Peter B Ward v. Minister of National Revenue, [1985] 1 CTC 2085, 85 DTC 98

Bonner, TCJ [ORALLY]:—The appellant appeals from assessments of income tax for the 1978, 1979 and 1980 taxation years. On assessment the Minister applied section 31 of the Income Tax Act to limit to $5,000 per year the deduction of farm losses from income from other sources. It was the appellant’s contention that section 31 did not apply to restrict deductibility of farm losses because his chief source of income during those years was a combination of his farming business and his interests in two companies referred to at the hearing as Ward Electric and Dreger-Ward.

It was common ground that the appellant’s farming operations were a business, that is to say, that the appellant was not a person falling in the third class of persons described by Mr Justice Dickson, as he then was, in the Moldowan case. Rather, it was the respondent’s position that the appellant fell into the second class. The respondent based his assessments on a finding, or at least his principal finding was that:

. . . at no time did the Appellant look to farming for his livelihood nor were the Appellant’s farming activities the centre of his work routine; rather, at all material times, the Appellant carried on farming as a sideline business.

Ward Electric was incorporated in 1961 to carry on an electrical contracting business which the appellant started as a proprietorship in the 1950s. At all relevant times the appellant held 70 per cent of the issued shares and was president and one of three directors of the company.

Dreger-Ward was incorporated in 1962 and carries on the business of renting mobile radios and paging devices. The appellant, at all relevant times, was president and one of three equal shareholders.

The farm was bought in August of 1976. The appellant was, he testified, bored with the work he had been doing. When he bought the farm he rearranged personnel and their responsibilities at both Ward Electric and Dreger-Ward. He did so in order to relieve himself of many of his previous duties and responsibilities and thus make time available for work on the farming business. In the result the appellant became able to spend an average of sixty hours per week working at the farm during the years 1976 to 1979 and only ten to fifteen hours per week working at Ward Electric. The time spent on the affairs of Dreger-Ward during that period was virtually negligible.

Initially, at least, much of the appellant’s time at the farm was devoted to making improvements and additions to its rather dilapidated physical plant. The cost of the farm and additions are set forth in detail on Exhibit A-2. The investments made by the appellant in farming were, roughly speaking, as great as the total of his investments in Ward Electric and Dreger-Ward.

The evidence plainly justifies findings that, if I may paraphrase the words used by Chief Justice Dickson, the appellant in 1976 changed occupational direction and committed his energies and capital to farming. What I cannot find on the evidence is that such change and commitment were made to farming as a main expectation of income.

The farming operation consisted of the acquisition, both by breeding and by purchase, of standardbred racehorses and the raising, training, racing and sale of such animals. The business in fact commenced in 1975, the year before the purchase of the farm property. The appellant still carries it on. It has never earned a profit, although Scandal Sheet Stud, a syndicate in which the appellant held an interest indirectly through another syndicate called Rembrandt Stables, did, when looked at in isolation, realize a $26,215 profit in 1979.

Reference should be made to the corrected version of the table setting forth firstly details of the appellant’s income and sources of income for 1977 to 1980 and, secondly, the amounts and origins of horse-related losses for those years. The composition of the losses was not examined in evidence and, although they occurred during the start-up years, it was not shown that they were start-up losses in the sense of losses which resulted from circumstances (such as inventory build-up) peculiar to the start-up period. Those losses persisted for a sufficiently long time to warrant doubt that the business was sound.

The appellant testified that he anticipated a profit this year and that he expects to sell five yearlings at $20,000 to $25,000 each on average. Significantly, however, he sounded a note of caution in giving that evidence. He pointed out that a lot can happen between now and sale time because, as he said, “after all, they are animals’’.

When the appellant embarked on the horse venture he had no experience, training or education to assist him. He had done some reading and had spoken to some persons involved in racing, but the evidence does not suggest that the appellant possessed any sort of significant qualification in the field.

Counsel for the appellant stressed that he did not need to show that the appellant, during the years of transition from his other occupations to farming, could reasonably expect a level of income sufficiently high as to warrant a conclusion that the appellant could be said to be looking to farming for his livelihood, and with that I agree. Nothing said in Moldowan, when read in context, can be so construed. It is sufficient, in my view, to show that the appellant’s anticipated level of farming income was substantial or significant when viewed in relation to other sources.

Here, however, there was no evidence which pointed to a conclusion that the appellant could reasonably expect any significant level of income from the horse operations. This, as I see it, is a case of a man who poured a great deal of capital and time into a risky venture for which he was ill-equipped. The losses were not surprising and it was not shown that a turn-around was likely, at least to the extent of generating significant profit. The appellant’s other business ventures were the sources of the income required to operate the losing farming venture. Those other sources were not elements of a combined chief source. They were and had every prospect of continuing to be the appellant’s only sources of significant amounts of income.

The assessments were, therefore, not shown to be wrong in respect of the application of section 31. The appeals will, however, be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis set forth in paragraph 13 of the reply to notice of appeal.

Appeals allowed.