Rolf Drescher, Edith Drescher, Evelyn Drescher v. Minister of National Revenue, [1983] CTC 2647, 83 DTC 579

St-Onge, TCJ [ORALLY]:—The appeals of Rolf, Edith and Evelyn Drescher came before me on May 5, 1983, in the City of Winnipeg, Manitoba, and the issue is whether they are entitled to claim more than the restricted farm loss of $5,000 with respect to their 1976 and 1977 taxation years.

During the years under appeal, Rolf Drescher, in partnership with his wife and daughter, operated Elmcrest Stables which incurred losses of $33,877.57 and $27,399.27 respectively.

During the same years, Rolf Drescher, in partnership with one Mr Witler, operated a farm which incurred losses of $3,786.30 and $3,271.40 respectively, the appellant’s share of which was $1,893.15 and $1,635.70.

As to the Elmcrest Stables operation each partner claimed a farming loss of $11,292.52 in 1976, and $9,133.09 in 1977.

The respondent disallowed the full farming losses on the following assumptions:

(1) The father:

(a) was a full-time employee of Elmcrest Furniture Manufacturing Ltd;

(b) his income from the office was $33,000 in 1976 and $30,000 in 1977;

(2) The mother:

(a) was an employee of Elmcrest Furniture Manufacturing Ltd, and her

income from the office was $33,000 in 1976 and $30,000 in 1977; (3) The daughter.

(a) was in full-time attendance at the University of Winnipeg; and

(b) part-time employee of Elmcrest Furniture Manufacturing Ltd, and Warren Jewelleries Ltd;

(c) her income from employment was $13,636.57 in 1976 and $14,904.61 in 1977.

The Elmcrest Stables income and expenses we re as follows:

(1) Mr Robert Hull, the accountant for all the business activities of the appellants;

(2) Mrs Edith Drescher;

(3) Mr Rolf Drescher, her husband.

Mr Robert Hull filed financial statements of Elmcrest Stables for 10 years which show the following losses:

In those years they claimed and were allowed the farm-restricted loss of $5,000.

In 1976, the appellants purchased three horses for a total price of $19,549 in order to go into the breeding operation and claimed a full loss of $34,000.

In 1977, they purchased two horses and claimed a loss of $27,000. Then, other losses:

Upon cross-examination, the respondent filed Exhibits R-9, R-10 and R-11, to show the income of each appellant and the farming losses for the years 1974 to 1981 inclusively:

He also explained that the appellant, Evelyn Drescher, became involved in Elmcrest Stables in 1975, in which operation there was no capital contribution before 1978, the year that the $1 million was won in a lottery.

Mrs Edith Drescher, the secretary-treasurer of Elmcrest Furniture Manufacturing Ltd, testified as follows:

(1) In 1972, the appellants were in horse-racing with only one horse and no stable.

(2) In 1973, they had a foal that died.

(3) In 1974, they acquired farm land for $79,000 with a downpayment and a mortgage.

(4) In 1976, they built a barn and 6 paddocks.

(5) In 1976, she went three days a week to the office of Elmcrest Furniture Manufacturing Ltd, to work at the cash register, to look after the accounts payable and to give work to the employees.

(6) She spent two days at the stable and some three hours on research on horses. She also did some physical work by painting fences. In that year, they had one employee for the farm and three foals were born.

As to Evelyn Drescher, she went to the races with them, painted fences and walked the horses.

All the farming losses were paid with their salaries from Elmcrest Furniture Manufacturing Ltd. She also went to the office of Elmcrest Furniture and discussed fabrics with her parents.

In 1976-77, the breeding operation was in an infant stage and Mrs Edith Drescher terminated her testimony by saying that the breeding operation required a lot of time. She had to look up several blood lines and did a lot of study and had to sent the mares either to Ontario or Kentucky, US, because there was no place in Manitoba to breed them.

Mr Rolf Drescher explained that in 1972 they went into the racing operation by accident, and that there was very little breeding done in Manitoba at that time. Later he realized that this business of horses was much harder than he thought and that it was very difficult to raise horses in Manitoba because of the long winters.

In 1977, he sold his company Royal Upholstering Ltd, and kept Elmcrest Furniture Manufacturing Ltd, because it was much bigger than Royal Upholstering Ltd, and it was earning without him being there.

As a matter of fact, the assets of Elmcrest Furniture Manufacturing Ltd, in 1976 and 1977 were over $1 million and retained earnings were $207,000 in 1976 and $235,000 in 1977. The sales for the two years were over $2 million and the gross profit was $478 in 1976 and $388,000 in 1977.

He went to the office of Elmcrest Furniture Manufacturing Ltd, every day from nine o’clock to five o’clock but he was free to leave to look after his farming activities whenever the circumstances dictated to go. He had 6 miles of fence to paint; 10 miles of road to look after; long hours of study and much work to do about pedigrees, blood lines and sick horses.

Elmcrest Furniture Manufacturing Ltd was incorporated in 1972 with a $53,000 grant from the Federal Government and which provided 28 jobs in downtown Winnipeg. He terminated by saying that before 1976 the farming operation was not a business, but thereafter they put everything into the farming, even the interest earned on money from the lottery.

Counsel for the appellants referred the Court to William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213. He argued that after 1976, the appellants’ work routine went into horse breeding. In the morning they went to the race track and in the evening, at least three times a week, they went to the race track. In 1976, they had one employee and in 1977 they had three employees. According to him it was much more than a hobby; it was the centre of their daily routine; the new horse-breeding operation.

Counsel for the respondent referred the Court to the following list of cases:

1. Helen Kasper v The Queen, [1982] CTC 178; 82 DTC 6148;

2. William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213;

3. James R Leslie v MNR, [1982] CTC 2233; 82 DTC 1216;

4. Hubert Plante and Reynald Plante v MNR, [1981] CTC 2052; 81 DTC 74;

5. Harry Arnold Brown v The Queen, [1980] CTC 413; 80 DTC 6341;

6. Joseph Shiewitz v MNR, [1979] CTC 2291; 79 DTC 340;

7. Charles R McCambridge v MNR, [1981] CTC 2314; 81 DTC 251;

8. Harold Stanton Hadley v MNR, [1981] CTC 2060; 81 DTC 66.

As may be seen the evidence adduced in the case, that the appellant, Rolf Drescher, resorted to a plan that if it were allowed, would entitle him to reduce his main source of income by deducting substantial farming losses and section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended, was enacted exactly to prevent such a plan.

According to the figures in the schedule of farm losses for both years, and the type of farming carried on by the appellants, it is obvious that they did not depend on farming for their livelihood.

According to the evidence adduced the Court would classify the appellants as being taxpayers with a sideline in farming.

For these reasons and for those mentioned in my decision in Harold Stanton Hadley, (supra), the appeals are dismissed.

Appeals dismissed.