Thomson L. Lanson v. Minister of National Revenue, [1988] 1 CTC 2088, 88 DTC 1074

Couture, C.J.T.C.:—These appeals are in respect of the appellant's 1981 and 1982 taxation years and deal with the perennial problem of whether the appellant's farming activities were carried [on] with a reasonable expectation of profit within the meaning assigned to these words by the pertinent jurisprudence.

The appellant gave this evidence. He is a butcher by trade and has been a full-time employee for the past twenty-three years. Since the age of eight he was brought up by his grandmother who was a widow living on a farm at Erin, Ontario. She passed away in 1975 and left him the farm. He married in the late sixties and at that time he built a house on a parcel of farm land given to him by his grandmother. Prior to the time that the appellant started to live with his grandmother she was engaged in farming so from an early age he worked at farming. This continued until about 1965 when she sold her cattle and retired. The appellant kept pigs and chickens after his grandmother's retirement. Between 1972 and 1976 he had a herd of some 30 Aberdeen Angus and raised calves during that period.

In 1969 he bought a two-year-old standard-bred mare which he raced from 1970 until 1975 when it developed problems with its knees. It was then bred and the first foal named Star Vista was born in 1976. The horse raced in the Ontario Sires Stakes Circuit for two-year-olds. This circuit covered southern Ontario. The horse raced for about two years and it was sold in 1981 for $2,050. This was the only revenue from farming reported for that taxation year by the appellant. After this sale the appellant did not engage in further racing activities during the taxation years under appeal.

In 1979 a second foal was born and named Star Nadir. In 1981 this horse was being trained by a professional trainer because the appellant had no experience in training horses and he intended to race it as a two-year-old. How- ever, in 1981 the horse developed a physical condition described as bows and on the advice of a veterinarian it was returned to the farm for the balance of the year so that it could recover from this ailment. In 1982 the appellant once more placed the horse with the trainer and this time it contacted a virus that required that it be returned to the farm again to cure this problem. The horse never did race. Between 1975 and 1980 a crop was never produced on the farm. The appellant's activities were restricted to horse racing and by his own admission, he never profited from this. In 1980 he reported $1,257 of purse money against which he claimed expenses and capital cost allowance of $9,665.91 and $595.23 respectively for a total of $10,261.14.

Following his unsuccessful horse racing venture in 1982 he directed his efforts to an unrelated farming activity. He bought a tractor to clear land and place it in a condition to produce crops. Nothing was planted in 1982. He built a greenhouse and in 1982 he began growing geraniums on a commercial basis. Unfortunately, the plants were infected with a disease and the whole crop had to be destroyed. By the spring of 1983 he had cleared and ploughed approximately 12 acres of land in which he planted squash and pumpkins. He reported sales of $3,376 and a profit of $910 from this source in 1983.

In 1984 he reported a profit of $18.50 from the sale of vegetables and flowers.

In 1985 the appellant suffered a loss from his vegetable and flower operations due to problems related to fertilizer. Also, his greenhouse burned down at the end of October. It was full of geraniums that were being nurtured for the following selling season so he did not expect a profit for 1986. However, he has replaced the greenhouse with a new one nearly three times in size and he expects a substantial profit in 1987 from his greenhouse operation. Apparently geraniums are easy to grow and they are much in demand.

It is obvious that the appellant has not been fortunate in his farming ventures since he inherited the farm in 1975. Whether his change of direction in 1982 from horse racing to the cultivation of vegetables and flowers will be more successful remains to be seen. Whether such operations constitute the carrying on of a business is a question that will have to be answered later.

The issue before the Court is whether during the 1981 and 1982 taxation years the appellant carried on a business in relation to his horse racing operations.

Very little was placed in evidence with respect to the appellant's racing activities between 1976 and 1980, beyond that it was established that one horse actually raced during that period. We do not know how often that horse raced during each year, the amounts of its winnings or the expenses incurred. With respect to Star Vista we know that this horse raced for two years, but there is no information regarding its winnings, if any. It was then sold for some unexplained reason. Selling the only potentially incomeearning asset of an alleged business is inconsistent with a serious intention of carrying on that business.

As far as Star Nadir is concerned it never raced during the years under appeal or in subsequent years. Its trainer who gave evidence on behalf of the appellant asserted that Star Nadir was a much better horse than Star Vista and had greater potential as a race horse. He said that it had the possibility of winning $100,000 a year. This was, of course, pure speculation on his part. Whether the horse could have won $100,000 in a year was more in the nature of hope on his part than reality considering that it had never been entered in a race and no data existed to support such a claim.

There are a great number of reported decisions pertaining to paragraph 31(1)(a) of the Income Tax Act (the Act) and the question regarding what constitutes a business for the purpose of the Act. Paragraph 31 (1)(a) presupposes the existence of a business before the limited losses prescribed therein can be deducted. While the abundance of jurisprudence on these questions is most useful as authority for principles of general application each case must, in the last analysis, be decided having regard to the particular facts placed in evidence.

I am not satisfied that training and racing a single horse over a few years on a somewhat casual schedule even with the assistance of a professional trainer is sufficient to characterize such an activity as a "business" for the purpose of the Act. The impression that I am left with is that this horse racing enterprise was carried on in a somewhat unorganized or ad hoc fashion much more akin to a hobby than a business. It was an activity that was enjoyed by the appellant during his hours of leisure.

The [D.T.C.] headnote in Magee et al. v. The Queen, [1987] 2 C.T.C. 17; 87 D.T.C. 5282 (F.C.T.D.) reads:

The taxpayers, who were husband and wife, purchased a race horse and an 80-acre parcel of land in 1977. They invested small amounts of money in the acquisition of buildings and the construction of paddocks. Over the next nine years, the taxpayers suffered consistent losses from their farming activities. They had no experience in breeding or training horses and they never owned more than three or four horses at a time. The taxpayers deducted their losses from business income for the 1981 and 1982 taxation years. The Minister disallowed the deductions and the taxpayers appealed to the Federal Court — Trial Division.

Held: The taxpayers’ appeals were dismissed. The Court found that the taxpayers did not have a reasonable expectation of profit in the taxation years in issue.

Mr. Justice Strayer said at page 19 (D.T.C. 5284):

Certainly in 1981 and 1982 it would have been unreasonable to have expected a profit either at that time or in the foreseeable future. Nor am I able to see any clear plan which existed then or now for making the venture profitable. The maintenance of one brood mare on a farm, with perhaps two or three offspring of that mare racing each year, even with the sale from time to time of the latter, does not seem to me to involve such a plan. I therefore conclude that this farm is not a "source of income” and thus the plaintiffs are within category 3 as mentioned above: namely, they are engaged in hobby farming and none of their net farm losses are deductible from other income.

In Hammond v. M.N.R., [1971] C.T.C. 663; 71 D.T.C. 5389 Mr. Justice Pratte of the Federal Court, Trial Division, had to decide whether a taxpayer who engaged in racing horses was taxable on his prize winnings. He held that he was not for the reason that he was not engaged in an undertaking that could properly be regarded to be a business. He said at page 667 (D.T.C. 5392):

The fact of purchasing and racing a horse is not, in itself, a trading venture because it is normally made with a view to profit. For this reason, purses won by a race horse cannot be considered as income from a business except in exceptional circumstances showing that the owner of the horse had so organized his activities that he was in fact conducting an enterprise of a commercial character.

From the evidence adduced, I am not satisfied that the appellant was "conducting an enterprise of a commercial character". Consequently the appeals are dismissed.

Appeals dismissed.