Tremblay,
TCJ
[TRANSLATION]:—This
case
was
heard
at
Sherbrooke,
Québec
on
March
10,
1983.
1.
The
Point
at
Issue
The
question
is
whether
the
appellant,
a
navigator
working
for
Les
Pilotes
du
St-Laurent
Central,
was
correct
in
deducting
expenses
of
$3,000,
$4,300
and
$5,000
in
calculating
his
income
for
1977,
1978
and
1979
on
account
of
farm
losses
from
his
horse-breeding
farm.
The
respondent
disallowed
the
expense
on
the
ground
that
the
business
had
no
reasonable
expectation
of
profit,
and
the
expenses
were
accordingly
to
be
regarded
as
personal.
2.
The
Burden
of
Proof
2.01
The
appellant
has
the
burden
of
showing
that
the
respondent’s
assessments
are
incorrect.
This
burden
of
proof
results
not
from
a
particular
section
of
the
Income
Tax
Act,
but
from
several
judicial
decisions
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
The
facts
assumed
by
the
respondent
are
described
in
subparagraphs
(a)
to
(g)
of
paragraph
4
of
the
respondent’s
reply
to
the
notice
of
appeal.
This
paragraph
reads
as
follows:
4.
In
assessing
the
appellant
for
the
taxation
years
1977,
1978
and
1979,
the
respondent
relied
inter
alia
on
the
following
assumptions:
(a)
during
the
taxation
years
at
issue
the
appellant
was
employed
as
a
pilot
by
Les
Pilotes
du
St-Laurent
Central;
(b)
the
appellant’s
income
from
his
employment
as
a
pilot
for
each
of
the
1977
to
1979
taxation
years
is
as
follows:
1977
|
$35,185
|
1978
|
$43,399
|
1979
|
$44,410
|
(c)
the
appellant’s
income
from
the
sale
of
horses
for
each
of
the
1977
to
1979
taxation
years
is
as
follows:
1977
|
$1,600
|
1978
|
$3,000
|
1979
|
$
300
|
(d)
at
the
time
he
bought
his
land,
the
appellant
had
the
house
renovated
and
has
since
lived
in
it
on
a
permanent
basis,
and
in
1978
he
rebuilt
the
stable
with
a
capacity
of
six
horses;
(e)
since
1975
the
appellant
has
never
owned
more
than
six
horses
at
the
same
time;
(f)
the
following
amounts
claimed
by
the
appellant
as
farm
losses
for
the
1977
to
1979
taxation
years
were
disallowed
by
the
respondent:
1977
|
$3,005.50
|
1978
|
$4,288.50
|
1979
|
$5,000.00
|
(g)
the
horsebreeding
done
by
the
appellant
is
not
a
business
carried
on
with
a
reasonable
expectation
of
deriving
profit,
but
rather
is
recreation.
3.
Facts
3.01
At
the
start
of
the
hearing
the
appellant
admitted
in
essence
the
facts
assumed
by
the
respondent
and
described
above,
except
for
subparagraph
(g).
He
further
maintained,
with
regard
to
subparagraph
(d),
that
this
should
be
nine
and
not
merely
six
horses.
3.02
In
his
testimony,
the
appellant
gave
in
essence
the
facts
set
out
in
his
notice
of
appeal.
They
read
as
follows:
1.
Mr
Duchesne
purchased
a
farm
in
November
1975
and
has
since
that
time
carried
on
a
farming
business
consisting
of
the
raising
of
purebred
horses;
2.
Mr
Duchesne
works
at
this
business
together
with
his
wife,
a
riding
instructor,
and
his
children;
3.
Mr
Duchesne
works
for
a
private
company,
Les
Pilotes
du
St-Laurent
Central,
as
a
pilot
on
the
St
Lawrence
150
to
200
days
a
year;
4.
Mr
Duchesne
has
devoted
time,
activity
and
effort
to
his
business
in
order
to
make
it
profitable;
5.
the
business
has
always
been
carried
on
with
a
reasonable
expectation
of
obtaining
a
profit;
6.
when
the
business
began
operation,
farm
losses
were
incurred;
7.
because
of
the
nature
of
the
business
and
experience
to
be
gained
in
the
specific
area
of
breeding
purebred
horses,
it
is
to
be
expected
that
such
a
business
will
not
be
profitable
in
its
first
years
of
operation.
3.03
Further,
the
appellant,
who
is
46
years
old,
testified
as
follows:
(a)
As
regards
his
employment,
his
work
consists
of
piloting
a
foreign
vessel
from
Montreal.
He
has
no
fixed
schedule,
but
is
told
twelve
hours
in
advance
of
the
vessel’s
departure.
(b)
Before
buying
the
farm
located
four
miles
from
Bromont
in
1975,
the
appellant
had
already
owned
horses
since
1971.
This
is
why
he
decided
to
buy
this
25-acre
farm,
with
15
acres
in
woodland
and
10
acres
in
pasture.
He
initially
raised
half-purebred
jumpers,
but
then
went
into
purebred
horses
to
breed
racing
(saddle)
horses
for
horse
shows.
He
bred
such
horses
for
resale;
he
said
that
he
did
not
give
riding
classes
himself,
but
trained
the
horses.
Although
his
wife
and
his
three
children
(22,
21
and
15
years
old
in
1983)
did
ride,
this
was
not
for
purposes
of
shows
(though
they
had
done
this)
but
to
demonstrate
the
horses.
(c)
He
had
done
repairs
to
the
stable,
but
in
1978
heavy
wind
blew
it
down
entirely.
He
rebuilt
it
from
scratch,
with
stalls
10
ft
by
10
ft,
so
the
horses
did
not
have
to
be
tethered.
(d)
In
addition
to
income
from
the
sale
of
horses,
the
appellant
also
earned
income
from
the
sale
of
corn,
oats
and
hay.
As
the
former
owner
had
raised
goats
and
sheep,
he
had
to
“rework”
the
land
(tilling
and
so
on)
so
that
corn
could
be
sown
(for
two
years).
He
then
sowed
timothy,
oats
and
clover
alternatively,
changing
annually.
(e)
The
income
breakdown
in
the
following
years
was
as
follows:
Oats
or
corn
|
Horses
|
Gross
Gross
|
Net
(Loss)
|
1977
|
$1,380
|
$
1,600
|
$
2,980
|
($
3,511)
|
1978
|
$1,420
|
$
3,000
|
$
4,420
|
($
6,077)
|
1979
|
$1,550
|
$
300
|
$
1,850
|
($10,011)
|
1980
|
|
$
2,600
|
$
2,600
|
($
7,584)
|
198]
|
|
$14,800
|
$14,800
|
$
5,520
|
(Exhibits
A-l
to
A-5)
|
|
(f)
As
Exhibit
A-6,
the
appellant
submitted
an
inventory
of
all
the
horses
he
owned
between
1976
and
1982,
with
the
purchase
and
sale
prices.
It
can
thus
be
seen
that
in
1982
he
sold
for
$7,800
a
colt
out
of
Dame
St
Clet
born
in
early
1982.
He
paid
$1,800
for
the
latter.
Thus,
at
the
end
of
the
said
years
he
owned:
four
horses
in
1976;
three
in
1977;
seven
in
1978;
six
in
1979;
six
in
1980;
two
in
1981;
and
two
in
1982.
(g)
In
his
absence,
his
wife
and
children
fed
and
trained
the
horses.
They
got
up
at
6:30
am.
They
had
to
do
the
chores,
care
for
the
horses,
prepare
them
(brush
them),
harness
and
train
them
(for
riding
with
saddles
or
on
a
leading
rein).
Training
is
very
important:
when
a
buyer
wants
a
horse,
he
always
requires
it
to
be
well
trained.
(h)
The
servicing
of
a
mare
costs
$750,
including
stable
time.
(i)
As
regards
his
work
as
a
pilot,
he
is
at
work
20
days
a
month,
from
March
to
December;
but
from
January
to
March,
he
has
45
days
of
work
and
45
days
off.
3.04
In
cross-examination,
the
appellant
testified
as
follows:
(a)
He
has
been
a
pilot
since
1967.
(b)
In
1971
he
lived
in
Ville
Brossard
(south
of
Montreal),
but
leased
a
stable
from
his
brother
who
was
living
in
St-Bruno.
He,
his
wife
and
their
children
were
all
riders.
(c)
In
1974,
he
leased
a
house
in
Bromont
near
the
equestrian
centre.
He
took
courses
in
equitation
and
courses
as
a
riding
instructor,
courses
in
dressage.
He
trained
horses
and
riders
also.
A
horse
depends
on
its
rider;
the
rider
must
train
the
horse.
(d)
He
often
undertook
the
dressage
of
his
own
horses,
and
still
does,
at
the
Bromptonville
equestrian
centre
in
order
to
make
them
better
known.
(e)
In
1976
and
1977,
his
wife
gave
riding
courses
at
the
said
equestrian
centre.
(f)
The
municipal
assessment
on
his
farm
rose
to
$64,000,
$18,000
of
which
is
for
the
land
and
$46,000
for
the
buildings.
3.05
Mr
Théo
Noël,
an
auditor
for
the
Department
of
National
Revenue,
testified
that
in
January
1981
he
visited
the
farm
with
the
appellant
(house
and
stable).
Mr
Noel
reviewed
the
figures
in
the
financial
statements
and
they
are
summarized
above
in
paragraph
3.03(e).
In
essence
he
confirmed
the
testimony
of
the
appellant
concerning
the
assets;
he
added
that
the
appellant
had
four
saddles.
4.
Act
—
Case
Law
—
Analysis
4.01
Act
The
principal
provisions
of
the
Income
Tax
Act
concerned
in
the
case
at
bar
are
subsection
31(1)
and
paragraph
248(1
)(a),
under
the
definition
of
“personal
or
living
expenses”.
They
read
as
follows:
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
(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
deduction
under
section
37,
from
all
farming
businesses
carried
on
by
him
exceeds
the
aggregate
of
his
incomes
for
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”
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.
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
case
law
to
which
the
Court
was
referred
is
as
follows:
l
.
William
Moldowan
v
The
Queen,
[1977]
CTC
310;
77
DTC
5213;
2.
Chester
G
Harris
v
MNR,
[1974]
CTC
801;
74
DTC
6623;
3.
The
Queen
v
Douglas
C
Matthews,
[1974]
CTC
230;
74
DTC
6193;
4.
Donald
Preston
McLaws
v
The
Queen,
[1976]
CTC
15;
76
DTC
6005;
5.
The
Queen
v
R
Zavitz,
[1981]
CTC
17;
81
DTC
5007;
6
Sydney
Vernon
v
MNR,
32
Tax
ABC
68;
63
DTC
414;
7.
McCleary
Drope
v
MNR,
[1978]
CTC
2639;
78
DTC
1483;
8.
Hubert
Plante
et
al
v
MNR,
[1981]
CTC
2052;
81
DTC
74;
9.
E
R
Probert
v
MNR,
[1982]
CTC
2608;
82
DTC
1628;
10.
Helen
Kasper
v
The
Queen,
[1982]
CTC
178;
82
DTC
6148;
11.
Donald
A
Holley
v
MNR,
[1973]
CTC
539;
73
DTC
5417;
12.
Donald
Carom
v
MNR,
[1977]
CTC
2085;
77
DTC
67;
13.
Donald
J
Gillis
v
The
Queen,
[1978]
CTC
44;
78
DTC
6103;
14.
Dr
Jacques
April
v
MNR,
[1982]
CTC
2083;
82
DTC
1092;
15.
Douglas
B
Cowx
v
MNR,
[1982]
CTC
2708;
82
DTC
1737.
4.03
Analysis
4.03.1
In
Moldowan,
the
Supreme
Court
referred
to
the
old
section
13
of
the
Act,
which
is
the
same
as
section
31
of
the
present
Act:
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
or
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
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.
(3)
the
taxpayer
who
does
not
look
to
farming,
or
to
farming
and
some
subordinate
source
of
income,
for
his
livelihood
and
who
carried
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
case
at
bar,
the
point
at
issue
is
whether
the
appellant
is
a
gentleman
farmer
or
whether
his
farming
activities
should
be
regarded
as
a
pastime
(a
hobby).
The
respondent
maintained
that
this
was
a
pastime
since
there
was
no
reasonable
expectation
of
a
profit.
Accordingly,
these
were
personal
and
living
expenses
which
could
not
be
deducted.
As
regards
the
reasonable
expectation
of
a
profit,
the
Supreme
Court
made
the
following
observation:
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
(1974),
28
DTC
6193.
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.
4.03.2
The
evidence
is
that
there
was
no
profit
during
the
years
at
issue.
However,
as
the
courts
have
often
noted,
the
word
“reasonable”
qualifies
the
word
“expectation”,
not
the
word
“profit”.
As
regards
the
knowledge
necessary
for
the
breeding
and
training
of
horses,
I
think
it
is
clear
from
the
evidence
that
the
appellant
and
his
wife
had
the
necessary
capacity
(paragraphs
3.03(b)
and
(g)
and
3.04(b),
(c),
(d)
and
(e)).
In
addition,
the
time
spent
by
the
appellant
and
his
family
is
sufficient
for
the
type
of
work
to
be
done
(paragraphs
3.03(g)
and
(i)).
The
physical
assets
(farm,
stable,
saddles
and
so
on)
are
also
sufficient
for
the
needs
of
the
business
(paragraphs
3.03(b),
(c)
and
(d)).
As
the
Supreme
Court
observed
in
Moldowan,
it
is
clear
that
the
nature
of
the
business
is
an
important
factor
in
determining
reasonable
expectation
of
profit.
Horse-breeding
(including
conception,
carrying
the
fetus
and
training)
is
of
a
rather
special
nature.
The
fetus
is
often
not
carried
to
term.
Before
acquiring
the
physical
assets
and
the
appropriate
knowledge
to
undertake
this
type
of
business,
more
than
a
year
is
needed.
In
the
case
at
bar,
the
cooperation
of
the
entire
family
was
also
necessary
as
the
appellant
had
to
be
absent.
During
1981,
there
was
a
profit
of
$5,520
(paragraph
2.03(e)).
In
1982,
the
sale
of
a
single
colt
produced
$7,800.
Considering
the
evidence,
the
rules
stated
in
Moldowan
and
the
principal
cases
to
which
it
was
referred,
the
Court
concludes
that
there
was
a
reasonable
expectation
of
profit
in
the
years
in
question
and
that
the
appellant
should
be
regarded
as
a
gentleman
farmer.
5.
Conclusion
The
appeal
is
allowed
and
the
whole
is
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
foregoing
reasons
for
judgment.
Appeal
allowed.