Brynmor G Cook v. Minister of National Revenue, [1985] 1 CTC 2229, 85 DTC 167

Bonner, TCJ:—The appellant appeals from assessments of income tax for the 1980 and 1981 taxation years. In making the assessments in issue the respondent disallowed the deduction of losses from automobile performance rally operations carried on by the appellant. The assessments were made on the basis that the deduction of the expenses incurred by the appellant in carrying on performance rally operations was prohibited by paragraphs 18(1)(a) and 18(l)(h) of the Income Tax Act. In short, the question is whether the activity was carried on as a hobby or as a business. If the activity was a hobby both provisions would prevent the deduction of the costs of carrying it on.

The findings or assumptions of fact made by the respondent on assessment were:

(b) during the taxation years under appeal, the Appellant was employed full-time as a director of policy analysis for the Government of Ontario and his total earnings from that source were $44,383.92 and $50,495.47 in 1980 and 1981 respectively;

(c) the Appellant is a rally car driver and he has been involved in rally racing for a number of years;

(d) in 1977, the Appellant started operating under the business name “Cook’s Autosport & Rally Enterprises” to carry on rally racing and to prepare cars for rally racing.

(e) the Appellant has suffered losses in each year of his rally car racing activities;

(f) the Appellant’s losses in 1980, 1981 and 1982 are summarized as follows:

	1980 1981* [1] 1982
Gross Revenues:	$ 855.00
Expenses:	4,003,28
Net Loss:	(3,148.28)

(g) the Appellant had no reasonable expectation of earning a profit from his rally car racing activities;

(h) the expenses incurred by the Appellant with respect to his rally car racing activities were personal or living expenses and not outlays or expenses incurred to earn income from a business or property.

The appellant was the only witness called at the hearing. He testified that he started to participate in rally driving in 1973. In 1975 performance rallying was introduced in North America. That activity, the appellant said, is a form of auto sport in which manufacturers seek to demonstrate the value of their product. The cars used resemble those sold to the general public. The appellant said that he saw a potential for business involvement and that he felt that he could realize a profit. Accordingly, he sought professional advice, established contacts in the marketing and automotive worlds and proceeded to register a business name.

The appellant said that he did not consider the rally operation a hobby because of the strong commitment and degree of organization required for success. The operation requires the acquisition of a car and the preparation of it for rally operations. Spares and tools must also be acquired and be transported to the site of the rally. Plans have to be laid to enter the rallies necessary to success in a series of races while, at the same time, avoiding entries in rallies held at distant locations involving unnecessary expensive travel.

The fact that the appellant held a full-time job during the 1977 to 1981 period has no bearing on the outcome of this case. The appellant explained that rallies take place on weekends and that, furthermore, he had enough vacation time and sick leave to enable him to enter rallies as necessary.

The appellant explained that success in the various races was not, in itself, sufficient to ensure profits. It was necessary, as well, to exploit that success by securing sponsorships. Sponsorship arrangements were variable but, generally speaking, involved supplemental prize moneys and cost sharing arrangements. The appellant stated that one of his goals was to secure enough experience and standing to obtain sponsorship by a car manufacturer and thus to run a “factory team”. Beyond that level he hoped to arrive at the stage at which he could be paid fees simply for association with a team.

The appellant did in fact enjoy a measure of success on the track. In 1980 he won a first and in 1981 a second in the Canadian championships for the production class. This success did not result in immediate profit. The parties agreed that the financial results of 1980 and 1981 were:

Losses were sustained in 1977, when the appellant first treated rallying as a business for income tax purposes, in 1978 and in 1979 as well. All such losses were allowed as deductions for tax purposes. The appellant could not remember the amount of the 1977 loss, but said it was less than $3,000. The 1978 loss was $1,839. The 1979 loss was $1,291.41. The appellant admitted that none of his losses had resulted from unforeseen expense.

It is often difficult to distinguish between a hobby and a business. If a business is to be found to exist the taxpayer must have a profit or a reasonable expectation of profit.* [2] Generally speaking, the longer the unbroken string of losses the more difficult it is to establish the reasonableness of that expectation. In this case, however, the appellant was able, by winning at the track in 1980 and 1981, to demonstrate the level of ability which might reasonably be regarded as a prerequisite to securing the sponsorship necessary to financial success.

The evidence showed that the appellant earned a small profit in 1983. The profit was the result of a contract with an automobile manufacturer whereby the appellant agreed to manage and drive that manufacturer’s entry in certain rally events. In consideration the manufacturer agreed to bear many of the expenses of rallying and to permit the appellant to keep any prize moneys won. The success of 1983 serves to corroborate the reasonableness of the appellant’s expectation in 1980 and 1981 that his program would bear fruit.

For the foregoing reasons the appeals will be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to deduct losses of $3,059.99 in 1980 and $3,782.79 in 1981.

Appeals allowed.