Louis S Levy v. Minister of National Revenue, [1985] 2 CTC 2107, 85 DTC 450

Cardin, TCJ:—Mr Louis S Levy has appealed from reassessments with respect to the 1978, 1979 and 1980 taxation years. The issue is whether the Minister properly reassessed the appellant on the basis of subsection 31(1) of the Income Tax Act, RSC 1952, c 148, by restricting to $5,000 per year losses of $12,758.09, $21,289.90 and $15,248 claimed by the appellant in each taxation year respectively as losses incurred as a result of investments in horses.

The facts and the issue are clearly set out in the pleadings. The notice of appeal reads as follows:

A. STATEMENT OF FACTS

1. The appellant is a chartered accountant residing in Hamilton, Ontario.

2. At all times the Appellant was a practising partner in the accounting firm of Levy, Feldman & Trustcott, Chartered Accountants, whose offices are in Hamilton.

3. One of the Appellant's clients, Peter Ward, owns a farm near Hamilton. Since 1975 Mr Ward has carried on a business of boarding, breeding and racing stand- ardbred horses. He carries on this business under the name Ward Farms.

4. In the summer of 1978 Mr Ward invited the Appellant and 2 other individuals to form a syndicate to invest in standardbred horses. Mr Ward's proposal was as follows.

(a) From time to time he would recommend a particular horse to the syndicate.

(b) If everyone agreed, Mr Ward would buy the horse, each investor contributing 25% of the cost.

(c) Mr Ward would be solely responsible for boarding, breeding and racing the horse as he saw fit, charging his expenses plus a reasonable fee to the other investors.

(d) The gross revenues which he was able to produce from the horse would be shared equally by the 4 members of the syndicate.

5. Mr Ward adopted the name “Rembrandt Stables” to refer collectively to the investors in this syndicate. Title to any horses, however, was taken in the investors' individual names as co-owners, not in the syndicate’s name.

6. Rembrandt Stables itself did not own any horses or any other kind of property. It did not enter into any contracts. It did not hire any employees. It did not have an office or stationery or telephone listing. All dealings with the co-owners' horses were handled by either Mr Ward or by his Ward Farms employees.

7. Investing as a member of this syndicate, the Appellant acquired an undivided 25% interest in 6 horses from the summer of 1978 to the summer of 1979.

8. In the summer of 1979 the Appellant and the other members of Rembrandt Stables began investing through a second syndicate called Scandal Sheet Stud. This syndicate was organized by George Moyer, who owned and operated a standardbred horse farm near Brantford, Ontario. The arrangement between the members of this syndicate and Mr Moyer was the same as that between the members of Rembrandt Stables and Mr Ward.

9. Scandal Sheet Stud, like Rembrandt Stables, was nothing more than a name which referred to its members’ co-ownership of horses. It owned no assets, had no employees, no office, no stationery and no telephone listing.

10. Investing through this second syndicate in 1979 and 1980, the Appellant acquired an undivided 6 /4% interest in another 8 horses.

11. The Appellant did not engage in any activity in connection with his investments in horses. He did not maintain, train, breed, negotiate the purchase or sale of any horse. He simply invested his money, in the hope that Mr Ward and Mr Moyer would produce a return on his investments.

12. To finance his investments in horses, the Appellant borrowed funds and incurred interest expenses. Taking these interest expenses into account, his investments in horses produced net losses in each of his 1978, 1979 and 1980 taxation years, VIZ.,

Taxation year	Net loss
1978	$12,758.09
1979	$21,289.90
1980	$15,248.00

13. The Appellant deducted these losses from his income from other sources when computing his taxable income for these years.

14. By 2 Notices of Reassessment dated August 30, 1982 concerning the Appellant’s 1978 and 1979 taxation years, and by a Notice of Assessment dated July 28, 1982, concerning the Appellant’s 1980 taxation year, the Respondent restricted the amounts of the Appellant’s losses to $5,000 per year, citing subsection 31(1) of the Income Tax Act as authority for this action.

15. On October 20, 1982 the Appellant served Notices of Objection on the Deputy Minister of National Revenue by registered mail. More than 180 days have elapsed since then and the Minister has not notified the Appellant that he has vacated or confirmed the subject assessments and the reassessments or reassessed.

B. STATUTORY PROVISIONS ON WHICH THE APPELLANT RELIES AND THE SUBMISSIONS HE INTENDS TO MAKE.

16. The Appellant relies, inter alia, on subsections 3(d), 9(2), 31(1), 9(1) and 248(1) of the Income Tax Act, RSC 1952, c 148, as amended (“the Act”) and on sections 2 and 3 of The Partnerships Act of Ontario, RSO 1980, c 370.

17. Subsection 31(1) of the Act did not apply in the present case because the Appellant’s losses were not “‘losses from a farming business carried on by him” within the meaning of that subsection.

18. The Appellant submits that he was entitled to deduct the full amount of his losses from his income from other sources, by virtue of subsections 9(2) and 3(d) of the Act.

The respondent’s reply to the notice of appeal is as follows:

A. STATEMENT OF FACTS

1. The Respondent admits the facts set forth in the Notice of Appeal.

2. The Respondent further states that the Appellant was reassessed as admitted on the basis of the said facts and on the further assumption that the Appellant’s co-ownership of race horses through the two syndicates and the arrangements respecting each whereby he was to pay a share of the expenses in return for the right to share in revenues constituted the maintaining of horses for racing or farming as defined by subsection 248(1) of the Income Tax Act.

3. The Respondent also assumed that neither farming nor a combination of farming and some other source of income was the Appellant’s chief source of income for the taxation years in question.

4. The Respondent states in the alternative that, if the Appellant’s investment in the two syndicates by which he was entitled to share in profits in return for monies contributed, (equivalent to the cost of maintaining the horses), was not farming, (which is not admitted but expressly denied), then the amounts contributed by the Appellant were on account of capital.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS HE INTENDS TO SUBMIT:

5. The Respondent relies, inter alia, on sections 18 and 31 and subsection 248(1) of the Income Tax Act, RSC 1952, Chapter 148 as amended.

6. The Respondent respectfully submits that the Appellant’s share of losses from his co-ownership and maintenance of race horses was a share in losses from farming as defined by subsection 248(1) of the Act, and that such losses were properly restricted in accordance with subsection 31(1).

7. The Respondent submits that if in the alternative the Appellant’s investments in the two syndicates did not constitute farming itself, but were merely investments in a business or property, then the funds invested were on account of capital and not current expenses, and pursuant to paragraph 18(1)(b), the Appellant’s losses would be restricted to the amount of interest expense incurred to finance these investments.

The facts and the amounts are not disputed. The question of reasonable expectation of profit was not raised and the basic issue is whether the appellant was engaged in the business of farming. There can no longer be any doubt that maintaining horses for the purpose of racing comes within the definition of farming (subsection 248(1) ). If it is found that the appellant was so engaged, then subsection 31(1) is applicable since there is agreement that the appellant's chief source of income was neither farming nor a combination of farming and some other source, within the meaning of subsection 31(1).

After giving an interesting summary of the legislative history of the “restricted farm loss” rule in his memorandum of points of argument, the appellant concluded that the rule, as it now stands, applies to losses from a farming business carried on by a taxpayer and does not apply to a loss from farming property nor to a loss from a farming business carried on by someone other than the taxpayer. Counsel for the respondent pointed out that the prior legislation also dealt only with losses from a farming business, not losses from farm property. The appellant's submissions are:

(1) that his losses arose from his investments in the horse syndicates and as such were losses from property and not losses from a business;

(2) if the losses can be regarded as losses from a business, they should be regarded as losses from the business of dealing in horses, not as losses from the business of farming;

(3) the losses did not arise from a farming business carried on by the appellant.

The appellant contends that subsection 31(1) does not apply and that the full amount of the losses are deductible from his income from other sources by virtue of subsections 9(2) and 3(d) of the Act.

The respondent's position is that the source of the appellant’s losses is from a business of farming carried on by him even though the actual farming operations may have been performed by an agent. The appellant therefore, according to the respondent, is subjected to the restricted farm loss provisions of subsection 31(1).

With respect to his contention that the losses claimed arose from his investments in property (the horse syndicates), the appellant pointed out the distinction to be made between business income and property income. After underlining some of the various rules which apply to one and not the other of those two sources of income, the appellant rightly concluded that the determination as to whether a source of income is from business or from property is a question of fact.

With supporting case law (Appellant’s Book of Case Authorities), the appellant gave as examples of income from property sources: apartment buildings, shopping centres, corporate shares, debentures, mortgages, pat- ents and farm land. With reference to farm land as a source of property income, the decision of Alfred Hoivik v MNR, 10 Tax ABC 96; 54 DTC 113, was cited.

In Hoivik (supra), the appellant having leased his farm on a share basis, supervised and assisted his tenant by also working on the farm. The Minister assessed the farm income as income from property and Hoivik appealed to the then Tax Appeal Board. The Board held that “the income to be earned must come from carrying on a business either alone or as a partner actively engaged in the business?' Mr W S Fisher, QC (the presiding Member of the Board) stated at 98 (DTC 114), the following: "Nevertheless, I am of the opinion that, in the circumstances of this case, the taxpayer was not carrying on a business as a partner with his tenant in the operation of the farm.”

The appellant’s contentions are that the appellant either as a co-owner, a member of syndicates or a partner in the purchase and maintenance of horses for racing was not in the business of farming, first because he was not personally involved in the actual training, grooming and racing of horses and secondly because by investing in the horse syndicates he had invested in property.

I do not believe that Hoivik (supra) (or any other case law cited by the appellant) is authority for the proposition that before a taxpayer can be said to be actively engaged in a business, he must necessarily and personally perform the actual work or render the services of the business. In this instance, the fact that the appellant did not personally train or race the horses, does not of itself establish that he was not in the business of farming. (See: The Queen v Fred Juster, [1973] CTC 410; 73 DTC 5325, Fred Juster v The Queen, [1974] CTC 681; 74 DTC 6540; Morbane Developments v MNR, [1981] CTC 490; 81 DTC 5362). On the other hand, for a taxpayer to be considered in business, he must be actively involved with and be a participant directly or indirectly in the income-producing processes of the business. The conceptual distinction between the two, very often a very fine line, can only be made on the basis of the facts . . . and the circumstances.

The nature of the appellant’s co-ownership of the horses also gave rise to some debate. In my opinion, whether the appellant was a member of syndicates or a partner with the other owners, though sequentially relevant perhaps, has no direct bearing in deciding whether the source of the appellant's losses was from a business or from property.

The appellant contends that no partnership agreement existed between the co-owners of the horses in either Rembrandt Stables or Scandal Sheet Stud. It is alleged that the appellant with others invested in the acquisition by each of them of an undivided interest in horses as revenue-producing property. An independent contractor was paid by each co-owner for the purchase, the training, the grooming and the racing of the horses, the profits or the losses to be shared, as I understand it, according to the owners' respective interests. Neither Rembrandt Stables and Scandal Sheet Stud had any employees, assets or place of business. The names were a convenient means of identifying the co-owners of the horses who had agreed that they would not themselves either buy or sell — horses leaving the matter entirely to the independent contractor.

The appellant concluded that if there was no partnership (as he contends), the appellant could not be said to have carried on the business of farming. Put another way, the appellant claimed that he can be considered as carrying on the horse business only if he was a partner with the other co-owners — if he was not a partner then, according to the appellant, he was not carrying on any business. The onus of clarifying and establishing that point remains with the appellant.

The appellant alleges that he was a member in horse syndicates which had invested in horses as property with revenue-producing potential both racing and breeding. The appellant went to some length in drawing an analogy between his investments in horse syndicates and investments made in mining syndicates or MURB projects.

The Exchequer Court of Canada decision in Tara Exploration and Development Company Limited v MNR, [1970] CTC 557; 70 DTC 6370, was cited by the appellant as authority for the proposition that investing in a mining syndicate does not constitute carrying on a business. The facts and the issues in Tara (supra) are, in my opinion, fundamentally diferent from those in the case at bar and I am not at all convinced that the Tara decision is authority for that proposition. But even if that were one of the findings of the Exchequer Court in Tara (supra), which in my opinion it was not, one could not possibly conclude from it that an investment in a syndicate automatically excludes it from being a source of business income.

It appears clear from the Income Tax Act that Parliament, in adopting generally applicable taxing provisions with respect to the three principal sources of income: employment, business and property, considered the particular circumstances of certain sources of income such as fishing, mining, the lumber industry and farming and passed special provisions for each of these resources. Indeed, subsection 31(1) is one of the exceptional provisions with respect to farming. These exceptional provisions are to be applied restrictively and are not interchangeable or applicable by way of analogy.

In my opinion, the appellant's analogy between investments in a mining syndicate (Tara) (supra) and investments in horse syndicates has no substantive value in deciding the present issue. Here again the facts will determine whether the appellant, either as a member of a syndicate or as partner or on his own, was engaged in the business of farming or whether he invested in income-producing property.

The determining factors in this appeal are set out in the notice of appeal and are not contested by the respondent. In 1978, the appellant and three other individuals each purchased a 25 per cent undivided interest in six horses. In 1979, the appellant and others purchased a six and one-quarter per cent undivided interest in an additional eight horses. To this point, there can be no doubt that the appellant invested in horses. However, whether the investment was in horses as property, or an investment in a business, depends entirely on the purpose for which the horses were acquired and the appellant’s participation in the income earning process.

Unlike MURBs and other assets such as bonds debentures, etc, which by their very nature are income-producing with a minimal amount of effort and activity, race horses by themselves can only produce income as a result of constant care, maintenance, training and grooming, to the point where they cannot, in my view, be considered as self-generating income property.

It is most unlikely that the horses were acquired just for the sake of owning property. Indeed, the evidence is abundantly clear that the horses were acquired for the purpose of racing — there is no evidence that they were acquired for trading or any other purpose. More importantly, the appellant, in addition to the cost of acquiring the horses, also paid his share of the expenses and reasonable fees to Mr Ward and Mr Moyer who were responsible for the purchase, the sale, the boarding, the training, the maintenance, the racing permits and the racing of the horses. It is alleged in paragraph 4(d) of the notice of appeal, that the gross revenues would be shared by the members of the syndicates. However, in the tax returns and in the notice of appeal, the appellant claimed net losses incurred by him including interest expenses on borrowed funds.

These are the facts on which the Court must decide whether the appellant's losses are from property or from a business.

The respondent's position — that the appellant’s losses were from a business of farming although the appellant did not himself perform the work — was supported by several decisions some of which I have already mentioned. Although I do not propose to refer here to all the submissions made by the respondent, there are two points which I believe to be particularly important and with which I agree. The first is that basically the issue here is to characterize the source of the appellant's losses. The second point is that syndicates and partnerships along with joint ventures and other similar arrangements are simply agreements between legal entities with respect to entering into and carrying out specific common objectives. Whatever arrangement is chosen will therefore not change the nature of the income generated or the losses incurred.

In this appeal, the evidence is unclear as to whether the appellant was a member of syndicates or in partnership. The appellant himself admitted that there was some overlapping between the two, but he did not establish exactly what the relationship between himself and the other co-owners of the horses was. However, it is not necessary for me to decide that point in disposing of the appeal. The appellant was clearly the owner of interests in horses acquired and used for the purpose of racing which according to the Act and case law comes under the definition of farming. Furthermore, maintaining, training and racing horses are ongoing farming activities in which the appellant, albeit indirectly, was involved. His participation in these specific farming operations, in my opinion, constitutes being engaged in the business of farming. The income or losses realized therefrom are from a business and not from property. The appellant has not convinced me that since he was not a partner in the horse racing operations, he was not carrying on any business.

I find that the appellant's losses did not arise from investments in horses as property but were incurred in the business of maintaining horses for racing; that the appellant was not in the business of trading but was in the business of farming carried on by him.

The Minister correctly assessed the appellant in applying to losses claimed the restricted farm loss provision of subsection 31(1) of the Act.

For these reasons the appeal is dismissed.

Appeal dismissed.