properties on the partnership's financial statements cannot override the conclusions which arise from the facts as a whole.

In the notice of appeal, the taxpayer contended:

. . .The taxpayer's position is that his business is the operation of athletic, competitive show jumping at the national and international level, designated a major sport activity by the Government of Canada for funding and control purposes, and by Revenue Canada for special tax relief to donors of show jumping horses or financial contributions: The taxpayer contends that his business is a normal, commercial enterprise, and non-farming in nature.

In the Alternative, the taxpayer says that if his activity is adjudged to be a farming business, that it is for full-time farmer status and not a farming business to which

S. 31 of the Income Tax Act should be applied, as desired by the Department, from 1982 to current operations.

From the reply to notice of appeal, the situation for the Minister was:

— The Appellant's activities in regard to exhibiting horses at equestrian jumping events constituted farming;

— The Appellant's chief source of income, during the 1982 or 1983 taxation year, was neither farming nor a combination of farming and some other source of income.

Also in the reply to notice of appeal, the Minister provided a summary of the basic information upon which the assessments had been struck:

— In assessing the Appellant to tax for his 1982 and 1983 taxation years to permit him to deduct farm losses only to the extent permitted by section 31 of the Income Tax Act, the Respondent states as follows:

— In or about 1975, the Appellant began maintaining horses for the purpose of exhibiting them in equestrian jumping events;

— The Appellant's inventory of horses and costs of acquisition and training were as follows:

	1979	1980 1980	1981 1981	1982 1982	1983 1983
Kee Konk	$ 8,000.00	$ 8,000.00	$ 8,000.00	$ 8,000.00	$
Development
Costs	1,145.68	1,145.68	1,145.68	1,145.68	4,427.00
Southern Most	3,500.00	3,500.00	3,500.00	3,500.00	3,500.00
Stanus D’Avon	8,000.00	8,000.00	8,000.00	8,000.00	8,000.00
One More	19,857.35	19,857.35	36,319.50	60,453.74
Time
2/3 Axeman					37,418.32
2/3 Grand					17,655.84
Marnier
Adjustment to
reconcile with
Appellant's
figures	(298.03)	(298.03)	(298.03)	(298.03)	(6.35)
	$40,205.00 $40,205.00 $56,667.15 $80,801.39 $70,994,81

— During the 1979 through 1983 taxation years, the Appellant earned income as follows:

	1979	1980	1981	1982	1983
Taxable
Canadian
Dividends		$ 131.25 $ 159.36 $ 136.00 $ 11.00
Interests		13,909.82	17,535.37	21,048.00	10,273.00
Rental Income		37,573.61	22,725.42	1.00	1.00
Allowable
Capital				(31.00)	(2,000.00)
Other Income
(IAAC)		4,098.88	8,929.93	12,976.00	12,976.00
Taxable Capital
Gain		2,140.00	6,375.00
Commission
Income		150.00
Show Earnings	$2,633.00	3,149.00	3,497.00	2,985.00	3,201.00
Expenses
claimed
against show
Income	18,207.00	16,372.00	15,230.00	10,472.00	7,208.00
Farm Losses	($15,573.00 ($13,223.00) ($11,733.00) ($ 7,486.00) ($ 4,007.00)

— The Appellant earned revenues and incurred expenses with respect to the training, maintenance, and showing of horses as follows:

	1979	1980	1981 1981	1982	1983
Earnings	$ 3,201.81	$ 2,985.97	$ 3,497.25	$ 3,149.00	$ 2,633.50
Vet		379.50	303.10	472.66	706.00
Training,
stabling	3,179.58	3,949.96	5,982.37	4,935.15	7,892.20
Office	277.82	711.37	204.28	432.07	393.41
Sundry &
Membership	861.41	186.18	873.25	1,094.16	477 .30
Shows Lodging		2,063.88	1,256.00	2,459.50	1,681.11
Trailer & Tack
Repair	445.97		2,350.26	1,818.74	926.55
Car Expenses
(30%)	1,562.38	2,010.93	2,701.16	2,363.06	2,366.36
Depreciation
Trailer	381.10	544.50	777.73	1,111.13	1,587.32
Tack	501.00	626.20	782.78	978.46	722.42
Insurance				708.00
Entertainment					88.57
Interest					1,366.04

Total Expenses $ 7,209.26 $10,472.52 $15,230.93 $16,372.93 $18,207.28

Net Loss as per

returns of

income	($4,007.45) ($7,486.55) ($11,733.68) ($13,223.93) ($15,573.78)
Development
costs and
purchase of
horses not
expensed
consistently
with prior
years	$5,679.	$24,134.	$16,462.	—	$19,857.
Actual Loss	($9,686.)	($31,620.)	($28,195.)	($13,223.)	($35,430.)

— The Appellant, in years prior to 1979, did not earn a profit from his show- jumping activities;

— The Appellant's capital commitment to his farming activities, his rental operations, and his income producing investments were (approximately) as follows:

	1982 1983 1983
Investment in Real Estate — U.S.	40,000	40,000
Canadian	120,000	120,000
Horses and Equipment (Equipment — $5,000)	85,801	75,994
Interest bearing investments	210,480	102,480
Total Investment in Canadian Dollars	456,281	338,474
Investment in Horses and Equipment compared with
total Investment	18.8%	22.4%

Obviously, there was a dispute between the parties as to the perspective to be taken in this matter — (i.e.: the nature of the operation).

In testimony this taxpayer regarded the "capital account" as an "inventory of horses". In reviewing this aspect of the matter with the Court, Mr. Epstein indicated the real money was in buying horses, developing them and selling them. Having acquired the horses, with the full realization that there could be a profit from that part of the operation, the results must be reported and assessed just as the Minister has done. As an individual taxpayer, neither the legislation or jurisprudence would permit Mr. Epstein to report only his profit or loss from the show jumping portion as a "business", and at the same time, to ignore any profit or loss from the sale of horses portion in this set of circumstances. His reference to the capital account as an "inventory of horses", is basically correct, but that would not even be a “capital account”, as I understand it, any more than the inventory account in any other business would be capital. If he had acquired the horses for some purpose other than eventual sale, such designation as a capital account (similar to Armstrong (supra)) might be valid, but that is not the case. It is possible that a taxpayer could acquire horses and keep them as capital — just for the purpose of showing them for a profit — but that is not the understanding I have of the perspective and intention of Mr. Epstein. He "showed" his horses for the purpose of winning ribbons, or perhaps small money prizes (which could not cover his expenses), with the real objective of improving their recognized worth.

In this matter, there can be no doubt that Mr. Epstein recognized clearly that the potential for profit in the operation rested with the obtaining, developing, training and eventually selling good horses — there was little if any possibility of profit from the showing itself. In that sense, these appeals are quite the opposite to the situation in Armstrong (supra), but the principle permitting, perhaps requiring, such separation under certain circumstances remains intact.

During the course of the hearing a discussion was held regarding the $5,000 restricted farm loss already allowed by the Minister. The Court stated that the real issue was whether the appellant could demonstrate that the "horse operation" was conducted with "a reasonable expectation of profit". If so, the appellant would be successful, and entitled to the amounts claimed; if not, the assessments would remain as struck — with the "restricted farm losses" allowed. This was the situation which counsel for the Minister agreed must remain, — the Court not being required (or competent) to withdraw these earlier concessions by the Minister, even if the operation was determined not to be “farming”. As will be seen later, I do not believe it is necessary, in this set of circumstances, to decide whether the operation was “farming”, even though we will make reference to that proposition by the appellant.

To provide the thrust of Mr. Epstein's propositions, I would quote extensively from the summary of that which he relied upon for his notice of appeal:

Prime issue is whether the taxpayer is a businessman (non-farming) or in the farming business, and if the latter, whether the taxpayer is subject to s. 31; The Audit Division and the Appeal Division of Revenue Canada, with Head Office support, desire to impose S. 31 restrictions on the taxpayer's operation.

The taxpayer, since 1959 was totally involved in the practice of law and the ownership and management of substantial rental properties. In 1975 he ceased active law practise, retained property managers and commenced an equestrian show jumping operation at a national and international level, which he still operates. He had also, between 1975 and 1981 disposed of all his remaining rental properties except premises in which he personally resides. His income is from a variety of sources and he has no other occupation or employment except the show jumping activity. For seven years, from 1975 to 1981 inclusive, the Department granted the taxpayer total allowance of all expenses/losses generated by the show jumping activity as reported in the normal, commercial practise and basis — never using, seeking or requesting the status of a "farmer" in any guise whatsoever; and never being treated as a "farmer" in any manner whatsoever by the Department as to the many various special rules and beneficial incentive provisions, or special farming provisions and elections granted, available and often required to and from all farmers under the Income Tax Act.

REASONS: That the taxpayer has established a prima facie case as to his status as a commercial businessman operating a non-farming equestrian show jumping activity based upon presumptions derived from, but not limited to, the following:

Reporting his operation annually for seven years in a normal commercial manner and the Department's annual perusal and acceptance of same with full allowance of expenses/losses.

The Department's failure to treat the Taxpayer in any other manner over a seven year continuous period except in a normal non-farming manner:

That over a seven year continuous period from 1975-1981 inclusive, the Department failed totally to request special filing return procedures and other determination, as required under the Income Tax Act, from the Taxpayer, treated or adjudged the status of "full time unrestricted farmer";

That the Department failed to acknowledge world-wide recognition that show jumping is an athletic competition and not a livestock exhibition, both within and outside the industry; and that the horse is to the show jumping rider what the automobile is to the racing car driver;

That the Department failed to acknowledge equestrian show jumping as a federally designated and approved national sport and Olympic sport receiving federal direction and funding from the Department and the Minister of National Sport and Amateur Fitness with similar recognition and financial support from provincial counterparts;

That the Department failed to acknowledge that Revenue Canada itself grants special tax relief to donors assisting this national sport of show-jumping with horses as well as to all persons or entities making financial donations or other gifts of value to the sport at the national level; and that special funding is provided the nation's top equestrian athletes under national assistance programmes for this country’s leading atheletes;

That the Department has failed to utilize, consider, or equitably apply the various rules of interpretation where doubts, lack of clarity, uncertainties, and ambiguities exist in terms which permit alternative construction; nor to accept the resultant burden and onus on the taxing authority which arises therefrom and is normally to be resolved in favour of the taxpayer; that subsequently the statute is subject to strict interpretation against the Crown in that there must be clear and unambiguous enactment to permit taxation;

That the Department failed to follow long-established basic guidelines of its own contrary to such certain established policies favouring the Taxpayer in matters of strict interpretation, doubt, discretion, ambiguity, clear intention, confusion, alternate meanings, and the theory of (civil) balance of probability benefiting the taxpayer (and not proof beyond a reasonable doubt.);

That various Department divisions, to wit, Audit and Appeal, within Revenue Canada, were both confused and in conflict as a result of unclear and ambiguous terms stated in the Income Tax Act, s.s. 248(1)’s definition of "farming" — particularly with regard to the words, “livestock, raising, maintenance and exhibiting”, and erred in their interpretation and application accordingly;

That the Minister must establish more than the bare definition of farming to justify, affixing the status of farmer to the taxpayer;

That the bare definition of "farming" in the Income Tax Act, no matter how encompassing it appears, is such that a show jumping operation, by its form and substance, generically removes such activity from a farming operation;

That the phrase "livestock exhibiting” in the Income Tax Act does not appear in isolation and cannot be interpreted or taken out of context; its meaning must be construed in a farming aura or sense within that section of the Act dealing specifically with farming and read as a whole within it;

That if the Department is to resort to the farm definition of “livestock”, then must it also resort to the farm definition of “exhibiting” and there does not exist a bona fide farmer or accountant in Canada who would, in all honesty, classify equestrian show jumping as either a farming activity or as livestock exhibiting; No single instance exists of a show jumper (being judged) as a livestock exhibit, and if it is not an exhibit it cannot be exhibited; it is a joint venture or entry by man and animal participating in competition — not exhibition, and their efforts are presented for viewing or exposure as to their athletic prowess;

That the Department failed to acknowledge that Canadian governments do not automatically treat horses, and the equestrian show jumper in particular, as livestock, or as a livestock exhibit and Parliament has clearly spelled out for many decades which horses and which activity (racing horses) were to be treated as “farming.” Revenue Canada itself created confusion, both internal and external with an unclear and ambiguous inclusion of ALL horses as PETS in its July 1, 1985 imposition of a 10% tax on animal feeds, livestock excepted, with the initial result that horses were not treated as livestock;

That had Parliament desired “exhibiting” to apply to the public activity of all livestock, per se, (horses), it would have stated so clearly instead of separating racing sport horses from livestock generally, as it has clearly done in use of the words, “maintaining horses for racing", — special, distinguishing words so that racing horses fell within its exclusive definition of farming;

That the taxpayer has been advised, both verbally and in writing, by appropriate Department of Agriculture authorities that in no way, shape or form would the taxpayer or his activities, qualify as a farmer, or farm activity;

That the statute's (s.s. 248(1)) definition of farming phrase, "livestock raising or exhibiting” has inherent to it, both a lack of clarity as well as ambiguity, further confirmed by the erroneous and conflicting grounds stated by two different divisions within the Department as reasoning for declaring the taxpayer to be a farmer; that the Audit Division concluded that the taxpayer was "raising horses" as part of his activity which supposition the Appeal Division rejected, preferring to base their position on the phrase “exhibiting livestock”. The Audit Division, with its expertise, failed to clearly understand and distinguish the difference between “raising livestock" as compared to “maintaining livestock" OR providing them with basic necessary sustenance likewise, the Appeal Division failed to acknowledge that the term "livestock exhibiting” was both unclear and ambiguous and subject to various alternate meanings — by the industry, by the public, by Governments and by Revenue Canada itself;

That both the Audit and Appeal Divisions attempt to attribute to the word “exhibit” a singular, clear meaning which it does not possess; the word “exhibit”, to the contrary, has an aegis or umbrella effect capable of a myriad of more alternate meaning;

THAT IN THE ALTERNATIVE, if the taxpayer is deemed to be operating a farming business, then the taxpayer's position is that S. 37 of the Income Tax Act is not applicable; the Audit and Appeals Divisions desire to apply S. 31 restrictions to the taxpayer's activity from 1982 to the present time (BUT NOT from 1975-1981 inclusive) which decision the Department's Head Office confirms and supports;

That it is incongruous that the years since 1981 reflect a considerable improvement in every respect of the farm operation by the taxpayer with ever-growing potential to yield income of significant importance and proportion; that the Department's determinations present a totally inconsistent approach creating an undesirable commercial dilemma for the taxpayer as to steadily increasing development of the farming operation and commitments for future expansion according to the taxpayer's available resources;

That the taxpayer's chief source of income stems from farming in combination with other sources; nor is it necessary that the income from all the taxpayer's other sources be the lesser of the two — and the test of comparing income from each source is NOT VALID as the test for determining the chief source of income;

That the farming activity needs only to form part of the contribution that constitute the chief source of income; where a taxpayer derives income from a source other than farming, and the farming activity sustains losses, the farm losses are deductible in full nevertheless provided the taxpayer carried on the farm enterprise With a reasonable expectation profit, and in this instance all parties agree that such reasonable expectation of profit exists;

For a source of income to be the taxpayer's chief source of income, it is not necessary that the income produced from it be greater than the income from all of the taxpayer's other sources of income NOR in fact from any of the taxpayer's other sources of income;

That the taxpayer has reported substantial gross income in recent years; nevertheless, pure quantum measurement is decidedly not the test for determining a taxpayer's chief source of income — the direction of his mode and habit of work or reasonable expectations from his various sources of income form the distinguishing features as to the taxpayer's chief source of income.

Further, the application of S. 31 restrictions is not to be applied where the farming activity is the centre of the taxpayer's work routine and is also the major preoccupation of the taxpayer; Such is the case for the taxpayer and as such he is entitled to deduct the full amount of any farming loss from other income. S. 31 envisages that a taxpayer may have farming losses without prejudicing the status of farming, either alone or in combination with other incomes, as a chief source of income;

The taxpayer is an individual who changed his occupational direction and committed his energies, time and capital (according to available resources) to his farming activity of athletic, equestrian show jumping with reasonable expectation of income and profit;

AND THAT the taxpayer has operated his farm activity continuously since it began in 1975 and has not engaged in any other work or occupation since requiring any significant amount of his time or energies, and has, since commencing the show jumping operation retained the services of property managers on a regular basis, and investment counsellors from time-to-time. The farm activity is not of auxiliary interest to the taxpayer — it is his prime centre of work routine and his major preoccupation.

In addition to testifying himself, the appellant assisted the Court, by providing testimony from the following in support of his "business" contention:

Mr. Donald R. Spencer — Retired Property Manager

Mr. Peter Clement Petersen — Public Accountant

Mrs. Katherine Morgan — Regional Account Supervisor for a local publisher.

At the close of the testimony, the Court requested a written submission from Mr. Robinson, counsel to Mr. Epstein, outlining the basis upon which the evidence supported a conclusion that the taxpayer's operation, if a "business" had been conducted with a “reasonable expectation of profit”, or in the alternative if “farming”, that it was the "chief source of income” for Mr. Epstein. Some of the critical points from that written submission were:

— It is nevertheless respectfully submitted that should the Court not grant the aforementioned motion, then in the alternative there was still ample evidence given at the Hearing to indicate that the Appellant was in all aspects carrying on a business and carrying on a business with a reasonable expectation of profit.

— Evidence solicited from the Appellant indicates the prior study, examination and months of decision making that went into acquiring his first horse.

— The Appellant was not inclined to think of his show-jumping business as embarking on as a farm activity, however, it didn't matter from a day to day point of view what appellation it went under. The taxpayer treated it as a business and expected to make a profit and in his mind, the potential for profit was there.

— Testimony showed that the Appellant had a generally fixed annual income and much of his capital in lifetime investments. Additionally, the Appellant uses the bulk of his annual income and whatever funds can be transferred in a prudent manner within reasonable and available limits to invest in his show-jumping operation.

— The position of the Minister is that the Appellant was not carrying on a business but merely indulging in a "hobby". This merely repeats the true intent of the assumptions set out in Paragraph 10 of the Minister’s reply which the Court ruled at the preliminary stage of this Hearing as being a non-issue.

— There were without doubts setbacks and adversities in the Appellant's business; one with a relatively high risk factor.

— Evidence was presented that one horse,"One More Time” accounted for the lion’s share of the Appellant's losses, in fact, the loss relating to this horse was approximately 98% of those losses over the course of the Appellant's operation. Surely, the Appellant cannot be penalized or told he is not operating a business with a reasonable expectation of profit simply because of one unwise decision.

— The Appellant also faced adversity with other animals and particular riders and/ or trainers, but changes were necessary and he made changes that were normal to the trade in an attempt to overcome specific problems and continue the advancement of his equestrian operations.

— It is respectfully submit(ted) that the Appellant has met these tests. We have seen evidence from the Appellant and other witnesses that the Appellant:

1. Completely terminated his law practice.

2. Disposed of all real estate except those in which he maintained a personal residence.

3. Maintained separate bank accounts.

4. Documented partnership agreements in a businesslike fashion.

5. Registered his stable name.

6. Made use of other professionals in the accounting, property management and investment areas to allow full freedom of time and movement.

7. The taxpayer changed the animals within his jumping activities and/or trainers and/or riders as the situation dictated and additionally changed the locale of his own home to bring him closer to the show-jumping areas of Nova Scotia.

8. Used riders and trainers of an international level and exhibited at shows of that quality.

— It is respectfully submitted that all of these are the actions of a prudent, conscientious businessman attempting to operate a profitable organization and attempting to meet changes in the particular industry in an appropriate and timely fashion.

In light of the recent judgments in The Queen v. Steven Gorjup, [1987] 2 C.T.C . 129; 87 D.T.C. 5348 (F.C.T.D.) and André R. Demers and Carolyn Demers v. M.N.R., [1987] 2 C.T.C. 2247; 87 D.T.C. 537, the Court requested responses to the above comments from counsel for the Minister. Essentially, these responses were:

— The Appellant strenuously argued in his Post-Trial Memorandum that he is not in the business of buying and selling horses . . .

— . . .It is submitted that the applicability of the decision in Gorjup is inappropriate in the present appeal due to the fact that this appeal has proceeded on a non-farming basis and the facts of the Gorjup decision should be confined to the situation as it existed in Gorjup.

— In summation and in response to the instructions in the letter dated August 18, 1987 from your secretary, the Gorjup decision can be distinguished from the present appeal on the following basis:

(1) The Appellant has admitted that he did not expect to make a profit from his horse show jumping activities which, even on a subjective view of the evidence, must lead to the conclusion that the Appellant's activities had no expectation of profit, reasonable or otherwise;

(2) The Appellant's activities were not farming and, therefore, the test to be applied in determining whether or not a taxpayer's activities have a reasonable expectation of profit should be of a higher standard in accordance with the reasoning used in Gorjup.

(3) The Appellant had not developed and followed an operational plan for his equestrian activities and is not carrying on a business;

Final comments from Mr. Robinson were then reviewed.

Analysis

The Minister has accorded the appellant a deduction in each year of $5,000, for the "restricted farm loss". The primary assertion of the appellant

— and his argument (supra) — is that he was not “farming”, but rather was in the business of "show jumping". Counsel for the Minister has accepted that argument — and even if such agreement was inconsistent with the assessment at issue I can think of no reason for the Court to upset that accord. Whatever comfort might come to this taxpayer from the “farming” characterization is indicated in Gorjup (supra) where the learned justice noted that:

. . .It would also appear that the test for a reasonable expectation of profit for an agricultural business will be of a lower standard in general than for other businesses.

The comment may be intriguing when referenced against earlier jurisprudence, but it is clearly to be restricted to “farm loss” cases in any application and is of no help to this appellant, since his primary argument eliminates its use. I would add however that, even in “farm loss" cases there must be some bottom line, below which the Court should deny a taxpayer the benefit of the deductions sought and I would refer to the recent case of Lloyd Hooker

V. M.N.R., [1987] 2 C.T.C. 2380; 87 D.T.C. 653.

We turn then to the straight question of "business". The results (continued losses) do not demonstrate that on any objective basis that there was a "reasonable expectation of profit”, hence no “business” for income tax purposes in the "show jumping" category itself. Neither can it be said when the evidence and testimony provided at the hearing is examined that there was a "reasonable expectation of profit" when even more subjective views are taken into account, such as where examined in Warden v. M.N.R., [1981] C.T.C. 2379; 81 D.T.C. 322 — in the portion dealing with the "antique" operation. While the trial concentrated primarily on the evidence and information related to the "Show jumping" activity, it cannot be overlooked that in the reassessments at issue, the Minister had also taken into account (and disallowed) the costs of the portion of the operation related to the "Sale of Horses". The Minister is not on the most stable ground now to assert that the only matter under consideration by the Court is that of the losses from the "Show jumping" operation. But in my view, neither the "Show jumping", nor the “buying and selling of horses" demonstrated any reason to be regarded as a "business", as that term should be applied for income tax purposes. And I see no reason to conclude that even combining these two as one operation as the Minister has done would indicate any more favourable results for the taxpayer.

On the final point raised before the Court, if the operation being conducted whatever it is called does not support a conclusion that there was "a reasonable expectation of profit”, (and that has been found by the Court) then "the chief source of income” argument of the appellant would also fail in the “farming” category. I am not aware that it is possible to have a "'chief source of income” without there being a "source of income”, in other words a business with "a reasonable expectation of profit" must be demonstrated and that has not been done.

Accordingly, it has not been demonstrated that the operation conducted by Mr. Epstein had a “reasonable expectation of profit”, and that disposes of both propositions from the appellant — that it was a "business" (nonfarming); and that (if farming) it was the “chief source of income".

The appeals are dismissed.

Appeals dismissed.