Walter Polhill v. Minister of National Revenue, [1984] CTC 2911, [1984] DTC 1735

Tremblay, TCJ:—This appeal was heard in London, Ontario, on June 6, 1984.

1. The Point at Issue

The point at issue is whether the appellant, a mechanic, an employee of Bud Polhill (London) Ltd, is correct in the computation of his income for the taxation years 1978, 1979 and 1980 to deduct losses of $9,696.88, $13,709 and $5,260 respectively. These losses resulted from the operation of the racing of a motor vehicle, for the purpose of gaining and producing income. The respondent disallowed the said losses on the basis that there is no reasonable expectation of profit and therefore the expenses were personal and living expenses.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court also decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

7. In assessing the appellant as aforesaid, the respondent found the following facts:

(a) at no time did the appellant earn any income from his racing activities;

(b) the appellant at no time had a reasonable expectation of profit from his racing activities;

(c) any expenses incurred with respect to racing activities by the appellant were not incurred for the purpose of gaining or producing income from a business or property but were personal and living expenses of the appellant.

3. Facts

3.01 Counsel for the appellant admitted the facts given in paragraphs 5 and 6 of the reply to notice of appeal. They read as follows:

5. In computing his income for the relevant taxation years, the appellant sought to deduct losses alleged to have been incurred with respect to car racing activities, as follows:

	1978	1979	1979	1980 1980
Income	—	—		—
Expenses:
Repairs	$1,223.28	$ 1,966.00		$ 217.00
Replacement Engine	5,500.00
Replacement Transmission	560.40
Racing fuel	200.00		422.00	350.00
Tires	500.00		192.00	306.00
Travel	392.40		423.00	156.00
Light and Power	160.00
Parts			5,160.00	1,905.00
Gasoline			247.00	229.00
Entry Fees			283.00	150.00
Break and Enter Theft			7,200.00
Insurance Claim		(4,965.00)
	$8,536.18	$10,928.00		$3,313.00
Capital Cost Allowance	1,160.70		2,781.00	1,947.00
Net Loss	$9,696.88	$13,709.00		$5,260.00
6. By assessments, the respondent:

(a) with respect to the 1978 taxation year, included the cost of replacing an engine in the undepreciated capital cost of the appellant’s automobile and deducted applicable capital cost allowance of $1,650.00; he did not permit the appellant to deduct the resulting amount of $5,847.00 in the computation of his income for that year;

(b) did not permit the appellant to deduct the sums of $13,709.00 and $5,260.00 alleged to be losses of the appellant from his car racing activities in the 1979 and 1980 taxation years.

3.02 Counsel for the respondent informed the court at the beginning of the trial that the point in dispute includes the quantum of the expenses.

3.03 The appellant was 39 years of age in 1978.

3.04 In his testimony the appellant said that:

(a) he had been a mechanic for 10 years in 1977 when he started to be a drag racing driver; in fact he was the mechanic of another drag racer, a world record holder named Bill Kydd;

(b) in 1977, he was, with David Robertson, the co-owner of a racing car; they had repaired and rebuilt it for racing; its cost value was $12,000; in the summer of 1978, however, the appellant became the sole owner of the car; the expenses claimed for 1978 are one-half of the total;

(c) a drag race is a quarter mile racing straight line:

They have two cars lined up beside each other. They have a thing called a Christmas tree self-starting system, where you have yellow lights come down and then you get a green light; (TS p 5)

(d) there is a handicap for higher calibre cars to give the lower class racer an equal chance to win; (TS p 5)

(e) there are many categories of drag races: Top-fuel eliminator; Funny cars; Pro-stock eliminator; Top-Alcohol dragster; Top-Alcohol Funny car; Competition eliminator; Super stock eliminator; Stock eliminator; Super gas eliminator; Super competition eliminator; (TS pp 11, 12, 13, 14) These categories appear from newspaper clippings (Exhibits A-1, A-2);

(f) one must have a special licence to be a race driver and also must pass a special medical test; (TS p 8)

(g) depending on the category of race and the number of cars involved in the race, one can win prizes which range from $8,500 to $12,000 for the first winner and $2,400 for the second; (TS pp 9, 16, 17) It varies depending if it is in Ontario, California, Indianapolis, etc;

(h) however, in most of the drag races, the number of cars is limited; for instance in the competition eliminator race only 32 cars may run (Exhibit A-l); however if there are 50 cars, then there is a preliminary race to be qualified among the 32; from the moment one is qualified, the owner of the car may receive a prize from the automobile sponsor; the prizes vary from $100 to $750 depending on the number of cars involved in the preliminary race and the number of cars to be qualified;

(i) it was found, in 1981, that his car had a structural problem;

There was a lot of stress cracks in the frame. I couldn’t get it to go straight. It would turn left one time; turn right the next. It just didn’t want to go down the track straight. (TS pp 23, 24)

(j) in 1979, the engine of his car was stolen; the car was then disassembled in his garage; this cost $7,200;

(k) the car was sold in 1981 for $3,500;

(1) the appellant filed the 1978 (Exhibit A-3), 1979 (Exhibit A-4) and 1980 (Exhibit A-5) income tax returns including invoices;

(m) he is an employee of his own company, Bud Polhill (London) Ltd; that company presently has four other employees.

3.05 In cross examination, the appellant testified that:

(a) from 1977 to 1980, he participated in about 10 preliminary races for national events; however he never succeeded in being qualified and thence never participated in an official race; (TC p 32)

(b) in the years involved, he also participated in about 10 small events (there it is possible to win $1,000); he never won;

(c) he never had a sponsor, a company or a person who supported and paid him to race and paid his expenses.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are 3, 9, 18(1 )(a), 18(1 )(h), and the definition of “personal or living expenses’’ of section 248. They will be quoted in the analysis if required.

4.02 Cases at Law

In analysing the evidence and the principles involved in the instant case, the Court refers to the following cases:

1. Ken Huband v MNR, [1974] CTC 2001; 74 DTC 1039:

2. F W Beyer v MNR, [1978] CTC 2026; 78 DTC 1066;

3. H B Cree v MNR, [1978] CTC 2472; 78 DTC 1352:

4. J D Pike v MNR, [1981] CTC 2628; 81 DTC 548;

5. W Moldowan v MNR, [1977] CTC 310; 77 DTC 5213.

4.03 Analysis

4.03.1 The crux of the matter is whether the appellant’s drag racing in the years involved had a reasonable expectation of profit.

If there is no expectation of profit indeed the losses must be considered as personal or living expenses pursuant to the said definition quoted above and therefore the expenses are not deductible pursuant to 18(l)(h). “Personal or living expenses’’ is defined as follows:

248. (1) In this Act,

“personal or living expenses’’ includes

(a) 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,

18. (1) In computing the income . . .

(h) Personal or living expenses — 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 carrying on his business;

4.03.2 In the Huband case, the appellant was involved in road-racing, (ie Formula racing, a circle, the lap-type racing) as opposed to drag racing (a quarter mile racing straight line). In fact in the Beyer case, the Cree case and the Pike case, the appellants were also involved in road-racing. Their appeals were dismissed, but the appeal of Mr Huband was allowed. The issue, as in the instant case, was the same in the four above cases, whether there was a reasonable expectation of profit.

In the Huband case, the facts and the decision are summarized as follows in [1974] CTC 2001; 74 DTC 1039:

The appellant, who was employed as a commerce officer with the Department of Trade and Commerce, began his car racing activities as a hobby in 1965. From that year through 1968 he bought and resold bigger and better cars and entered more rigorous and demanding racing competitions each year. In 1969 he realized $500 from racing but claimed a net loss of $3,600. The following year he made $800 but sustained losses of $8,000. When the Minister refused to allow the deduction of these amounts from income, claiming that the appellant was not in the business of racing with a reasonable expectation of profit, he objected.

Held'. The appeal was allowed. The appellant was entitled to deduct the losses he had suffered in 1969 and 1970. Over the years he spent 80% of his salary in acquiring cars and the equipment necessary to race professionally — therefore, it could not be said that he was merely enjoying a sport or hobby no matter how much pleasure he may have derived from the activity. Further the Board noted that autoracing, unlike most enterprises, involves a high degree of risk, in which large losses can be expected as a matter of course.

On page 2002 [1040], Mr Cardin said:

I am of the opinion that a person who spends 80% of his salary over the years in acquiring competitive racing cars and the necessary experience to drive them, who invests in a towtruck and trailer, whose declared intention is to race for bigger purses on a full-time basis, and who in fact competed in some 18 or 20 racing competitions in the year pertinent to this appeal, is not merely enjoying a sport or hobby no matter how much pleasure he may derive from this activity. The appellant may well have started racing cars as a hobby but in 1969 and 1970 he was racing professionally for profit and engaged in the business of car racing.

Whether the appellant had a reasonable expectation of making a profit from the business of racing cars can best be judged by the systematic progress the appellant made, not only in respect of his personal competence as a racer, but also in his acquisition of more powerful cars in his participation in races where the purses were in 1969 and 1970 in the amount of $20,000 — from which the appellant earned $500 and $800 respectively. One can reasonably assume that money has been made by people engaged in automobile racing and there is nothing in the facts of this appeal that might indicate that the appellant had no chance or hope of making a profit from his racing business in those years.

4.03.3 In the instant case the facts are quite different. The evidence is to the effect that from 1977 to 1980 the appellant never won a penny in car racing. Indeed he never succeeded in being qualified and then never participated in an official race. Even if he participated in 10 small events, he never won a prize, (paras 3.05(a) and (b))

The fundamental reason is certainly because his car had a structural problem. (para 3.04(i))

4.03.4 In 1977, the Supreme Court of Canada in the Moldowan case said the following about “reasonable expectation of profit”, at [1977] CTC 313; 77 DTC 5215 respectively:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.

4.03.5 In the instant case, especially because of the facts given above in 4.03.3, in my opinion, there is no possible objective determination to be made in favour of the appellant’s thesis. There was no reasonable expectation of profit during the years involved. The reassessments issued by the respondent must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.