Alfred Wallace Garrard v. Minister of National Revenue, [1972] CTC 2362, 72 DTC 1307

A J Frost:—This is an income tax appeal in respect of the appellant’s 1968 taxation year. Upon Notice of Objection duly signed and filed the Minister of National Revenue reconsidered the assessment and confirmed it on the ground that the appellant was not in the business of farming during the taxation year within the meaning of the appropriate provisions of the Income Tax Act and therefore was not entitled to claim as a deduction from income his farm losses. The appeal was heard by the Tax Appeal Board as it was then constituted, on December 13, 1971, at Belleville, Ontario.

The appellant operated a farm consisting of approximately 55 acres and had a total income from various farming sources in 1967 of $3,191. In 1968 his income declined to $1,795 due to a change in his method of operations. The appellant had decided to go into the horse business which altered his pattern of operations and reduced his receipts. His aim was to acquire a basic stock of standard-bred horses as a base for future farm operations. He decided to breed horses and to develop a racing stable. He personally prepared for his new venture by study and hard work, supporting himself as an employee of General Motors of Canada Limited. The evidence indicated that, for every two hours put in at General Motors, the appellant had put in approximately one hour on his farm.

The question before the Board is: did the appellant in 1968 have a reasonable expectation of profit relating to future years? The appellant had operated a farm for several years raising oats, hay and grain and in addition swine and cattle with the following result:

Type of income

Year Hay/Straw Oats Grain Other Swine Cattle Total

1965	$ 27 $	$	$ 22 $ 577 $ 2,407 $ 3,033
1966	660			6,457	7,110
1967	251	199	25	2,715	3,190
1968	580			1,215	1,795

After some 15 years’ farm experience, the appellant in 1967 decided to switch to horse-raising and breeding. At that time, harness-racing was the fastest growing sport in North America and offered a potential for profit without too large an investment. In late 1967 the appellant had many of the necessities essential to establish himself in the horse business and began acquiring additional horses and added an extension to his barn to provide suitable accommodation for his animals. During 1967 and 1968 the appellant purchased four racehorses of top standard breeding, having devoted some time to the studying of horseracing as a business. His horses were registered pacers and trotters. This intention was to race his horses or sell the offspring. The appellant impressed the Board as having acquired a considerable background of experience in this particular business. At the time of the hearing, the appellant’s stable had reached a capacity of nine horses and, according to the evidence, he could have sold five animals in 1971. Maintaining his accounts on a cash basis, the appellant does not have to treat closing inventories as income items which, especially in case of a change in the nature of a business as in this instance, may create a financial sag until such time as inventory accumulations start generating actual cash sales.

The question of the time required for farming activities was cleared in evidence by the assertion that the appellant always had ample day- light time to attend to his horses. Even during day shifts he came home in time to put in several daylight hours of work.

Counsel for the appellant in his argument contended that a reasonable man placed in the circumstances would not have expected to make a profit. However, the “reasonable” man is bound to be a rather mythical character. What he might think of as having some importance in this case would depend on his actual knowledge of horses and their potential. For this reason, the Board is inclined to give more weight to the forthrightness and serious determination of the appellant farmer than to the more sophisticated argument of counsel for the respondent. In this case the farmer impressed the Board as an honest, sincere, hard-working man who knew what he was talking about In a practical sense. He outlined a number of situations in respect of which he could have made a profit.

I agree with the appellants contentions as related in his appeal, where he says:

S-13 and S-139(1 )(p) of the Income Tax Act clearly cover the case of a farmer maintaining horses for raising [sic] as does the taxpayer in this case. This is clearly established by the taxpayer’s whole course of conduct including the expenditure of considerable funds, major expenditures on horses and Capital equipment and the commitment of a significant amount of time and energy. Additionally, the taxpayer’s activities in the field of breeding also clearly qualify as farming.

S-12(1)(h) and S-139(1)(ae) are clearly inapplicable as it is inconceivable for a person to make such major commitments of time and money without the reasonable and firm expectation of profit, which profit appears imminent.

Bad breaks played an important role in the negative operational results achieved by the appellant and appeared to be reasonably unforeseeable and of an accidental nature. These results should, in my opinion, not weigh too heavily against the taxpayer. Appellant’s whole course of conduct convinced me that, in view of the statutory provisions and jurisprudence pertaining thereto, the appellant’s farm losses should be considered deductible and the appeal herein should be allowed.

Appeal allowed.