27 April 1998 External T.I. 9803415 - HORSES ON DUDE RANCH

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether cost of horses used on a dude or guest ranch are deductible and if not, how losses from death of horses are treated

Position -

treat as a capital asset

Reasons: :

horses on a non-working farm are not inventory, not deductible and no CCA

XXXXXXXXXX 980341
A. Humenuk
Attention: XXXXXXXXXX

April 27, 1998

Dear XXXXXXXXXX:

Re: Tax Treatment of Horses acquired for use on a Dude Ranch

This is in reply to your letter of February 6, 1998, concerning the tax treatment of horses acquired for use in the operation of a ranch of the type called a dude or guest ranch.

You ask whether the cost of horses used in a ranch of this type is deductible in computing income for the year in which the expense is incurred or whether the cost should be added to inventory in the manner of supplies on hand. If the cost is neither deductible nor added to inventory, you ask how a loss incurred when a horse dies or is sold will be recognized. Related to this issue, you ask whether the operation of a ranch of this type can be considered farming for the purposes of the Income Tax Act (the "Act").

Farming is defined in subsection 248(1) of the Act to include various activities, including raising or exhibiting livestock or the maintenance of horses for racing. While it is a question of fact as to whether any particular individual is carrying on the business of farming, it is our view that a dude or guest ranch which is not engaged in one or more of the activities described in the definition of farming in subsection 248(1) of the Act with a reasonable expectation of profit therefrom does not qualify as a farming business for the purpose of the Act.

Under generally accepted accounting principles, an expense is a net decrease in economic resources of a business, either by way of an outflow or reduction of assets or an incurrence of a liability, resulting from the ordinary activities of revenue generation of the business. An asset, on the other hand, is an economic resource controlled by a business as a result of a past transaction or event and from which future economic benefit may be obtained. The purchase of an asset does not result in an expense because the decrease in economic resources as a result of the expenditure is balanced by the increase in economic resources as a result of the acquisition of the asset. As an asset is used up in the course of a business, an expense is incurred. When an expenditure does not result in any economic benefit beyond the end of the fiscal period, it is deductible as an expense. In the case of horses purchased for use by guests of the ranch, the economic benefit to the business is expected to extend beyond the end of the fiscal period in which the horses were purchased. As horses are not assets that are used up or depleted when they are used for riding, the cost of the horses purchased for this purpose is not deductible as a current expense.

Inventory is defined in subsection 248(1) of the Act to include property the cost of which is, or would be, relevant in computing a taxpayer's income from a business for a taxation year if the income from the business had not been computed in accordance with the cash method, and for greater certainty, includes all livestock held in the course of a farming business. As explained above, the operation of a dude or guest ranch which does not rely on income from one or more of the activities of farming as defined in subsection 248(1) of the Act as a source of profit, would not be considered a farming business. In this regard, one must distinguish between a working farm which provides a farm life experience to guests for a fee and an operation in which the income from guests forms all or substantially all of the income of the business. Since the cost of acquiring horses is not a cost which would otherwise be relevant in the calculation of income under the accrual method, it is our view that the cost of acquiring horses is not added to inventory for tax purposes. Generally, capital property is used for the purpose of earning income from the use of the property rather than the sale or depletion of the property which occurs with property that is inventory.

As paragraph 1702(1)(g) of the Income Tax Regulations precludes a deduction of capital cost allowance on account of animals, horses are not depreciable property within the meaning of subsection 13(21) of the Act. As a result, horses used in a business other than farming are considered non-depreciable capital assets and any gain or loss realized on the disposition of such an animal will result in a capital gain or loss in the year of disposition.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch