Morris I. Boddington v. Minister of National Revenue, [1988] 1 CTC 2195, 88 DTC 1146

Sherwood, D.J.T.C.: —The respondent, by concurrent notices of reassessment which he confirmed following objection by the appellant, disallowed farm losses claimed as deductions by the appellant in respect of the 1982 and 1983 taxation years. This is an appeal from those disallowances.

The very brief notice of appeal reads as follows:

Reason for Appealing,

I do not agree with your decision that my losses were personal or living expenses, nor do I agree with your original decision that I had no reasonable expectation of making a profit.

I have not read the Income Tax Act, so I am ignorant to subsection 248(1) or paragraph 18(1). But I do know that the Government takes a large amount of money from horse racing and if it were not for people like myself, horse racing would not be possible.

Paragraph 2 of the reply to the notice of appeal sets out the facts and assumptions relied on by the respondent:

(a) The appellant carried on a farming operation wherein he purchased and sold or otherwise disposed of standard-bred rare* [1] horses throughout the period at issue as follows:

Horse	Date	Date	Purchase Date Date		Selling
	Purchased		Price	Sold Sold	Price
Eartha	October 1980 $2,500.00 February 1984 $ 300.00
Osborne
Jefferson	January 1981		$1,000.00	June 1981	$ 500.00
Fortune
Tarbrush	January 1982		$2,500.00	June 1982	$1,500.00
Hoodsland	January 1982		$ 750.00	Given away to son
Popout

(b) The appellant earned $364.00 in purse money in 1982 and $300.00 in purse money for 1983, earned from racing these horses;

(c) The appellant had no prior experience in the area of horse racing before he purchased these horses;

(d) The appellant was employed in 1982 as a field-erection superintendent and in 1983 he worked part-time as a driver and claimed unemployment insurance benefits;

(e) Throughout this period, the appellant lacked sufficient capital to expand his operation into a viable business and no profit was ever earned from the pursuit of this hobby;

(f) The nature and extent of the appellant's activities indicate that the expenses claimed by the appellant were not incurred in connection with a business carried on for profit or with a reasonable expectation of profit;

(g) The expenses claimed by the appellant in the year 1982 and 1983 taxation year in respect of which he claimed deductions in computing his income for those years were expenses of a personal nature and were not expenses incurred for the purpose of gaining or producing income from a business or property.

The appellant represented himself and was the only witness in this appeal. His evidence only slightly altered and enlarged the factual statements in the respondent's reply. He disagreed with paragraph 2(b) saying he earned $1,100 in 1982, not $364 and earned $350 in 1983, not $300 from racing his horses. When reminded that the figures cited by the respondent came from his income tax return respondent said the tax return figures were in error. The Court was given no evidence from which it could determine which figures were correct but the difference is of no real consequence.

The appellant denied paragraph 2(c). He testified that he had been interested in horses for 15 years before purchasing his first one in 1980. He had attended horse races four or five times a week during that period, wagering, talking to trainers and owners to acquire some knowledge of the business and buying some books on the subject. He considered his own operation of buying, training and racing horses to be a business.

His first horse, a four-year old mare named Eartha Osborne, was bought in 1980 with the help of a qualified trainer. Eartha was untried but well bred and the appellant said "although I know the possibilities of a quick profit were small . . . her future in the years to come had reasonable expectations of making a profit".

The picture painted by the appellant was the familiar one of unfulfilled expectations, lack of luck and dwindling of his too slim resources. In 1980, Eartha began her racing career and, on an icy track at Barrie, Ontario, she injured her knee requiring surgery. After rest and gradual resumption of training Eartha raced once again in 1981. She failed to qualify and came up with a hot and swollen knee. In 1982, Eartha appears to have been entered in 17 races. She qualified in 11 races and her record was one win, two seconds and a third. The appellant felt she had "shown the speed and capability to be an average race horse". In 1983, Eartha raced 12 times with no wins, three seconds and one third. During 1982, the appellant had two other horses of which one raced. This is the year in which he said his purses totalled $1,100, not the $364 shown on his tax return. Eartha was his last horse. He had to sell her at the end of 1983 due to lack of funds and seek other work. He estimated that he devoted 1400 hours in 1982 and 900 to 1000 hours in 1983 to the horse racing activities.

The appellant frankly and repeatedly acknowledged the crucial factors of risk and luck which are such predominant characteristics of horse racing. He was insistent that with any luck his activities could have been profitable and that they failed because he ran short of money and never had any luck at all. He explained that a horse first races as a "maiden" and once she wins a race she goes on to "25 claimers” which means $2,500 claiming races. He stated several times that “profit is impossible in 25 claimers”. Profit comes when the horse does well and moves up to a higher classification but his horses did not make it. They were "25 claimers” with no hope of profit.

The primary issue in this appeal is whether there was a reasonable expectation of profit in the appellant's operation. Only if that issue is decided in the affirmative does a further issue arise as to whether he was entitled to deduct his farm losses in full in 1982 and 1983 or was subject to the restriction contained in subsection 31(1) of the Income Tax Act.

There is no doubt that the appellant, both in 1982 and in 1983, devoted the bulk of his time and effort to his horse racing activities. The Income Tax Act by definition recognizes the maintaining of horses for racing as farming. These are important elements in determining eligibility to deduct farm losses. A third, and in this case, critical element, is the reasonable expectation of profit. Without that element the appellant’s operation does not qualify as a business. He then falls into the third class of farmer described by the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480 at 488; [1977] C.T.C. 310 at 315 of which the Court said "The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount".

The onus is on the appellant to establish on balance of probability that there was reasonable expectation of profit in his operation (Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182). His honesty, his sincerity and his dedication to horse racing are obvious, however, the test to be applied is that set out in Kerr and Forbes v. M.N.R., [1984] C.T.C. 2071 at 2072; 84 D.T.C. 1094 at 1095:

The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep-felt they may be. The issue is to be decided by objective testing.

This appellant, while aware of the highly hazardous nature of horse racing, appears to have based his expectation of profit on enthusiastic optimism rather than reason. Wishful thinking, however sincere, is not reasonable expectation. The appellant lacked the capital, a management plan or a contingency plan to minimize risk. His racing and preparation for and his investment in the operation were minimal.

On an objective view of the whole of the evidence, the appellant has failed to meet his onus of proving on balance of probability that there was a reasonable expectation of profit in the 1982 and 1983 taxation years in issue in this appeal. It follows that the appellant's operation did not, in law, constitute a business in those years and he was not entitled to deduct any farming losses from his income in those years.

The appeal is dismissed.

Appeal dismissed.