William Moldowan v. Minister of National Revenue, [1973] CTC 2294, 73 DTC 228

The Assistant Chairman:—This is the appeal of William Moldowan from an income tax assessment in respect of the appellant’s 1968 and 1969 taxation years.

The appellant is a businessman who over a period of some seven years operated, either alone or in partnership, several distinct businesses not related to his horse-racing operations. In 1960-1961 the appellant began on a relatively small scale the operation of horse racing which was expanded, particularly in the years 1968-1969. Late in 1967 the appellant sold a company called “Active Trading Ltd” and invested his capital in the acquisition of a farm, situated at the rear of a racetrack, on a rental basis where he boarded, bought, trained, raced and sold race horses on a relatively larger scale than heretofore. There is no doubt that the appellant, apart from other businesses he may have had at the time, was in 1968-1969 engaged in farming within the meaning of paragraph 139(1 )(p) of the Income Tax Act.

In. 1969 Cascade Fasteners Ltd, in which the appellant had substantial interest and from which he had derived part of his income, went into receivership. In the same year, the appellant acquired Cascade News Ltd — a company engaged in the distribution of racing forms.

In 1968 the appellant reported as income from employment an amount of $1,750 from investments an amount of $8,822.43 and from a real estate transaction an amount of $12,500, making a total income for 1968 of $23,072.43. In 1969 the appellant reported as income from employment an amount of $17,833.40 and from investments an amount of $17,048.65 making a total income for 1969 of $34,882.05.

However in 1968 the appellant sustained a loss of $21,097.46 from his horse-racing operations and in 1969 sustained a further loss of $20,609.69 which he sought to deduct in its entirety from income from other sources in those years.

On the grounds that the appellant’s chief source of income in 1968 and 1969 was neither from farming nor a combination of farming and some other source of income, the appellant was allowed by the Minister to deduct a farming loss of only $5,000 in each of those years pursuant to subsection 13(1) of the Income Tax Act.

In support of his contention that the entire farm losses incurred in 1968 and 1969 should have been allowed in determining the appellant’s income for those years, counsel for the appellant cited a decision of the Federal Court of Canada, Trial Division, Bert James v MNR, [1973] CTC 457; 73 DTC 5333, where it was held that the chief source of income referred to in section 13 of the Income Tax Act means business, employment or property from which the bulk of a taxpayer’s income might reasonably be expected to come even though it produces no income in the sense of profit in a particular taxation year.

In support of his argument that the appellant was actively engaged in the horse-racing business which was in fact a source of income for him, counsel for the appellant by means of statements filed as exhibits showed that in the period 1962 to 1969 the appellant had, for purposes of racing, purchased 53 horses at a total cost of $183,463.82—most of which were disposed of in that period as a result of injury, devaluation or inadequate performance of the horses, at a loss of $55,722.45 (Exhibit A-1). However, the total purses earned by the appellant’s racehorses from 1962 to 1969 were $184,018 (Exhibit A-2).

Subsection 13(1) refers specifically to a taxpayer’s chief source of income, and in attempting to determine whether or not the appellant’s chief source of income is from farming or a combination of farming and some other source of income, a most important consideration, referred to in the Federal Court decision in Bert James v MNR (supra), is whether the bulk of the appellant’s income might reasonably be expected to come from the appellant’s horse-racing operations.

In the period 1962 to 1969, the appellant’s horse-racing activities realized a profit of $1,593.44 in 1963 and $1,368.64 in 1964 but in every other year in that period the appellant sustained losses totalling roughly $55,000—the greatest losses being incurred in 1968 and 1969 (Exhibit A-3). Under the circumstances it is difficult indeed to consider that the bulk of the appellant’s income might reasonably be expected to come from the appellant’s horse-racing operations.

Counsel for the respondent noted that pursuant to subsection 13(2) a determination was made by the Minister that the appellant’s chief source of income for 1968 and 1969 was neither from farming nor a combination of farming and some other source, and produced a registered letter addressed to the appellant to this effect (Exhibit R-1) which reads as follows:

Your income tax returns for the 1968 and 1969 taxation years are presently under review and in connection therewith the provisions of Section 13 of the Income Tax Act, as set out hereunder, are brought to your attention.

“Section 13. Chief source of income.

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

In accordance therewith it is proposed to assess you under the provisions of this section on the basis that your chief source of income is neither farming nor a combination of farming and some other source of income.

For your information, please note that any portion of your “farming loss” for 1968 and 1969 that may be disallowed as a result of the above-mentioned recommendation can be applied against profits from the farm in other taxation years to the extent authorized by Sections 27(1)(e) and 27(6) of the Act. Any loss so applied against profits of other years may include capital cost allowances.

Please advise us by letter whether you agree to your claim for a farming loss being reduced in accordance with the above. If you do not agree, any representations you may wish to make should be made within thirty (30) days.

Yours truly,

Enclosures

cc Docherty, Meyer, Sapera for Director-Taxation and Burnett, Vancouver.

Counsel also referred to the notification by the Minister (Form T2008A) addressed to the appellant and which reads in part:

The Honourable the Minister of National Revenue having reconsidered the assessments and having considered the facts and reasons set forth in the Notices of Objection hereby confirms the said assessments as having been made in accordance with the provisions of the Act and in particular on the ground that the Minister has determined that in the taxation years 1968 and 1969 the taxpayer's chief source of income was neither farming nor a combination of farming and some other source of income and therefore his farming losses have been allowed to the extent of $5,000.00 in each of these years in accordance with the provisions of section 13 of the Act.

In dealing with the question of the determination by the Minister, counsel for the appellant referred to the following paragraph at page 467 [5339] of Bert James v MNR’.

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 reenacted.

Notwithstanding counsel’s argument that the determination by the Minister is not final and conclusive, subsection 13(2) specifically provides for such a procedure and the practice of the courts has been to uphold the Minister’s determination unless he has proceeded on a wrong principle or without sufficient evidence to support his determination.

From the exhibit produced by the respondent, I am satisfied that in making the determination the basic principles of law were followed by the Minister and the facts of the appeal, in my opinion, support the determination made by him.

The appeal is therefore dismissed.

Appeal dismissed.