Levy v. The Queen, 90 DTC 6346, [1990] 2 CTC 83 (FCTD)

Rouleau, J.:—The plaintiff taxpayer, an accountant by profession, appeals the decision of the Tax Court of Canada, who upheld certain reassessments by the Minister of National Revenue for the 1978-79-80 taxation years, restricting the taxpayer's deductible losses to $5,000 per year under subsection 31(1) of the Income Tax Act, S.C. 1970-71-72, c. 63. The Minister determined that the plaintiff was involved in a farming operation which was not his chief source of income, either alone or in combination with any other source.

In 1978, Mr. Levy accepted to invest, along with three other men, in a three- year old pacer "Rembrandt Hanover". One of the investors who owned a farm was entrusted with the care, training and maintenance of the horse. The agreement was that each of the four investors would pay one-quarter of the purchase price and reimburse Mr. Ward for one-quarter of the expenses plus a fee for training and care. Mr. Ward would attempt to make a profit on the horse, by breeding, racing or resale of yearlings. The four investors would share equally in any revenues. Throughout 1978-79, the group invested in five more horses on the same terms. They referred to themselves collectively as "Rembrandt Stables”; title was not however taken under this name, but rather in the names of the four investors as co-owners.

This same group entered into a similar and separate arrangement in the summer of 1979 along with a number of other investors. The larger group became known as “Scandal Sheet Stud", and the interest of the "Rembrandt Stables” investors was in effect a minority position. This larger group eventually invested in eight horses.

The plaintiff suffered certain losses from these investments, including interest expenses on the money he had borrowed to invest in the acquisition of horses. He attempted to deduct these losses, in the amount of $12,758.09 in 1978, $21,289.90 in 1979 and $15,248 in 1980, from his income from other sources for the respective years.

The Minister reassessed him, restricting his losses to $5,000 per year under subsection 31(1) of the Act. This was upheld by the Tax Court of Canada in a decision dated June 18, 1985. Cardin, J. of the Tax Court of Canada determined that the horses were acquired, not as property, but for the purpose of racing; further, that the taxpayer was involved in the business of farming regardless that the work was not carried on by himself.

The plaintiff advances the following arguments in support of his contention that he does not fall within the restricted farm loss provisions in subsection 31(1): first, he submits that, on the basis of Tara Development Co. Ltd. v. M.N.R., [1970] C.T.C. 557; 70 D.T.C. 6370 (Ex. Ct.), passive investment in a syndicate is not "carrying on business"; rather, his losses were from property and therefore deductible in full from his income from other sources by virtue of subsections 9(2) and 3(d) of the Income Tax Act. Secondly, if he is found to be carrying on a business, he submits that it is not the business of farming, but of trading in horses. In support of this, he notes that he had absolutely no right under the agreement with the other investors to have any involvement with the horses or any farming activity; further, the activities which were carried on do not constitute “farming” as defined in section 248 of the Act, since the emphasis was on breeding and not racing. His final contention is that the addition in 1972 of the words "farming business carried on by him” in subsection 31(1) indicate that Parliament did not intend this section to apply to persons who are not actively involved in farming activity.

Concerning the plaintiff's first argument, I must say with all due respect that I have grave doubts that Tara Developments stands for the proposition that passive investment in a syndicate, where the subject matter is exploited by an independent contractor, does not constitute “carrying on business”. Whether a taxpayer can be said to be carrying on business is a question of fact to be determined in the circumstances of each case. The mere fact that the business relationship is termed a "syndicate" has little relevance to the determination of whether the income earned is from an investment in property or from carrying on business. The test is based on the purpose for which the "syndicate" or other business relationship is formed. In Californian Copper Syndicate v. Harris, [1904] 5 T.C. 159, the test for determining whether profit is taxable income from trade or not was determined to be whether the sum of gain was a mere enhancement of value by realizing a security, or a gain made in operation of a business in carrying out a scheme for profit-making.

This was applied in Kit-Win Holdings Ltd. v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030, where the Court found that profit from an investment, through a syndicate in real estate was a capital gain rather than income from trading. The judge determined that there was no intention to carry out a scheme for profitmaking (i.e.: to sell as soon as possible); it was the mere realization of a security, since the intention was to hold the land for possible development. It is interesting to note that in spite of this, the Court also stated that "the syndicate has the attributes of and is analogous to a partnership. The existence of a partnership implies the existence of a business.”

The plaintiff argued that he was not a member of a partnership; in fact, the syndicate members had expressly stated the relationship between them was not that of partners. However, this in and of itself is not sufficient to negate the existence of a partnership; it is for the Court to determine as a matter of law whether the subsisting relationship between the members was that of a partnership. If necessary, I would be prepared to accept that in fact this enterprise was a partnership, defined in the Ontario Partnership Act, R.S.O. 1980, c. 370, s. 2, as "the relationship that subsists between persons carrying on a business in common with a view to profit". The taxpayer was carrying on a business in association with others, with a view to profit. It matters not that the work was carried on by only one of the four men who was part of the group. As noted in Kit-Win Holdings, supra, a syndicate may be analogous to a partnership—it is merely a form of carrying on some business in association with others. However, I do not find it necessary to determine whether the relationship ought properly to be characterized as a syndicate or a partnership. Characterizing it as a syndicate would not automatically define it as a capital undertaking. It must be determined whether the activity of investing in horses, paying a percentage of their upkeep and a fee for maintenance, constitutes a business—in particular, the business of farming.

I am satisfied that these activities do constitute the business of farming as defined in the Income Tax Act.

Section 248 of the Act provides as follows:

“farming” includes 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, but does not include an office or employment under a person engaged in the business of farming.

The French language version of this provision refers to "l'entretien de chevaux de course”, which may be translated as "care of race horses". This difference was dealt with in the case of /uster v. The Queen, [1974] C.T.C. 681; 74 D.T.C. 6540, where the Federal Court of Appeal found that the French version expanded the meaning slightly from the English, although what it was intended to include, under subsection 31(1) of the Act, was the business of owning the horses, as opposed to the business of boarding them for a fee.

Counsel for the plaintiff submitted that this passage was not necessarily concerned with the definition of a farming “business”. However, it is clear to me that what is being referred to in section 248 are the various activities which constitute the business of farming. The last line of the definition confirms that this is dealing with a business. In Hollinger v. M.N.R., [1972] C.T.C. 592 at 600; 73 D.T.C. 5003 at 5008, in determining whether certain income was from business or property, the Court had the following to say in finding that the source was Clearly from business:

If income from property has any meaning at all, it can only mean the production of revenue from the use of such property which produces income without the active and extensive business-like intervention of its owner or someone on his behalf.

I am not satisfied that income from an investment in horses, even though care and maintenance was performed by someone other than the taxpayer, could constitute income from property. The active involvement of someone is required in order that the horses may generate revenues; they cannot do so by themselves.

A further submission put forward by the plaintiff was that the activities carried on by means of the syndicate could not constitute "farming" within the meaning of section 248, since the primary operation was actually breeding horses, rather than actually racing them. The evidence indicated that in 1978, one out of the six horses was raced, three out of twenty in 1979, and two out of thirteen in 1980. I am not persuaded, however, that this takes the activity outside of the definition of farming. The admitted purpose of investing in the horses was to make a profit in whatever way possible, whether by breeding, racing or resale of yearlings. The evidence indicated that the farming operation was concerned with standardbred race horses. The Court cannot attempt to distinguish and prorate racing, breeding, etc., and conclude that it does not constitute farming. Each of these activities is involved in "maintaining race horses" or "maintaining horses for racing". The Federal Court of Appeal in Juster v. The Queen, supra, in commenting on the various expressions used in the definition of farming in section 248, said that these expressions are "obviously used, in each case, to refer to the whole gamut of operations constituting the particular class of business succinctly described by the words commonly used to describe it” (page 683 (D.T.C. 6541)). Although not determinative, the Tax Court of Canada in the present proceeding found as a fact that the horses were acquired for the purpose of racing. There is nothing which would lead me to find to the contrary even though breeding may have been the ultimate goal.

The final argument raised by the plaintiff was that he could not fall within the wording of subsection 31(1), which was changed in 1972 to include the words “farming business carried on by him". He submits that Parliament did not intend to include in these provisions someone who did not actively participate in the farming operation. Concluding, that it previously applied to any farming loss, and not just losses from business.

The R.S.C. 1952, c. 148 version read as follows:

13.(1) 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, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of:

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for the year exceeds $2,500, or

(ii) $2,500.

(2) For the purpose of this section, the Minister may determine that 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.

(3) For the purpose of this section, "farming loss" means a loss from farming computed by applying the provisions of this Act respecting the computation of income from a business mutatis mutandis.

The S.C. 1970-71-72 version reads:

31.(1) Loss from farming where chief source of income not farming. 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, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph (i) exceeds $2,500, and

(B) $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words "and before making any deduction under section 37 or 37.1" were deleted.

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer's "restricted farm loss” for the year.

(2) Determination by Minister. For the purpose of this section, the Minister may determine that 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.

[Emphasis added.]

My initial reaction is that the R.S.C. 1952 version of the restricted farm loss rule applied to farming as a business, as can be seen from the direction in subsection (3); to compute farming loss by using the rules for computing income from a business. This is how it has been treated in the jurisprudence (for example, Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213; Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080).

Counsel for the plaintiff urged me to accept certain legislative background and history to the 1972 changes to the restricted farm loss provisions, referring to the Report of the Royal Commission on Taxation, 1966 (the "Carter Commission"). That Commission pointed out the difficulties between the personal versus business elements of farming operations. They questioned when the personal element becomes predominant. Counsel suggested to me that this was what Parliament had in mind when they added the words "farming business carried on by him"; the personal element predominates when the taxpayer is personally, actively involved in the farming operation. Mr. Levy, so the argument goes, had no personal, active involvement in the farm, the personal element did not predominate therefore it should not apply to him.

I am not persuaded. The evidence of Parliament's intention, as found in the Royal Commission's report, is not sufficiently clear to convince me to interpret the section according to his submission.

The plaintiff urged me that any alteration in the statute must be taken to have been deliberate (D.R. Fraser v. M.N.R., [1945] C.T.C. 429; 49 D.T.C. 521), and if there is any element of ambiguity, it ought to be resolved in favour of the taxpayer (Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.)). That Parliament in subparagraphs 146(1)(c)(ii) and (v) defined "earned income” for RRSP purposes as income from carrying on business either alone or as a partner actively engaged in the business; and, therefore the words in subsection 31(1) ought to be interpreted similarly. He suggests that if Parliament had intended application to passive investors, it would have been a simple task to make this clear, either by leaving out the words "carried on by him”, or by specifying that it was to apply even where a person was only passively involved. He also referred to the French version of these words in subsection 31(1): "toutes les entreprises agricoles exploitées par lui”. These words imply a more active sense than the English.

The words “carried on by him” cannot be said to have the same meaning as “actively engaged". In fact, I am confident in saying that an investment of capital, plus contributions towards expenses and a fee for care and maintenance, does constitute carrying on business.

The jurisprudence is clear that business may be said to be "carried on" by a taxpayer, even though the actual work is undertaken by another, when the taxpayer invests capital only with a view to sharing the proceeds (Juster v. The Queen, supra, Hollinger v. M.N.R., supra). Changes in the wording in subsection 31(1) has not altered the intention of the statute.

I conclude that the plaintiff was involved in a farming business, which was not his chief source of income either alone or in combination with any other source. His deductible losses were therefore correctly restricted by the Minister under subsection 31(1) of the Income Tax Act to $5,000 per year.

This action is dismissed with costs.

Appeal dismissed.