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Citation: 2004TCC52
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Date:20040211
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Docket: 2003-2143(IT)I
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BETWEEN:
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LLOYD NUGENT,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
McArthur J.
[1] The issue in these appeals is
whether the Appellant can deduct farming losses of $21,765 in the
1998 taxation year and $19,525 in the 1999 taxation year.
[2] The Appellant is a 75-year old
retired employee of the Ontario Ministry of Transportation where
he had worked for 35 years. Since retiring in 1989, he has worked
for the Sutton Group as a real estate agent and now with the
parts department of an auto garage. In addition to these
activities, he kept and showed two or three standard breed horses
known as Roadsters since at least 1987. He has a small barn with
three stalls and his residence on 45 acres of land where he grows
hay for the feeding and raising of his horses.
[3] He was raised on a farm where he
gained his interest and love for show horses from his father. He
is a member of the Ontario Federation of Agriculture and an
active member of two horse-related associations. His daughter
gratuitously assists him raising and training his horses. She is
a full-time employee of the Ontario Health Insurance Plan.
[4] During 1998 and 1999, the
Appellant owned two or three horses and participated in 20
different shows and fairs. I have no doubt that he works very
hard on his horse farm and takes great pleasure in doing so. He
is obviously a very healthy active man who has adopted this
lifestyle as his pleasure in life.
[5] The Appellant kept no books or
budget and inadequate records. The auditor for the Minister of
National Revenue had to refer primarily to bank statements. The
Appellant reported the following revenues and losses from the
farm.
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Year
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Revenues
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Expenses
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Losses
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1987
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$2,480
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$6,410
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$3,930
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1988
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2,695
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7,314
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4,619
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1989
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3,356
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35,975
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32,619
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1990
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3,090
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22,004
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18,914
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1991
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1,942
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21,685
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19,743
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1992
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1,992
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30,690
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28,698
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1993
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4,600
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32,736
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28,136
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1994
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2,300
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19,201
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16,901
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1995
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2,500
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16,200
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13,700
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1996
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3,000
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21,214
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18,214
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1997
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8,166
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28,664
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20,498
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1998
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3,300
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25,065
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21,765
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1999
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5,200
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24,725
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19,525
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$44,621
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$291,883
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$247,262
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The farm revenues included the sale of hay, occasionally the
sale of horses and prize money. In 1998, he had income of $1,000
from the sale of hay and $2,300 from Fall Fair Prizes. In 1999,
his farm income was $1,200 from the sale of hay, $1,500 from the
sale of a horse and $2,500 for Fall Fair Prizes. His average
annual farm income over 13 years was about $3,500 and the annual
expenses were about $24,500 or seven times the income with no end
in sight.
[6] The Appellant acknowledged that
annual revenues from the sale of hay could not exceed $5,000.[1] The maximum annual
prize money available if he won every prize at the shows or fairs
would be $10,000. He was not in the business of breeding horses
and never received more than $2,800 from the sale of a horse. He
stated that with increased provincial grants, the prize money
available may increase but there was no clear evidence to assist
his position. I agree with the Minister's conclusion that the
farm as operated is not capable of making a profit.
[7] The Appellant has no plans to
change his farm operation. His position essentially is based on
articles from the Toronto Star and the National Post which
include:
... September 28, 2001 Toronto Star, Canada Customs and
Revenue Agency's own Collette Gentes-Hawn doing the talking
"You might have earned $250,000.00 worth of a salary but you
may also have had a business that had a loss of $250,000.00 or
more. The business loss can then be deducted from
income"
... "Business and investment losses can sometimes be
high enough that no income tax need be paid even for high
earners".
... Toronto Star May 22, 2001 issue article on page A6
entitled "Many Farms Pay Little Or No Tax. ... Almost
two thirds of all business in Canada with annual revenues of less
than 15 million paid not a dime of federal tax between 1995 and
1998".
... "Taxes are based on profits - not all companies
are profitable".
... May 30, 2002 National Post. ... "Real
estate investors appeared to win a major battle last week when
the Supreme Court killed a key weapon for the nations tax
collectors, reasonable expectation of profit (REOP)".
... Toronto Star article, paper dated December 4, 2002
... "The revelation that half of all businesses in the
Province are not filing tax returns"
He concludes that in view of the above statements by CCRA in
the Toronto Star concerning its general policy in allowing
business losses during the years in question, it was not only
totally inconsistent but grossly unfair for CCRA officials to
allow him to be singled out and not allowed to deduct the farm
losses claimed in the relevant taxation years.
[8] I have no difficulty in finding a
predominant personal element in the Appellant's farm
operation. It is a true hobby. He does not conduct it as a
business to earn income. He does not keep adequate books and
records and has no business plans to improve a losing situation.
Even if he won first prize money in all of the show competitions
he entered,[2] sold
a maximum amount of hay, and sold a horse each year, he could not
make a profit based on his average expenses. He now has a daytime
job in the parts department of an auto garage. Prior to this and
upon his retirement, he worked as a commission real estate
salesman. Also, he receives a pension of about $27,000 annually.
His investment in farming includes a three-stall horse barn
and hay growing acreage. He has no intention of expanding. He is
satisfied with the status quo. It is clear that the Appellant
does not have a business. His activity is a hobby and not a
source of income within the meaning of sections 3, 4 and 9 of the
Act. He supports himself and his hobby through his pension
and his auto parts job.
[9] Having found that the
Appellant's horse related activity is not a business, there
is no need to proceed further. The Minister having relied solely
on the position that the Appellant had no reasonable expectation
of profit and the Appellant believing this to be the issue he had
to face, I will deal with it briefly.
[10] The Supreme Court of Canada in
Stewart v. The Queen, 2002 DTC 6969, modified the test set
out in Moldowan v. The Queen, 77 DTC 5213, stating at
paragraph 60 of Stewart:
In summary, the issue of whether or not a taxpayer has a source
of income is to be determined by looking at the commerciality of
the activity in question. Where the activity contains no personal
element and is clearly commercial, no further inquiry is
necessary. Where the activity could be classified as a personal
pursuit, then it must be determined whether or not the activity
is being carried on in a sufficiently commercial manner to
constitute a source of income. ...
The Supreme Court also stated in Stewart that the
Moldowan factors can be taken into account when, as in the
present case, there is a personal element involved. Those factors
include (i) profit and loss experience in the past years; (ii)
the taxpayer's training; (iii) the taxpayer's intended
course of action; and (iv) the capabilities of the venture to
show a profit and the reasonable expectation of profit.
[11] Applying the above factors to the
present situation, I find that: (i) the Appellant's business
has a history of 13 years of significant losses with no
optimistic pattern and the percentage of losses to income has not
diminished; (ii) the Appellant has never taken any formal
training in horse raising and showing but he, no doubt, has a
wealth of knowledge from the school of hard knocks; (iii) the
Appellant has no intention of changing his course of action and
he is quite prepared to continue his horse operation as he has
over the past 13 years; and (iv) as stated earlier, there is
no evidence to conclude other than that the Appellant's
venture can never show a profit. The Appellant's statement
that the prize money may increase is vague, unsupported and
unreasonable. To conclude, the Appellant's business has a
predominant personal element and clearly is not carried on in a
sufficiently commercial manner to constitute a source of income
within the meaning of sections 3, 4 and 9 of the Act.
[12] The appeals are dismissed.
Signed at Ottawa, Canada, this 11th day of February, 2004.
J.T.C.C.
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