Date: 19980921
Docket: 96-4628(IT)I
BETWEEN:
MAITLAND THOMPSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] These appeals were heard at St.
Catharines, Ontario on September 3, 1998 pursuant to the Informal
Procedure of this Court.
[2] The principal facts and issues
involved are summarized in the following allegations in the Reply
to the Notice of Appeal:
2. In
computing income for the 1991, 1992 and 1993 taxation years, the
Appellant claimed restricted farming losses in the amounts of
$8,747, $8,748 and $8,747, respectively, and for the 1994
taxation year, the Appellant reported net income from farming in
the amount of $18,743 against which he claimed non capital losses
carried-forward, from prior years' farming losses, in the
amount of $18,743.
3. The
Minister of National Revenue (the "Minister") assessed
the Appellant as filed, for the 1991, 1992, 1993 and 1994
taxation years by Notices of Assessments dated July 15, 1992,
June 24, 1993, June 9, 1994 and June 22, 1995 respectively.
4. The
Minister reassessed the Appellant for his 1991, 1992 and 1993
Returns of income, by concurrent Notices of Reassessment dated
May 23, 1995 and the 1994 Return of income, by Notice of
Reassessment dated Mar 4, 1996.
5. In
reassessing the Appellant for the 1991, 1992, and 1993 taxation
years, the Minister of National Revenue (the
"Minister") disallowed the restricted farming losses
claimed, ...
6. In so
reassessing the Appellant, the Minister made the following
assumptions of fact:
(a) the Appellant
was employed by Allstate Insurance Co. of Canada and reported
employment income from that source, in the amounts of $83,366,
$77,821, $91,413 and $84,584 for the 1991, 1992, 1993 and 1994
taxation years, respectively;
(b) the Appellant
claimed farming losses from the 1988 taxation years as
follows:
|
YEAR
|
TOTAL
FARM LOSS
|
RESTRICTED PORTION
|
FARM LOSS CLAIMED
|
|
|
|
|
|
|
1988
|
$13,327
|
$8,327
|
$5,000
|
|
1989
|
$15,545
|
$6,795
|
$8,750
|
|
1990
|
$15,280
|
$6,530
|
$8,750
|
|
1991
|
$14,995
|
$6,248
|
$8,747
|
|
1992
|
$14,997
|
$6,249
|
$8,748
|
|
1993
|
$14,993
|
$6,247
|
$8,746
|
...
(e) the Appellant
reported gross farming income in the amounts of $2,675, $1,181,
$4,375 and $6,037 in the 1991, 1992, 1993 and 1994 taxation
years, respectively;
...
(j) the
Appellant did not have farm losses available to carry forward to
the 1994 taxation year;
[3] Further facts are as follows. The
limited farm losses claimed relate to the activities of breeding,
training and racing standardbred horses. The Appellant has always
been interested in horses. During the years under appeal he owned
a training license. Further, up until 1993 he also had a driving
license. He was a member of the Canadian Trotting Association and
the Canadian Standardbred Horse Society. Apparently he was a
member of the first association to permit him to own and train
horses and of the second association to breed horses.
[4] In 1982 the Appellant and his
family moved to a home on a 20 acre farm which he owned and which
is located approximately ten miles from the town of St.
Catharines where he performed his duties as an insurance agent.
On the farm are a barn and stalls to accommodate four horses.
[5] The Appellant was born in 1936
thus making him 52 in 1988. He testified that he feared the
Government of Ontario was going to take over the automobile
insurance business which might have led to an early retirement
from his insurance activities. He sought an alternative source of
income and thought that breeding and racing standardbreds might
be the answer.
[6] The Appellant started his breeding
operation in 1988 by purchasing two three-year-old mares. He bred
these to a local stallion at relatively low stud fees ($300 to
$400). He chose that stallion because he liked his blood-lines.
The Appellant formulated a six year plan in 1988 aimed at
profitability in 1994. He explained the reasons for that long
period including the length of time from breeding the mares to
when their foals could be expected to race, the risks of not
getting sound foals and of injury and the uncertainties inherent
in breeding of getting mares in foal. Although foals were
produced by the first two mares, they were not acceptable and the
mares were sold, one in 1990 and the other in 1991. In 1989 the
Appellant bought another mare, named Oprah, for $2,000. The
Appellant considered that mare to be royally bred but she was not
a racing prospect because of a leg problem. Oprah had one foal in
1991 and another in 1994. The Appellant also owned or leased
other inexpensive horses from time to time. One type was referred
to as "chanceys" meaning essentially unproven as
racers. He needed to have such horses mainly to keep his
trainer's license in force. It was these other horses who
produced the small purses in the years in question, the Appellant
never having raced a foal bred by him.
[7] The Appellant did not have
training facilities on his farm and consequently had to go to a
training centre for that purpose.
[8] As to the time involved, the
Appellant testified that his mandatory hours with respect to the
insurance business were only 16 hours per week but that he
actually spent approximately 30 to 40 hours a week on insurance
business. The time required for the horses was 50 to 60 hours a
week and the Appellant was assisted in this by his son, his
daughter and his son-in-law.
[9] As to finances, the Appellant was
able to secure a line of credit with a local bank in the amount
of $50,000. He drew on this line of credit and applied the monies
to the standardbred activity.
[10] The Appellant relied heavily on the
advice of his rather large accounting firm with respect to the
preparation of income tax returns and the claiming of restricted
farm losses. On their advice he switched from a cash basis of
reporting to an accrual basis.
[11] In the years 1991 through 1994 the
Appellant reduced his actual losses by including inventory
valuations in the calculation of net income. The inventory
valuation in 1994 was large, namely $48,193.34. This contributed
largely to producing farming income in 1994 of $18,743 against
which the Appellant applied unused farming losses of previous
years in the amount of $18,743. The Appellant explained that the
inventory figure was reasonable considering mainly the value of
Oprah and the foal born to Oprah in 1994. No appraisals were
submitted. This foal, who in 1998, is four years old, has not yet
raced.
[12] The Appellant had no written plan for
his operations but had the six year plan in his mind as described
above.
Submissions of the Appellant
[13] The Appellant submits that he is
entitled to the limited farm losses, that he is clearly not
simply a hobby farmer given his ownership of the farm, the
resources committed, the time put in by himself and his family
and his knowledge of and interest in horses. He acknowledges that
his profit and loss picture has been grim over the years but
explains that in a high-risk business such as breeding and racing
standardbreds it only takes one really good racing animal to turn
the picture around entirely.
Submissions of the Respondent
[14] The Respondent submits that the
Appellant had no plan and no business with a reasonable
expectation of profit. He refers to the tests in Moldowan v.
Her Majesty the Queen, 77 DTC 5213, and concludes that
the Appellant is a third-class farmer, i.e., simply a hobby
farmer with no real expectation of profit. As to the valuation of
the inventory of horses in 1994, counsel for the Respondent
submits that there was no appraisal and one cannot simply accept
the large inventory valuation selected by the Appellant and his
accountants.
Analysis
[15] Section 31 of the Income Tax Act
("Act") limits farming losses to a formula
amount where a taxpayer's chief source of income is neither
farming nor a combination of farming and some other source of
income. Further, subsection 248(1) of the Act makes it
clear that "farming" includes "livestock
raising" and "maintaining of horses for racing".
Section 31 has kept the courts busy for many years and it is
clear that each case must be decided on its own set of facts.
Farming activities may fall within one of three categories as
defined by the Supreme Court of Canada in Moldowan.
Dixon J., at 5216 stated:
In my opinion, the Income Tax Act as a whole envisages
three classes of farmers:
(1) a taxpayer, for
whom farming may reasonably be expected to provide the bulk of
income or the centre of work routine. Such a taxpayer, who looks
to farming for his livelihood, is free of the limitation of s.
13(1) [now s. 31]in those years in which he sustains a farming
loss.
(2) the taxpayer who
does not look to farming, or to farming and some subordinate
source of income, for his livelihood but carried on farming as a
sideline business. Such a taxpayer is entitled to the deductions
spelled out in s. 13(1) in respect of farming losses.
(3) the taxpayer who
does not look to farming, or to farming and some subordinate
source of income, for his livelihood and who carried on some
farming activities as a hobby. The losses sustained by such a
taxpayer on his non-business farming are not deductible in any
amount.
[16] The purpose of section 31 was analyzed
by the Federal Court of Appeal in Her Majesty the Queen v.
Donnelly where, in a judgment dated October 15, 1997,
Robertson, J.A. said:
As is well known, section 31 of the Act is aimed at
preventing "gentlemen" farmers who enjoy substantial
income from claiming full farming losses: see The Queen
v. Morrisey, supra, at 5081-82. More often then
[sic] not it is invoked in circumstances where farmers are
prepared to carry on with blatant indifference toward the losses
being incurred. The practical and legal reality is that these
farmers are hobby farmers but the Minister allows them the
limited deduction under section 31 of the Act. Such cases
almost always involve horse-farmers who are engaged in purchasing
or breeding horses for racing. In truth, there is rarely even a
reasonable expectation of profit in such endeavours much less the
makings of a chief source of income.
[17] As is established by section 18.28 of
the Tax Court of Canada Act, a judgment of this Court
under the Informal Procedure is not a precedent. Thus, I am not
bound by the judgment of Judge Lamarre dated October 12, 1994 in
which, in a similar fact situation, she disallowed the
Appellant's claim for losses in 1989 and 1990.
[18] In my opinion, one must look at all of
the aspects of an operation to determine into which category a
particular farmer fits. One must also consider the risky nature
of a standardbred operation and how, as the Appellant explained,
one good horse can make a tremendous difference to the profit
picture. Again, consideration must be given to the resources
involved and the time devoted by the particular farmer to the
operation. In the present case the Appellant had his own farm,
was actively involved in the purchasing and selling of horses and
the breeding operations, had licenses as a trainer and driver
(until 1993) and had the resources to operate the business. He
lived on the farm where the horses were mainly stabled and he and
his family devoted considerable time to the horses. He has a keen
interest in bloodlines and chooses the matings of his mares. How
can such a person be considered as a "gentleman" or
"hobby" farmer as described by the Federal Court of
Appeal in Donnelly? His involvement in the activities of
the farm operation was considerable. The monies devoted to the
farm operations were significant. Although he sustained losses,
that reason alone is not sufficient to establish that the
Appellant must be considered as a hobby farmer with no reasonable
expectation of profit.
[18] In my opinion the Appellant clearly
carried on farming as a "sideline business" and, as
stated in Moldowan, is entitled to the limited farm losses
he claimed in 1991, 1992 and 1993. Moreover, he had restricted,
i.e., unused farming losses which he could, under section 111 of
the Act carry forward to the 1994 year. As to the 1994
inventory valuation used by the Appellant, his was the only
evidence before me and his reasons for the high valuation are
accepted.
[19] Consequently, the appeals are allowed
and the matter is referred back to the Minister for
reconsideration and reassessment on this basis.
Signed at Ottawa, Canada this 22nd day of September 1998.
J.T.C.C.
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