Harold L. Livergant v. Minister of National Revenue, [1989] 2 CTC 2127, 89 DTC 362

Goetz, T.C.J.:— The appellant is appealing tax reassessments for his 1977, 1978, 1979 and 1980 taxation years whereby the respondent disallowed certain farm expenses sought to be deducted from income by the appellant. The appellant, however, was allowed a “limited” farm loss.

The appellant has a degree in accounting and in hospital administration and in 1968 he established Extendicare Ltd. (Extendicare) a company which later went public and carried on business throughout Canada, the United States and elsewhere in the health care field. He has been President and Chief Executive Officer of Extendicare since that time. The American operation under the name Medico Centres Inc. (now Humana Inc.) is wholly- owned by Extendicare. In 1974 Extendicare bought out J.F. Hartz (Alta.) Ltd. a medical supply company.

In 1977 the appellant entered into an employment contract for a term of seven years. Section 2.02 of that agreement reads as follows:

Section 2.02. During the full-time employment period the Employee:

(a) shall remain in the full-time employment of Extendicare and, except as may from time to time be authorized by the directors of Extendicare, shall accept no employment except with Extendicare; and

(b) shall devote his best efforts to the conduct of Extendicare's affairs and the faithful and diligent performance of the duties of his employment with Extendicare and any office or offices from time to time held by him in Extendicare and the duties which may from time to time be imposed upon him by the directors of Extendicare in accordance with the provisions of this agreement.

In 1980 there was a "reverse takeover whereby Extendicare acquired Crown Life shares with Extendicare shares and thereby Crown Life became the major shareholder of Extendicare". At the same time the appellant agreed to continue as President and Chief Executive Officer for four years and thereafter for the rest of his life on a part-time basis.

In his reply to notice of appeal, the Minister pleaded, inter alia, as follows:

4. In so reassessing tax to the Appellant for the 1978 taxation year, the Respondent relies upon the following assumptions or findings of fact:

(a) the Appellant since September 1, 1977, has lived in a house located at 519 Spadina Road in the City of Metropolitan Toronto. This home, located in a beautiful area of Toronto, is owned and supplied by the Appellant's employer;

(b) the Appellant, at all material times, was the Chairman of the Board of Directors and Chief Executive Officer of Extendicare Ltd. He held such positions since 1968 and furthermore has been the President thereof since September 1,1977;

(c) the Appellant at all material times was also Chairman of the Board of Medico Centres Inc. — the U.S. subsidiary of Extendicare Ltd.;

(d) Extendicare Ltd. has more than 5,000 employees in 25 facilities in Canada and the United States of America, and plans new operations in Europe and the Middle East;

(e) the Appellant was regularly involved in high level corporate decisions of Extendicare Ltd., attended all important executive management meetings, and travelled frequently on behalf of the Company;

(f) the Appellant has an employment contract with Extendicare Ltd. dated November 1, 1977. For seven years the contract ensures full time employment with the Company to be followed by ten years part-time employment;

(g) in the employment contract, the Appellant covenanted to remain on full- time employment. Specifically, subsection 2.02(b) thereof states he “shall devote his best efforts to the conduct of Extendicare's affairs . . .”;

(h) neither the Appellant nor his employer is in breach of the employment contract;

(i) as of 1980, the Appellant's net worth was approximately $2,200,000.00;

(j) the Appellant owns 21% of 356877 Ontario Inc. which in turn owns 36% of Extendicare Ltd.

In 1970 the appellant with an associate in Extendicare decided to get into the business of horse raising with a standard bred horse. He says he read horse magazines and other literature and attended races. He eventually became a member of the Canadian Horse Breeders Association. Until he purchased a farm in 1979 for $450,000 he stabled one to three horses in Toronto where he paid a trainer to take care of his horses and who consulted him with respect to hiring jockeys, claiming races, etc. The farm was located north of Toronto near the Airport Road and he built a 3,500 sq. ft. home there for himself and his farm manager. He would visit there in the summer months. In 1983 and 1984 he converted his operation into Whispering Hills Farms Inc. owned by a numbered company which was owned by the appellant and his wife. In 1984 he established Whispering Hills Thoroughbred Breeding Limited Partnership with whom he invested his brood of mares for $500,000 — others invested $700,000. He now holds 55 per cent of that partnership. The horses are stabled and boarded at his horse farm.

The appellant says that in the early stages he spent 30 per cent of his time in the horse business and literally [sic] about 50 per cent.

Basically, there was a continued loss picture in the appellant's horse activities, although in 1982 he sold a horse "Regent Miss” for over $300,000, which he had acquired in 1981 for $75,000. This appears to be the high point in his horse activities.

Tab 1 of Exhibit A-4, an Analysis of Income and Losses for Harold L. Livergant and for Whispering Hills Farm Inc., gives a clear picture of the appellant's operation:

Note: Benefits and deductions under sections 80.4 and 80.5 of the Income Tax Act

removed and effects of election under section 28 of the Income Tax Act.

Michael Bourne, whose occupation was that of a horse breeder and broker of horses testified that he knows the appellant's operation and meets with Livergant several times a month at the farm, races, horse sales and at the appellant's office in Toronto. He goes to the farm three to four times a year and discusses horse matters with the farm manager. He is optimistic about the appellant being able to make a profit from sale of his brood mares which takes from seven to eight years to develop. He says ”. . . to create business cash flow one would need an awful lot of capital to get a good brood mare”. As to the nature of breed operators, he says ”. . . there are more losers than winners".

The appellant is a very successful businessman and as Chief Executive Officer his responsibilities were heavy and his business operations required his personal time and attention. Not too much evidence was heard with respect to his business affairs, although it is clear he surrounded himself with competent men to whom he could delegate certain duties. Extendicare Ltd. was and is a marvelously successful company with lucrative earnings. He says horse racing is a passion that he has but it rates second to Extendicare Ltd.

With his high income from Extendicare he was able, in 1970, to acquire two or three horses which he stabled in Toronto. The facts illustrate his path in dealing with horses.

Counsel for appellant argued that the horse operation was a business and that section 31 did not apply. Further he stated in the alternative, that the appellant's capital investment, his business expertise, time spent and his reasonable expectation of profit were an indicia of his serious involvement in the breeding and the racing of horses. In support of his position he cited a number of cases, the most relevant of which are:

William Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77

D.T.C. 5213

Harold S. Hadley v. The Queen, [1985] 1 C.T.C. 62; 85 D.T.C. 5058

The Queen v. Paul E. Graham, [1985] 1 C.T.C. 380; 85 D.T.C. 5256.

Counsel for the Minister on the other hand contended that the breeding of horses is a risky business and that the appellant could not reasonably expect to establish horse breeding as his main source of income in the years 1977 to 1980 inclusive; further, that appellant's income from Extendicare Ltd., and his other investments, showed clearly that his horse breeding and racing activities were merely a sideline business.

Findings

The Minister acceded to the fact that the appellant had a reasonable expectation of profit and that he would allow a restricted farm loss for the taxation years under review. In Moldowan v. The Queen, supra, at page 315 (D.T.C. 5216) Dickson, J. set out 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 subsection 13(1) 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 subsection 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.

To succeed the appellant must establish that he falls within the first class. Dickson, J. says at page 314 (D.T.C. 5215-16) the factors to be considered.

Whether a source of income is a taxpayer's "chief source" of income is both a relative and objective test. It is decidedly not a pure quantum measurement. A man who has farmed all of his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of “chief source” are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential. A change in the taxpayer's mode and habit of work or reasonable expectations may signify a change in the chief source, but that is a question of fact in the circumstances.

[Emphasis added]

Exhibit A-4 shows that other than for the years 1982 and 1983 the horse- breeding activities operated at a loss from 1975 to 1988 whereas the appel- lant's "other income" rose substantially which enabled him to carry the farming operation.

The Federal Court of Appeal case of Raymond Morrissey v. Canada, [1989] 1 C.T.C. 235; 89 D.T.C. 5080, follows the dicta in Moldowan and finds that the words "the time spent, the capital committed, the profitability both actual and potential" must be considered conjunctively and not disjunctively. At page 242 (D.T.C. 5084) of Morrissey Mahoney, J. says:

On a proper application of the test propounded in Moldowan, when, as here, it is found that profitability is improbable notwithstanding all the time and capital the taxpayer is able and willing to devote to farming, the conclusion based on the civil burden of proof must be that farming is not a chief source of that taxpayer's income. To be income in the context of the Income Tax Act that which is received must be money or money's worth. Absent actual or potential profitability, farming cannot be a chief source of his income even though the admission that he was farming with a reasonable expectation of profit is tantamount to an admission which itself may not be borne out by the evidence, namely, that it is at least a source of income.

The capital committed to the farm did not generate profits actually or foreseeably. At no time would farming be considered as his main source of income either alone or in combination with his other business activities, rather it was carried by the income from his other activities.

Though he says he spent 30-50 hours [per cent] of his time to his horse activities, the evidence shows that in calculating time spent he attended horse races and horse sales in Canada and in the U.S.A. He was well able to afford this.

The appellant's major preoccupation was discharging his duties as Chief Executive Officer for Extendicare Ltd. and other companies and attention to investments and the income therefrom, when compared to the farm income, clearly illustrates that fact. The Hadley and Graham decisions are unique to the facts of those cases. As can be seen, Moldowan gives the Court a clear guide in determining its decision.

The buying, raising, breeding and racing of horses is a risky business and requires a very large amount of capital to have any hope of success as a profitable exercise. The income record of the appellant's farming operation confirms this. Though he was a great lover of horses and though contributed his business expertise and financial resources to his horse farm that in itself does not resolve the issue in his favour. His commitment and dedication to Extendicare Ltd. and other investment ventures and the income therefrom, satisfy the Court that these constituted his main source of income and that because of the success of these ventures he was able to indulge in his farming activities. His horse enterprise quite obviously was a sideline business.

Finally, the appellant submitted that, because he made instalment payments for the year that exceeded the amount of tax for which he was reassessed, he should only be liable for interest as of the date of the reassessment. In other words, he argues that he should not be required to pay interest on that portion of his instalments that the Minister erroneously refunded to him. As subsection 161(1) of the Act reads currently, this position is obviously untenable. To paraphrase, the subsection provides that where, at any time, a taxpayer's tax payable for a taxation year exceeds the aggregate of those amounts paid by the taxpayer on account of his tax payable and applied as such by the Minister, interest shall be payable on the difference. In this case, while the appellant's instalment payments exceeded his tax payable, the Minister did not apply these amounts fully against the appellant's tax payable, but rather refunded that portion of the instalment payments in excess of the tax initially assessed. However, the requirement that an amount be applied by the Minister against a taxpayer's liability — as well as being paid — was only introduced as of April 19, 1983. Accordingly, as the notice of reassessment pre-dates this amendment, the appellant succeeds in his argument that interest may only be assessed as of the date of the notice of reassessment and the appeal is allowed to this extent.

The appellant is entitled to no other relief.

Appeal allowed in part.