John Hoare v. Minister of National Revenue, [1987] 2 CTC 2040, 87 DTC 408

Brulé, T.C.J.: — The appellant, John Hoare, appeals from reassessments by which the Minister of National Revenue added to the appellant's income amounts of $4,296, $4,954 and $10,000 for the taxation years 1979, 1980 and 1981 respectively, on the basis that these amounts were income earned from a business carried on by the appellant.

By these reassessments, the Minister also imposed penalties pursuant to subsection 163(2) of the Income Tax Act (the "Act"). At the outset of this hearing, counsel for the Minister informed the Court that the Minister had withdrawn the assessments with respect to these penalties and they were therefore not an issue before this Court.

Issue

During the years under review, the appellant was part owner of a stan- dardbred horse called "Steady Cameo". The amounts in question relate to moneys received in respect of racehorse winnings during those years and from the subsequent resale of the horse. The sole question in issue is whether these amounts were income earned from a business and therefore to be included in income pursuant to section 3 and subsection 9(1) of the Act.

Facts

In 1979, 1980 and 1981 the appellant was employed by his father in a roofing business. In 1979, he acquired a one-third interest in the racehorse "Steady Cameo". This was the appellant's only experience with respect to the ownership of a racehorse. The remaining two-thirds interest was owned by a Mr. Barry Drury who had been a friend of the appellant's since high school. During the years under review, Mr. Drury was employed as a horse trainer and operated his own business involving the acquisition, training, racing and selling of race horses. The evidence at trial was that he owned different horses during this period and carried on these operations for a living.

The appellant's testimony with respect to his financial arrangements with Mr. Drury was that he paid one-third of the acquisition price of the horse, was responsible for one-third of all related expenses and shared in one-third of the proceeds from racing and the subsequent resale of the horse. The appellant's net profit from race winnings was $4,296 in 1979 and $4,954 in 1980. In 1981 the appellant received a $10,000 profit from the sale of "Steady Cameo". He did not report any of these amounts as income for those years.

Appellant's Position

The appellant maintains the position that his ownership of the horse was a personal hobby undertaken with the primary intention of providing a source of entertainment for himself. He submits that any gains he received as a result of his investment were not derived from a commercial venture and are therefore not taxable as income in his hands

In support of his position the appellant's agent referred the Court to the following cases:

M.N.R. v. Dr. Jean Beaudin, [1964] C.T.C. 70; 64 D.T.C. 5077;

Ernest C. Hammond v. M.N.R., [1971] C.T.C. 663; 71 D.T.C. 5389;

Alida Filion v. M.N.R., [1973] C.T.C. 2067; 73 D.T.C. 56.

All of these cases involved racehorses and in each the Court determined that the racing of such was a hobby and the purses earned non-taxable.

The appellant emphasized that the present case was on a smaller scale and certainly was not a commercial undertaking for profit, although profits did result. It was suggested that prize money is not income from a business.

Minister's Position

Counsel for the Minister asserts that the profits earned by the appellant were income earned from a business, since at all material times, the appellant owned his interest in the horse with the intention of earning profits from the racing or sale of the horse.

The present case, it was argued, is distinguishable from the cases cited by the appellant. The respondent also relied on extractions from the Hammond case (supra) and as well on:

Donald Preston McLaws v. The Queen, [1976] C.T.C. 15; 76 D.T.C. 6005;

Mohawk Horning Limited et al. v. The Queen, [1986] 2 C.T.C. 89; 86 D.T.C. 6297.

Analysis

The appellant asserts that his investment in "Steady Cameo" was merely a hobby and that he was not carrying on a business. The determination of whether or not a taxpayer is carrying on a business requires consideration of all the surrounding circumstances. Some of the factors to be considered were noted by Mr. Justice Addy in McLaws (supra) at page 19 (D.T.C. 6009):

As I have previously stated, the status, capacity, experience, interests and actions of the partners are quite relevant in determining the issue of whether the operation constituted a business or a hobby.

In the present case, the appellant’s partner is acknowledged to be a professional horse trainer engaged in the business of training, racing and selling horses for a profit. There is clearly no question in his case that he was carrying on a business.

The appellant argues, however, that his intentions are quite distinct from those of his partner and that it is his intentions which should prevail in determining whether the operations constitute a hobby or a business to him. Established case law is clearly contrary to the appellant's position.

In the case of Mohawk (supra) a similar argument was rejected by the Federal Court of Appeal and it was held that the intention of the consortium as a whole must subsume that of the individual. At page 98 (D.T.C. 6304), Mr. Justice Urie stated:

. . . cases such as Rothenberg v. M.N.R., [1965] C.T.C. 1; 65 D.T.C. 5001; Ettie Wiss v. M.N.R., [1972] C.T.C. 264; 72 D.T.C. 6231, and Carr v. M.N.R., [1965] C.T.C. 334; 65 D.T.C. 5201, each illustrate the proposition that where there are active participants and passive ones involved in a transaction, the position of the passive ones will be no different from that of the active ones. Noël, J. (as he then was) in M.N.R. v. Lane, [1964] C.T.C. 81 at 91; 64 D.T.C. 5049 at 5054-55, had this to say about the responsibilities of passive partners:

It would appear from this that the syndicate's non-active members were quite content to leave the handling of the syndicate's activities to the executive committee who had carte blanche to handle the business of the syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.

A fortiori, when all are to greater or lesser degrees active, (as here) the most active participant's intention (in this case Schneider's) must be enveloped by that of the consortium as a whole, even if, alone, his purpose would have been different.

The appellant's agent suggested that the Beaudin case (supra) was similar to the present appeals, but in that case the horse involved was used throughout the winter by Dr. Beaudin to visit patients and was trained in the summer to race. The winnings produced were not taxable as the racing part of the horse's existence was as a true hobby for Dr. Beaudin. Here racing was the whole endeavour of the appellant's horse.

In the Filion case (supra) a horse was purchased for the appellant who trained it herself with the aid of her sons. At the time of purchase, the horse had lost 23 races and was purchased by the appellant more as a source of amusement. The fact that it later produced winnings was not considered as part of a business venture.

The Hammond case (supra) was cited by both parties. One passage by Pratte, J. at page 667 (D.T.C. 5392) sums up the situation:

. . . purses won by a racehorse cannot be considered as income from a business except in exceptional circumstances showing that the owner of the horse had so organized his activities that he was in fact conducting an enterprise of a commercial character.

The appellant argued that there was no commercial character; the respondent maintained that there was.

Despite any evidence that the appellant may have viewed his investment as a hobby, regard must be had to the partnership arrangement under which Mr. Drury controlled a two-thirds interest. It is the intentions of Mr. Drury which evidence the intentions of the partnership as a whole and in that respect it must clearly be concluded that the partnership was operating a business.

In the case of D. A. MacEachern v. M.N.R., [1977] C.T.C. 2139; 77 D.T.C. 94, Mr. D. E. Taylor, Member of the Tax Review Board (as he then was), in dealing with profits realized from a deep-sea diving venture, said at page 2142 (D.T.C. 96):

. . . hobby though it may have been, it was clearly a hobby with a potential for profit, and under favourable circumstances, substantial profit. At the minimum this would tend to distinguish it from a hobby and endow it with characteristics somewhat akin to a business endeavour.

Such is the case here.

Conclusion

I have concluded that the appellant's assertion that his intentions should govern his taxability in respect of the transaction in issue must fail. These appeals are allowed in part, in order that the penalties imposed for the years 1979, 1980 and 1981 shall be deleted. In all other respects, these appeals are dismissed. No costs are to be awarded.

Appeals allowed in part.