Her Majesty the Queen v. Fred Juster, [1973] CTC 410, 73 DTC 5325

Cattanach, J:—These are appeals from a judgment of the Tax Review Board, dated June 12, 1972 whereby appeals by the defendant herein from assessments to income tax for the defendant’s 1965, 1966, 1967 and 1968 taxation years were allowed.

During the taxation years in question the defendant carried on business under the firm name and style of Fleur de Lys Stable Reg’d in partnership with R. Gibson, N. Seltzer and J. Rimerman. Capital contributions to the partnership were made in the proportions of one- third by the defendant, one-third by Rimerman, one-sixth by Seltzer and one-sixth by Gibson and under the partnership agreement profits and losses were shared in those proportions.

The defendant described the business of the partnership as the buying and selling of horses for the purpose of earning profits.

In the 1965 taxation year 19 horses were purchased of which 15 were sold.

in the 1966 taxation year 14 horses were purchased and during that year one was traded for another horse, and 11 were sold.

In the 1967 taxation year 6 horses were purchased. During the year 3 were destroyed and 3 were sold.

In the 1968 taxation year 6 horses were purchased and during the year 6 were sold and one destroyed.

The losses incurred by the partnership from its operations in the taxation years 1965, 1966, 1967 and 1968 were respectively $15,085.69, $22,253.23, $53,383.50 and $19,737.95.

During the period from January 1, 1965 to October 31, 1967 the defendant held a one-third interest in the partnership. On October 31, 1967 R. Gibson withdrew from the partnership and in the ensuing partnership the defendant became the holder of a one-half interest.

Accordingly in computing his income for taxation purposes the defendant deducted from his other sources of income for his 1965, 1966 and 1967 taxation years one-third of the losses incurred by the partnership in each such years. In his 1968 taxation year the defendant in computing his income deducted one-half of the losses incurred by the partnership in that year.

In assessing the defendant as he did the Minister of National Revenue did so on the basis that since the defendant’s chief source of income for the 1965, 1966, 1967 and 1968 taxation years was neither farming nor a combination of farming and some other sources of income, the defendant’s share of the losses incurred by the partnership must be limited in accordance with subsection 13(1) of the Income Tax Act which reads as follows:

13. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for the year exceeds $2,500, or

(ii) $2,500.

Prior to trial the parties agreed upon the following facts and issue:

1. THAT the Defendant, Mr Fred Juster, was carrying on a business in partnership under the firm name and style ‘‘Fleur de Lys Stable Reg’d” a business within the meaning of paragraph 139(1)(e) of the Income Tax Act;

2. THAT the Defendant’s chief source of income for the taxation years 1965, 1966, 1967 and 1968 was neither farming nor a combination of farming. and some other source of income;

3. THAT the sole issue to be decided is whether or not the business of “Fleur de Lys Stable Reg’d” comes within the definition of farming as set out in paragraph 139(1)(p) of the Income Tax Act:

4. THAT if this Honourable Court comes to the conclusion that the business of “Fleur de Lys Stable Reg’d” comes within the definition of farming as set out in paragraph 139(1)(p) of the Act, then the Statement of Claim should be allowed and the reassessment confirmed;

5. THAT if this Honourable Court comes to the conclusion that the business of “Fleur de Lys Stable Reg’d” does not come within the definition of farming as set out in paragraph 139(1)(p) of the Act, then the Statement of Claim should be dismissed and the reassessment referred back to the Minister of National Revenue for reconsideration.

Paragraph 3 above sets forth the issue in clear relief.

Paragraph 139(1)(p) of the Income Tax Act referred to in paragraph 3 reads as follows:

139. (1) In this Act,

(p) “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;

The words in the above definition pertinent to the present appeals are: “farming” includes maintaining of horses for racing.

As I have intimated before, the defendant described the purpose of the partnership to be buying and selling of horses to generate a profit.

However this description of the object of the partnership must be examined within the context of the customs and rules of horse racing and what the partnership actually did.

The horses owned by the partnership were acquired by it through the claiming of a horse entered in a claiming race by another owner at the claiming price and the partnership disposed of horses by the same expedient, that is by entering a horse owned by it in a claiming race, for which the claiming price would be acceptable to the partnership, in the expectation that the horse would be claimed.

To be eligible to claim a horse an owner must have entered a horse or horses of his own at the race meet. In claiming races the officials of the race track set a claiming price to attract the entry of horses of that value. The claiming price varies from race to race, for example, the claiming price may be within the range of $3,000 or less to $40,000 or more. Any owner who is eligible, (by owning a horse entered at the race meet) may claim any horse entered in a claiming race at the claiming price and the owner of the horse so entered and claimed must sell the horse to the claimer at that price.

The defendant explained that it was the purpose of the partnership to improve a horse claimed by it. This is done by a trainer. The results of that improvement are demonstrated by entering the horse in races which it wins or otherwise displays a creditable performance. A winning horse is more attractive to other owners and will therefore command a higher claiming price. Basically what the partnership sought to do would be to claim a horse, say for a claiming price of $3,000, then by reason of training, exercise and care, to improve its records by successful racing, then enter it in a claiming race with a claiming price of say $5,000. If the horse is claimed at that price then the partnership will reap a profit of $2,000 less the expenses incurred during the period the horse was owned by the partnership. That period of ownership might vary between three days and two years.

In my opinion the buying and selling of horses is so inextricably bound up in the racing of those horses as to constitute one integral business.

I am further confirmed in this conclusion by reason of the fact that the claiming of horses by the partnership and the claiming of horses from the partnership (which is the method by which horses were bought and sold by it) resulted in the losses the appropriate share of which the defendant seeks ‘to deduct from his income, whereas any profit accruing to the partnership came from purses won by its horses in racing.

Because of this conclusion it follows that the horses were maintained “for racing” within the meaning of those quoted words as they appear in the extended definition of ‘‘farming” in paragraph 139(1)(p).

The next question which remains for determination is whether the partnership was engaged in “maintaining of horses” for racing.

When a horse was acquired by the partnership it was immediately turned over to Ronald Gibson, who, in addition to being a partner in Fleur de Lys Stable Reg'd from its inception in 1965 until he withdrew in October 31, 1967, was a public trainer of horses. By that is meant that Mr Gibson was in the business of training horses owned by others and entrusted to his care by them for remuneration.

The responsibility undertaken by Mr Gibson with respect to the horses entrusted to him by the partnership, and other owners, was to oara the horses and take care of them. For this purpose he engaged employees to feed, water, curry, wash, groom, walk, exercise and generally look after the well- -being of the horses. There is no question in my mind that these services performed by Gibson for the horses constitutes maintenance of them.

The partnership did not own any land or buildings to accommodate the horses owned by it, nor did the partnership own any tack or equipment for racing or training its horses.

All such equipment and services were provided by Gibson in accordance with his contract with the partnership. Because of his occupation as a “public trainer” Mr Gibson applied for and was invariably allotted stable space to accommodate all horses under his care at the race parks on the circuit in which Gibson raced those horses.

For the services performed for the partnership Mr Gibson was paid from $12 to $18 per day for each horse.

The relationship between the partnership and Mr Gibson was not that of employer and employee but rather Mr Gibson was an independent contractor. By virtue of its contract with Mr Gibson the partnership stipulated the work to be done but it did not have the right to direct how that work was to be done. That was a function exercised by Gibson in which he was not subject to direction or control by the partnership. However, Gibson did act as agent for the partnership in connection with the claiming or disposition of a horse. On his recommendation the partnership might take the decision to claim a particular horse in which event Gibson would act on behalf of the partnership. Similarly he would take steps leading to the disposition of a horse by entering it in a claiming race after the decision to do so had been made by the partnership on his advice.

I do not think that the precise nature of the relationship between the partnership and Mr Gibson is material to the determination of these appeals. The question to be resolved is whether the partnership by arranging with Gibson, as a public trainer, to care for its horses, is itself maintaining those horses.

The word “maintaining” as used in paragraph 139(1 )(p) is not a word of art and accordingly is to be ascribed the meaning as understood in common parlance. The common understanding of the word “maintain” implies provision of the means of subsistence and the necessaries of life. It also implies the preservation, continuation or improvement of a certain state of being. It is also a connotation of the word that the means for the preservation of a state of being may be furnished or paid for by the person responsible therefor.

It follows that the act of “maintaining horses for racing” need not be physically performed by the person who undertakes that activity but that it can be accomplished by engaging someone else to furnish the requisite services and by paying for those services.

This is. precisely what the partnership did, from which it follows that the activities of the partnership fall within the definition of “farming” within the meaning of paragraph 139(1)(p) for the reasons I have expressed.

it was contended on behalf of the defendant that the partnership had precluded itself from deriving income from the maintenance of horses because it had transferred the possibility of earning income from that source to Mr Gibson and because it could not or did not seek to earn income from the maintenance of horses it was not engaged in the business of farming.

It is significant to note that the words used in paragraph 139(1)(p) are “farming includes . . . maintaining of horses for racing . ..” and that the partnership did derive income from the racing of horses through purses won. Further it was the avowed purpose of the partnership to earn profits from the purchase and sale of horses in conjunction with its racing activities. Obviously the mere maintenance of horses for racing can only result in expense and cannot result in earnings when conducted by a person on his own behalf without some further activity to generate earnings except where the maintenance of horses is embarked upon incidental to or as part of the business of a public trainer as was. done by Mr Gibson and as was done in times long past by the keeper of a livery stable putting up horses for a fee.

The extended definition of farming also includes “tillage of the soil” and “livestock raising”. The mere act of cultivating the soil so as to fit it for raising crops, which is tillage, does not result in income unless crops are planted, reaped and sold. Neither does the raising of livestock result in income unless the progeny is sold. Like the words “tillage of the soil” and “livestock raising”, the words “maintaining of horses for racing”, are part of the definition of farming.

If the partnership maintains horses for racing, which I have concluded it did for the reasons above expressed, then the partnership falls within the definition of “farming” outlined in paragraph 139(1)(p) and is engaged in farming. The whole of the operations of the partnership was susceptible of making profits and the fact that it had precluded itself from making a profit from “maintaining of horses” because it had contracted with Gibson to perform that phase of its activities does not detract from its overall activities being those of farming and a source of income.

In my opinion the Minister was therefore right in assessing the defendant as he did. I so conclude because it is admitted in paragraph 2 of the Agreed Statement of Facts that the defendant’s chief source of income in the taxation years under review was neither farming nor a combination of farming and some other source of income and because I have found that the business of the partnership is that of farming. It follows therefrom that the defendant’s proportion of the partnership’s farming losses cannot exceed the amounts allowed by the Minister as being deductible as losses in the respective taxation years in accordance with subsection 13(1) of the Income Tax Act.

The appeals are, therefore, allowed with costs and the assessments are restored.