Les M Zichy v. Minister of National Revenue, [1985] 2 CTC 2340, 85 DTC 639

Taylor, TCJ: —This is an appeal heard in Calgary, Alberta, on August 20, 1985, against income tax assessments, for the years 1978, 1979 and 1980 in which the Minister of National Revenue disallowed claims of $10,500, $12,604 and $14,155 respectively, allegedly for losses incurred by the appellant in a farming operation. At the hearing counsel for the Minister noted that the Minister was prepared to allow the "restricted" farm loss up to the maximum of $5,000 for the year 1978. The Court did not pursue the basis for the Minister’s decision and irrespective of what else may arise out of this matter that will be done. Also at the hearing — having accepted the Minister's allowance regarding 1978, the agent for the appellant notified the Court that his client would only be pursuing a claim for the same "restricted" farm loss for the remaining two years in issue. The simple question therefore before the Court was whether the appellant could demonstrate that a “reasonable expectation of profit” existed in the operation. The assertion of the appellant was spelled out in information attached to the notice of appeal:

I am in the business of buying, training, showing, and selling horses. The horses are not used for personal enjoyment nor as a hobby. I am in the process of enlarging and expanding my farm business to include becoming involved with race horses. It is my understanding that it is not abnormal for beginning farmers to incur losses in the first several years of business. My farm business is an economically viable enterprise and is well on its way to becoming an income producing business.

For the Minister the situation was:

— that the Appellant was employed on a full-time basis as a commission sales representative in the said taxation years;

— that the Appellant farmed by carrying on horse training activities in the said taxation years;

— that the Appellant owned no lands or stables in which the horse training activities were carried on;

— that for the taxation years here in in issue, the Appellant’s inventory of stock consisted of no more than two horses;

— that the horse training activities of the Appellant were carried on in his spare time in the said taxation years, as the Appellant’s full-time employment constituted the major career direction and preoccupation;

— that amounts deducted on account of purported expenses of the farming business in the said taxation years were personal or living expenses of the Appellant and not made or incurred for the purposes of gaining or producing income from a business or property of the Appellant;

— that the farming activities of the Appellant in the said taxation years were not carried on with a reasonable expectation of profit and as such did not constitute the carrying on of a business by the Appellant in the said taxation years.

The Minister relied, inter alia, upon sections 3, 18(1)(a), 18(1)(h) and 248(1) of the Income Tax Act, RSC 1952, c 148 as amended by SC 1970-71-72, c 63, s 1 as applicable to the 1978, 1979 and 1980 taxation years of the Appellant.

In testimony, Mr Zichy reiterated his long standing interest in horses — his father also had trained horses — and he regarded the activities under review as simply part of his program to engage in such activity, at some time in the future, on a full-time basis, and earn a living from it. He agreed he had earned little revenue — in 1978, about $175, in 1979, about $355 from show prizes, and in 1980, $1,500 as a commission for the sale of another person’s horse. In contrast his typical on-going expenses (as shown on the 1980 financial statement) were:

It was evident to the Court that when Mr Zichy spoke of “making a profit” on a sale of a horse he spoke in terms of selling the horse for more than he had paid for it. The concept that — for example — a $2,000 horse, kept for a year at a cost of say $10,000 (see example of 1980 expenses above) and then sold for $6,000, actually showed a $6,000 loss, not a $4,000 profit did not to be part of his business orientation when those points were discussed. In the same manner, on a theoretical basis, if he had purchased a horse, again say for $2,000, spent $10,000 in keeping the horse for a year, and had not sold the animal, that it now might be argued he had a horse which had cost him $12,000, appeared to be foreign to his concept of the undertaking.

Essentially, it was the position of the appellant, and his agent, that Mr Zichy had suffered a string of bad luck, but he might just as easily have managed to get a horse that would have been worth (or earned) tens of thousands of dollars. The agent for the appellant cited certain case law for the Court, notably: Casimir Van Straubenzee v MNR, [1981] CTC 2692; 81 DTC 552 (TCC), Bio-Test Laboratory Inc v MNR, [1983] CTC 2348; 83 DTC 295, Clément Rivest v MNR, [1985] 2 CTC 2031; 85 DTC 436, which appeared to the agent to support the appellant’s position in this matter. Counsel for the Minister also cited certain case law including: William Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213 (SCC), The Queen v Paul E Graham, [1985] 1 CTC 380; 85 DTC 5256 (FCA), The Queen v Fred Juster, [1973] CTC 410; 73 DTC 5325 (FCTD), Peter B Ward v MNR, [1985] 1 CTC 2085; 85 DTC 98 (TCC), Doug Smith Holdings Ltd v MNR, [1985] 1 CTC 2320; 85 DTC 265 (TCC), Ambrose J Lewis v MNR, [1984] CTC 2306; 84 DTC 1267 (TCC). It was pointed out to the agent that the same Court and adjudicator which produced Van Straubenzee, Bio-Test Laboratory Inc, and Rivest (supra) upon which he relied, and allowed the appeals in those cases, also produced Lewis (supra) and gave the following comments therein at 2310 (DTC 1270) :

Therefore one must not even contend to anticipate a reasonable expectation of profit with only one mare; it is a hobby.

However, with only one mare, the Court thinks with the inherent risk of losing the foal, the expectation of profit is not reasonable.

The agent for the appellant disagreed completely with these two statements from Lewis (supra) but was unable to reconcile the conflict which arises when Lewis (supra) is compared to Van Straubenzee, Bio-Test Laboratory Inc, and Rivest (supra).

In my view, a quotation taken from Steven Gorjup v MNR, [1985] 2 CTC 2194 at 2198; 85 DTC 530 at 533, is applicable to the present situation:

Therefore, while examining a question such as that before the Court in this appeal one may find some assistance in Moldowan (supra), the basic question to be addressed — entitlement to “restricted” farm loss — is not specifically addressed therein. One might therefore usefully vault over all the intervening case law and arrive at the recent case of The Queen v Paul E Graham, Federal Court of Appeal, wherein that which might be gleaned from Moldowan (supra) regarding “restricted farm losses” is reviewed and certain perspectives attained, since it can reasonably be asserted that some current pertinent and different illumination has been provided to the lower courts, in Graham (supra).

I would also make reference to Hall v MNR, [1985] 2 CTC 2314; 85 DTC 624.

Mr Zichy was “farming”, as that term should be understood arising out of the definition under section 248 of the Income Tax Act, and there is no evidence that the activities and operations described to the Court were conducted by him for his own personal enjoyment or pleasure — albeit that he may have gained some personal satisfaction from doing so. His stated objective, and his pursuit of the venture were in the belief that the golden grail of profit awaited him right after the immediate catastrophe had been overcome, whatever it was — a broken leg, a winded horse, a muddy track, a poor jockey, or whatever. And once attained, that goal and resultant gain would erase not only all the bitter and difficult memories, but also the financial losses he had suffered. It might be argued, that he was naive and misguided — perhaps even deluded about the prospects, but I am unable to distinguish in this case a demarcation line which would clearly allocate this “farming” to the “hobby” side of the equation, as opposed to “business” on the other side (see Gorjup (supra)). As noted in Hall (supra), perhaps the lesson to be learned from Graham (supra) is that the utmost discretion and caution should be used before attaching the appellation “hobby” from Moldowan (supra) to any “farming” activity. Or in other words “farming” is a “business” not a “hobby” unless the facts point conclusively to the latter designation. That more charitable view of the requirement may have fallen somewhat into disrepute during the immediate past, (see Stewart I Cooke v MNR, [1975] CTC 2296; 75 DTC 223, and Fred S Goring v MNR, [1976] CTC 2255; 76 DTC 1202, both referenced in Johnson v MNR, [1984] CTC 2656; 84 DTC 1513), but resurrection and refurbishing could be on the horizon. It may not hold true for all enterprises at this point in time, but it would appear to hold true for farming now. The criteria required to identify a “farming” operation as a “business” — with a “reasonable expectation of profit” — may not be too clear in the instant case, but the operation conducted by Mr Zichy under review by the Court was not a “hobby” as I comprehend the recent jurisprudence. I would only add the note of caution regarding the “revenue” versus “capital” allocation demonstrated in the recent Federal Court case of Armstrong v The Queen, [1985] 2 CTC 179; 85 DTC 5396 and reference in the Tax Court case of Hall (supra).

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in accordance with the attached reasons for judgment. The appellant is entitled to party and party costs.

Appeal allowed.