Abe Zigelstein v. Minister of National Revenue, [1983] CTC 2477

The Chairman:—The appeal of Abe Zigelstein is from an assessment of tax with respect to the 1977 taxation year by which the respondent disallowed an amount of $3,175 claimed by the appellant as farm losses.

Summary of Facts

The appellant was in the meat market business until November 1976 when it was sold because of the marginal profit generated and the appellant’s declining health. Indeed, the appellant died in June 1982. The principal witness was Baron Zigelstein, the appellant’s son. His evidence was that the appellant also has substantial interest in Crown Glass & Mirror Ltd which was more successful and continues to be operated by the appellant’s two sons. Although the witness recalls his father taking him to horse races when he was a Child and that the appellant was an avid reader of horse racing publications, he had no special qualifications in or knowledge of horse racing or the breeding of horses. The appellant first became interested in standard-bred horses as an owner in 1974 when he acquired a horse by the name of Checkdale. In 1975 he acquired seven horses and sold two.

However, other than in 1975, from 1974 to 1979 the appellant had on hand an average of not more than two horses in a year. It is alleged that the appellant invested some $35,000 in the horse-racing business. The necessary licensing and authorizations from the Standard Bred Racing Association were obtained and the necessary equipment purchased. Some of the appellant’s horses were occasionally raced.

The appellant’s activities with respect to the horse business were very limited. He drove to the stables where his horses were boarded and attended races as a spectator. The training, racing and breeding of the horses were done by professional trainers.

One of the appellant’s principal acquisitions was a horse by the name of “Call Me Kit” whose purchase price was $10,000. The appellant acquired the horse by trading in two horses and paying an additional $3,200. Mr Robert Stewart, Secretary Manager of the Horse Society of Toronto and involved officially with the Standard Bred Racing Association, testified that “Call Me Kit” and other horses owned by the appellant at one time or another, were from the Hanover Shoe Farms which, according to the witness, had a good reputation in breeding, racing and selling pedigreed race horses (Exhibits A-2 and A-3 and Exhibit R-7, page 1).

The appellant and his wife were partners in all of the appellant’s business activities including the horse business. Mr Allen Copeland, the accountant for the appellant, testified that the appellant kept separate books for each of his businesses. However, in the appellant’s taxation years from 1974 to 1976, no income or losses from the horse business were reported. Mr Copeland explained that he had not known of the appellant’s horse business until 1977. In 1977, although no financial statement was included in the returns, a loss of $3,175 was claimed with respect to the horse operations.

From the appellant’s own documents, no income was earned in 1974 and expenditures in the amount of $2,245.79 for equipment and training and the purchase of a horse for $175 were incurred (Exhibit R-4); in 1975 an amount of $2,109.50 in purses was earned from racing and $22,162.20 was expended for purchase of horses, equipment, training expenses, interest, etc, incurring a loss of $20,052.70 (Exhibit R-5); in 1976 no expenses were incurred and $200 was earned from the sale of a horse (Exhibit R-7) and in 1977 purses in the amount of $91.50 were earned and expenses incurred in the amount of $4,134, showing a loss of $4,043.05 (Exhibit R-6). Income from the purses went to pay the trainers’ fees. Indeed two of the appellant’s horses, “Prima Argo” and “Checkdale”, were given to a trainer in lieu of salary. Some of the horses were owned in partnership with the trainers and in 1978 the appellant’s share of the purses was $190 (Exhibit R-7, page 6).

If the appellant was exercising a horse-racing business, it was for a businessman, an unusual way of running it. The evidence would indicate that the appellant himself did not consider his horse-racing activities a business until 1977. He had financial statements made for his meat business and Crown Glass & Mirror Ltd business, and reported their profit and loss in his tax returns.

No profit and loss statements of the appellant’s horse operations were made and no related income or loss reported in his tax returns until 1977 when only a farm loss was claimed.

Even if I were able to come to the conclusion that the appellant was in fact operating a horse-racing and breeding business, I would still find it very difficult to believe that the appellant could, in the circumstances, have had a reasonable expectation of profit. The operation was small; the number of races participated in over a period of 3 to 4 years and the very modest amount of the purses to be won were insufficient to meet the basic operational expenses. On the evidence, the appellant’s management of the horse business which, according to Mr Stewart, had an inherent high risk factor, was, in my opinion, less than adequate and his active participation in the operations of the business was in fact non-existent. The appellant’s life-time interest in race horses and his dream that a winner could one day be bred from “Call Me Kit” or from another of his other pedigreed horses is understandable but it cannot, in my opinion, be viewed as constituting what is meant by a reasonable expectation of profit.

I have come to the conclusion that the appellant’s horse-racing activities were not a business enterprise with reasonable expectation of profit; they could not reasonably be expected to provide the bulk of the appellant’s income and were not the centre of his work routine. The racing and/or breed ing of horses were not being operated as a businessman seeking to make a profit normally would, even from a sideline business.

In my opinion, the appellant was realizing a life-long dream of owning, racing and breeding standard-bred horses and in 1977 was engaged in those activities as a hobby.

For these reasons, judgment will go dismissing the appeal.

Appeal dismissed.