19 April 2007 External T.I. 2007-0229961E5 - Meaning of "Maintaining of Horses for Racing"

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: How broadly does the CRA interpret the expression "maintaining of horses for racing" included in the definition of "farming" in ss 248(1)?

Position: Racehorse owners will be considered to be in the business of farming irrespective of whether they maintain the horses themselves or contract out that function. The provision of services relating to the maintaining of horses for racing, for a fee, generally does not constitute farming. Ancillary income from activities conducted in connection with maintaining of horses for racing may be considered farming income also, but only to the extent that those other activities do not constitute a separate business.

Reasons: Juster v. the Queen [74 DTC 6540], McLaws v. the Queen [76 DTC 6005], Levy v. the Queen [90 DTC 6346], Bourque v. the Queen [96 DTC 6412] & previous administrative positions relating to single or separate businesses.

Pierre Bilodeau
Agriculture and Agri-Food Canada
Strategic Policy Development					2007-022996
930 Carling Avenue, Room 367					James Atkinson CGA
Ottawa ON   K1A 0C5						(519) 457-4832

April 19, 2007

Dear Mr. Bilodeau:

Re: Meaning of "Maintaining of horses for racing"

This is in response to your e-mail of April 4, 2007, concerning how the Canada Revenue Agency ("CRA") interprets the expression "maintaining of horses for racing" that is included in the definition of "farming" in subsection 248(1) of the Income Tax Act ("Act").

Our Comments:

The definition of "farming" in subsection 248(1) of the Act includes the "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". This list is not exhaustive.

Whether a taxpayer's business operations in a particular case are considered farming for tax purposes is a question that can only be resolved after a complete review of the facts and circumstances of the case. Accordingly, our comments below are only general in nature.

The Act contains certain rules that apply to a taxpayer in the farming business. For instance, the taxpayer may use the cash method in computing income. However, 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, the Act limits to a maximum of $8,750 the amount of loss from a farming business that the taxpayer is entitled to claim.

There is case law relating to the meaning of the expression "maintaining of horses for racing" and therefore provides authoritative direction in interpreting the meaning of this expression. The leading case dealing with the expression "maintaining of horses for racing" is Juster.¹ That case dealt with a partnership, operating a business of racing horses in the hope of realizing a profit. The primary argument by the appellant was that the partners did not themselves carry on the business of "maintaining of horses for racing" (i.e., farming) as this function was contracted out to a racehorse trainer. The court rejected this argument, ruling that the appellant was involved in farming and that the quoted expression was meant to describe the business of the businessman engaged in "racing" rather than the mere stable operations of the businessman who normally performs services for a fee. That is, the court concluded that the expression refers to the business of having horses for racing and not to the business of maintaining, for a fee, horses that other persons have for racing.

In McLaws² the court ruled that the breeding and keeping of horses for racing purposes fall squarely within the meaning of the expression "maintaining of horses for racing." The court placed reliance upon the Federal Court of Appeal's decision in Juster, commenting that the expression was to be given a broad interpretation.

In Levy³ the taxpayer, a partner in a partnership that invested in racehorses, argued that he was not in the business of farming, but of trading horses. The court, again placing reliance on the reasoning provided in Juster, rejected this argument and found that the taxpayer was involved in farming.

In Bourque⁴ the taxpayer maintained horses that he raced. He argued that this resulted in two separate sources of business income: the maintenance of horses for racing and racing itself. Of these, he argued that only the former would fall into the definition of "farming" in subsection 248(1) of the Act. In ruling that the taxpayer's entire operations were farming, the Federal Court of Appeal rejected the appellant's argument, stating that it could not be reconciled with the Court's earlier decision in Juster.

Although whether or not a particular taxpayer is in the business of farming, or in any business at all, is a question of fact that can only be determined after all the facts relevant to a particular situation are examined, based on the forgoing jurisprudence, one could make certain general conclusions regarding the meaning of the expression "maintaining of horses for racing". The expression is to be given a broad interpretation and generally includes the business of a taxpayer engaged in "racing," irrespective of whether the horses are cared for by the taxpayer or by others. It also generally includes the activities of acquiring, keeping and disposing of horses by means of claiming races and breeding. However, the expression "maintaining of horses for racing" would not usually include the stable operations of a taxpayer who normally performs services for a fee, or the operations of maintaining, for a fee, horses that other persons have for racing, unless the operations are incidental to other activities that qualify as farming. Where a taxpayer carries on a farming operation (i.e., maintaining horses for racing) together with some other non-farming operation (e.g., the provision of services connected with the horse racing industry), it is a question of fact dependent upon the circumstances of the case as to whether or not the farming and non-farming operations will be considered one business or separate businesses. Generally, the resolution is dependent on the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations. Useful comments can be found in Interpretation Bulleting IT-206R, Separate Businesses. The CRA will generally consider income from certain activities that by themselves would be non-farming activities to be from a farming business if the activities are incidental to the taxpayer's farming operations and the income generated by these activities is not material in relation to the taxpayer's other farming revenue.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

¹ Juster v. the Queen, [74 DTC 6540], Federal Court of Appeal.

² McLaws v. the Queen [76 DTC 6005], Federal Court - Trial Division.

³ Levy v. the Queen [90 DTC 6346], Federal Court - Trial Division.

⁴ Bourque v. the Queen [96 DTC 6412], Federal Court of Appeal.