Gary Armstrong v. Minister of National Revenue, [1988] 1 CTC 2198, 88 DTC 1122

Tremblay, T.C.J.: —This appeal was heard on February 6, 1987, at the City of Ottawa, Ontario.

1. The Point At Issue

The point at issue is whether the appellant, a full-time employee of the Department of National Defence as an electronics technician, is correct in the computation of his income, with respect to the 1980 and 1981 taxation years, to deduct farming losses of $4,237.12 and $5,638.03 respectively.

The appellant who, during those years, had six horses, contends that his farming activity was a source of income.

The respondent disallowed the said losses on the basis that the appellant trains horses for his personal enjoyment during the weekends and had no reasonable expectation of profit.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessments are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 5(a) to (I) of the reply to notice of appeal as follows:

5. In reassessing the Appellant as described in paragraph 4, the Respondent assumed, among others, the following facts:

(a) At all material times the Appellant was a full-time employee of the Government of Canada who worked at the Department of National Defence. [admitted]

(b) The Appellant is a member of the National Brotherhood of Electrical Workers, local 2228. [admitted]

(c) The Appellant lives in Ottawa. He rents a barn and facilities at Cardinal

which he uses on week-ends to train horses, [admitted in part]

(d) The Appellant trains horses for his personal enjoyment.[denied]

(e) The Appellant's farming activity is not a business. [denied]

(f) With the exception of 1979, at no time has the Appellant made a profit from his farming activity. [admitted]

(g) The Appellant claimed the following farming losses against his other income:

Year	Cross Income — Expenses Losses
1976	$3,352.88	$ 5,927.93	$2,575.05
1977	2,603.30	6,936.63	4,333.33
1978	4,049.52	7,259.19	3,209.67
1979	6,581.38	6,384.05	197.33 Profit
1980	5,014.46	9,251.58	4,237.12
1981	6,200.95	11,838.98	5,638.03
1982	8,907.41	13,342.21	3,476.40 applying s. 31
			[admitted]

(h) The Appellant's gross farming income for each year included the following amounts as optional value of livestock:

1976	$2,000
1977	2,000
1978	2,000
1979	4,750
1980	5 ,000
1981	6,000
1982	6,000
	[admitted]

(i) Excluding the optional value of livestock, the Appellant's gross farming income consisted of the following amounts:

		Gasoline	Livestock	Sale of
Year	Purses	Tax Rebates Sold		Cartage Equipment
1976	$1,271.00	$81.88
1977	477.00	76.30		$50.00
1978	136.00	20.52	$1,750.00	$143.00
1979		31.38	1,800.00
1980		14.46
1981	194.00	6.95
1982	2,898.00	9.41
				[admitted]

(j) During the years 1980 and 1981, the Appellant was not engaged in farming for the purpose of gaining or producing income, and he had no reasonable expectation of profit from his farming activity. [denied]

(k) The Appellant's farming expenses were personal or living expenses. [denied]

(l) At no time was farming the center of the Appellant's work routine, nor did he look to farming for his livelihood, nor was his chief source of income farming or a combination of farming and some other source.

3. The Facts

3.01 The appellant was 50 years old in March 1987. Cardinal, where the farm is rented, is located 50 miles south of Ottawa. The rental facilities consist of box stalls, paddock and training track.

3.02 The appellant's income tax returns from 1976 to 1985 were filed as Exhibit R-1.

3.03 Using Exhibit R-1, a schedule of income and expenses was prepared. It is Exhibit R-2 which reads as follows:

3.04 A schedule of the details of the gross farming income was also prepared. It is Exhibit R-3 which reads as follows:

Purses Gasoline Livestock Sale of

Year From Horses Tax Rebates Sold Cartage Equipment Total

1976	$1,271.00	$81.88		$1,352.00
1977	477 .00	76.30	$50.00	$ 603.30
1978	136.00	20.52	$1,750.00 $143.00	$2,049.52
1979		31.38	1,800.00	$1,831.38
1980		14.46		$ 14.46
1981	194.00	6.95		$ 200.95
1982	2,898.00	9.41		$2,907.41
1983	1,332.00	9.44		$1,341.44
1984	5,637.00	13.00	1,500.00	$7,150.00
1985	4,265.75	47 .96		$4,313.71

3.05 The appellant explained that he has always liked horses. His grandfather had race horses. In his childhood and youth he went and helped him. The appellant, in fact, started his farming activities around 1972. He never made a profit except in 1979.

The appellant always purchased purebred horses. Here is a list of some of them as registered by the Canadian Standard Bred Horse Society:

3.06 In 1980, the appellant owned five horses and six in 1981. They were young and they had to be trained. In 1981, Bullet Prince became progressively better and was second and third out of seven starts. In 1982, its record was 18 starts, three first places and four second places. Bullet Prince was injured during the winter of 1983.

In 1984, the purses, to the amount of $5,637, were won mainly by Bullet Prince and Mister Misty. At the end of 1984, the total earnings of Mister Misty was $6,681 and at the end of 1985, $7,643 (Exhibit A-9).

3.07 The appellant is registered as owner and active driver with the Canadian Trotting Association.

His membership and licence number is 516559 (Exhibit A-7). He was registered the first time in 1963. He has been fully licenced since 1967.

3.08 The appellant testified that he worked on the farm five hours a day during the weekend, for a total of ten hours. During weekdays, the appellant's brother who had two horses in the stable, took care of the appellant's animals.

3.09 Dr. Roland Armitage, veterinarian and president of Rideau Carleton Raceway, testified that he was aware of the quality of the appellant's race horses. With the computer system, all information concerning registrations, genealogy, and speed records of each animal are kept (Exhibit A-11). In his opinion, the appellant is the owner of the best race horses in town.

4. Law - Cases At Law - Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this appeal are subsection 31(1) and the definition of “farming” in subsection 248(1). They read as follows:

31. (1) Where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's “restricted farm loss" for the year.

248. (1) In this Act, “farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

4.02 Cases at Law

Counsel for the parties referred the Court to the following cases at law:

1. Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213;

2. Croutch v. M.N.R., [1984] C.T.C. 2113; 84 D.T.C. 1112 (T.C.C.);

3. Revell v. M.N.R., [1983] C.T.C. 2710; 83 D.T.C. 638 (T.C.C.);

4. Auclair v. M.N.R., [1986] 2 C.T.C. 2040; 86 D.T.C. 1531 (T.C.C.);

5. Dreger et al v. M.N.R., [1985] 1 C.T.C. 2131; 85 D.T.C. 142 (T.C.C.);

6. Cowx v. M.N.R., [1982] C.T.C. 2708; 82 D.T.C. 1737 (T.R.B.);

7. Zichy v. M.N.R., [1985] 2 C.T.C. 2340; 85 D.T.C. 639 (T.C.C.);

8. Hall v. M.N.R., [1985] 2 C.T.C. 2314; 85 D.T.C. 624 (T.C.C.);

9. Rivest v. M.N.R., [1985] 2 C.T.C. 2031; 85 D.T.C. 436 (T.C.C.);

10. Gorjup v. M.N.R., [1985] 2 C.T.C. 2194; 85 D.T.C. 530 (T.C.C.);

11. The Queen v. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256 (F.C.A.);

12. The Queen v. Zavitz, [1981] C.T.C. 17; 81 D.T.C. 5007 (F.C.T.D.);

13. Foessell v. M.N.R., [1986] 2 C.T.C. 2129; 86 D.T.C. 1604 (T.C.C.).

4.03 Analysis

4.03.1 In this appeal, there are two problems: the first one is whether farming is a source of income or, in other words, does the appellant's farming operation have a reasonable expectation of profit?

If this question is answered affirmatively, then the second problem arises: is the appellant a full-time farmer?

4.03.2 In the leading case of Moldowan (para. 4.02(1)), the Supreme Court of Canada makes the distinction at page 487 (C.T.C. 315) between three classes of farmers:

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 s. 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 s. 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.

To have a right to be in class one or in class two, a farmer must have a reasonable expectation of profit.

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R. [1972] C.T.C. 151. See also s. 139(1)(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred. [S.C.R. 485; C.T.C. 313]

Concerning the reasonable expectation of profit, the Supreme Court of Canada gives some criteria:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews (1974), 28 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land [S.C.R. pp. 485-86; C.T.C. 313-14]

4.03.3 If the appellant's profit and loss experience does not favour him (para. 3.03), his experience since 1962 and his liking of race horses since his childhood favour his thesis (para. 3.05).

Concerning the appellant’s intended course of action, he did not explain his organized plan since 1962. However, one can state that he had one. He did not buy too many horses. Moreover, rather than spending his money on a large investment, he chose to rent a barn and facilities and to buy purebred race horses (para. 3.05) and he had good ones (para. 3.09).

In my opinion, it was the best asset to reach the profitability. It is true that he did not reach it and above all, that in 1980 no horse was available to race.

Despite that, in 1981 Bullet Prince was second and third out of seven starts (para. 3.06). In 1984 and 1985, there were more successes (paras. 3.04, 3.06).

As it was often stressed by the courts in the expression "reasonable expectation of profit", the word "reasonable" qualifies the word "expectation" and not the word “profit”.

In my opinion, during the taxation years 1980 and 1981, there was a reasonable expectation of profit.

4.03.4 The second point is whether the appellant has changed his main source of income from employment to farming business. In other words whether during the two years involved, the chief source of income of the appellant was farming or farming and another source.

In my view, the uninterrupted string of net farming losses from 1972 to 1985, except for the year 1979, prevents me from arriving at that conclusion. As Christie, A.C.J.T.C. said in Wilson v. M.N.R., [1986] 1 C.T.C. 2488 at 2492; 86 D.T.C. 1336 at 1339, such fact “is significant and is detrimental to the appellant's contention . . .”.

The following sentences, written by Christie, A.C.J.T.C., apply mutatis mutandis to the present case:

While it may well have been his profound aspiration since the commencement of his farming enterprise in 1969 that farming would reach a point when it could reasonably be expected to provide the bulk of his income or the centre of his work routine that ambition has not been attained during the years 1978 to 1981 inclusive. In the overall context of his existence during this period he cannot, in my opinion, properly be regarded as looking to farming as his means of living. His farming enterprise during that time was a sideline business.

5. For these reasons, the appeal is allowed in part with costs and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed in part.