Martin Flush v. Minister of National Revenue, [1985] 2 CTC 2310, 85 DTC 611

Brulé, TCJ [ORALLY]:—The appellant originally filed an appeal in respect to 1978, 1979,1980 and 1981 taxation years.

The Minister's counsel announced to the Court that the Minister was not opposing the appellant with respect to the 1978 and 1979 taxation years but in so doing was not admitting “a reasonable expectation of profit” for those years in this farm loss case.

The facts are relatively simple. Mr Flush, in conjunction with a partner, purchased racehorses from time to time during the years in question, raced them, and bred one mare. The appellant has been involved with horses since 1972 but has never owned a farm, or farm land, and has never made a profit with horses. At all times he held other full-time employment positions. Generally the appellant had an interest in two horses but at one time the figure was three. When the appellant commenced his interest in horses he had no experience, training or education to assist him. His education and experience were gained by talking to people in racing with some “hands on” involvement.

A small amount of revenue was earned from racing in 1978 and 1979 but nowhere near the expenses involved. In 1980 and 1981, the years in question, there was no income from the venture.

The appellant testified that he anticipated a profit in these years but because the horses involved either did not run well, suffered injuries, were not born with proper confirmation or died, no income or profits were realized.

The best opportunity for profit was with a mare called First Majorette, obviously of some fair value from the evidence given. Unfortunately, the animal died prior to its being sold. The sale may have turned the whole operation of the appellant to a profit picture but this cannot now be determined.

The agent for the appellant pointed out that the racing business might only produce one or two good animals out of 20, and that one can come along and could wipe out all the previous losses. He made the analogy to a corporation experimenting with many products before finding a successful one.

In this latter case, if no successful product is found the company suffers and is not compensated by tax allowances such as are found in section 31 of the Income Tax Act.

I have considered the authorities advanced by both the appellant and the respondent, as well as other cases, and without going into details, I have come to the conclusion that the taxpayer did not look to farming in the racing and breeding of horses for his livelihood, despite the hours and efforts he devoted to this endeavour.

He ought to have known of the high risks involved. He disregarded insuring his most valuable asset when the costs would not have been great as the animal was not racing. He did not display to the Court any formal plan for his operation. He had no partnership agreement and in fact ended up in disagreement with his partner.

No income was earned in 1980 and 1981 and it does not appear there was any reasonable expectation of profit. If a profit did arise, the appellant could utilize the provisions of section 111 of the Income Tax Act to offset the losses in 1980 and 1981.

In those years of 1980 and 1981 the appellant reported in his income tax returns all the farm expenses, even though he held only a 75 per cent interest in the horses. The reason given was that the partner had no money and left the appellant to pay 100 per cent of the expenses. This is no basis to deduct all the expenses. The appellant probably has a claim against the partner for his respective share, but there is no justification in trying to have the taxpayers of this country bear the portion that should come from the partner.

Accordingly, for record purposes the farm expenses and therefore the farm loss shall be shown as $7,723.96 for 1980 and $9,206.21 for 1981, such amounts to be used by the appellant if and when circumstances permit.

In the final analysis, therefore, the appeal is allowed with respect to the 1978 and 1979 taxation years, the lossds in 1980 and 1981 are hereby adjusted as set out above and in all other respects the appeal is dismissed. The matter is referred back to the respondent for reassessment in accordance with this judgment.

Appeal allowed in part.