Ken Huband v. Minister of National Revenue, [1974] CTC 2001, 74 DTC 1039

The Assistant Chairman:—This is the appeal of Ken Huband from income tax assessments in respect of the appellant’s 1969 and 1970 taxation years.

The appellant, who was a commerce officer with the Department of Trade and Commerce, began his motor-car racing activities as a hobby in 1965. In that year the appellant was driving an MGA which he raced with a novice’s licence in three or four competitions. In 1966 the appellant sold the MGA and bought the shell of a “Sprite” in which he installed a racing motor and took part in seven or eight racing competitions, having acquired a national racing licence. In 1967 the appellant sold the Sprite and bought a Corvette, which was bigger and faster than the Sprite, which he raced five or six times in that year. Having sold the Corvette and having ordered a Camaro which he did not receive, the appellant did not race in 1968. In 1969 the appellant purchased a Formula C racing car and took part in six or seven racing competitions, earning a revenue of $500 in that year.

In 1970 the appellant sold the Formula C car and purchased the bigger Formula B car with which he took part in nine or ten racing competitions In both Canada and the United States, the appellant having then acquired an international racing licence. None of the cars purchased, except the MGA, was used by the appellant for purposes other than racing.

The appellant claims that between 1965 and 1969 he was racing as a hobby, spending a very substantial part of his salary as a commerce officer In acquiring the necessary experience in racing cars and purchasing bigger and faster cars so as to participate in races that offered more remunerative purses. In 1969, however, the appellant claims that he no longer was racing as a hobby but considered his racing activities as a business which he intended to pursue on a full-time basis as soon as he had the necessary financial support. In order to achieve the required financing, the appellant sought to acquire a commercial sponsor who would contribute to the cost of the appellant’s racing business. (Exhibit A-1.)

In 1969 the appellant, from his racing activities, realized a revenue of $500 but claimed a net loss of $3,604.05. In 1970 an amount of $802.81 was realized as revenue from racing but the net loss claimed by the appellant was $7,947.03. The amounts of $3,604.05 and $7,947.03 were disallowed by the Minister on the grounds that they cannot reasonably be regarded as business losses because they were not incurred in connection with a business carried on for profit or with a reasonable expectation of profit.

The issue in this appeal, of course, is whether the appellant’s racing of motor-cars in 1969 and 1970 was in the nature of a hobby or a sport, or whether it was a business carried on for profit, or with a reasonable expectation of profit.

It appears to me that we are dealing with a borderline case. From the facts of this appeal there seems to be no doubt that from 1965 to 1969 the appellant was racing cars as a hobby. During that time, however, the appellant acquired the necessary driving experience, the required racing licences and competitive racing cars necessary to compete professionally in the more remunerative national and international racing competitions, which the appellant in fact did.

I am satisfied that automobile racing can be a business and that the appellant’s intention and his whole conduct in 1969 and 1970 was that of a person engaged in the business of racing cars for profit.

In my view it is not necessary that a person be engaged in some activity on a full-time basis for that activity to be rightly considered as a bona fide business. Nor do I believe that it would be a fair criterion to determine whether a certain activity is a business on the basis of whether or not all the required finances were immediately available at a specific time.

In this instance the fact that the appellant was not successful in acquiring a sponsor does not make his activity of racing cars for money any less a business than the person who either has, or who does not need, a sponsor in racing cars for profit.

I am of the opinion that a person who spends 80% of his salary over the years in acquiring competitive racing cars and the necessary experience to drive them, who invests in a tow-truck and trailer, whose declared intention is to race for bigger purses on a full-time basis, and who in fact competed in some 18 or 20 racing competitions in the years pertinent to this appeal, is not merely enjoying a sport or hobby no matter how much pleasure he may derive from this activity. The appellant may well have started racing cars as a hobby but in 1969 and 1970 he was racing professionally for profit and engaged in the business of car racing.

Whether the appellant had a reasonable expectation of making a proTit from the business of racing cars can best be judged by the systematic progress the appellant made, not only in respect of his personal competence as a racer, but also in his acquisition of more powerful cars in his participation in races where the purses were in 1969 and 1970 in the amount of $20,000—from which the appellant earned $500 and $800 respectively. One can reasonably assume that money has been made by people engaged in automobile racing and there is nothing in the facts of this appeal that might indicate that the appellant had no chance or hope of making a profit from his racing business in those years.

In determining whether a reasonable expectation of profit from a business can be entertained, attention must be given to revenue as well as to the net loss of the business. In 1970 the appellant’s revenue was $800 and the net loss was almost $8,000. So great a disparity between revenue and expenses in the majority of businesses would generally be indicative of great difficulty in realizing a profit from the business.

However, automobile racing, which under the circumstances of this appeal can be considered business, is nevertheless far more subject to risk and chance than most other businesses because of its great dependency on the performance of the machinery which operates at unusually high speeds. The nature of automobile racing business must therefore also be kept in mind in deciding on whether there can be an expectation of profit. In comparing the appellant’s revenue in 1970 with the expenses for that year and the subsequent net loss, the Board took note of the fact that in 1970 the appellant’s racing-car motor exploded and the expenses for the repairs to the motor amounted to $4,071. Such an accident is part of the risk of the business but neither such unforeseeable eventualities nor the general expenses incurred by the business can justify the conclusion that automobile racing is not a business carried on for profit or with a reasonable expectation of profit.

I conclude therefore that the amounts of $3,604.05 and $7,947.03 were losses sustained by the appellant in 1969 and 1970 respectively from the business of racing automobiles carried on for profit or with a reasonable expectation of profit.

The appeal is allowed.

Appeal allowed.