Richard Auclair v. Minister of National Revenue, [1986] 2 CTC 2040, 86 DTC 1535

Tremblay, T.C.J. [TRANSLATION]: — This case was heard at Montreal, Quebec on November 8, 1985.

1. Issue

According to the notice of appeal and the respondent's reply, the issue is whether the appellant, sales manager for Celanese Can Inc., is justified in deducting, in computing his income for the 1980, 1981 and 1982 taxation years, the sums of $991, $3,764 and $1,039 respectively as restricted farm losses. The appellant maintained that the purchase of a pregnant mare with a good pedigree in 1977 indicated that there might be excellent foals.

The respondent disallowed the losses on the basis of the fact that the appellant had no appropriate knowledge of breeding and had no physical assets for this purpose. Furthermore, since the appellant had only one mare, he did not have a reasonable expectation of profit during the years in question.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of 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 This judgment also held that the assumptions of fact on which the respondent relied in establishing the assessment are also presumed to be true until proven otherwise. In the present appeal the facts presumed are described in the reply to the notice of appeal, in paragraph 11.

In court, the appellant admitted and denied a number of facts. They read as follows:

11. In assessing the appellant for his 1980, 1981 and 1982 taxation years, the respondent, the Minister of National Revenue, relied on the following presumptions of fact, inter alia:

(a) In 1977, the appellant purchased a mare with foal for the purpose, he says,

of breeding foals and possibly making a profit on their sale; [admitted]

(b) Apart from the mare with foal, the appellant did not own a farm or any equipment; the said mare being boarded with his father-in-law, a professional breeder; [admitted]

(c) Unlike farmers, the appellant never increased the number of mares he owned; he acquired only one mare in 1977 [admitted], which is not sufficient to be able to claim to operate a business;

(d) The appellant kept the mare from 1977 to 1982; during that period the

mare gave birth to five foals, two of which were stillborn; [admitted]

(e) None of the foals, when sold at the breeders' auction, allowed the appellant to make a profit; on the contrary, the balance sheet for the appellant’s farming activities has shown only losses since 1977:

Farm losses claimed incurred by the appellant since 1977

1977	$2,433.00
1978	$2,012.00
1979	$ 905.00
1980	$ 991.00
1981	$3,764.00
1982	$1,039.00
[admitted]

(f) The appellant did not use the means and did not devote the necessary time to be able to claim that he was breeding foals with a reasonable expectation of profit but was rather carrying on these activities as a pastime and hobby; [denied]

(g) Thé expenses the appellant incurred in connection with breeding foals were personal or living expenses within the meaning of subsection 248(1) of the Income Tax Act; [denied]

3. Facts

3.01 At the outset of the hearing counsel for the respondent informed the Court that, as a result of an administrative decision, his client was allowing the appeal with respect to 1980.

3.02 In 1977 the appellant purchased a brood mare named Slick Chick Lion for $2,200. She was the result of a cross between a stallion of the Heel pedigree and a mare of the Adios pedigree. This Heel-Adios cross was the prime cross according to experts at the time.

Slick Chick Lion was the sister of Jefferson Style and Jefferson Boy, both of whom were supposed to be animals of distinction.

3.03 At the time she was purchased Slick Chick Lion was three years old and was already with foal. She had never raced.

3.04 The facts set out by the appellant in his notice of appeal accurately describe the facts adduced in evidence.

Paragraphs 1 to 8 read as follows:

1. During the 1980, 1981 and 1982 taxation years, Mr. Auclair was employed by the Celanese company as sales manager — plastics division for Canada.

2. After the Société de développement de l'industrie des courses de chevaux du Québec Inc. (Sodic) was established in 1976 by the Quebec Minister of Finance, Jacques Parizeau, a subsidy program was set up by it to develop the Quebec foal breeding industry. This program offered incentives to racehorse breeders, regardless of the size of their farms. After the program had been announced, an intensive advertising campaign was launched by SODIC to recruit new breeders. In 1977 the taxpayer acquired a mare with foal, Slick Chick Lion, and took advantage of the subsidies available under this program.

3. The taxpayer’s aim was to breed foals and sell them before they reached the age of two at the breeders’ auction held each autumn. Selling at this age is a common practice among breeders of “yearlings”.

These foals had not participated in any races when they were sold. The taxpayer’s role was strictly that of a breeder.

4. During the years from 1978 to 1982, Slick Chick Lion produced the following results:

1978 — 1 live colt — Meilleur Ailleurs

1979 — 1 live colt — Echec et Mat

1980 — 1 stillborn colt

1981 — 1 live filly — Miss Karnac

1982 — 1 stillborn colt

After this last colt was stillborn, showing that it would be impossible to make a profit with this mare, the taxpayer decided to have her slaughtered.

5. Since the taxpayer is not a farmer and does not live on a farm, the mare and foals were boarded with a professional breeder who also took care of training the foals.

6. The Department issued notices of reassessment to the taxpayers [sic] for 1980, 1981 and 1982 in which it disallowed any deduction for the losses incurred in the taxpayer’s breeding activities.

7. During these years the taxpayer’s chief source of income was not farming and therefore any losses incurred by the taxpayer’s breeding business had to be restricted under section 31 of the Canadian Income Tax Act (the Act).

8. The taxpayer’s business was not a hobby for him. He neither fed nor trained the horses himself. He did not run them in races and, as a breeder and owner, could not derive any of the personal pleasures inherent in a hobby. His only pleasure lay in the possibility of making a profit when the foals were sold.

3.05 The three foals that survived were sold for $3,500, $3,100 and $1,500. They had had pitiful performances on the racetrack.

3.06 According to the appellant, the Heel-Adios cross, which was thought to be a prime cross in 1977, turned out with time and with the results obtained on the racetrack to be a far from excellent cross. It was rather the opposite.

3.07 During the years in question the income and expenses were as follows:

4. Act, Case Law, Analysis

4.01 Act

The principal provisions of the Income Tax Act involved in this appeal are paragraph 18(1 )(h), subsection 31(1) and the definition of “personal or living expenses'" in section 248, the relevant parts of which read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(h) Personal or living expenses of the taxpayer except travelling expenses (including the entire amount spent for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

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

248. (1) In this Act,

“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

4.02 Case law

The parties referred to the following cases:

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

2. Ambrose J. Lewis v. M.N.R., [1984] C.T.C. 2306; 84 D.T.C. 1267;

3. Tony Mele and Tony Mele Incorporated v. M.N.R., [1985] 1 C.T.C. 2082; 85 D.T.C. 88;

4. Clément Rivest v. M.N.R., [1985] 2 C.T.C. 2031; 85 D.T.C. 436;

5. William Hall v. M.N.R., [1985] 2 C.T.C. 2314; 85 D.T.C. 624;

6. Steven Gorjup v. M.N.R., [1985] 2 C.T.C. 2194; 85 D.T.C. 530.

4.03 Analysis

4.03.1 The Income Tax Act contemplates three classes of farmers according to Dickson, J. in Moldowan (para 4.02.1) at 487-88 (C.T.C. 315):

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 carries 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 carries on some farming activities as a hobby. The losses sustained by such a taxpayer on his nonbusiness farming are not deductible in any amount.

4.03.2 The appellant does not claim to be a class 1 farmer. This was established by the evidence, moreover. He is primarily the sales manager, plastics division for Canada at the Celanese company. He devotes most of his time to this.

4.03.3 The only issue is whether the appellant’s farming activity should be regarded as falling into class 2 or class 3 described by the Supreme Court.

The respondent maintained that the appellant falls into class 3, since he has no reasonable expectation of profit. In Moldowan (supra), the Court stated the following at 485-86 (C.T.C. 313-14):

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. 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.

4.03.4 The various criteria set out by the Supreme Court apply having regard to the nature of the activity concerned. In the present case breeding

racehorses for resale involves a certain number of risks: miscarriage, illness, accident, etc. That is why by keeping only one brood mare, the appellant was not giving himself much chance for success.

Moreover, the brood mare Slick Chick Lion had never herself run on race tracks.

A foal may become a good runner if the mother and father were good runners. There may be exceptions, but they merely confirm the general rule.

Finally, another factor which seems to be significant in explaining the impossibility of success, when it should have been the cause of success, is the Heel-Adios cross. Experience has shown that this so-called “prime” cross proved instead to be the opposite on the racetrack (para 3.06).

This is somewhat like a racing car which has a fundamental defect preventing it from realizing its performance.

4.03.5 In view of the foregoing, the Court must conclude that fundamentally the appellant’s farming activity could not have a reasonable expectation of profit. The said activity must therefore be regarded as a hobby and the expenses as personal expenses (section 248 of the Act) that are not deductible (subsection 18(1) of the Act). The reassessments must therefore be upheld for 1981 and 1982. Owing to the respondent's decision, however, the appeal is allowed with respect to the 1980 taxation year.

5. Conclusion

For these reasons the appeal with respect to the 1981 and 1982 taxation years is dismissed and with respect to the 1980 taxation year is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed in part.