Wayne Royce Masson v. Minister of National Revenue, [1987] 2 CTC 2186, 87 DTC 515

Rip, T.C.J.:—The appellant Wayne Royce Masson appeals from notices of assessment issued by the respondent Minister of National Revenue, Taxation, for the 1978 to 1982 taxation years inclusive wherein the Minister, pursuant to subsection 31(1) of the Income Tax Act ("Act"), disallowed losses in excess of $5,000 for each year from his farming business on the basis that neither farming nor a combination of farming and some other source of income was Mr. Masson's chief source of income in any of the years.

The appellant's father was a grain farmer in Saskatchewan and the appellant helped him on the farm during high school and university vacations.

Mr. Masson graduated from university as an engineer and has been employed by the city of Regina in that capacity for approximately 17 years; at the time of trial he was Manager of Sewer Maintenance Engineering.

Mr. Masson was married in 1967 to a woman whose father was “involved” with race horses. Mrs. Masson's father bred horses and one of his horses was unbeaten in the show ring. Mrs. Masson lived on her father's farm until she was 11 years old; as a youth she enjoyed working with horses. Her father had discussed horse racing and breeding with her at an early age and had taught her the necessity of providing proper care and feed to a horse; he also instructed her on the conformation of a horse.

Prior to 1969 Mr. Masson had not been exposed to horses, although his father-in-law had discussed breeding and racing with him and his wife. In 1969 the Massons travelled to southwestern Ontario where they visited a breeding farm for standardbred horses and race horses owned by Mrs. Masson's uncle.

Acting on the advice of Mrs. Masson's father the Massons purchased a colt for $500 in 1971; in 1972 a second colt was purchased, also for $500, from Mrs. Masson's mother, upon the death of the latter's husband. Mr. Masson testified that the first colt was acquired as a learning experience and to determine if he was interested in raising horses.

In 1972 Mr. Masson purchased a half section of land, approximately 35 miles east of Regina, for $22,000; he immediately sold a quarter section to his brother for $9,000. He financed the purchase with a loan from his brother-in-law and cash, the amounts of which he does not remember. The buildings on the quarter section he retained consisted of a house, a barn, which required repair, and two granaries. In the years since acquisition of the property Mr. Masson added a shelter to the back of the barn in 1972 and increased the capacity of the barn during 1978 and 1979. During 1977 and 1978 he moved a house trailer to the farm. Also in the winters of 1978 and 1979 he added a second water supply in order to have water available to the horses in the corral.

In 1972 Mr. Masson also acquired six additional horses from his wife's uncle for $6,000. These horses were purchased as a package and were recommended to him by the vendor and approved by his wife. These horses included both fillies and mares since Mr. Masson wanted to continue the family string. Also in 1972 Mr. Masson hired a trainer to take the horses to the track in order to condition them for races. Mr. Masson broke the first two horses and the trainer the other six.

The first brood mare was born in either 1973 or 1974, Mr. Masson could not recollect exactly. She had been in foal when she was brought to the farm. In 1974 Mr. Masson started breeding horses, although he did not have a stud on the farm until 1977.

During the years 1972 to 1977 Mr. Masson worked on the farm, as indicated, preparing the barn, adding corrals and shelters. He also educated himself on breeding and blood lines and in racing in general. He joined the Canadian Trotting Association as well as the United States Trotting Association which in his opinion was a very good source of breeding information through the publication of its magazine "Hoofsteps", which provides records of sires and dames. The United States Trotting Association, according to Mr. Masson, is the "overseer" of registration of horses in North America. He also subscribed to the sport's magazines, Sportsman and Harness World. His physical work on the farm consisted of trucking the mares for breeding to a stud farm in Lloydminster, putting up feeding hay, seeding part of his quarter section to grass and to oats. He testified that he was busy each weekend and that his whole life was dedicated to farming. He was busy nights as well. Mrs. Masson helped her husband on the farm. Both Mr. Masson and Mrs. Masson testified on several occasions that Mrs. Masson had a innate ability to identify horses and their attributes and problems. Mrs. Masson also was able to treat many ill horses herself without the assistance of a veterinarian.

Also in the early 1970's Mr. Masson leased 80 acres of land from the city of Regina. He seeded the land to retain grass and cut for hay in the following year. The city of Regina received one-third of the hay crop and Mr. Masson retained the balance for the horses.

Mrs. Masson looked after the breaking of foals with the help of her husband. The horses would be broken for both trotting and pacing.

Mr. Masson's principal submission was that in 1977 he changed his farm operations to a “full-time” operation by acquiring 28 horses from his wife's uncle in Ontario at a cost of $30,000. He purchased the horses to expand his breeding and racing activities. He testified that he saw an opportunity to obtain horses at a good price and took the opportunity.

In 1975 Mr. Masson started a cow/calf operation which lasted until 1982. The cattle were acquired at first to obtain milk and beef for his family but later on, because the farm had spare food, for use in a feeder cattle operation. He first purchased some general stock cattle but later on he acquired some Herefords. The stated price for the cattle was favourable because he purchased calves for $350 which several years previously would have cost $2,500. The Massons indicated they wanted both to breed and sell the calves to sell as finished cattle. In 1980 a combination of high feed prices and of drought resulted in a diminished crop; the Massons decided to sell their cattle.

Mr. Masson's initial plans called for 20 to 25 horses to yield 15 colts per year. He would then select one-half dozen of the colts each year for racing, of whcih perhaps three or four of the six would actually race. He anticipated the balance of the colts could be sold as yearlings in Alberta where yearlings' sales were averaging $2,500 per horse.

Mr. Masson foresaw a profit from the renewed horse operation in about ten years. He stated that it would take about two years to get the foals to become marketable and four years from the first farm bred colt's birth to get a colt racing. This time frame would avail to afford the public the opportunity to know his breed. Mr. Masson testified this is a long process since not every colt is a winner at the racetrack. In any event he was of the view a profit cannot be anticipated before six years at the least.

Mr. Masson testified he and his wife kept meticulous records of his horses' breeding activities. His wife maintained a diary which recorded the various breeding dates of mares and who they were bred to. These records indicated, he added, whether the animal was pasture bred or not. Other information in the diary included such information of births as to when the foals were dropped and if a foal was lost, the reason, if it was possible to determine. Bookkeeping was performed by Mrs. Masson, who was also in charge of registering the horses. Mrs. Masson was in charge of the horses on a day-to-day basis and consulted with trainers on a daily basis as and when required.

In the meantime Mr. Masson retained his position as an engineer with the city of Regina. He stated he had no problems getting time off to work on the farm and said that he would not let his farming activities interfere with work with the city. During the day his wife would be on the farm and only if his wife had difficulties would he have to go to the farm during his regular job. He would arrange for leave when it was anticipated his presence on the farm was necessary or if one of his horses was racing or if any horse had to be trucked to stud. Mr. Masson testified during the years in issue he worked for the city 37/2 hours a week for approximately 46 weeks per year. He also indicated that he worked on the farm approximately 1,760 hours per year.

Mr. Masson testified he turned down opportunities for promotion with the city of Regina since he did not believe he could do justice to both his job at the city and on the farm. He said that he turned down a position offered to him by the Mayor of the city as assistant director of the department since this would require his attendance at City Council meetings and the various other meetings during the evenings.

During 1972 to 1976 inclusive Mr. Masson kept his horses at a raceway during the summer where they could be trained and on the farm during the winter time. After 1976 the racing stock was kept at the raceway all year. He hired a person to look after the farm during the winter.

In 1978 Mr. Masson shipped horses to the United States to race and engaged a trainer for this purpose. Unfortunately in 1979 he ran into difficulty with the trainer and was forced to return the horses to Canada for development. Some of the horses were trained on a track in Vernon, British Columbia and difficulties resurfaced with the trainer who, he says, was neglecting his horses. Mr. Masson and the trainer went their separate ways: some of the horses were sold, the trainer kept two and the balance were returned to Saskatchewan. In 1981 another trainer conditioned a horse called "Court Clerk” who ran a mile in one minute and 59.4 seconds, a particularly fast time. However Mr. Masson was advised by officials in Calgary that his horses were not being taken care of by the new trainer and again the Massons and their trainer parted ways.

Mr. Masson claimed he received little income from the sale of horses necessitated by the departure of trainers. He stated he may have received a great sum of money for the sale of "Court Clerk" but his trainer had not advised him of a rather substantial offer. Mr. Masson anticipated he may have lost $100,000 in sales from two or three good racers; in fact he states he sold a "couple" of horses for about $15,000.

Mr. Masson indicated a standardbred horse usually races once a week, but not for a full period of 52 weeks a year. A standardbred mare can breed until age 20. The breeding would start at age six or seven years and a horse would be able to breed at least once every year. However only 65 per cent of the mares will have a foal in a given year.

In 1981 Mr. Masson's horses had difficulty with strangles, a particularly contagious disease suffered by colts. The main indication of the disease is a high fever. No inocculation has yet been devised to protect horses from this disease. In that year seven of the 15 foals born on the farm died. Prior to 1981 Mr. Masson never had problems with strangles, although sleeping sickness in 1980 caused the death of one or two horses. Mr. Masson indicated that while sleeping sickness is not common it is not as devastating or unexpected as strangles.

In 1981 and in 1982 a stud went sterile. Mr. Masson blamed the sterility to two years of drought in Saskatchewan and the shortage of feed.

In 1982 Mr. Masson had a very small foal crop and a second stud had problems getting mares into foal.

Mr. Masson's income from his employment and from the farm during the years under appeal is as follows:

His income for 1986 from farming was approximately $10,000 including both winnings from races and from sales of mares. However most of the $10,000 was from the sale of mares. His expenses for 1986 were lower than usual because his wife managed the horses at the raceway and were approximately $5,000 to $10,000. A trainer had been paid to train the horses. His salary with the city of Regina was $53,000 in 1986.

Mr. Masson has not made a profit from farming, either before 1978 or after 1982 up to 1986. He faults his losses after 1977 to health problems with his horses and the notices of reassessment issued by Revenue Canada which limited the amount of money available for the continuing development of the horses to the extent he wished.

Mr. Masson is of the view if it were not for the loss of foals in 1981 due to strangles and the inability to have horses for sale in 1982, when horses were being sold in Alberta at their highest prices, about $2,500 per foal, he would have made a profit in 1982. In fact in the fall of 1982 the industry suffered a decline which is only now beginning to show improvement. He states he lost approximately $2,000 per colt that might have been born if not for the problems incurred. He claims he lost a two-year crop of horses.

Mr. Masson acknowledged that injuries do occur to horses and states that the injuries suffered by his horses were no worse than the norm.

In 1983 Mr. Masson had approximately 50 to 60 horses which has been reduced to approximately 21 to 22 horses at time of trial. He now has:

5 brood mares;

1 — 5-year old ready for racing;

4 — 3-year olds ready for training;

6 yearlings;

1 stud;

1 racing mare in Eastern Canada; and

3 horses in British Columbia.

He anticipates having a maximum of five foals born this spring.

Mr. Masson stressed the years 1972 to 1977 were informative years for himself to get to know how to breed, understand and learn about horses. He invested $112,750 including the purchase price, in the farm prior to 1978. He stated that all decisions were jointly made with his wife. These decisions related to which horses would race and which would breed.

Because Mr. Masson's son had extreme allergies and could not be exposed to various dusts produced on the farm the family lived in a home in the city of Regina. There was a house on the farm which was used by Mr. Masson to eat in and to sleep over on weekends. Also, the trainer would reside in the house.

According to Mr. Masson the driving time between his home and the farm was of 45 minutes. Mr. Masson testified that during the breeding season he

would leave at 6:00 p.m. for the farm and stay until 10:00 or 10:30 p.m. During the winter he would spend two nights a week at the farm. The 1760 hours he ascribes to the time he spent on the farm does not include times for discussion with his wife in respect of breeding and racing nor does it include the time driving back and forth to the farm. He would spend “lots of time" discussing breeding and racing with his wife including what horses were available for breeding, and researching pedigrees and race records.

Mr. Masson informed the Court of the possibility of racing starting in Regina which will permit him to more closely supervise his horses and therefore show a profit.

Mr. Masson testified that he has been frugal in acquiring machinery and equipment for his farm and in general has purchased used equipment. He financed operations with loans from the Credit Union and from the Royal Bank of Canada. His operating loan with the Royal bank of Canada was approximately $20,000 during the years 1981 and 1982 and increased to $35,000 to $40,000 by 1983. He stated he invests all the spare income to the farm and except for living and eating all income from employment is put into the farm business. He further added that in 1974 his wife sold an apartment block in the city of Regina because the money was needed for the farm; the proceeds of the sale, approximately $25,000 to $30,000, were applied to the farm.

Mr. Masson indicated that his is one of the largest horse farm operations in Saskatchewan and that he would have no trouble with 50 to 100 head of horses on his farm, although the most head he had on the farm was approximately 70. He stated that his horses were of higher quality than that [of] any other farm in the province.

When he expanded his farm operation in 1977 Mr. Masson was of the view that he could earn about $30,000 to $40,000 per year, his salary from the city of Regina, from the farm so long as there were no "pitfalls" in the way.

Mr. Danny Garinger testified on behalf of the appellant as an expert witness. Mr. Garinger was raised on a farm and has devoted 18 years as an owner, driver and trainer of horses and as a secretary and manager for six years of the Alberta Standardbred Horse Association. This Association represents trainers, drivers and owners in the province of Alberta and comprises 600 members. According to Mr. Garinger the Association's business relates 50 per cent to breeding and 50 per cent to racing. He is also secretarytreasurer of Canadian Harness Horse Association and a director of the Saskatchewan Harness Horse Association.

In Mr. Garinger's view at least four years is required between the time one begins to set up a breeding farm to the sale of the first offspring by an original horse acquired for breeding purposes. Another five to six years is required in order to obtain a profit. Mr. Garinger added that one requires a combination of hard work and luck for the ten years to establish a profit picture. However Mr. Garinger testified that an owner of a racing horse may obtain a profit ten days after acquiring the horse in that the owner may obtain a licence within three days of purchase and enter his first race seven days later. In his view it is not unusual to obtain income from horse racing almost immediately.

He said that for himself it took two years to show a profit on an investment of $50,000 and that he started to show a profit Within his third year. Mr. Garinger said that anything of a catastrophic nature could ruin the ten-year cycle and specifically he mentioned strangles, drought and economic depression in the farming area. He testified most farms combine breeding and racing so that if one branch is not successful a profit may be made from the other.

Mr. Garinger acknowledged that the horse business is high risk.

Mr. Garinger has known the Massons for 15 years and that Mr. Masson had consigned horses to him when he was a sales manager. He has visited their farm, the last time the day before the trial, and described the farm as an "average looking farm . . . acceptable”. He described the farm as not lavish.

Mr. Garinger confirmed Mr. Masson's evidence that the horse market is depressed today; the peak was in 1982. The downturn continued until 1986 but there appears to have been a turnaround at the end of 1986. Mr. Garinger indicated that it was important that the horses race in Alberta since the Alberta Government has provided assistance for racing. This assistance takes the form of increases in prize money for successful horses.

Mr. Garinger estimated that during the years 1979 to 1982, farms having 50 horses or more would include six in Alberta, two in Saskatchewan, two or three in Manitoba and one or two in British Columbia and that the Massons' farm would be amongst the top 12 in Western Canada. He was unable to indicate how many standardbred farms there were in Saskatchewan although he did say there were about 75 such farms in Alberta.

The maximum number of horses the Masson's farm could handle according to Mr. Garinger, would be 100 "without trouble"; the Massons would need approximately 25 mares, 15 to 16 weanlings, 15 yearlings and a couple of stallions increasing the numbers up to 75 when the horses could make the farm operation profitable.

According to Mr. Garinger the 800 horses racing in Alberta win approximately $9 million to $10 million a year, that is, approximately $10,000 per horse. The expenses per horse would run about $9,500.

In Paul J. Taillefer v. M.N.R., [1987] 2 C.T.C. 2137; 87 D.T.C. 418, I considered the meaning of "chief source" within the context of section 31(1):

Chief Source

Once the Court finds that a taxpayer carries on the business of farming does not always end the conflict between the taxpayer and the fisc. The Court may then be asked to find whether the taxpayer is a class (1) or class (2) farmer, that is, whether or not farming, or a combination of farming and some other source of income, is the taxpayer's chief source of income. If so, the taxpayer is a class (1) farmer. In describing the three classes of farmers envisaged by the Act Mr. Justice Dixon stated that a class (1) farmer looks to farming for his livelihood. One may apply quantitative tests, among others, to determine whether farming may reasonably be expected to provide the bulk of income to a taxpayer. To determine whether farming may reasonably be the centre of the taxpayer's work routine requires subjective tests bearing in mind the work routine must be directed to earning one's livelihood. Keeping oneself busy is not the work routine of a class (1) farmer unless he may reasonably be expected to earn his livelihood from that work.

In his reasons for judgment in Moldowan v. The Queen, 75 D.T.C. 5216 Mr. Justice Ryan of the Federal Court of Appeal considered the possibility that a source may be a source of income in a particular year although it did not yield a profit in that year and therefore to determine the chief source for a year it appears pertinent:

'. . . to look at each of the taxpayer's sources from the point of view of capacity for present or future profit or for both when one is seeking to determine his chief source of income in that year. The relative importance of sources as sources of income would seem to me to be in most part a function of their capacity to produce gain. In my opinion an appropriate path to a resolution of this difficult problem is to give significant attention to the taxpayer's ongoing income-earning activities in a practical and businesslike way and in this way to determine which of the taxpayer's sources of income, in the ordinary run of his affairs, but taking account of his plans and his activities in implementation of his plans,* is the chief source of his income in the sense of its usual or its foreseeable profitability or of both. In seeking an answer, gross income, net income, capital investment, cash flow, personal involvement, and other factors may be relevant considerations.' (page 5219)

See, for example, Wilfley v. The Queen, 74 D.T.C. 6422.

Mr. Justice Dickson stated in Moldowan, op cit, at pages 5215 and 5216, that:

'Whether a source of income is a taxpayer's “chief source” of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of ‘chief source' are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia, in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.’

In determining if a taxpayer's chief source of income is from farming the Court must consider whether it follows from the facts that notwithstanding the taxpayer's other income sources farming can reasonably be expected to be a major force in the taxpayer's income-earning process or to have priority over other incomeearning activities that require his energies. The taxpayer's commitment of capital or personal energy to the farm must be such that a knowledgeable person would reasonably expect the farm to provide a livelihood. In short, to find farming to be the chief source of a taxpayer's income the Court must determine the relevant importance of farming to the taxpayer's other sources of income: The Queen v. Graham, op cit, at page 5263 (F.C.A.).

Combination of Farming and Some Other Source

In many cases under section 31 the taxpayer usually acknowledges farming alone is not his chief source of income but claims his chief source of income is from a combination of farming and some other source of income. It is usually, but not always, from this other source of income that he is seeking to deduct his farming losses.

There need not be any connection between farming and the 'other source of income” for a taxpayer's chief source of income to be a combination of the two sources; however, the meaning of “combination” in section 31 does not mean the simple addition of any two sources of income for any taxpayer (Moldowan, op cit, page 5216).

In the Federal Court of Appeal Mr. Justice Ryan was of the view that:

‘Just as in the case of determining whether farming alone is the chief source, so in the case of determining whether farming combined with another source is the chief source, a practical judgment must be made, and in my opinion the judgment is to be made by way of analogy to the process appropriate to determining whether farming alone is the chief source. In making this assessment, the comparative importance of the combination must be assessed as if the decision were being taken by a reasonable and informed observer. The question to be decided is one of fact: Was the combination the taxpayer's chief source? The answer is to be sought in a context which, depending on the facts of the particular case, may embrace the past and predictions about the future as well as the present.' (pages 5219-5220)

Mr. Justice Dickson described what section 31 contemplates and what one must consider in determining whether a combination of farming and some other source of income is a taxpayer's chief source of income. On page 5216 he wrote that section 31 :

. . . contemplates a man whose major preoccupation is farming, but it recognizes that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. The section provides that these subsidiary interests will not place the taxpayer in class (2) and thereby limit the deductibility of any loss which may be suffered to $5,000. While a quantum measurement of farming income is relevant, it is not alone decisive. The test is again both relative and objective, and one may employ the criteria indicative of ‘chief source’ to distinguish whether or not the interest is auxiliary. A man who has farmed all of his life does not become disentitled to class (1) classification simply because he comes into an inheritance. On the other hand, a man who changes occupational direction and commits his energies and capital to farming as a main expectation of income is not disentitled to deduct the full impact of start-up costs.'

In the case at bar there is no evidence how much income Mr. Masson reasonably could have anticipated receiving from farming and therefore it is difficult, if not impossible, to make a finding that this income had the potential to be his chief source of income either by itself or in combination with his employment. Further, because Mr. Masson has not made any profit from his farming operation since its inception in 1972 I am limited by how much weight I can give to his expectation that his farming business would generate income sufficient to be a chief source of income. In my view, his expectation that farming would be his chief source of income, or contribute to his chief source of income, was only a hope or wish. I have considered Mr. Garinger's evidence that Mr. Masson's farm operation would probably be profitable when he had 75 horses. However, the amount of profit that would be generated is questionable.

Mr. and Mrs. Masson worked long hours on the farm. Mrs. Masson made no small use of her experience with, and love of, horses in working with these animals. The Massons were dedicated to the farm and their lives centred around the farm. However farming was not Mr. Masson's major preoccupation, as contemplated by Mr. Justice Dickson, which could be combined with his employment income to be his chief source of income. To be a taxpayer's major preoccupation farming must preoccupy the taxpayer in the course of earning his livelihood. If there is no reasonable expectation that the taxpayer can look to farming alone, or to farming together with another source of income, for his livelihood that taxpayer is not preoccupied with farming. Farming must contribute, or be reasonably expected to contribute, to the taxpayer's livelihood. Farming must be a positive force in the process of earning one's livelihood no matter how sincere or otherwise dedicated the taxpayer is to farming.

I appreciate that Mr. Masson has had serious financial reverses in his farm operation due to forces beyond his control, in particular the disease of strangles, which affected his breeding schedule, and a decline in the economy. The tax assessments also weighed heavy on the farm operations. However during trial no evidence was presented to show that notwithstanding these events it would have been reasonable to have expected the farm operations to have earned a profit that either by itself or in combination with Mr. Masson's employment income would be his chief source of income. In the appellant's view it was these events which adversely affected his anticipated income from the farm. The Massons' projections were based on ideal conditions continuing for an indefinite period without regard to what appears to have been their limited capital.

The appeals are dismissed.

Appeals dismissed.