Neil L Boyko, Licio E Cengarle, Robert O Watson v. Minister of National Revenue, [1984] CTC 2233, 84 DTC 1233

Christie, CJTC [ORALLY]:—I will now deliver judgment in respect of these appeals. They relate to deductions claimed for farming losses. By agreement they were heard on common evidence. The taxation years in issue are 1977, 1978 and 1979. Only the restricted deductions allowed under subsection 31(1) of the Income Tax Act (“the Act”) are claimed. In the light of this, the only question that must be answered is whether, during the relevant periods, the farming activities carried on by the appellants can properly be characterized as a sideline business, and I emphasize the word business. If the answer is yes, they are entitled to succeed, otherwise the appeals must be dismissed. In order to be successful the appellants must establish by a preponderance of evidence, the existence of profit or a reasonable expectation of profit from their enterprise. This is the test which determines whether farming activities constitute a business. On the 17th of this month I delivered judgment in Kerr and Forbes v MNR, [1984] CTC 2071; 74 DTC 1094. This litigation involved claims for farming losses by taxpayers in British Columbia. In my reasons for judgment I said:

The existence of a reasonable expectation of profit is not to be determined by the presence of subjective hopes or aspirations, no matter how genuine or deep-felt they may be. The issue is to be decided by objective testing. In Mo Ido wan v The Queen, 77 DTC 5213, a judgment of the Supreme Court of Canada) this is said at page 5215:

“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, 28 DTC 6193. One would not except 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.”

Later on in Kerr and Forbes I added:

Finally, by way of general observation, it is noted that, if a person who gets involved in farming cannot initially be regarded as being engaged in a business, that can mutate by reason of changed circumstances. A taxpayer could change from hobby farmer to business farmer and directly into a position of being able to lawfully claim deductions for the full amount of his farming losses. On the other hand, he might only move into a position of being able to claim restricted deductions and them possibly later on, to full deductions. These shifts in the position of a taxpayer vis-a-vis farming losses will depend on changed relevant facts. The various movements in the direction of favouring deductions are, of course, reversible by reason by changed circumstances.

During the time relevant to these appeals Cengarle and Boyko were self- employed members of the legal profession, practising in Toronto. I understand that they continue in that capacity. Watson was and is an employee of the Government of Ontario in the Ministry of Government Services in Toronto. He is concerned with computer operations. The aspect of farming which the appellants were primarily engaged in was the buying, selling and racing of horses. Later on they became engaged in a relatively minor way in the breeding of race horses. In his notice of appeal dated September 20, 1982, Boyko sais that when the horse racing venture was being considered he had “a very limited knowledge of the horse industry.” On the other hand, Boyko described Cengarle and Watson as being “being knowledgeable in the horse business.” On the basis of what was before this Court on the hearing of the appeals, neither Cengarle nor Watson can possibly be regarded as being within the “very knowledgeable class” at the time referred to. Cengarle’s knowledge was at best peripheral. Of the three appellants, Watson was the most knowledgeable, but his limited acquaintance with the horse racing industry was based primarily on the fact that when he was in high school he had friends in the standardbred facet of horse racing and he helped out on a standardbred farm during evenings and on weekends. Also later he met a Mr Lackey, who was concerned with thoroughbred race horses. He visited Lackey’s breeding operation ad attended races in which Lackey’s animals participated.

The appellants’ decision to become involved in racing and later the breeding of horses was taken early in 1977. Before becoming committed, however, the appellants took what, in the circumstances, was a wise course of action by consulting persons who were truly knowledgeable in that regard. The consultation took place prior to the venture being launched and during the course of its execution. Two of the these consultants were called as witnesses on behalf of the appellants. The first was Mr Robert Crean, who was born in Ireland and later came to Canada. He has participated in various categories of the horse racing industry since childhood. He is currently the manager of a farm concerned with the breeding, racing, selling and purchasing of race horses. This undertaking is involved with approximately 125 horses. This inventory, of course, changes from time to time. The other witness referred to is Mr James Nemett, who was engaged by the appellants as trainer of their horses and as an advisor. He testified that he has been involved with race horses since he was 11 years old, for a total of 34 years. He has been a trainer for 25 years.

In February, 1977, the appellants settled on a plan of action for the years 1977 to 1986. This plan was reduced to writing at that time. It is subdivided into five parts which relate first to 1977 and 1978, second to 1979 and 1980, third to 1981, fourth to 1982 and fifth from 1983 to 1986. It was specified that “the plan will be reviewed annually to determine viability.” Among other things it dealt with the purchase and sale of horses. For example, the first horse was to be purchased for a maximum of $10,000 and was to be in condition to engage in racing at the time of purchase, in order to precipitate immediate cash flow. Less promising animals were to be sold in the fall to reduce winter season overhead. All profits in the first 2 years were to be reinvested in the enterprise. The maximum number of horses to take part in 1979 to 1980 in claiming races was set at four. In the third and fifth divisions of the plan the breeding of horses is discussed. Attached to the plan was an estimate of expenses related to a horse for one year. In addition there was a estimate of annual miscellaneous expenses.

On March 1, 1977, the appellants executed a document entitled “Partnership Agreement”. It designated the name of the firm to be Willowdale Range Stable (“Willowdale”). It went on to provide for such things as duration of the agreement, banking, financing, division of profits and assignment of losses, the keeping of accounts, the appointment of a manager and dissolution. An account was opened in the name of Willowdale with the Canadian Imperial Bank of Commerce. Signing authority in respect of the account was conferred on Cengarle, who had been designated manager of Willowdale under the agreement of March 1, 1977. Minutes of annual meetings of Willowdale for the taxation years in question were produced. The arrangement of March 1, 1977, did not constitute a partnership in the sense that ownership of the horses regarded by the appellants as being in the inventory of Willowdale, and the profits or losses relating to them, were necessarily to be split three ways. For example, the division of ownership in the first horse purchased, Dashing Young Man, was Watson three- eights, Cengarle three-eighths and Boyko two-eighths. In the case of another horse, Spookem Joanne, Cengarle owned three-ninths, Boyko two-ninths, Watson two-ninths, and the remainder was owned by the trainer Nemett, who was not party to the agreement of March 1, 1977. In one instance only one of the appellants, Watson, had an interest in the horse. The horse referred to is Amazing Dan. In other cases two of the appellants would have ownership of horses along with others not party to the agreement of March 1st. This mix accounts for the variations in the profit and loss figures attributable to the appellants and which will be mentioned in a few moments.

During the course of the hearing 8 horses were referred to as being regarded by the appellants as having passed through Willowdale’s inventory from 1977 to 1980. A succinct history of each animal for present purposes is this: Dashing Young Man was purchased on March 16, 1977, for $7,500. On May 23, 1977, he was entered in a claiming race and was claimed for $8,000. Spookem Joanne was purchased on April 2, 1977, for $4,500 and sold on October 20, 1978, for $2,500. Maynooth was purchased on May 11, 1977, and sold on some unspecified day in November, 1978, for $1,756.95. A 60% interest in Favel was purchased on May 31, 1977, for $8,000. This interest was claimed on November 27, 1978, for $13,000. Amazing Dan was purchased by way of a claiming race on June 9, 1977, and sold on February 17, 1978, for $2,000. Bold Val was purchased for $8,000 by way of a claiming race on August 13, 1978, and was sold on September 23, 1978, by way of being claimed for $8,000. Snow Fence was purchased by way of a claiming race for $5,000 on May 31, 1979, and was claimed for $5,000 on July 20, 1979. Apple Jackal was purchased on October 8, 1979, for $5,000 and sold, according to the evidence, some time in April or May, 1980 for $3,000. Both the purchase and sale arose out of claiming races.

On August 1, 1979, an agreement was entered into:

BETWEEN:

LICIO E CENGARLE, In Trust, for a partnership carrying on business under the name Willowdale Ranger Stable, of the City of North York, in the Municipality of Metropolitan Toronto

Hereinafter called “Willowdale”

OF THE FIRST PART

— and —

JOHN CENGARLE and JEANNE CENGARLE, both of the State of Washington, in the United States of America,

Hereinafter called “Cengarle”

OF THE SECOND PART

John Cengarle is the brother of the appellant Cengarle. It is a somewhat elaborate agreement, but the essence of it is that John and Jeanne Cengarle were the owners of a mare named Dog Decree, whcih had been bred to Something Fabulous and was in foal. It was expected she would produce a foal in the spring of 1980. Something Fabulous was described as the premier stallion of the day. His sire was the famous Northern Dancer. The breeding fee was $4,000. The agreement established a joint venture between the parties to it. The scope of the venture was confined to the raising, managing, racing, breeding and marketing of the anticipated foal. The foal was to be transferred to Willowdale, and the agreement goes on to provide in detail for the payment of expenses, including the stud fee, and the allocation of profits. The foal was born in due course and is racing for Willowdale to this day. The appellant Watson did not participate in this venture for what I understand to be financial constraints upon him.

The financial results, as related in the replies to the notices of appeal, to each of the appellants in respect of their horse racing and related activities during the years 1977 to 1981 inclusive were this. Cengarle suffered losses in each year. The amounts in chronological order are: $2,297.93, $4,429.93, $6,997.78, $3,115.58 and $13,009.95. Boyko also had losses in each year in these amounts: $2,051.32, $3,941.70, $4,674.45, $1,159.05 and $1,276.25. Watson had profits of $1,357.59 in 1978 and $303.50 in 1980. His losses were $4,058.30 in 1977, $2,351.13 in 1979 and $10,457.45 in 1981.

Counsel for the respondent emphasized that the racing of horses is a risky venture. There is no doubt about that. Financial casualties from it abound. In Kerr and Forbes v MNR, [supra] to which reference has already been made, I said:

The breeding, raising, selling and racing of thoroughbred horses has, on more than one occasion, been recognized in decisions by members of the predecessor of this Court as being an undertaking involving high risk. I refer, by way of example, to Shiewitz v Minister of National Revenue, 79 DTC 340, and Hall v Minister of National Revenue, 83 DTC 8.

While the component of risk is relative and important to the determination of whether there is a reasonable expectation or profit, it is not of itself conclusive. To treat the existence of high risk, in relation to horse racing and those endeavours inextricably related thereto, as being decisive or nearly so would, inter alia, be tantamount to disregarding the phrase “maintaining of horses for racing” in the definition of farming in subsection 248(1) of the Act. The evidence establishes that the appellants experienced the adversity of this element of risk. The existence of a string of losses points away from an objective expectation of profit, but again it is not of itself determinative. The same thing can be said about the existence of the trappings of business, such as the formal agreement executed under seal of March 1, 1977; the agreement of August 1, 1979; the banking arrangements with the Canadian Imperial Bank of Commerce, and so on. As I see it, the correct approach is to have regard in composite form to all of the relevant evidence adduced.

What I am about to say has no application to the 1978 taxation year of the appellant Watson. Having viewed the evidence adduced on these appeals in the manner just described, I have come to the conclusion that the appellants are entitled to the deductions allowable under subsection 31(1) of the Act in respect of the taxation years under review. They fall within the second class of farmers which are described by Mr Justice Dickson in delivering the judgment of the Supreme Court of Canada in Moldowan. The relevant passage is [1977] CTC 310 at 315; 77 DTC 5213 at 5216, and reads:

The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried 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.

Subsection 13(1) to which His Lordship referred is now, of course, subsection 31(1).

One matter to which I assigned very considerable weight is the fact that, since the inception of the venture, there had been serious consultations with persons experienced and knowledgeable in the horse racing industry. This kind of consultation continued and, in large measure, the appellants appear to have been guided by it. While I regard them as being just within the bounds of the second class referred to, that is all that is necessary to entitle them to succeed.

Evidence was adduced concerning events subsequent to 1979, but nothing in these reasons is to be construed as being an expression of opinion in respect of the appellants’ liability under the Act for any taxation year except those in issue on the appeals; that 1s, 1977, 1978 and 1979.

In my opinion the real substance of Watson’s appeal in respect of his 1978 taxation year during which, as mentioned, he had a farming profit is a request that this Court refer the matter back to the Minister of National Revenue with a direction that the amount specified in the notice of appeal dated February 23, 1982, be added to the appellant’s taxable income as assessed for 1978. There is no jurisdiction in this Court to purport to allow an appeal brought under section 169 of the Act and to direct the Minister to pursue a course of action that would result in increasing the appellant’s liability for income tax in a taxation year.

One of the authorities brought to my attention by counsel for the respondent during the course of his argument is Shiewitzv MNR, [1979] CTC 2291; 79 DTC 340. That appeal involved claims for the deduction of farming losses arising out of the appellant’s involvement in the racing of horses. The appeal was heard by Judge Bonner of this Court who, at that time, was a Member of the Tax Review Board. Counsel for the Minister requested that, if it was held that there was an absence of a reasonable expectation of profit, the matter be referred back to the Minister to enable the assessment of more tax. The appellant had been allowed restricted losses. Judge Bonner held there was no reasonable expectation of profit, but rejected the request in these words at 341:

To do so (that is to grant the request) would be tantamount to allowing the Minister to appeal to this Board from his own assessment. This Board had no jurisdiction to entertain such an appeal.

While the request in these proceedings was made by the appellant, and in Shie- witz on behalf of the respondent, the result, in my opinion, comes to the same thing.

To summarize, the appeal of Neil E Boyko is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct the losses he incurred from farming during his 1977, 1978 and 1979 taxation years in accordance with the provisions of subsection 31(1) of the Act. The appeal of Licio E Cengarle is allowed and the matter referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct the losses he incurred from farming during his 1977, 1978 and 1979 taxation years in accordance with the provisions of subsection 31(1) of the Act. The appeal of Robert O Watson is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct the farming losses he incurred from farming during his 1977 and 1979 taxation years in accordance with the provisions of subsection 31(1) of the Act. The appeal in respect of his 1978 taxation year is dismissed.

Appeals allowed except Watson’s appeal for 1978.