John P. Weiss and Katherine Weiss v. Minister of National Revenue, [1988] 1 CTC 2163, 88 DTC 1080

Christie, A.C.J.T.C.:—These cases were heard together at the request of the parties. The appellants are husband and wife. In both appeals the taxation years under review are 1980 and 1981.

The appellants carried on a farming business in partnership and it is the position of the respondent that in computing their incomes for the years just mentioned they can only deduct against other income the limited amounts provided for under subsection 31(1) of the Income Tax Act. The appellants contend that they are not so constrained because their chief source of income for 1980 and 1981 was a combination of farming and some other source of income.

Initially it was anticipated that the hearing of these appeals would be completed within two days and they were scheduled to be heard on June 8 and 9, 1987. This was a miscalculation. The hearing of the appeals was not completed within the allotted time notwithstanding that on June 9 the Court sat from 9 a.m. to 7 p.m. with a three-quarter hour lunch break. Due to prior commitments the hearing could not continue on June 10 and indeed it was not completed until October 29, 1987, after an additional full day. Both appellants testified. In addition, Mr. James F. Cation and Mr. Earl Lennox, testified on behalf of the appellants. The respondent did not call any witnesses. On June 8 and 9 Kathleen Weiss gave the whole of her evidence. On June 9 Cation and Lennox gave their evidence and on that day John Weiss testified in chief. On October 29 he was cross-examined and re-examined. Argument followed. In the recital of evidence that follows it, of course, speaks as of the date it was given. Evidence given by John Weiss in cross- examination or re-examination that is referred to in these reasons will be identified as such.

John Weiss was born in 1941 in what was then Breslau, Germany. He was raised on a farm and emigrated to Toronto in 1954 at 13 years of age. There is nothing to suggest that this farm had any relationship to the horse-racing industry.

Katherine Weiss was born in Toronto in 1943 and graduated from grade 12 in 1961. She was employed as executive secretary to the Ontario English Catholic Teachers Association for one and a half years. The appellants married in November 1962 and there are two children to this marriage, a son born in 1968 and a daughter born in 1973.

The appellants lived in Chicago from 1962 to 1966. John Weiss worked for General Employment Enterprises, an employment agency. Katherine Weiss was employed as executive secretary to the Siberg Corporation and later as assistant manager at Presto Shipping, a freight forwarding company. It was during this period that they became interested in standardbred horses. They frequented racetracks in Chicago and spoke with owners regarding the purchasing, racing and breeding of horses. They acquired a copy of the Illinois Harness Racing Act and Rules, Regulations and Conditions of Harness Horse Racing and Race Meetings.

In 1966 John Weiss was transferred by his employer to Toronto where he established a branch office. On her return, Katherine Weiss again secured employment as executive secretary to the Teachers Association. She continued in this employment until 1968 when, as mentioned, her son was born.

John Weiss resigned from General Employment Enterprises and in 1971 Star Personnel Limited came into existence. It was incorporated for the purpose of engaging in the employment agency business. Two-thirds of its shares were and are held by John Weiss and one-third by his wife. John Weiss is the president and general manager of the corporation and he and his wife are the directors. Initially the offices of Star Personnel were in the Board of Trade Building on Adelaide St., Toronto. At this time Katherine Weiss was employed by the corporation. She did a number of things, bookkeeping and correspondence being mentioned in particular. At the outset this was done at home and later she worked in Star Personnel's offices. Her estimate was that she worked from 10 a.m. until 3 p.m., two or three days a week. This continued until 1978 at which time the appellants moved their home from Willowdale at the northern end of Toronto to Maple, Ontario, which is some miles northwest of Toronto. In the same year the offices of Star Personnel were moved to the Sheppard Centre which is north of Highway 401 at Yonge and Sheppard.

In 1976 the appellants were seriously contemplating purchasing a farm. Considerable groundwork was devoted to this project and the King City area was finally chosen because it was known as thoroughbred and standardbred country. In 1977 the appellants jointly purchased 25 acres of vacant land for $150,000. It was called Maple Star Stables. It is on the dividing line between King City and Maple. King City was described as being the hub of the horse industry. Katherine Weiss said the 25 acres had excellent soil and was in a prime location for having horses and farming. In 1978 a home was built on the farm. The Willowdale home was sold in 1979. A barn was subsequently built that came into use in the fall of 1983. Crops of hay, corn and wheat were produced on the farm under contract.

Two or three years prior to 1980 when the first horse was purchased the appellants commenced to determinedly educate themselves regarding that aspect of the horse-racing industry relating to standardbreds. This included not only attending at racetracks but conversing with trainers, drivers and owners. A good deal of literature was read and they attended a one-day seminar hosted by Earl Lennox at the Mohawk track at Campbellville, Ontario. They participated in a second seminar at the Greenwood Raceway, Toronto. Earl Lennox lectured at this meeting and the appellants consulted with Mr. John Hayes, president of the Canadian Trotting Association. Full- time courses were available but their domestic and business commitments precluded attendance.

Katherine Weiss related the history of the ten horses involved in the farming operation since its inception to date. Five of the horses were purchased at auction sales. Prior to purchases being made genealogical charts were carefully studied. First is Kathy's Superstar. She was born on February 2, 1979 and was bought for $4,200 in September 1980. It was expected — not just hoped, but expected — that this horse would earn a minimum of $50,000 in its first year of racing. In fact she competed in only three races. In the third she won $4,100 and her total purse earnings are $4,341. In 1981 the racing career of this horse terminated because of a fractured foot. She became a brood mare and her offspring to date are Chocolate Mint, Kahlua Kiss, Black Ninja and Champagne Frilly.

Second is Misty Smog. Her date of birth is February 4, 1979 and she was bought in October 1980 for $17,500. Katherine Weiss expected this horse to earn $100,000 in its first year of racing. In 1981 Misty Smog earned about $4,000. Before retiring from racing her purse earnings totalled $98,500. Her best years in this regard were 1984 and 1985 when she earned $39,000 and $33,000 respectively. She retired from racing in 1987. In that year she earned $490. She is due to foal in 1988.

The third acquisition was that of Armbro Aloof. She was born on May 24, 1979 and was purchased in December 1980 for $18,500. It was expected that this animal would earn $100,000 in its first year of racing. She raced two or three times and earned $444 in 1982. Armbro Aloof developed high-speed lameness which ended her racing. She was bred and subsequently sold in 1983 for $9,200 or slightly less than 50 per cent of the purchase price.

Ginger Snap was the fourth purchase. He was born on March 19, 1980 and was bought in May 1981 for $25,000. He was a full brother to Misty Smog. He, as happened with the other horses, was placed in the custody of a trainer who carried on his business some distance from Maple. Ginger Snap broke a splint bone and this led to his being put down in the spring of 1984. The expectations regarding this horse were as high or higher than those relating to Misty Smog. In fact he only earned $440.

Scotch Bride was the fifth acquisition. She was born on May 9, 1983 and purchased in September 1984 in Kentucky for $34,323 Canadian. Mrs. Weiss said that "if she had turned out to be exceptional the expected earnings would have been between the $150,000 and $200,000 mark." The horse fractured its knee in training and this made it necessary to retire her to the role of brood mare before she even had the opportunity to race. She was bred in 1986 and the offspring is a filly which has not been named to date. She is scheduled to foal again in 1988. This unnamed filly plus the four offspring of Kathy's Superstar make up the other five of the ten horses previously mentioned.

Chocolate Mint began racing in 1986 and won $3,000 in that year. In the first four months of 1987 she won $19,000. She is expected to run in 20 more races before the end of the current year and to earn a total of $50,000 in1987 and to exceed that figure in 1988. Kahlua Kiss is in training for racing. She is expected to earn $50,000 in 1987. Black Ninja is scheduled to go in training in the latter part of 1987 and is expected to earn $20,000 to $25,000 per year racing. Champagne Frilly and the unnamed filly are sucklings. There are no present plans to purchase more horses or to sell any of the horses in inventory.

In February or March 1987 Katherine Weiss obtained a trainer's licence from the Canadian Trotting Association entitling her to train her own horses only. Copy of this licence was entered as Exhibit A-6. It does not show the date that it was issued but the date of expiry is recorded on the document. It is June 1987. A similar licence is in evidence (Exhibit A-23) that was issued to John Weiss. Nothing was said about when it was issued. The date of expiry is December 1987. The appellants expected to cut down on expenses by doing their own training. Until the spring of 1983 when the barn was first occupied, the horses had all been in the hands of trainers. There have been five different trainers. While the animals could be kept at the farm after the date just mentioned and some were for varying periods of time, they could not be trained there because of a lack of facilities, particularly a training track. In expectation of purchasing a 50 to 100 acre farm on which would be built proper training facilities, the appellants entered into an agreement to sell the farm at Maple in October or November 1986 with occupancy by the purchaser at the end of June 1987. Nothing suitable was found so a home on a 10 acre parcel of land was purchased at Milton, Ontario. The appellants are negotiating to rent a training centre five miles away at which their horses could be kept and trained.

In his testimony-in-chief John Weiss said that when Star Personnel started in business he was the only employee. By the end of 1971 there were four. This rose over time and there were fluctuations but by 1977 there were 12 in addition to the appellants. His eventual goal in relation to race horses, which he acknowledged to be a high risk business, is summed up in this passage by the appellant:

This is where I’m going to continue adding on to my technical knowledge and competence and grow and get horses, breed them, have offsprings, so that eventually I’m going to have this farm with all kinds of horses running around and making all kinds of money and having grooms and having a much more relaxed life with an animal instead of a human. I guess maybe that's what it had to do with.

The long-term view of Katherine Weiss is reflected in this passage from the evidence:

Q. Did you have a long term plan to make this your only activity, your only business, or did you intend in the long term to continue to be involved with Star Personnel as well as being involved in horses?

A. The long term was not to be involved with Star Personnel. It was to be only the horses. Initially we required the money from Star Personnel in order to get started up in the horse business.

Q. Let me ask you this question. Husbands and wives do not always agree with each other, and I speak from personal experience. Did you and your husband share exactly the same goals and aspirations concerning your farm or were yours different from your husband's?

A. We were on the same frequency.

John Weiss took a different position. Regarding Star Personnel he said:

Q. Did you expect or plan to continue to retain an interest in this business?

A. Definitely.

Q. So, you did not plan to walk away from it completely.

A. No, that's my gold mine. You have to have that to sustain the business in the first place.

John Weiss said that earnings of $50,000 by Kathy's Superstar in 1981 was not unrealistic. In the spring of that year he was certain that earnings of $50,000 to $75,000 by Misty Smog in 1981 would be no problem whatsoever. The figures given regarding Armbro Aloof are the same as for Misty Smog. He predicted Chocolate Mint's 1977 earnings to be in the $40,000 to $60,000 range. He gave the worse case as $20,000 with a top figure of $70,000. He also predicted that Kahlua Kiss would earn at least $50,000.

In 1980 — the precise date could not be pinned down — the appellants entered into a partnership in equal shares to carry on the business of racehorse farming. In computing her income for 1980 and 1981 Katherine Weiss sought to deduct farming losses of $25,139 and $27,402 respectively. John Weiss sought to deduct $19,245 and $22,465. In reassessing the respondent reduced this to $5,000 in each instance. Counsel for the respondent sought a satisfactory explanation, without real success, for the discrepancy in the losses claimed by Katherine Weiss and her husband in respect of what was said to be an equal partnership. In the light of the disposition of these appeals it is unnecessary to pursue this point.

There is considerable evidence before the Court regarding income and expenses of Star Personnel, the partnership and the appellants. Exhibit A-5 shows "Revenue and Expenses from Farming Operation":

Exhibit A-11 relates to "Revenue and Expenses of Star Personnel Limited":

Exhibit A-12 depicts a “Comparison of Combined Gross Farming Revenues and Salary and Dividends" for the appellants:

Exhibit A-14 is a "Comparison of Incomes by Source 1980-1986” regarding Katherine Weiss:

Salary and

Dividends from Star

Year	Personnel Limited	Farming Losses
1980	$63,000	($25,139)
1981	76,500	( 27,402)
1982	33,467	( 13,894)
1983	14,817	( 9,391)
1984	19,300	( 16,309)
1985	20,000	( 14,832)
1986	nil	( 8,788)

Exhibit A-19 is the same as A-14 except that it relates to John Weiss:

Salary and

Dividends from Star

Year	Personnel Limited	Farming Losses
1980	$87,053	($19,245)
1981	$92,765	($22,465)
1982	$52,893	($13,894)
1983	$28,500	($ 9,391)
1984	$50,400	($16,309)
1985	$27,650	($14,833)
1986	$12,000	($ 8,788)

Exhibit A-15 is a "Breakdown of Earnings for Katherine Weiss From 1980-1986 Inclusive":

Exhibit A-20 is the same as A-15 except that it relates to John Weiss:

These additional uncontradicted figures appear in paragraph 6 of each of the replies to the notices of appeal. Paragraph 6 includes the assumptions of fact relied on by the respondent in assessing the appellants' liability to tax: income from employment 1979 — John Weiss $34,820, Katherine Weiss $25,468; dividends for both appellants 1979 — $45,000; for the years 1975 to 1979 inclusive in relation to Star Personnel:

There is also in evidence as Exhibit A-8 a 24-page document pertaining to the manner in which the appellants allocated their time during the period August 1980 to December 1985. It was put together at some unspecified time after the appellants were reassessed on April 29, 1983 in respect of the years under review and it was realized that time allocation could be relevant to the dispute with Revenue Canada. As it relates to time spent as late as December 1985, presumably it was prepared after that date. In preparation of the exhibit reliance was said to have been placed on “pocket diaries" and calendars. None of these are in evidence. Exhibit A-9 shows the hours spent by each appellant in relation to the farming and at Star Personnel during the period August to December 1980 - January to June 1987. The oral evidence is that A-9 is a summary of A-8, but it must be something more than that because, as already mentioned, A-8 concludes as of the end of December 1985. Exhibit A-9-1 is simply a reproduction of A-9 with items called "% of total” and “total hours" added. It reads:

With respect to allocation of time John Weiss said that he did a tremendous amount of research regarding a computer program designed to assist persons in the horse-racing industry. This was later estimated at two or three hours a day. The work started in March 1981 and continued for at least eight months. He was assisted by Mr. Brent Williams on this project. The latter is experienced in the field of preparing computer programs. This undertaking was not intended solely for the use of the appellants. It was hoped that it could be sold to many involved in various aspects of the horse-racing industry including veterinarians. The project was abandoned in February 1982 because by then it had been decided that it would not be profitable.

Turning now to the evidence of the witnesses other than the appellants. Mr. Cation is a horse breeder. His is one of the largest standardbred breed ing enterprises in Ontario. He has been in the business since 1961. He concentrates on the breeding aspect of the business and seldom keeps a horse for racing purposes because of a strong aversion to trainers and the racetrack atmosphere. He sells his horses to people who “prefer to deal with trainers and gamble their money." Although he was not put forward as an expert witness, his unchallenged evidence leads to the conclusion that he is knowledgeable and competent in his field. Cation first met the appellants in 1981 as clients. The three spent a considerable amount of time together on an increasing basis and they became close personal friends over the years. All professional advice given by Cation to the appellants has been gratis. He described the appellants as enthusiastic about and devoted to their horse farming business and in general he approved of the manner in which they managed things.

Mr. Lennox gave his occupation as farmer. He graduated from the University of Guelph in 1970 with a Bachelors degree in science and agriculture. From 1973 to 1976 he was employed by the Ontario Ministry of Agriculture as an expert in the care and breeding of horses. He is and has been for the past eight years a director of the Canadian Standardbred Horse Society. He has written articles for magazines on the subject of horse breeding and training. He is a racetrack announcer under contract to the Ontario Jockey Club and he calls races on about 230 nights a year. He has a financially successful 249- acre horse farm.

Lennox met the appellants in August 1980 at the half-day potential new owner seminar at Greenwood Raceway that has previously been alluded to. He recalled meeting the appellants there and talking to them but the details of the conversation are forgotten. He met them again in the fall of 1980 at the Canadian Classic Sale at the C.N.E. Horse Palace where about 500 horses were sold. After careful consideration Lennox and the sales manager had decided to bid on one horse, Misty Smog, but they were outbid by the appellants. The following May he was at the Mohawk track when Misty Smog was the first two-year-old to qualify that year and she looked "super". He would have expected her to win a possible $100,000 that year and at the least $50,000. Around May 21, 1981 the first race for two-year-olds that year was held at Kawartha Downs in Peterborough. There were two divisions for two-year-old fillies and Kathy's Superstar won one of those divisions. All this made a favourable impression on Lennox. He said: “So, within a month here is new owners and they have started in with what looked like could be the best two-year-old filly in the province and one we did not even know they owned winning the first race." In his opinion Kathy's Superstar had the potential to earn between $50,000 and $100,000 in 1981.

On October 29, 1987 counsel for the respondent, Mr. Ormston, opened his cross-examination of John Weiss with questions directed at ascertaining the accuracy of the prognostications made in June concerning the anticipated earning ability of Chocolate Mint and Kahula Kiss during the remainder of 1987. Chocolate Mint had earned nothing more. She sustained fractures to both knees and is still recuperating. Kahlua Kiss has not been entered in a race since June. She suffered a torn cartilage of the knee and is scheduled to undergo surgery. The witness repeated what he had said in substance during the examination-in-chief, that is, that Star Personnel was an indispensable condition of the very existence of the farming enterprise. The gold mine simile was reiterated.

In delivering the judgment of the Supreme Court of canada in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, Mr. Justice Dickson (as he then was) said at page 314 (D.T.C. 5216):

It is clear that “combination” in section 13 (now section 31) cannot mean simple addition of two sources of income for any taxpayer. That would lead to the result that a taxpayer could combine his farming loss with his most important source of income, thereby constituting his chief source. I do not think subsection 13(1) can be properly so construed. Such a construction would mean that the limitation of the section would never apply and, in every case, the taxpayer could deduct the full amount of farming losses.

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 respondent in reassessing, having allowed the appellants the limited losses provided for under subsection 31(1) of the Act, has for the purposes of these appeals accepted or admitted that the appellants’ farming venture was a business during the years under appeal: Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071 at 2073; 84 D.T.C. 1094 at 1096. This removes the appellants from the third or hobby class of farmers and places them in the second class: White v. M.N.R., [1987] 1 C.T.C. 2178 at 2182; 87 D.T.C. 122 at 126. The question then to be answered is: Did the respondent err in doing this? If he did the appellants are not within the second class and they must then fall into the remaining or first class which entitles them to deduct their farming losses in full. If there has not been error on the part of the respondent and the appellants properly belong to the second class, the appeals fail. The onus rests on the appellants to establish on the balance of probability that the reassessments are wrong.

First a word about a practice that I find is quite common in litigation of this kind. It is the preparation by appellants — presumably acting on advice — in anticipation of testifying of exhibits like A-8, A-9 and A-9-1 that purport to record ex post facto time devoted by them to different activities often over very long periods of time. In my experience the admission of these documents is not objected to by counsel for the respondent subject, usually, to the caveat of making representations regarding the weight to be assigned to them and accompanying viva voce evidence.

While 1 do not say that evidence of this kind is to be rejected out of hand it strikes me that its probative value must, generally speaking, be weighed with caution. Although not inevitable, the likelihood is that evidence of this kind will not be based upon records prepared contemporaneously for the purpose of creating a chronicle of allotment of time to various purposes. It may be simply an attempt at pure recollection or recollection plus records kept for different reasons, e.g. recording appointments. This evidence often, as in the case at hand, purports to allocate precise numbers to the time spent doing this and that and is then refined to percentages. Its worth must diminish in direct relationship to the gap in time between the occurrence of the events and the time of remembrance by appellants for purposes of litigation. Further, the probative value will vary depending upon the nature of the tangible contemporaneous evidence, if any, relied on in aid of recalling to mind what transpired. As counsel for the appellants, Mr. Fitzsimmons, said with commendable candour in the course of his able argument:

I confess, I have a great deal of difficulty in this kind of case attaching a great deal of weight or significance to a taxpayer's own estimate of how he was spending his time. I've asked myself, could I do this in my practice and the simple reality is, I couldn't do it in any meaningful way.

I cannot, from the oral evidence alone, reach a confident conclusion regarding the proper allocation of time among the activities carried on by the appellants and, in my opinion, the highest role that can be assigned to documentary evidence that purports to record the recollection of how the time was spent is that of supplementing the oral evidence.

The history of the appellants' farming activities as revealed by the evidence is yet another illustration of the high risk involved in various aspects of farming as it relates to race horses. This is something that has been reiterated in a number of reported and unreported decisions.

I am satisfied on the whole of the evidence that both appellants belong in the second class described in Moldowan. The figures previously cited and their relationship to each other speak for themselves. During the years under review the appellants cannot be regarded as having looked to farming and subordinate sources of income as their means of living. Buying, breeding, raising, training and racing of horses was a sideline business. The appeals are dismissed.

Appeals dismissed.