Bert James v. Minister of National Revenue, [1973] CTC 457, 73 DTC 5333

Gibson, J:—The appellant appeals from reassessments for income tax for his taxation years 1967 and 1968. The appellant claimed he was entitled to deduct losses from his horse racing business from income he received from another source. The Minister reassessed the appellant in the said years applying the provisions of section 13 of the Income Tax Act on the premise that the appellant’s chief source of income for the taxation years 1967 and 1968 was neither farming nor a combination of farming and some other source of income, and thereby limited the appellant’s deductible loss from horse racing to $5,000 for each of the said taxation years. The appellant in fact had a net loss from his horse racing activities of $110,043.64 in the taxation year 1967 and $96,638.04 for the taxation year 1968.

In the pleadings the Minister also raised another issue, namely, that in any event the expenditures of the appellant in the taxation years 1967 and 1968 which resulted in the said losses should be regarded as Outlays on account of capital for the purpose of enlarging permanently the appellant’s entire profit-making structure.

The appellant prior to 1967 had engaged full-time in the new and used automobile sales and service business through a limited company by the name Bert James Chev-Olds Limited in which he owned beneficially all the shares. That company carried on business in the Windsor, Ontario area. It was a successful business, commenced in 1960, and by the end of 1967 had accumulated a surplus of about $450,000.

In October of 1966, General Motors of Canada Limited terminated the new car franchise of that company when the appellant, as chief shareholder and executive officer of the company, could not reach agreement with General Motors of Canada Limited on the matter of building new and more elaborate premises. At that time, the company of the appellant was operating in leased premises and the lease had terminated, and when General Motors of Canada Limited terminated the franchise the appellant caused his car company effectively to go out of business by the end of December 1966. By that time, all of the assets of the car company had been converted into cash, save and except some accounts receivable and a few other items; and there remained in the employ of the car company only two employees, namely, the office manager and one secretary.

Following that, in the years 1967 and 1968 the appellant went into the standard-bred horse racing business in a most substantial way. The commencement of this business actually was in the latter part of 1966 when a contract was made whereby three standard-bred horses were taken in on a trade for a car. Although this transaction was closed in about March 1967, at which time the appellant took title to these horses in his own name, the arrangements were made with his car company in 1966 for this so that the horses never became part of the inventory of the car company.

During 1967 and 1968 the appellant expended about $240,000 in the acquisition of standard-bred race horses and this expenditure constituted the main item which resulted in the said net loss from the horse racing business of $110,143.64 and $98,638.04 respectively for the taxation years 1967 and 1968.

The funds used to purchase these race horses were received by the appellant from his car company. To obtain these funds, the appellant merely caused them to be paid out to him from the car company during the years 1967 and 1968 sufficent for such purpose. The balance of the funds which remained in the car company after 1968 the appellant caused to be paid out to him in 1969 for a similar purpose.

In his income tax returns filed for the years 1967 and 1968, the appellant deducted the said losses from horse racing in the taxation years 1967 and 1968 from the receipts of the funds which he received from his car company.

In the taxation years 1969, 1970 and 1971 the appellant further extended his race horse business, moving in 1969 to Avella, Pennsylvania in the United States, adjacent to Meadows Race Track, and this business, during those years, made for the appellant very substantial profits. As a consequence, the appellant became liable for income tax to the United States tax authorities during the taxation years 1969 and following.

The Minister did not make any determination that the appellant’s chief source of income for the taxation years 1967 or 1968 was neither farming nor a combination of farming and some other source of income pursuant to the provisions of subsection 13(2) of the Income Tax Act.

Contrary to his pleading in paragraph 16 of the notice of appeal, the appellant at this trial conceded that his horse racing business was “farming” within the meaning of paragraph 139(1 )(p) of the Income Tax Act.

The appellant also at the trial abandoned his plea in paragraphs 13, 14 and 15 of the notice of appeal to the effect that the receipts of money in the taxation years 1967 and 1968 from the car company, Bert James Chev-Olds Limited, were not income from a “source” within the meaning of section 3 of the Income Tax Act, and instead conceded that the moneys or payments which he had received were income from a source within such meaning.

In the result, therefore, the issue in this appeal in essence is limited to the meaning and application of section 13 to the facts of this case, plus the additional issue raised by the pleadings of the Minister in the defence, namely, as stated, whether the expenditures, especially the expenditures made in the acquisition of race horses in 1967 and 1968, were or were not on capital account.

The questions in issue in this appeal may therefore be stated as follows:

(1) the parties agreeing and the Court finding that the racing activities of the appellant during the taxation years 1967 and 1968 constituted “farming” within the meaning of paragraph 139(1)(p) of the Income Tax Act, the question is whether such farming in those years was a source of income to the appellant within the meaning of the words “source of income” in section 13 of the Income Tax Act;

(2) within the meaning of subsection 13(1) of the Income Tax Act, for the purpose of determining whether or not the limited deduction set out in subsection 13(1) applies, whether in the taxation years 1967 and 1968 the appellant’s chief source of income” was farming or a combination of farming and some other source of income, or whether, instead, his chief source of income” was from Bert James Chev- Olds Limited; and

(3) whether the amounts claimed by the appellant as losses (arising in the main out of expenditures made in acquiring race horses) for the taxation years 1967 and 1968 were in fact capital expenditures and therefore not deductible or whether instead the amounts expended (again, in the main, for the acquisition of race horses) were expenditures for inventory.

The relevant provisions of the Income Tax Act, RSC 1952, c 148, are paragraphs 12(1)(a), 12(1)(b), 12(1)(h), section 13, paragraphs 139(1 )(p), 139(1 )(x), 139(1)(ae) and 139(1a)(a) and read as follows:

12. (1) In computing income, no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carying on his business,

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.

(2) For the purpose of this section, the Minister may determine that 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.

(3) For the purposes of this section, “farming loss” means a loss from farming computed by applying the provisions of this Act respecting the computation of income from a business mutatis mutandis.

139. (1) . . .

(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;

(x) “loss” means a loss computed by applying the provisions of this Act respecting computation of income from a business mutatis mutandis (but not including in the computation a dividend or part of a dividend the amount whereof would be deductible under section 28 in computing taxable income) minus any amount by which a loss operated to reduce the taxpayer’s income from other sources for purpose of income tax for the year in which it was sustained;

(ae) “personal or living expenses” include

(i) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(ii) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(iii) expenses of properties maintained by a personal corporation estate or trust for the benefit of the taxpayer as one of its shareholders or beneficiaries;

139. (1a) For the purposes of this Act,

(a) a taxpayer’s income for a taxation year from a business, employment, property or other source of income or from sources in a particular place means the taxpayer’s income computed in accordance with this Act on the assumption that he had during the taxation year no income except from that source or those sources, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or those sources and except such part of any other deductions as may reasonably be regarded as applicable to that source or those sources;

Paragraph 139(1)(p) of the Act uses the word “includes” and therefore it enlarges the meaning of the word “farming” and must be construed as comprising the word “farming” in its dictionary meaning and also comprising those things which the section declares it shall include.

The concept of section 13 of the Income Tax Act in its present form and in previous statutory form has been judicially considered by this Court on a number of occasions, as for example in the following cases: MNR v Barbara A Robertson, [1954] CTC 110; 54 DTC 1062; George H Steer v MNR, [1965] CTC 181; 65 DTC 5115; J Harold Wood v MNR, [1967] CTC 66; 67 DTC 5045; MNR v Grieve et al, [1959] CTC 320; 59 DTC 1186; Robert Charles Simpson v MNR, [1961] CTC 174; 61 DTC 1117; CBA Engineering Limited v MNR, [1971] CTC 504; 71 DTC 5282; Oscar Dorfman v MNR, [1972] CTC 151; 72 DTC 6131.

In MNR v Robertson, Potter, J reviewed the statutory history of this section as it existed up to the time of that case, which history will be referred to later in the context of the factual situation in this case. He commented on the meaning of source of income and adopted the words of Isaacs, J in Nathan v The Federal Commissioner of Taxation (1918), 25 CLR (Australia) 183 at 189, in reference to the meaning of the word “source”, that is to say:

The Legislature in using the word “source” meant, not a legal concept, but something which a practical man would regard as a real source of income.

Then, Potter, J made the following finding of fact in that case, namely,

In the case under consideration the only income which the respondent had was from her investments and the only source of that income was the securities in which that portion of her capital was invested.

In Dorfman v MNR (supra) Collier, J in reference to the meaning of “source of income” stated at page 154 [6134]:

I cannot accept the interpretation put by counsel for the Minister in this case on the words “source of income”: that there must be net income before there can be a source. In my view the words are used in the sense of a business, employment, or property from which a net profit might reasonably be expected to come.

In Steer v MNR (supra) Noël, J, as he then was, stated at pages 185-6 [5117] that prior to the year 1952 section 13 of chapter 52 of 1948 would have operated to prevent a loss from one business reducing the appellant’s income below his income from “his chief source of income”, but that this rule was abrogated by section 4 of chapter 29 of 1952 with the result that:

.. . the enactment and its repeal would now clearly indicate that losses from one source are otherwise deductible in computing income from all sources.

He stated that:

. . . Section 3 defines income for a taxation year as being “income . . . from all sources” for the year, which concept necessarily involves the setting off of losses from income sources for the year.

In other words, this is a single concept. It is not merely the aggregation of one’s incomes from all sources from which there were incomes in the year but it is made up of the gains from all sources minus the losses from these sources or the net income from all sources of income taken together.

In other words, this statement of the law expressly abrogated the view that there must be “income” in the sense of profit to be a “source of income” within the meaning of the Act.

In MNR v Grieve et al (supra) Thurlow, J noted that:

. . . It was conceded in the course of argument, and I think quite properly so, that the taxpayer’s chief source of income was not farming, and the case was thus narrowed down to a submission that the taxpayer’s chief source of income was in fact a combination of farming and investments.

He then commented, as obiter,

. . . there does not appear to have been any connection or relation whatever between his farming as a source of income in any year and the estate or investments from which the bulk of his income was derived . . .

(Italics mine.)

In relation to these comments, namely, the matter of whether or not there must be some “connection” between the sources of income before there can be a finding of fact that a taxpayer’s chief source of income was in fact a combination of farming and some other source, Thorson, P in Simpson v MNR (supra) at pages 178-9 [119] stated:

In view of my finding I need not deal with the submission of counsel for the respondent that the expression “combination of farming and some other source of income” in section 13(1) must mean a combination of farming and some other source of income that is physically related to farming beyond saying that I do not see why there must be such a limitation. The statement of the condition for the applicability of the section that the taxpayer’s chief source of income must be “neither farming nor a combination of farming and some other source of income” is simply another way of saying that the taxpayer’s chief source of income must be a source that is not only a source other than farming but is also a source that is other than farming and some other source of income taken together. The use of the. word combination does not, in my opinion, imply any more than that.

(Italics mine.)

Collier, J in Dorfman v MNR (supra) at page 154 [6134] in referring to these comments of Thorson, P in the Simpson case stated:

. . . While Thorson, P did not expressly rule on this argument in the Simpson case (supra), I adopt his comment at p 178 [1119] “I do not see why there must be such a limitation”.

The only statute reference to “connection” existed, not in section 13 of the Act in its present or predecessor statutory form, but instead existed in the Income War Tax Act, as will be outlined hereunder, in paragraph 3(f) of the 1917 Act and in the amendment to it by chapter 49, section 2 of the Statutes of 1919, Second Session, as an addition to paragraph (f) of subsection (1) of section 3 of the original Act (prescribing limits to deductions from income derived from the chief business, trade, profession, or occupation of the taxpayer in determining his taxable income) namely:

(Subsection (f) before the said amendment):

(f) deficits or losses sustained in transactions entered into for profit but not connected with the chief business, trade, profession or occupation of the taxpayer shall not be deducted from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income.

(The said amendment):

and the Minister shall have power to determine what deficits or losses sustained in transactions entered into for profit are connected with the chief business, trade, profession or occupation of the taxpayer, and his decision shall be final and conclusive.

(Italics mine.) In other words, this subsection, as amended, provided that losses sustained in transactions entered into for profit “but not connected with the chief business, trade, profession or occupation of the taxpayer” (italics mine) could not be deducted from the income derived from “the chief business, trade, profession or occupation of the taxpayer” for the purpose of determining his taxable income.

This did not refer in particular to losses from the business of farming, but applied to losses from all other businesses of a taxpayer. A taxpayer was not permitted to deduct in 1919 any losses suffered from carrying ‘on any other business which was “not connected with the chief business, trade, profession or occupation of the taxpayer”.

Such is the only reference in the Income Tax Act from its inception to the necessity of there being a “connection” between businesses for the purpose of deducting losses; and I find no statutory authority for the proposition that in order for it to be possible to make a determination under section 13 of the Act, whether or not the chief source of income for a taxation year of a taxpayer is a “combination” of farming and some other source of income that there must be some “connection” between the business of farming and the business from which such other source of income is derived.

In CBA v MNR (supra) Cattanach, J had to decide this question, namely:

. . . whether the appellant was farming as part of its business or as one of its businesses and consequently whether the deductibility of its farming losses from income from other sources is limited to $5,000 in accordance with the provisions of section 13(1) of the Income Tax Act.

Before reaching the factual decision in that case, Cattanach, J reviewed at pages 510-11 [5286] the provisions of the Act generally and then discussed what section 13 in particular contemplated. He did so in these words:

in such consideration it is expedient to recall the basic scheme of Part I of the Income Tax Act. That Part is divided into Divisions: Division A provides for the liability for tax, Division B provides for the computaton of income, and Division C provides for the computation of taxable income which is defined in Section 2(3) as income for the year as computed under Division B less deductions permitted by Division C.

By Section 3 (which is within Division B) the income of a taxpayer for a taxation year is its income from all businesses. By Section 4 income for a taxation year from a business is the profit therefrom. Therefore to determine the income of a busines, the profit therefrom must be determined which involves the setting off against the revenue derived from the business the expenditures laid out to earn that revenue.

Under Division B, the computation of income, Parliament enacted Section 13 which is a special provision applicable to the deductibility of farming losses where a taxpayer is engaged in farming and the taxpayer’s chief source of income is neither farming, nor a combination of farming and some other source of income.

Section 13 contemplates three possibilities:

(1) the farming losses of a ‘full-time farmer where farming is the chief source of income (or a combination of farming and something else) in which event all losses are deductible,

(2) farming losses incurred in a farming operation with the expectation of profit or the eventual expectation of profit but where farming is not the taxpayer’s chief source of income, nor part of it, in which event the deductibility of losses is limited by Section 13, and

(3) an operation which is in the nature of a hobby, pastime or way of life, the losses from which are not deductible being personal or living expenses.

It is clear, when the farming activity of a taxpayer falls within Section 13, that Parliament must have intended that the losses incured in farming are not to be deducted except in the manner and to the extent authorized by that section. Such intention is evident from a reading of Section 13 with the other sections of the Act. It is a specific section designed to cover a specific set of circumstances in Division B dealing with computation of income. Being a specific section it is axiomatic that it takes precedence over a general section.

Section 3 of the Act clearly contemplates that a taxpayer (which includes a company) may carry on more than one business. In the present instance the Minister alleges that the appellant had two businesses, one farming and the other consulting engineering, whereas the appellant maintains there was but one, that of consulting engineering.

Section 13(3) requires that a loss from farming shall be computed by applying the provisions of the Act respecting the computation of income from a business. When there is more than one business, each business is a source of income. Section 139(1a) of the Act directs that income from a source is to be computed in accordance with the Act, that is to say, by following the provisions of the Act applicable to the computation of income from each source on the assumption that the taxpayer had no income except from that particular source. In so computing income from a source the taxpayer is entitled to no exceptions except those relating to that source.

Then in coming to the conclusion in that case Cattanach, J found that:

The crucial issue, upon which the matter turns, is whether what the appellant did constituted farming within the meaning of that word as used in Section 13.

Cattanach, J then found on the facts of that case that the appellant was engaged in farming as contemplated by the statute and that the appel- lan fell precisely within the provisions of section 13 of the Act.

So much for a review of the cases.

It is now proposed to review the legislative origin and history of section 13 of the Act and then to apply its relevant provision at the material time to the factual situation of this case.

The Income War Tax Act 1917, chapter 28 of the Statutes of Canada of that year, by section 3 defined income and by paragraphs (1)(a), (b), (c), (d) certain exemptions and deductions therefrom were permitted. The deductions are not relevant to this decision.

By chapter 25 of the Statutes of Canada, 1918, section 2 made certain amendments and additions to said section 3 which are also not relevant to this decision.

By chapter 55 of the Statutes of Canada, 1919, section 2 certain additions to said section 3 were made including paragraph (f), namely:

(f) deficits or losses sustained in transactions entered into for profit but not connected with the chief business, trade, profession or occupation of the taxpayer shall not be deducted from income derived from the chief business, trade, profession or occupation of the taxpayer in determining his taxable income.

(Italics mine.)

By chapter 49, section 2 of the Statutes of 1919 (Second Session) said paragraph (f) of subsection (1) of section 3 of the original Act was added which reads as follows:

and the Minister shall have power to determine what deficits or losses sustained in transactions entered into for profit are connected with the chief business, trade, profession or occupation of the taxpayer, and his decision shall be final and conclusive.

Then by chapter 52 of the Statutes of 1923, paragraph (f) of subsection (1) of section 3 was repealed and a new paragraph re-enacted in its place which read:

(f) In any case the income of a taxpayer shall be deemed to be not less than the income derived from his chief position, occupation, trade, business or calling, and for the purpose of this Act the Minister shall have full power to determine the chief position, occupation, trade, business or calling of the taxpayer. Where a taxpayer has income from more than one source by virtue of filling or exercising more than one position, occupation, trade, business or calling, then the Minister shall have full power to determine which one or more, or which combination thereof shall, for the purpose of this Act, constitute the taxpayer’s chief position, occupation, trade, business or calling, and the income therefrom shall be taxed accordingly and the determination of the Minister exercised pursuant hereto shall be final and conclusive.

In the statute revision in 1927 by chapter 97, RSC 1927, these provisions in slightly different form were set out in section 10 thereof, namely:

10. [(1)] In any case the income of a taxpayer shall be deemed to be not less than the income derived from his chief position, occupation, trade, business or calling.

(2) Where a taxpayer has income from more than one source by virtue of filling or exercising more than one position, occupation, trade, business or calling, the Minister shall have full power to determine which one or more, or which combination thereof shall, for the purpose of this Act, constitute the taxpayer’s chief position, occupation, trade, business or calling, and the income therefrom shall be taxed accordingly.

(3) The determination of the Minister exercised pursuant hereto shall be final and conclusive.

In The 1948 Income Tax Act, chapter 52, certain of the said provisions were not re-enacted and those that remained, with some changes, were re-enacted in section 13 which reads as follows:

13. (1) The income of a person for a taxation year shall be deemed to be not less than his income for the year from his chief source of income.

(2) The Minister may determine which source of income or sources of income combined is a taxpayer’s chief source of income for the purpose of this section.

By section 4 of chapter 51 of the Statutes of 1951, additions were made to section 13. Said section 4 reads as follows:

4. (1) Section thirteen of the said Act is amended by adding the following subsections thereto: r j

“(3) 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 (after application of the rule in subsection one) minus the Issser of

(a) one-half his farming loss for the year, or

(b) $5,000.

(4) For the purpose of subsection (3), a ‘farming loss’ is a loss from farming computed by applying the provisions of this Act respecting computation of income from a business mutatis mutandis except that no deduction may be made under paragraph (a) of subsection (1) of section 11.”

(2) This section is applicable to the 1949 and subsequent taxation years.

From this recital of these provisions of the Income Tax Act, it will be noted that beginning with the amendment made by chapter 55 of the Statutes of 1919, consideration was to be given to the taxpayer’s chief business, trade, profession or occupation in determining his taxable income and that deficits or losses sustained in transactions entered into for profit, that were not “connected" with the same, could not be deducted for such purpose; that beginning with the amendment made by chapter 49 of the Statutes of 1919 (Second Session) until changed, the Minister had power to determine what deficits or losses sustained were “connected” with the taxpayer’s chief business, trade, profession or occupation and that his decision was final and conclusive; that by the amendment made by chapter 52 of the Statutes of 1923, the income of a taxpayer was deemed to be not less than that derived from his chief position, occupation, trade, business or calling and where a taxpayer had income from more than one source by virtue of filling or exercising more than one position, occupation, trade, business or calling, the Minister had full power to determine which one or more or combination thereof constituted the taxpayer’s chief position, occupation, trade, business or calling and that his determination was final and conclusive.

Analogous provisions were carried through the revision of 1927 and were contained in section 19 of chapter 97 of the 1927 Revised Statutes.

Then, by the enactment of The 1948 Income Tax Act, consideration was first given to the taxpayer’s chief source of income instead of his chief position, occupation, trade, business or calling but the provision permitting the determination by the Minister to be final and conclusive was not re-enacted.

From the above, therefore it appears that in 1919 losses from businesses could be regarded as part of the chief source of income even though they produced no income. The only requirement was that they had to be “connected with the chief business, trade, profession or occupation of the taxpayer” before they could be deducted. There was no specific reference to losses from the business of farming then. A loss from the business of farming was in the same category as a loss from any other business, whether it was manufacturing, retailing or whatever. What the statute prohibited was the deduction of what might be called casual losses, in the sense of not being “connected” with the chief business, etc, of the taxpayer.

In The 1948 Income Tax Act taxable income of a taxpayer was premised on the sources of income of the taxpayer rather than on his chief position, occupation, trade, business or calling; but this did not change the fundamental premise in the Act since 1919 that there could be a source of income in a taxation year without actual income in the sense of profit from that source, or, in other words, there could be a loss from that source.

In considering the scheme of the Act as it existed at the relevant time of this case, you start with section 3 which prescribes that the income of the taxpayer shall be his world income from all sources. One of the sources of income so prescribed is from all “businesses”. Paragraph 139(1a)(a) of the Act in referring to income from a source says the same thing, that

139. (1a) For the purposes of this Act,

(a) a taxpayer’s income for a taxation year from a business, employment, property or other source of income or from sources in a particular place means the taxpayer’s income computed in accordance with this Act on the assumption that he had during the taxation year no income except from that source or those sources, and was allowed no deductions in computing his income for the taxation year, except such deductions as may reasonably be regarded as wholly applicable to that source or those sources and except such part of any other deductions as may reasonably be regarded as applicable to that source or those sources;

From this it follows, therefore, that every business must be regarded as a “source of income”.

Then subsection 13(3) of the Act in defining “farming loss” prescribes that it must be computed in the same way as computing income from a business, that is, inter alia, by keeping in mind that a “business” is a “source of income”.

Paragraph 139(1)(x) of the Act on the other hand, defines “loss’’ generally applicable to any business. That paragraph states that a loss shall be computed by applying the provisions of the Act respecting ‘the computation of income from a business.

Then section 3 of the Act, as discussed heretofore, prescribes that for the purpose of computing world income a taxpayer is entitled to net his income from all sources, that is to deduct his losses from all his sources from this profit from all his sources. Being permitted to net, it follows that every business of a taxpayer is a “source of income” notwithstanding that a particular business may not produce in a given year any income in the sense of “profit” from such business.

In the same manner as determined pursuant to section 3, a “source of income” is determined pursuant to section 13 of the Act. From this it follows, putting it again in another way—there may be a source of income in a taxation year, notwithstanding that there may be no income. The scheme of the Income Tax Act throughout its legislative history prior to and up to the enactment of section 13 and as section 13 in the form it had during the relevant taxation years in this case, 1967 and 1968, support this view.

Section 13 in the form it had in 1967 and 1968 was put in the 1948 Act by amendment in 1951.

In the 1948 Act originally before the 1951 amendment, in the provisions dealing with income from a taxpayer’s chief source of income or his income from any source, there was no specific reference to the business of farming as a source. The intent then was to limit the deduction of losses that were not a chief source of income. But there was no intention in the 1948 Act to prescribe that where there was a loss from a business for example, there was no source of income therefrom.

In the 1951 amendment, there was added the specific reference to farming. The effect of section 13 as amended in 1951, was that when a taxpayer suffered a loss from his farming business and farming business was neither his chief source of income, nor was a combination of farming and some other source of income his chief source of income, such a taxpayer was restricted to the limited loss prescribed in subsection (3). Therefore in 1951 a taxpayer was subject to the general limitation in respect to losses from business, but subsection

(3) of section 13 gave such a taxpayer a special concession in respect to a farming loss.

In 1952 the statute was amended to its present form. It now relates only to the business of farming. And the general limitation respecting deduction of losses from any source not the taxpayer’s chief source of income, as prescribed originally in the 1948 Act, no longer is the law.

Repeating, in the 1952 statute, section 13 of the Act only refers to a farming loss and the limitation of section 13 only applies when farming is not the chief source or a combination of farming and some other source of income is not the chief source of income of a taxpayer.

The first question of fact that must be resolved in determining whether or not section 13 of the Act applies in any case, is whether or not the taxpayer is “farming” as that term is meant employing the usual dictionary definitions and including whatever additional meaning may be contained in the statutory definition of “farming” in paragraph 139(1)(p) of the Act. And the phrase “with reasonable expectation of profit” employed in defining “personal or living expenses” in subparagraph 139(1)(ae)(i) of the Act, is only relevant or germane to the finding of fact of whether or not such a taxpayer is “farming”. If the finding of fact is that the taxpayer is farming, then “farming” being a business is a source of the world income of that taxpayer as prescribed in section 3 of the Act.

In other words, if it is resolved as a fact that a taxpayer in a taxation year is “farming”, then “farming” is one of that person’s businesses and therefore a source of his income for the purpose of section 3. As a consequence, whether or not a taxpayer in carrying on his business of farming has a reasonable expectation of profit is irrelevant if a determination has been made that such a taxpayer was “farming” Once made, what expenses he incurred in doing what he did in relation to his farming business could not possibly be categorized as “personal or living expenses”.

Of course, it is relevant in the determination of fact as to whether or not a taxpayer is in the business of farming to consider exactly what that taxpayer is doing and in a given case, if what a taxpayer is doing indicates that he really is incurring personal or living expenses, that indicium alone may be the critical one in a determination that such a taxpayer is not farming. But the point to note is that the fact of reasonable expectation of profit or not is one indicium only to be considered in each case.

Recapitulating, if there is a finding of fact that what a taxpayer is really doing when he is incurring certain expenses is “farming” as statutorily and dictionary defined, as stated, then that finding imports the proposition that “farming” is a business and being a business, it is a source of income within the meaning of section 3 of the Act.

Some of the relevant law for the taxation years 1967 and 1968 therefore, may be restated as follows:

1. It is a finding of fact in each case as to whether a taxpayer’s “chief source of income” for a taxation year for the purpose of section 13 of the Act is (1) farming, (2) a combination of farming and some other source of income, or (3) neither farming nor a combination of farming and some other source of income.

2. There does not have to be any “connection” between farming as a source of income and some other source of income in order to make a finding of fact that a taxpayer’s “chief source of income” was a “combination” of “farming” and “some other source of income” for the purpose of subsection 13(1) of the Act.

3. A business is a “source of income”. There may be “a source of income” in a taxation year notwithstanding that there may be no “income” in the sense of “profit” from such source.

4. The concept conveyed by the words “with reasonable expectation of profit” in paragraph 139(1)(ae) of the Act in defining “personal or living expenses” (which by paragraph 12(1)(h) of the Act are not deductible in computing income) is one of the indicia to be employed in determining whether or not a taxpayer in a given taxation year is in the business of farming”. But the converse is not true, ie, the fact that a taxpayer in a given taxation year or for years before and after, had or appeared to have no reasonable expectation of profit is not proof in itself that he was not in the business of “farming” if other indicia establish or prove that such a taxpayer was in fact in the business of farming.

5. If a taxpayer establishes or proves in fact that he was in the business of farming in any taxation year, section 13 of the Act is relevant, permitting him, if he has a loss therefrom, either a full deduction of such loss, if farming or a combination of farming and some other source of income is not his chief source of income, or the limited deduction of loss prescribed in the section from the source of the business of farming, as the facts of the case may be.

So much for the law.

As to the facts, a careful view of all of the evidence leads me to make the following findings of fact:

1. Up to and including the end of October 1966, the appellant was engaged full-time in the business of selling automobiles through his car company.

2. After October 31, 1966 the car company commenced not to be, and by December 31, 1966 no longer was, an active automobile dealership business.

3. Commencing October 31, 1966 and throughout 1967 and 1968 the appellant engaged full-time in the business of horse racing, buying, owning, racing and selling horses, and during that time engaged in no other business of any substance.

4. Specifically, an integral part of his horse racing business is and was at all material times the selling of horses.

5. The appellant financed the purchase of horses with funds drawn by him from the car company and by the end of 1968 he had committed about $190,000 for this purpose and by the end of 1969 he had paid out, and committed for a similar purpose all the remaining funds that were formerly in the car company.

6. Although the appellant suffered losses in 1967 and 1968 from his business of horse racing, he did earn substantial net profits from this business in subsequent years.

The appellant, among other things, submitted in respect of the two issues raised on this appeal, the following:

(A) As to the issue of whether the claimed losses (arising in the main in acquiring race horses) are on capital or income account:

(1) The appellant, although he anticipated having development costs in building up his racing activities in the early years, such should not be categorized as capital in nature in that there is no proposition in law that start-up costs are to be regarded as capital costs ipso facto', instead the basic test in determining whether the costs are on capital or income account, is whether or not they are made once and for all to create an asset of enduring benefit to the business.

(2) All expenses, including the cost of acquiring the horses were current in nature; that by its nature an integral part of the appellant’s horse racing business, either through the mechanics of claiming or by the market facts of the business generally, is the selling of horses.

(3) The costs of buying horses should be deductible in the years incurred as inventory costs and as a consequence of deduction of such costs, the appellant did in fact incur the losses he reported in 1967 and 1968.

(B) As to (1) whether the business of “farming” of the appellant was a “source of income” within the meaning of section 13 of the Act, and (2) even if such a “source of income”, whether in the taxation years 1967 and 1968 the appellant’s “chief source of income” was farming or a combination of farming and some other source of income, or whether, instead, his “chief source of income” was from Bert James Chev-Olds Limited:

(1) “Chief source of income” within section 13 of the Act means the business, employment or property from which the bulk of the taxpayer’s income might reasonably be expected to come.

(2) A business can constitute a source of income even though it produces no income in the sense of profit in a particular taxation year.

(3) The business of farming of the appellant was a “source of income” within section 13 of the Act and the combination of that source and the car company source of funds was the “chief source of income” of the appellant.

The respondent, among other things, submitted that the business of farming of the appellant was not a “source of income” of the appellant in the taxation years 1967 and 1968 within the meaning of section 13 of the Act; that the “chief source of income” was from the appellant’s employment with Bert James Chev-Olds Limited; and that in any event, the losses claimed in the taxation years 1967 and 1968, occasioned in the main by the expenditures in the acquisition of race horses were on capital account.

In coming to a conclusion in this case, I have considered what the appellant did in respect to his business of horse racing from 1966 to 1971.

In this initial period, which included the taxation years 1967 and. 1968, the appellant built up an inventory of race horses and there were not many sales of horses, only purchases, training and racing of horses. But in the latter period after the inventory was built up and a substantial number of the horses had been proven by racing, there were many sales of horses resulting in very substantial profits for the appellant.

In my view, in the taxation years 1967 and 1968, the appellant in purchasing race horses was acquiring an inventory for such business; that during those years his horse racing business was a source of income within the meaning of the Act; that the appellant during the relevant taxation years reasonably expected that his chief source of income would be from a combination of his horse racing business and from the funds in Bert James Chev-Olds Limited; and that in fact in the taxation years 1967 and 1968 the “chief source of income” of the appellant within the meaning of section 13 of the Act was a combination of the horse racing business, a farming business source, and Bert James Chev-Olds Limited, another source of income of the appellant.

In the result, therefore, the appeal is allowed and the reassessments are referred back for further reassessments not inconsistent with these reasons.

Counsel may prepare in both official languages an appropriate judgment to implement the foregoing conclusions and may move for judgment in accordance with Rule 337(2)(b).