Sartori v. The Queen, docket 1999-4676-IT-G

Date: 20011220

Docket: 1999-4676-IT-G

BETWEEN:

OTTORINO SARTORI,

Appellant,

and

HER MAJESTY THE QUEEN,                                                                                

Intimée.

Reasonsfor Judgment

BOWMAN, A.C.J.

[1]            These appeals are from assessments for the appellant's 1993 and 1994 taxation years. By these appeals the Minister of National Revenue treated the losses incurred by the appellant from farming as limited by section 31 of the Income Tax Act on the basis that neither farming nor a combination of farming and some other source of income was the appellant's chief source of income in those years. The Minister also applied the so-called half-year rule to the appellant's claim for capital cost allowance on depreciable property acquired by the appellant.

[2]            I can deal briefly with the issue of the half-year rule. On December 30, 1992 the appellant acquired a farm, including depreciable property, from his company, Sartori and Son Company Limited (the "company"). The transfer was not registered until 1994 and the Minister assumed that it did not take place until then. I find as a fact that the acquisition of depreciable property occurred in 1992 and that accordingly the one-half year rule does not apply to the calculation of capital cost allowance in 1994 on depreciable property owned by the appellant in that year.

[3]            So far as section 31 of the Income Tax Act is concerned, Mr. Sartori has been involved in the construction business all of his life. He is now 74 years of age. At all times that are material to these appeals he was the sole shareholder of the company. At the age of 59, he retired and his son Douglas took over the construction business, whose major client was Union Gas. After three or four years, his son asked him to come back and he acted as a consultant to the company and supervised many of the major projects. In the years in question he worked 40-50 hours a week in the construction business. In 1993 and 1994 the company's income from the construction business or from providing services to Mr. Sartori's son's company went from $30,000 to about $200,000.

[4]            The company paid him a consulting fee from 1987 to 1992. From 1993 to 1999 he was paid dividends by the company. In 1999 he sold the company to his son.

[5]            In 1992 he bought the farm from the company for $273,000. Of the price the parties attributed $124,000 to the house. He paid $23,000 down and $50,000 a year for five years out of the dividends he received. The company had bought the farm in 1970 and constructed a horse track and a house. The farm, which consisted of 30 acres, had a horse barn with 19 stalls.

[6]            From that point on, Mr. Sartori and his company were involved in a rather substantial way in raising, buying, selling, training and racing horses. Although he appears to have been reasonably successful in racing horses neither he nor the company ever made a net profit except in 1995 when he realized a small profit when he sold the farm.

[7]            In 1995 he sold the farm and the business because of an automobile accident he was involved in and because of some personal problems relating to one of his sons.

[8]            His involvement in the horse business was essentially a hands-off relationship. He paid other people to take care of the horses, groom them and train them. In and prior to the years in question I think on the evidence he devoted more time to the construction business than to farming. The construction business was the real focus of his activities and all of his life it provided the bulk of his income. Indeed, the raising, racing and selling of horses provided him with nothing but losses. While it is true, as Dickson J. said in Moldowan v. The Queen, [1978] 1 S.C.R. 480 at 486, the determination of chief source of income is not a pure quantum measurement — after all, the application of section 31 of the Income Tax Act is premised upon the hypothesis that it is possible for a "chief source of income" to yield a loss which may be set off against other income. Nonetheless, the fact that another source of income provides a taxpayer's livelihood and farming consistently yields a loss is not something that one can entirely ignore. We all know that Dickson J. in Moldowan divided all farmers in Canada into three categories - full time, part time and hobby. Mr. Sartori's involvement in horses went beyond a mere hobby but I cannot find on the evidence that it ever attained the status of a full time occupation. His chief source of income was the construction business carried on by his company. Farming, as in the case of Moldowan, was a secondary source of income.

[9]            The appeal for the 1993 taxation year is dismissed. The appeal for the 1994 taxation year is allowed and the assessment for that year is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing the appellant's farming loss to which section 31 of the Income Tax Act is subject, the one-half year rule is not applicable to the calculation of capital cost allowance.

[10]          There will be no order for costs.

Signed at Ottawa, Canada, this 20th day of December 2001.

"D.G.H. Bowman"

A.C.J.

COURT FILE NO.:                                                 1999-4676(IT)G

STYLE OF CAUSE:                                               Between Ottorino Sartori and

                                                                                Her Majesty The Queen

PLACE OF HEARING:                                         Windsor, Ontario

DATE OF HEARING:                                           December 5, 2001

REASONS FOR JUDGMENT BY:                      The Honourable D.G.H. Bowman

                                                                                Associate Chief Judge

DATE OF JUDGMENT:                                       December 20, 2001

APPEARANCES:

Counsel for the Appellant:                  Terry Hermiston, Esq.

Counsel for the Respondent:              Gatien Fournier, Esq.

COUNSEL OF RECORD:

For the Appellant:                

Name:                Terry Hermiston, Esq.

Firm:                  Holden & Moorhouse

                          Windsor, Ontario

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

1999-4676(IT)G

BETWEEN:

OTTORINO SARTORI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on December 5, 2001, at Windsor, Ontario, by

The Honourable D.G.H. Bowman, Associate Chief Judge

Appearances

Counsel for the Appellant:          Terry Hermiston, Esq.

Counsel for the Respondent:      Gatien Fournier, Esq.

JUDGMENT

It is ordered that the appeal from the assessment made under the Income Tax Act for the 1993 taxation year be dismissed.

It is further ordered that the appeal from the assessment made under the Income Tax Act for the 1994 taxation year be allowed and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing the appellant's farming loss to which section 31 is subject, the one-half year rule is not applicable to the calculation of capital cost allowance.

          There will be no order for costs.

Signed at Ottawa, Canada, this 20th day of December 2001.

"D.G.H. Bowman"

A.C.J.