Ernest C. Hammond v. Minister of National Revenue, [1971] CTC 663, 71 DTC 5389

PRATTE, J.:—The appellant appeals from income tax reassessments made upon him for the taxation years 1964, 1965 and 1966. In these re-assessments, dated April 27, 1970, the Minister of National Revenue added to the declared income of the appellant amounts of $9,294.41 for 1964, $29,546.51 for 1965 and $28,942.85 for 1966, which supposedly represented the net gains that the appellant had realized during each of those years from racing a horse known as George Royal.

In his notice of appeal, the appellant attacked these re-assessments on two grounds: first, that his racing gains were not income and, therefore, not taxable, and, second, that the amounts that the Minister had added to his declared income did not truly represent his net racing gains. Of these two objections, however, the latter no longer needs to be considered since the parties agreed at the trial that the net profit made by the appellant from racing the horse George Royal amounted to $9,083.81 in 1964, $28,543.13 in 1965 and $28,114.26 in 1966. Consequently, only the first objection raised by the appellant remains to be considered.

In his notice of appeal, the appellant sets out as follows his reasons for contending that the amounts added to his declared income are not taxable income:

2. The aforementioned amounts added to the Appellant’s net income in 1964, 1965 and 1966 were derived from successful races by the horse George Royal which the Appellant acquired as a suckling in 1962 and in which the Appellant had a half interest by way of co-ownership.

3. The Appellant acquired and raced the said George Royal between 1963 and 1966 in pursuit of his chosen hobby of owning and racing a horse or horses from which he derived personal enjoyment and entertainment.

9. The Appellant says further that his gains from horse racing w’ere not derived from a commercial venture or enterprise of raising and training horses to race but represented windfall gains derived from a personal hobby undertaken by the Appellant with the dominant object of entertaining himself.

In his reply to the appellant’s notice of appeal, the respondent says that, in re-assessing the appellant for the years 1964, 1965 and 1966, he acted upon the following assumptions:

6. . . .

(a) The Appellant during and for some years prior to relevant times has been engaged alone or with others in the business of racing horses for profit.

(b) During 1964, 1965 and 1966 the Appellant was co-owner of a race horse known as George Royal.

(c) Between May, 1963, and October, 1966, proceeds from racing the horse George Royal amounted to $279,482.00.

(d) The Appellant’s share of the proceeds of horse racing . . . is income within the meaning of that word as it is used in the Income Tax Act.

It is therefore admitted that during the years 1964, 1965 and 1966, the appellant was the co-owner of a very successful race horse known as George Royal and that the various amounts (as varied by the agreement made at the trial) added by the respondent to the appellant’s declared income for the years under consideration represent the appellant’s share of the prize money won by George Royal after deduction of the legitimate expenditures made in connection with the racing of this horse. The issue to be resolved is whether the appellant’s share of the net proceeds of racing this horse during the period under consideration is income within the meaning of that word in the Income Tax Act, R.S.C. 1952, c. 148, Sections 3, 4 and 139(1) (e).

Counsel for the appellant and the respondent agreed that the question whether or not prize money won by horse racing is taxable income admits different answers, depending on the facts of each case; more precisely, counsel for both parties agreed that such prize money is income only inasmuch as the taxpayer’s racing activities are such that they can be considered as a business.

The appellant, who lives in Vancouver, is now 68 years old. He has always been interested in sports and was even a football player for many years. In 1933, he had to abandon football in order to join his father and brother in running The Hammond Furniture Manufacturing Company, a family company which, apart from being the second largest Canadian manufacturer of wooden furniture, was also involved, through various subsidiaries, in other businesses like floor covering, upholstery and bedding, plywood and lumber. To this new task, appellant for many years devoted all his energies, working from 16 to 18 hours a day. Shortly before 1957 both the appellant’s father and brother died; and this loss, coupled with the fact that appellant had apparently encountered difficulties in dealing with labour unions, prompted him to close down his various enterprises. All this with the result that, at the beginning of 1957, the appellant had disposed of nearly all the various businesses previously operated by the Hammond Furniture Manufacturing Company and its subsidiaries; he had only retained the ownership of a large office building and continued to operate the bedding and upholstery section of his business (which, sometime later in that year, he sold to former employees of his for $250,000, payable by monthly instalments of $1,150). This is not to say that the appellant stood idle in the following years. According to his testimony, he would still have been very busy, specially from 1963 to 1966, looking after the administration of his office building, working for an Australian furniture manufacturer and devoting much time to the affairs of Western Mines Ltd., a company of which he was a director. It is certain, though, that the appellant had then reduced the pace of his business activities as could be expected of one who had suffered a stroke in 1962; in these circumstances, one understands that the appellant, from 1964 to 1966, could spend much time away from home following his horse wherever it was raced. The appellant asserted, and there is no reason not to believe him, that during all those years he was in a good financial situation and was not relying on horses to make money ’

It is against this background that the appellant’s horse racing activities must now be seen.

Until 1955 the appellant had never owned a race horse but had attended the race track frequently. In that year, in order to enjoy the thrill of betting on a horse of his own, he purchased his first race horse. Since then he has always owned one. He would buy a horse, have it trained and raced, and if it did not prove good or did not please him for any other reason, he would sell it or give it away before purchasing another one. The appellant did not own a farm where he could have kept his horses and he knew nothing about horse training; all his horses, therefore, had to be trained and looked after by professional breeders and trainers.

Around 1962 the appellant, who by that time had already owned four race horses, purchased a foal known as George Royal for a little less than $3,500. He made arrangements with one Robert Hall, a professional breeder who owned a farm near Vancouver, to have his new horse kept and trained. In order to induce Hall to take good care of George Royal, he gave him a one-half interest in it, with the understanding that Hall would share in the cost of keeping, training and racing the horse and also, eventually, in the prize money that it would win.

Unexpectedly, George Royal developed into a superior race horse. It proved so good when it was raced in British Columbia that, late in 1963, the appellant and Hall decided to send it to California with a trainer and a jockey so that it could compete against suitable rivals. In 1964, 1965 and 1966 George Royal was raced with considerable success mainly in California and in Ontario. In the fall of 1966, the horse suffered from arthritis, the appellant and Hall then decided not to race it any more. As the appellant was not interested in the breeding business, he sold his one-half interest to a friend of Hall’s. In its rather short but highly fruitful racing career, George Royal had won purses totalling $335,000.

It was the appellant, apparently, who did the administrative work that the racing of George Royal involved. For instance, he insured the horse and corresponded with the organizers of the various races in which it was to participate. The appellant did not keep detailed and complete records of the expenses made in connection with his racing activities. However, he collected and preserved all that was published in the newspapers concerning George Royal.

If the appellant’s racing activities consumed much of his time, specially in 1965 and 1966, it is because, as I already said, he chose to follow his horse wherever it went. As an example, the appellant spent the winter months of 1965 and 1966 in California. These trips, which were certainly expensive, were in no way necessary since the appellant did not train nor race the horse himself. The appellant followed his horse because he liked it: thanks to George Royal he had the occasion to associate with people that he could not have met otherwise.

In support of his contention that the appellant was engaged in the business of racing horses for profit, respondent’s counsel referred to well-known authorities: 7. Campbell v. M.N.R., [1953] 1 S.C.R. 8; [1952] C.T.C. 334; M.N.R. v. J. A. Taylor, [1956-60] Ex. C.R. 3; [1956] C.T.C. 189; C.Z.R. v. Livingston (1926), 11 T.C. 538; Edwards v. Bairstow, [1955] 3 All E.R. 48. In my opinion, these precedents have no application here. In all these cases the court had to determine whether or not a gain resulting from a purchase and a resale was income; but such gains cannot be assimilated to prize money won from horse racing. He who purchases and later sells a commodity at a profit prima facie acts as a trader; for this reason, even if this transaction is an isolated one, it can very easily be considered as an “adventure or concern in the nature of trade’’. But if one succeeds in realizing gains from horse racing, the situation is altogether different. It is notorious that only men of means can afford to own and run horses for the very reason that normally one does not reap profit from this form of entertainment. The fact of purchasing and racing a horse is not, in itself, a trading venture because it is not normally made with a view to profit. For this reason, purses won by a race horse cannot be considered as income from a business except in exceptional circumstances showing that the owner of the horse had so organized his activities that he was in fact conducting an enterprise of a commercial character. In the present case, no such exceptional circumstances having been proved, I conclude that the appellant cannot be considered as having been, during the years under consideration, in the business of racing horses for profit and that, therefore, his racing gains during these years were not income.

The appeal will be allowed with costs.