Taylor, TCJ:—This is an appeal heard in Toronto, Ontario, on January 18, 1984 against an income tax assessment for the year 1977.
The point at issue as detailed in the notice of appeal was:
5. The Appellant states that the losses relating to its horse breeding and racing operation were incurred in the course of and as an integral part of the Appellant’s profit making enterprise as a whole and as such, were incurred to earn income.
6. The Appellant states that the provision of building supplies and the breeding and racing of thoroughbred horses are inter-connected operations in the context of the Appellant’s business and together constitute its chief source of income.
10. The Appellant respectfully submits that, inasmuch as its chief source of income for the 1977 taxation year was a combination of thoroughbred horse breeding and racing and the provision of building supplies, section 31 of the Income Tax Act did not operate to constrain the taxpayer from deducting the loss that it sustained in connection with thoroughbred horse breeding and racing in the said year.
For the respondent the position was:
(e) that the amount of $112,784.00 sought to be deducted by the Appellant was in respect of losses resulting from the Appellant’s race-horse business;
(f) that the said race-horse business, in the taxation years immediately preceding the 1977 taxation year and in the immediately following year, suffered losses in the following amounts:
| 1972 | 18,496.00 |
| 1973 | 58,652.00 |
| 1974 | 76,414.00 |
| 1975 | 43,774.00 |
| 1976 | 270,522.00 |
| 1978 | 148,572.00 |
(g) that, in the 1977 taxation year, the Appellant’s race-horse business did not constitute the Appellant’s chief source of income either alone, or in combination with any other source of income.
A chartered accountant witness for the appellant, Mr Kates and counsel for the appellant, put forward for the Court’s consideration that the process of preparing a statement of income and expenses itself for any business amounted to a system of “netting” that is producing a net financial result. Accordingly simply “netting”, all the related income and expenses for the corporation could be viewed as a very similar process. The appropriate definition of the term “combination” in section 31 of the Act was also touched upon by counsel for the appellant. The fundamental position of the appellant however was described by counsel as:
. . . it would be my submission that in view of the intertwining or the interconnection of the horse-racing activity for the specific purpose that it was engaged in with the sale of building supplies that the revenue from the sale of horses per se should be treated as revenue from what I would call the business within the meaning of section 4(l)(a), that is, if one were to look at the source one would look at the business as being the source and describe the business as the total enterprise carried on by the corporation and simply regard the revenue derived from the sale of horses or the winning of purses as being ancillary to or necessarily incidental to or tied up with the sale of building supplies. There is a functional, at least on the evidence, a functional interconnection between the two in the same way, for example, that in the Marsh and McLellan case the Federal Court of Appeal has held that interest income which is incidental to the business is really part and parcel of the same business and there is to be no separation of the sources so in either view of the matter from an accounting presentation point of view I do not think and it is my submission that 4(1 )(a) would not stand as an obstacle to treating the expenses in question as being in the nature of advertising.
So in the case at bar I would simply submit that the expenses incurred in engaging in horse breeding and horse-racing on the evidence constituted net of associated revenue expenses which can fairly be characterized as advertising and promotional expenses which are deductible in computing income from the business carried on by the appellant corporation Blair Supply Co. Ltd.
I know of no other reported case that would even tangentially deal with this issue other than the Olympia Floor and Wall Tile (Quebec) Limited case which in itself to my recollection was a unique case and which has not certainly in the reported decisions repeated itself. But the Olympia Floor and Wall Tile case has not been alluded to, however, in a number of other cases not involving this type of fact situation but involving, for example, gratuitous payments . . .
There is a connection and the connection that does exist on the evidence has relevance as I mentioned earlier, that the expenses incurred in the horse-racing activity can properly be viewed as an expense incurred in the course and for the purpose of earning income from the business, however that business may be characterized. You can characterize it as the building supply business; you can characterize it as the building supply business with a little horse-racing involved; you can characterize it as just the business of the corporation and the horse-racing activity as having an advertising and promotional purpose.
. . . When we are dealing with such things as advertising and promotion one cannot relate every expenditure to a specific item of revenue or even to a source of revenue.
It is difficult to show, it is impossible to show really a direct causal relationship between any business promotion or advertising expense and an item of revenue but that on the basis of all the jurisprudence of which I am aware is not an impediment to claiming an expense of that nature as a proper business expense.
Clearly a taxpayer corporation can carry on as a part of its total business operation, the business of farming, with profits and losses from other nonfarming businesses, and combine the net profits from that business in order to produce one net profit (or loss) for the year. It seems to me that the same corporation cannot combine a farming loss with similar other non-farming profits or losses without surmounting the restrictive provisions of section 31 of the Income Tax Act. The question which has been posed in this appeal is whether a corporation can avoid the restrictive provision of section 31 by calling the farming loss not a “loss” but a form of “promotion or advertising” for the benefit of the non-farming business it also operates.
Paragraph 31(l)(a) of the Act provides for a situation where a taxpayer has more than one source of farming operation, simply put he operates more than one farm:
aggregate of his losses for the year — from all farming businesses carried on by him — exceeds the aggregate of his incomes — from all such businesses.
From Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213 also I would assert that it was in the minds of the legislators that such a farmer (with more than one farming operation) should not be prohibited from netting “his farm losses and incomes — that is he should not be required to report as income the total of the gains realized on the profitable operation(s) while being restricted to a limit of $5000 as a “farm loss” from the unprofitable operation(s)”.
The separate portion of the Act which deals specifically with farmers, and the calculation of their income for tax purposes, is basically an option to report on the “cash” or “accrual” method. In general, that portion of the Act covers sections 28 to 30. These sections of the Act are followed immediately in section 31 by the heading: “Loss from farming where chief source of income not farming”. The thrust of the appellant’s proposition in this appeal would be to negate the provisions of section 31 of the Act. This appeal might be dismissed simply on the basis that the inclusion of the separate “farming” provisions in the Act (refer- enced above) section 28 to 31 mandates for that business of farming the risk of encountering the restrictions in section 31, but that answer seems somehow to me only to beg the question. In my view the real problem in the proposition of this taxpayer corporation is that it negates the “farming business” as a “source” of income. That is, it is inherent in the act of dropping the term “farm loss” and substituting therefore the term “promotion and advertising”, that the expense items which constitute the basis for the loss are transferred from one source of income to a separate and different source of income. That would be inconsistent with, indeed in direct opposition to the specific provisions of section 3, and 4 of the Income Tax Act, which must govern and overrule all others, unless so stated. One might pick from section 3 just the following:
(a) determine the aggregate of amounts each of which is the taxpayer’s income — from a source —
and from subsection 4(1)
(a) — and was allowed no deduction in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source —
and from subsection 4(3)
— all deductions allowed in computing the income of a taxpayer for a taxation year — shall be deem to be applicable either wholly or in part to a particular source —
[Emphasis added]
The appellant did not show that the “farming” operation in question should not be considered a “source”, and therefore the appeal must fail.
I am conscious of the earlier jurisprudence noted in this judgment, by counsel for the appellant, but I do not find therein any rationale for extending the comments of the learned judges in those cases to provide the relief sought by this taxpayer today. In this matter, the Minister did not challenge the “business” nature of the farming operation, even though the losses were continued and consistent, therefore it warrants the appellation “source”. Certain other activities may not be so easily distinguishable as is farming under the Act, and therefore more difficult to call a “source”. Because of that, the judgment in this matter cannot be taken to apply unreservedly to all similar sets of circumstances. Such other business possibilities were alluded to, in certain comments by the parties and, for example, one could imagine a manufacturing company sponsoring a hockey team which loses money and proposing a net taxation result somewhat analagous to that at issue in this appeal. This judgment cannot be viewed as providing any perspective for the result which could obtain in that theoretical situation.
The source of income to which the expenditures constituting the farming loss at issue in this appeal, while part of the overall business activity of the corporation, is not the same source of income as the main building supply business of this corporation. This is the situation for income tax purposes even though it might well be argued that the horse-racing activity did produce useful and productive contacts for the building-supply business. The loss from the one source is not deductible as an expense item from the profit from the other source. I would note in closing, that while Combined Appraisers and Consultants Ltd v MNR, [1983] CTC 2606; 83 DTC 543 deals with quite a different section of the Act, it does touch on much the same thrust as is raised in the instant appeal. It could have some merit in support of this judgment.
The appeal is dismissed.
Appeal dismissed.
Email this Content