Ralph a Gerock v. Minister of National Revenue, [1980] CTC 2952, 80 DTC 1820

John B Goetz:—The appellant has filed a notice of appeal for the 1974, 1976 and 1977 taxation years. In particular, he claims $6,800 with respect to the cost of horses acquired, as he says, in 1974, as well as other expenses incurred in the other taxation years. The Minister has disallowed the claim for $6,800 for cost of horses and has reduced certain expenses subsequently incurred in the appellant’s farming operation. In reassessing the appellant, the respondent relied, inter alia, upon sections 3, 18, 28 and 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The respondent particularly submits that the horses referred to, acquired for $6,800, were not used for the purpose of gaining or producing income from the business of farming nor was there a reasonable expectation that they would so be sold. He further submitted that the snowmobile purchased by the appellant was for personal use.

Facts

The appellant’s main occupation was that of project co-ordinator for the Province of Saskatchewan, and he lived in the City of Regina. He started farming in 1974, having acquired 22 acres and a quarter section of land in the spring of 1974, near the City of Regina.

Findings

In cross-examination, it appeared that the four or five horses acquired by the appellant were acquired prior to 1974 and as a result I cannot allow that as an expense either current or as a capital expense. In 1976 he acquired a Snowmobile which was a 1968 or 1969 model. In 1975 he also acquired a 1973 model, secondhand snowmobile, which he submits he used to haul manure and for the purpose of servicing his horses. He submitted vouchers to the Department of National Revenue for certain expenses and claimed the sum of $2,257.81 as expenses re the purchase of a truck. The respondent only allowed him the sum of $1,653.11 and disallowed $604.70 which did not include oil and gas. It was agreed during the course of argument that the expenses claimed by the appellant should be raised to the sum of $1,874.38 as a result of the Department giving him a further allowance for these expenses in the amount of $221.27. This part of the appeal is therefore allowed to that extent.

In that the appellant was operating on a cash basis, any expenses claimed for in 1974, must be incurred in that year. This did not happen so therefore I cannot allow any claim for the $6,800 for purchase of horses. I might say that had these horses been acquired subsequent to 1974 and paid for thereafter, they could possibly have been considered as a capital asset. The appellant sold no horses since 1974 and the following is a picture of his profit and loss for the years 1974, 1976, 1977 and 1978:

1974—$11,181.20 (loss)

1976— $ 5,514.00 (loss)

1977— $ 5,019.37 (loss)

1978— $ 1,135.00 (profit)

I refer specifically to the case of William Moldowan v Her Majesty The Queen, [1977] CTC 310; 77 DTC 5213. Mr Justice Dickson at 313 and 5215 respectively, stated:

. . . If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

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, 74 DTC 6193. One would not expect a farmer who purchased a productive going operation to suffer the same startup losses as the man who begins a tree farm on raw land.

I further quote from Mr Justice Dickson’s decision at 315 and 5216 respectively:

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 of 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 nonbusiness farming are not deductible in any amount.

The appellant stated under oath that for one of the horses acquired prior to 1974, for which he paid $2,500, he has since been offered the sum of $14,000 for the said horse. One of the three horses that he owned in Canada qualified for the Oklahoma Opulucius Show, which is a breeding show. It Is quite clear that the appellant’s farming operations relating to the breeding of horses, which sometimes can be disastrous financially, can, on the other hand, be extremely successful. He studied horse breeding extensively and this, coupled with growing up on a “mixed farming” farm, certainly extended his farming knowledge.

I find that the 1973 snowmobile purchased in 1975 by the appellant was a necessary expense in his horse breeding operations in the care and maintenance of the horses. The fact that the respondent alleges that the appellant had no reasonable expectation of profit from the raising and breeding of horses falls in face of the offer of $14,000 for one of the appellant’s horses which he has retained as part of his herd.

I further find that the taxpayer did not look to farming as some subordinate source of income for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to deductions spelled out in subsection 13(1) of the Act in respect of farming losses (now section 31). See also J eno Horvath v MNR, [1980] CTC 2636; 80 DTC 1540.

For the above reasons, I allow the appeal in part and refer the matter back to the Minister for reconsideration and reassessment.

Appeal allowed in part.