Romain Audet v. Minister of National Revenue, [1985] 2 CTC 2237, 85 DTC 557

Tremblay, TC) [TRANSLATION]: This appeal was heard in Montréal, Québec on July 17, 1984.

1. Issue

According to the notice of appeal and the reply to the notice of appeal, the issue is whether the appellant, a partner in an accounting firm, is entitled to claim business losses of $16,209, $27,017 and $20,946 in computing his income for 1977, 1978 and 1979 respectively. These losses arise from two businesses: “Ecurie Risquetou Enrg” and “Ecurie Ambletrot Enrg”’.

The respondent, applying section 31 of the Income Tax Act, considered these losses to be farm losses, and allowed only $5,000. The respondent therefore maintained that the appellant's chief source of income for the said years was neither farming nor a combination of farming and some other source of income.

2. The Burden of Proof

2.01 The appellant has the burden of showing that the respondent’s reassessments are incorrect. This burden of proof derives from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In that decision, the Court ruled that the facts assumed to be true by the respondent in support of his reassessments are also assumed to be true until proven otherwise. In the instant case, the facts assumed to be true by the respondent in the reply to the notice of appeal are as follows:

2. In his assessments of the appellant for the 1977, 1978 and 1979 taxation years, the respondent has assumed the following facts, among others, to be true:

(a) during the years in dispute, the appellant was one of the principal partners in a firm of chartered accountants known as “Audet, Gosselin, Lapointe & Associés” and derived almost all his income fron his profession of chartered accountant;

(b) since 1977, the appellant has also been involved in two businesses, Ecurie

Risquetou Enrg and Ecurie Ambletrot Enrg, which race and deal in horses;

(c) neither of these businesses owns a farm and all their horses are boarded out;

(d) one of the partners in Ecurie Risquetou Enrg, Mr Blouin, looks after the training and care of the horses;

(e) during the period in dispute, the operations of Ecurie Risquetou Enrg produced gross operating income of $167,748, including $38,091 from the sale of horses;

(f) for the same period, the operating expenses of Ecurie Risquetou Enrg totalled $385,325, including $226,678 attributable to the purchase of horses; an operating loss of $217,577 for the period resulted; the appellant’s share of this loss was 20 per cent or $43,515;

(g) concerning Ecurie Ambletrot Enrg, gross operating income totalled $22,435, including $5,000 from insurance and $4,867 from the sale of horses; operating expenses totalled $42,334, including $23,250 for the purchase of horses;

(h) the operating loss of Ecurie Ambletrot Enrg for the period was $19,899, which is the appellant’s share;

(i) the potential profitability of these two businesses was minimal and insufficient for the appellant to earn his livelihood;

(j) the appellant did not personally help with the care or training of the horses; the only duties he performed were bookkeeping and preparing financial statements for Ecurie Risquetou Enrg and Ecurie Ambletrot Enrg;

(k) most of the appellant’s efforts were directed toward, and his major preoccupation was, his chartered accounting firm;

(l) the appellant’s income during the years in dispute did not derive mainly from farming or from a combination of farming and some other source of income;

(m) the respondent has therefore applied the provisions of s 31 of the Income

Tax Act, thus limiting the appellant’s farm loss to $5,000 for each taxation year.

3. Facts

3.01 At the beginning of the hearing, the appellant acknowledged that his losses were not business losses as originally claimed, but ordinary farm losses. However, he denied that they are restricted farm losses as claimed by the respondent.

3.02 Concerning the facts assumed to be true by the respondent, quoted in subparagraphs 2(a) to (m) in paragraph 2.02 above, the appellant admitted subparagraphs (b), (c), (d), (e), (g), (h), (j) and (m). He denied subparagraphs

(i) and (I).

He admitted in part:

(1) subparagraph (a): he was a partner in the accounting firm Audet, Gosselin, Lapointe & Associés; his share was 36 per cent;

(2) subparagraph (f): he admitted the figure $385,325 but stated that the figure $226,678 should be replaced by $258,737; he also admitted the other figures;

(3) subparagraph (k): on September 27, 1977, he started farming activity; from that date, his major preoccupation was no longer the accounting firm.

3.03 At the very beginning of the hearing, the appellant also filed the following documents as Exhibits A-1 to A-16:

A-1 original assessment notices for 1977 to 1982;

A-2 letter from the respondent to the appellant dated June 19,

A-8 notice of appeal to the Tax Review Board by the appellant,

dated September 3, 1982, for 1977 to 1979;

A-9 acknowledgement of receipt of the notice of appeal;

A-10 letter from the respondent's Appeal Branch, dated October

18, 1982, stating that various documents concerning the notice of appeal had been sent to the Tax Review Board;

A-11 letter from Mr Daniel Verdon, dated November 2, 1982, stating

that he had been authorized to represent the respondent in the appeal before the Tax Review Board;

A-12 letter from Mr Verdon to the appellant, dated November 25,

1982, which accompanied a copy of the reply to the notice of appeal;

A-13, A-14, notice of hearing by the Tax Court of Canada, dated May 25,

A-15, A-16 1984, and correspondence concerning the setting of the hearing

date.

3.04 The appellant explained that when he began his horse-racing activities, he did not believe that they were farming activities. He regarded horses as a rich man's hobby. However, such an activity could gain new clients for him.

He filed as Exhibit A-17 a list of individuals, partnerships and companies who owned racehorses and who became his clients as a result of his farming activities. In this exhibit appear the fees charged to these clients by the accounting firm from 1978 to 1981: $38,603. Exhibit A-18 shows the fees charged to these same clients by the appellant himself from 1982 to 1984, after leaving the accounting firm: $55,325. These two figures total $93,928.

3.05 Concerning these fees, the appellant filed as Exhibit A-19 an authorization dated June 12, 1984, entrusting him with the sale of a farm for $1 million. As a result of his farming activities, in 1980 and subsequent years he was appointed auditor for the United Harness Horsemen Association of Quebec. The agenda of a meeting of this Association, dated November 30, 1983 and showing the appellant’s name, was filed as Exhibit A-20.

3.06 During the years in dispute, the appellant owned 20 per cent of the shares in Ecurie Risquetou Enrg and 100 per cent of Ecurie Ambletrot Enrg. He filed as Exhibit A-21 the statements of profit and loss for tax purposes, and the adjusted statements of profit and loss, for both businesses, as well as the invoices to clients (horsemen, horse owners and others) for professional fees. The profit and loss statements for tax purposes show a total loss for both businesses of $19,345. The adjusted profit and loss statements (which include the year-end inventories of race horses) show total losses of $19,232. Since the professional fees charged to clients (horsemen and others) amount to $93,928, the professional fees therefore exceed the total losses by $74,696.

3.07 The registation papers of Ecurie Risquetou Enrg, dated December 9, 1977, and of Ecurie Ambletrot Enrg, dated February 6, 1978, were filed as Exhibits A-25 and A-26. In Ecurie Risquetou Enrg the appellant was associated with Mr André Blouin, an owner and trainer of racehorses, Mr Pete Morin, an insurance broker and racehorse owner, and Mr Clément Beauregard, comptroller for Maislin Transport, and Mr Gérald Legault, a real estate administrator.

3.08 The following exhibits were filed concerning Ecurie Risquetou Enrg: financial statements as at December 31,1977 (A-30), balance sheet as at May 8, 1978 (A-27) and financial statements as at November 10, 1978 (A-28), December 31, 1978 (A-31), June 30, 1979 (A-29), December 31, 1979 (A-32), December 31, 1980 (A-33), December 31, 1981 (A-34) and December 31, 1982 (A-35).

3.09 The following statements for Ecurie Ambletrot Enrg were filed: December 31, 1977 (A-36), December 31, 1978 (A-37), December 31, 1979 (A- 38), December 31, 1980 (A-39), December 31, 1981 (A-40) and December 31, 1982 (A-41).

3.10 For the years in dispute, Risquetou and Ambletrot losses were $15,452 (1977), $27,017 (1978) and $20,946 (1979). In subsequent years, there was a profit of $14,585 in 1980, a loss of $742 in 1981 and a profit of $30,227 in 1982 (Exhibit A-49).

3.11 The appellant filed his résumé as Exhibit A-24: in it, he showed that from the age of 14, inspired by his father’s example, he had developed a taste for business. Although he had been a member of the Ordre des comptables agréés since 1959, he claimed that he had always wanted to run his own business, other than accounting, as one of his former professors had advised: “Be an accountant if you want to be something else someday.”

The appellant described some of his activities:

From 1967 to 1976, my business activities outside the chartered accountancy profession were quite limited, except for some real estate transactions.

In March 1976, in my wife’s name, I bought 50 per cent of the shares of a belt and pulley import and wholesale distribution company operating under the name of “Dominion Belting and Machinery Co Inc”. The other 50 per cent of the shares was acquired at the same time by my brother-in-law, who still runs the company with my wife.

In early 1977, I bought 50 per cent of the shares of a company called “Les Entreprises Guy Riopel Ltée”: the remaining 50 per cent of the shares was held by one of my clients, Mr Guy Riopel. This was a floor covering company, specializing in small contracts.

In 1977 and 1978, he formed Ecurie Risquetou Enrg and Ecurie Ambletrot Enrg in order to buy and race horses to win prize money and make profits.

In March 1978, I formed a new company, “Tapis Canadiens (Québec) (1978) Ltée”, to buy out another carpet company wishing to leave Québec. I ran this company until the end of June 1979, when the bank, acting under a trust agreement, withdrew its line of credit and took possession of the company’s assets to repay this loan. During its first financial period, this company had sales of almost $1,000,000 but also suffered a loss of approximately $90,000.

Finally, in 1981, I negotiated for my wife the purchase of an interior decorating business then run by the company “René Lacroix Inc”. This business now operates under the name of “Ambiance Décor et Maison Lacroix Enrg”.

3.12 In the exercise of his profession, the appellant kept a personal office from 1960 to 1964, but practised in partnership with other accountants from 1964 to 1982. Nevertheless, his partners changed five times during this period. Since 1982, he has practised alone (Exhibit A-24). During the years in dispute, his net income from the accounting firm was $80,800 (1977), $37,723 (1978) and $50,377 (1979) (Exhibit A-29). This type of income in subsequent years was $43,335 (1980), $67,282 (1981) and $50,945 (1982).

3.13 In 1979, to assist his business Ecurie Risquetou Enrg, the appellant borrowed $50,000 from the Banque Provinciale (Exhibit A-42), and later borrowed $100,000.

One of the most important horses purchased by Ecurie Risquetou Enrg was "Summer Soldier’", purchased in May 1978 for $100,000 (Exhibit A-44). From 1977 to 1981, this business had a total tax loss of $59,268. The sale of the horse “Silent Chant’’ for $5,000 in January 1982 left a total net loss of $54,268 (Exhibit A-45).

3.14 During its existence, Ecurie Risquetou Enrg purchased 11 horses, including six foals. A statement of revenue and expenditures for each horse from 1977 to 1981 and a summary were filed jointly as Exhibit A-46. The loss of $54,268 cost each parter $10,854, or $2,171 for each of the five years of this stable’s existence. In addition, the appellant lost $8,378 through Ecurie Ambletrot Enrg from 1977 to 1982.

3.15 The foals were the main reason for the loss. The five race horses (other than the foals) earned an operating profit (prize money less expenses) of $45,566, and a profit on sales of $54,934, for a total of $100,000 (Exhibit A-47).

3.16 In 1982 the two stables were liquidated, except for a share of $10,000 in the jointly-owned horse “Summer Soldier’’.

3.17 Exhibit A-49 shows the appellant’s sources of income from 1977 to 1982:

3.18 In cross-examination, counsel for the respondent filed the appellant’s income tax returns for 1977, 1978, and 1979 (Exhibits 1-1, 1-2 and 1-3). The appellant stated that he was no longer involved with horse-races since the Department of National Revenue had claimed payment of between $25,000 and $30,000. To give an indication of the amount of time devoted to horseraces, the appellant claimed that before 1977, he had played approximately 100 games of golf each season. From 1977 on, he no longer played golf. According to the appellant, during the years in dispute, he worked at his accounting office from nine am until six pm.

3.19 Mr André Bourbeau, CA, testified that he had known the appellant for ten years and that he had been his partner from 1975 until 1982. The partnership agreement of the accounting firm Audet, Gosselin, Moreau & Lapointe, dated February 1, 1975, was filed as Exhibit A-22.

It was common ground that promotion expenses were the responsibility of each partner, but that if a partner brought a new client to the firm, he should receive 20 per cent of the gross income from fees invoiced.

Paragraph 10 of this agreement stipulates that partners must work full- time for the firm. They could not be partners or shareholders in another business without authorization by a vote of 75 per cent of the partners. Since the appellant attended more to his personal affairs than to those of the firm, he was obliged to leave the firm in 1982. The by-law dated December 5, 1975, admitting the witness Mr A Bourbeau to the partnership, was filed as Exhibit A-23.

3.20 In cross-examination, Mr Bourbeau stated that Mr Audet was usually at the office during office hours, but that he spent his time on matters relating to carpets, decoration, floor coverings and his stables.

3.21 Mr Pete Morin, the appellant’s partner in Ecurie Risquetou Enrg, stated that he himself had been involved in horse-racing since 1974. In 1977 and 1979, he invested $7,200 and $2,000 respectively in Risquetou.

He testified that the appellant represented the business on trips to the United States, as well as looking after its administration and correspondence. Increasingly, he looked after its financial aspects (banking and other duties). The partners met every two or three days at noon, and on Saturday mornings.

3.22 In cross-examination, Mr Morin claimed that “Summer Soldier" had been sold for $180,000. This horse no longer races but still earns income from stud fees. In 1978 and 1979 respectively, he earned $54,615 and $21,200 in prize money (Exhibit A-46).

3.23 Mr Jean-Paul Charron, a horse owner, trainer and driver for 22 years, is president of the 3,500-member United Harness Horsemen Association of Quebec. He owns 65 horses, approximately 50 of them in shares. He purchases horses to a total value of approximately $100,000 each year. Since 1974, he has made a very comfortable living from horses. His stable buys foals and resells them eighteen months later. He knew the appellant and his partners well. According to him, Ecurie Risquetou Enrg was doing well.

3.24 In cross-examination, Mr Charron stated he owned no buildings, but rented stalls. He owns a horse, “Boomer Drummond", which was purchased for $22,000 in the autumn of 1982. In 52 races, this horse has earned $645,000. In 1984, he earned $318,000. Mr Charron has refused to sell this horse for $1 million.

3.25 Mr Gustave Lacombe, public relations representative for Blue Bonnets since 1976, also testified. His work consists of supervising the races and settling disputes between horsemen and people at the track.

He attends 99 per cent of the races. He has known the appellant and his partners since 1976. Very often, the appellant would come to view films of races before buying a horse. He would come about three times a week. According to Mr Lacombe, there are between three and four hundred stables in the province.

4. Act — Case law — Analysis

4.01 Act

The major provisions involved in this case are sections 3(d), 4(1)(a), 18(1 )(a) and 31(1). They read as follows:

Section 3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

determine the amount, if any, by which

(i) the aggregate of

(A) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property,

(B) his taxable net gain for the year from dispositions of listed personal property, and

(C) the amount, if any, by which

(I) the aggregate of his taxable capital gains for the year from indexed security investment plans

exceeds

(Il) the aggregate of his allowable capital losses for the year from indexed security investment plans,

exceeds

(ii) the amount, if any, by which his allowable capital losses for the year from dispositions of property other than listed personal property exceed his allowable business investment losses for the year;

(c) determine the amount, if any, by which the aggregate determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the aggregate of the deductions permitted by subdivision e in computing the taxpayer’s income for the year (except such of or such part of those deductions, if any, as have been taken into account in determining the aggregate referred to in paragraph (a));

(d) determine the amount, if any, by which the remainder determined under paragraph (c) exceeds the aggregate of

(i) the aggregate of amounts each of which is his loss for the year from an office, employment, business or property or his allowable business investment loss for the year, and

(ii) the amount, if any, by which the amount determined under subclause (b)(i)(C)(11) exceeds the amount determined under subclause (b)(i)(C)(l).

Section 4. (1) For the purposes of this Act,

(a) a taxpayer’s income or loss for a taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer’s income or loss, as the case may be, computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from that source or no income or loss except from those sources, as the case may be, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto;

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

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

section 31. Loss from farming where chief source of income not farming

(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 section 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 deduc- tion under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes or 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.

4.02 Case Law

The parties referred to the following cases:

1. W Moldowan v The Queen, [1978] 1 SCR 480; [1977] CTC 310; 77 DTC 5213;

2. Bert James v MNR [1973] CTC 457; 73 DTC 5333;

3. S J Cooke v MNR, [1975] CTC 2296; 75 DTC 223;

4. Helen Kasper v MNR, [1982] CTC 178; 82 DTC 6148;

5. J R Leslie v MNR, [1982] CTC 2233; 82 DTC 1216;

6. Olympia Floor and Wall Tile (Quebec) Ltée v MNR, [1970] CTC 99; 70 DTC 6085;

7. H R Plante v MNR, [1981] CTC 2052; 81 DTC 74;

8. H S Hadley v. MNR, [1981] CTC 2060; 81 DTC 66;

9. Blair Company Limited v MNR, [1984] CTC 2560; 84 DTC 1457.

4.03 Analysis

4.03.1 In Moldowan, at 487 (CTC 315), the Supreme Court of Canada ruled that 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 non-business farming are not deductible in any amount.

In the instant case, the respondent claims that the appellant falls into class two and is therefore subject to subsection 31(1). The content of this section is still the same as that of the 1978 subsection 31(1) quoted in Moldowan. On the other hand, the appellant claims that he belongs to class one: that is, his income derives mainly from farming or from a combination of farming and some other source.

On page 486 (CTC 314) of Moldowan, the Supreme Court of Canada makes the following comments on determining whether a source of income is the chief source:

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. [Emphasis added.]

The same Court also, on page 488 (CTC 315) of Moldowan, makes the following analysis concerning the differences between classes one and two of farmers:

The reference in s 13(1) to a taxpayer whose source of income is a combination of farming and some other source of income is a reference to class (1). It 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.

[Emphasis added.]

4.03.2 Practically speaking, therefore, we must determine if farming was the appellant’s chief source of income during 1977, 1978 and 1979.

Using the principles set forth in Moldowan, we can state the problem in general terms as follows: during the years in dispute, could the appellant reasonably expect to derive most of his income from farming, or expect farming to be central to his usual work? In this regard, we must consider for each source the reasonable expectation of income, the profitability both present and future, the capital committed and the time spent.

4.03.3 In the instant case, the taxpayer had several sources of income: his accounting firm; his farming activities (Ecurie Risquetou Enrg and Ecurie Ambletrot Enrg); Dominion Belting and Machinery Co Inc; Les Entreprises Guy Riopel Ltée; and Tapis Canadiens (Québec) (1978) Ltée. In 1981, he would also acquire the company René Lacroix Inc, now operating under the name of Ambiance Décor et Maison Lacroix Enrg (paragraphs 3.04, 3.05 and 3.11).

The two disputed sources are the accounting firm and the farming activities. Which of the two is the chief source?

4.03.4 First, if we consider only the quantum of income derived from farming and that derived from the accounting firm (see paragraphs 3.10, 3.12, 3.13 and 3.17), it seems obvious that the the appellant’s chief source of income was the accounting firm. Over six years (1977 to 1982), the accounting firm brought the appellant a net income of $330,462, while his farming activities lost $58,944. However, establishing the chief source of income is not only a simple question of quantum. Even though the amount is indeed relevant and important, according to the Supreme Court decision quoted above it is not decisive. It must be admitted that the present and future profitability of a source of income such as the one in dispute is risky. Indeed, risk is inherent in horse racing. This is clearly shown by the evidence in this case. While buying and reselling foals is a profitable part of Mr Jean- Paul Charron's farming activities (paragraphs 3.23 and 3.24), buying foals caused the appellant a loss (paragraph 3.15).

4.03.5 Concerning the capital committed and the way the investment was made, that is, by associating with people in the business, the Court notes that the appellant acted in a careful, well-informed manner (paragraphs 3.06, 3.07, 3.13 and 3.14).

4.03.6 Concerning the time spent by the appellant on farming activities, the evidence shows that he spent a major part of his time on farming activities. According to the appellant, it was because of the time spent on his stables that he was obliged to leave the accounting firm in 1982. However, we must remember that he also had many other businesses: carpets, decoration, floor coverings and so forth (paragraph 4.03.3). The appellant was the usual administrator of the stables, according to the testimony of Mr Pete Morin (paragraph 3.21); Three or four times per week, the appellant would view films of races with Mr Gustave Lacombe (paragraph 3.25). Finally, the appellant attributed to his farming activities the fact that from 1977 onwards, he hardly played any golf, while before 1977, he regularly played 100 games each summer (paragraph 3.18). We may assume that his many other activities also contributed to this situation.

4.03.7 From the start, all the evidence has shown that there was a reasonable expectation of profit, which the respondent does not deny. Indeed, the appellant is classed as a class two farmer, which gives him the right to claim restricted farm losses.

ls this evidence sufficient to conclude that from 1977 onwards, the appellant abandoned accounting activities to devote himself entirely to farming activities? The appellant claims that this is so, when he quotes one of his former professors: “Be an accountant if you want to be something else someday." In addition, the number of businesses the appellant took on shows that he might have wanted to leave accounting someday in order to run his own business or businesses (paragraphs 3.11, 3.19 and 3.20). Does this mean that the weight of the evidence is that, from 1977 onwards, the appellant wanted to abandon accounting and make horse-racing activities his chief source of income? The Court thinks not.

The appellant did not originally believe that this was a farming activity within the meaning of the Income Tax Act, but rather a purely business activity. The notice of appeal is clear on this point.

It was only at the beginning of the hearing, before the Court, that the appellant changed his basic position, admitting that the activities of the stables were not business but farming activities (paragraph 3.01). In addition, he considered horse-racing an activity exclusive to the rich.

The weight of the evidence indicated not so much that he wanted to change his source of income, but rather that he used his activities as a horse owner to gain new clients. Indeed, the evidence showed that this undertaking was particularly successful (paragraphs 3.04, 3.05 and 3.06). The appellant also used this as a subsidiary argument.

4.03.8 Can the amount of losses from horse-racing over and above the amount of restricted farm losses be applied against other sources of income in the year of loss?

First, restricted farm losses are applicable against other income in the year of computation of the loss, and only the said losses are thus applicable, according to subsection 31(1). In the instant case, in the reassessments by the respondent, these restricted farm losses have already been applied against the income from the chartered accounting firm. The general scope of paragraph 3(d), specifying that losses must be applied in the year of computation of the loss, is limited to restricted farm losses by subsection 31(1). Nothing else in the Act provides for the application of the remainder of the losses arising from the appellant’s horse-racing activities. If the appellant had been a farmer whose chief source of income was farming or a combination of farming and some other source, or if he had been an ordinary farmer as described in class one of the Supreme Court's classification quoted above in Moldowan, the total farm loss would have been applicable against other income for the year, under the said paragraph 3(d). Further, if the income had not been great enough to absorb the total loss, under paragraph 111(1)(a), the remainder of this loss would have been applicable against income from a previous year and possibly against that of subsequent years.

4.03.9 Since the appellant’s farming activities gained clients for him, he wished to use paragraph 18(1)(a) to apply the remainder of the losses from this activity against his other income, as losses incurred to earn income.

First, as explained above, the remainder of the losses as such cannot be applied.

The only possibility would be if part of the expenses incurred in the course of farming activities could be applied in computing his professional income, or in computing income from his other businesses. Paragraph 4(1)(a) rules out such a computation. In fact, this section provides that income must be computed as if it were the only source of income, that is, independently of the other sources of income.

It is quite clear that if the appellant incurred expenses (such as invitations, meals, gifts and so forth) in the course of his farming activities with the purpose of attracting clients to his professional firm, such expenses, if proven, may be included in computing his professional income. However, it is clear that expenses such as veterinary fees, blacksmith fees or the purchase price of horses may not be applied against his professional income.

The evidence clearly showed that all the appellant’s farming activities resulted, at least occasionally, in attracting clients. In addition, this farming activity is in itself a source of income and not simply an expense as described in paragraph 18(1 )(a). The farming activity must therefore be treated as a source of income, and income or loss must be computed in conformity with section 4.

There is therefore no possibility of applying losses from farming activities over and above the restricted farming losses against other sources of income, either as losses, or as expenses that may indeed have attracted clients for the appellant. The decision of Taylor, TC] in Blair Supply Company Limited v MNR, [1984] CTC 2560; 84 DTC 1457, is to the same effect.

4.03.10 The reassessments made by the respondent must therefore be upheld.

5. Conclusion

The appeal is dismissed for the reasons given above.

Appeal dismissed.