Glenn Anderson v. Minister of National Revenue, [1980] CTC 2588, 80 DTC 1501

Guy Tremblay:—This case was heard in Toronto, Ontario, on June 27, 1979.

1. The Point at Issue

The problem is whether the appellant who, in 1973 carried on a farming business, iS correct in considering as capital gains:

(a) the profit on the sale of two standardbred stallions or shares in the syndication thereof to a corporation in which he was a shareholder;

(b) the sale of shares to other persons after syndication of a stallion.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 At all material times until 1973, the appellant, a horse trainer, and his wife carried on a farming business under Haw Lea Stud Farms Inc. The appellant held 75% interest in this business and his wife 25%.

3.02 In connection with the said business the appellant partially owned standardbred stallions known as Lang Hanover and High Level.

3.03 Lang Hanover was purchased by the appellant at a cost of $3,797. After it was syndicated (the ownership of Lang Hanover was divided into 30 shares) these shares were sold, and the profit realized by the appellant was $2,953. The appellant affirmed that when he bought Lang Hanover he knew that he would be syndicated (SN p 28).

3.04 High Level was purchased for $1,875.

3.05 In February 1973, the appellant and his wife sold the said business (except the land and building) including inventory to a corporation known as Haw Lea Stud Farms Inc.

3.06 The shareholders of that corporation were the Anderson family 42% (father, mother and son), Burgess family 42% (father, mother and son) and Mr Francis A Wheelihan 16%. The new corporation rented the Anderson farm, the Burgess farm and three other farms.

3.07 Among the goods transferred to the corporation were Lang Hanover and High Level, or rather the interest in the syndication thereof.

3.08 The profit realized by the appellant on deemed sales of the shares of the syndication was in the amount of $6,328.

3.09 According to the testimony of the appellant and Mr Robert Burgess (both syndicate managers, ie persons skilled in raising horses who have the responsibility of a syndicated stallion) stallions as Lang Hanover or High Level service mares from 80 to 100 times per year. The cost for such service was from $300 to $1,000.

3.10 The presence of a well-known stallion on a farm is not only a great financial asset (in selling services and yearlings), but also attracts patronage and publicity, and customers to the farm.

3.11 The Ontario Sires Stakes Stallion Registration issued by the Ontario Racing Commission in 1974 concerning Lang Hanover was introduced as Exhibit A-4. It reads as follows:

THIS IS TO CERTIFY that the following stallion has been duly registered and recorded in the Ontario Sires Stake Program for the 1974 breeding season, and all of his resulting progeny will be eligible for nomination to the Ontario Sires Stakes.

3.12 With the two stallions, 16 other horses (5 or 6 brood mares and 9 or 10 race horses) were transferred to the corporation. Later, the company had up to 100 race horses and brood mares.

3.13 Another stallion was syndicated in 1975. Its name was “Egyptian Candor”. The shares were sold and the profit was declared as income.

4. Law—Precedent Cases—Comments

4.1 Law

The main legal provisions of the new Income Tax Act involved in the present case are paragraphs 8(1)(b), 29(3)(a), Regulation 1702(1)(f)(i), Schedule B—Class 8(d)(ii) and subsection 248(1) (farming). They read as follows:

28.(1) For the purpose of computing the income of a taxpayer for a taxation year from a farming business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method (in this section referred to as the “cash” method) whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(b) such amount, if any, as may be specified by the taxpayer in respect of the business in his return of income under this Part for the year, not exceeding the fair market value at the end of the year of livestock (other than animals included in the basic herd within the meaning assigned by section 29) owned by him at that time in connection with the business.

29.(3) For the purposes of this section,

(a) a taxpayer’s “basic herd” of any class of animals at a particular time means such number of the animals of that class that the taxpayer had on hand at the end of his 1971 taxation year as were, for the purpose of assessing his tax under this Part for that year, accepted by the Minister, as a consequence of an application made by the taxpayer, to be capital properties and not to be stock-in- trade, minus the numbers, if any, required by virtue of this section to be deducted in computing his basic herd of that class at the end of taxation years of the taxpayer ending before the particular time;

1702.(1) Nothing in this Part shall be construed as allowing a deduction in respect of a property

(f) that is

(i) an animal, or

Schedule B—Class 8—Property not included in Class 2, 7, 9 or 30 that is

(d) a tangible capital asset that is not included in another class in this Schedule except

(ii) an animal,

248.(1) In this Act,

“Farming”.—“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

4.2 Precedent Cases Cited

1. M P Moore and Annie Louise F Moore v USA, US Tax Cases 96, 870;

2. Leslie Ehrlick v MNR, [1967] Tax ABC 285; 67 DTC 240;

3. Ronald K Fraser v MNR, [1964] CTC 372; 64 DTC 5224;

4. J Bert Macdonald and Sons Limited v MNR, [1970] CTC 17; 70 DTC 6032;

5. MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125.

4.3 Comments

4.3.1 The profit of $2,953

The main argument of Mr Stewart, the appellant’s counsel, is that the main purpose of the syndication of Lang Hanover was “to get a cornerstone animal, on the basis of which the stud farm would earn hundreds of thousands of dollars in stud fees” (SN p 72).

Mr Anderson, however, syndicated the stallion only after the purchase of the animal, and at the date of the purchase he knew that he would syndicate it (para 3.03).

Mr Stewart said that the profit of $2,953 “was totally incidental”. On one hand, the Board understands that syndicating a horse and selling shares to different individuals, is an efficient method of having not only investors, but also associates and persons who help bring money into the business. Moreover, even if the syndication of a horse is a well-known method to have associates, the evidence however showed that in his lifetime, the appellant has syndicated only two horses. So it was quite unusual for his business.

On the other hand, it is very different to share the purchase of the horse, the syndication of it, the sale of interest thereof, and the profit therefrom, especially when the purchase of the stallion was done with a view to syn- dication. The Board thinks that the profit on the sale of the interest of the syndicate, at least, comes from “an adventure in the nature of trade’’ which is included in the definition of “business’’.

4.3.2 The Sale of the Company

The principles explained in the above paragraph cannot be applied in this sale of interest of the syndicate of the two stallions to the company. As the former was limited to shares of syndicate, this present sale comes within the sale of the whole business of the appellant. At first glance, this appears to be a capital transaction.

However, the other horses sold to the company were considered part of the inventory and not capital property. The basis of that was sections 28 and 29 quoted above. The 16 horses indeed were not considered as “basic herd’’ because the appellant had not made the election required by the Act. Consequently, the animals must be considered as a stock in trade and the sale price as income.

The respondent contends that the sales of the interest of the syndicate of the two stallions must be treated on the same footing. The appellant contends that the stallions are cornerstone animals. In fact, the evidence shows that they are “la marque de commerce’’ of the whole business (para 3.09). Should it not be normal that the two stallions be considered as capital property? However, there is no specific exception in the Act, so the basis herd and the two stallions are not part of it. The stallions indeed are not basic herd.

The Board is bound by the Act and could not find how it is possible to construe the Act without considering sections 28 and 29 as they are written.

The Board must also maintain the assessment on this point. However, the Board wishes to add that the situation might have been the same if the transfer of the shares of the syndicate had been done within section 85 of the Act.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.