Hubert Plante, Reynald Plante v. Minister of National Revenue, [1981] CTC 2052, 81 DTC 74

The Chairman [TRANSLATION]:—The appeals of Mr Reynald Plante and Mr Hubert Plante from income tax assessments for the 1976 and 1977 taxation years, with the principal point of the case being the same in both appeals, were by mutual consent heard at the same time.

In his income tax return, Mr Reynald Plante had also claimed that in practising his profession as a chartered accountant he had incurred automobile expenses of $7,238.80 in 1976 and $5,880.38 in 1977, which represent 95% of his automobile expenses for the years under review. In the notice of assessment the respondent reduced those automobile expenses by $3,001.45 for 1976 and $2,315.02 for 1977, alleging that these amounts were not deductible under paragraphs 18(1)(a) and (b) of the Income Tax Act, SC 1970-71-72, c 63, as amended, since they had been incurred by the taxpayer in his personal use of his automobile.

At the hearing Mr Reynald Plante, who had the burden of proof, did not present any evidence with regard to the automobile expenses he had claimed. I can only conclude that the appellant is no longer disputing this aspect of his assessment for those years, and I must therefore dismiss this part of Mr Reynald Plante’s appeal.* [1]

Issue

The principal point to be determined in both appeals is whether the appellants’ chief source of income for the 1976 and 1977 taxation years was farming or a combination of farming and some other source of income, in accordance with section 31 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

Mr Reynald Plante is a practising chartered accountant whose gross income for the 1976 and 1977 taxation years was $27,245.01 and $31,696.32 respectively. Mr Reynald Plante admitted that his professional income was greated than those amounts in the 1978 and 1979 taxation years.

Mr Hubert Plante, a resident of Casselman, is employed by the Ontario public service in the Department of Agriculture as a dairy products supervisor. In the 1976 and 1977 taxation years he was paid $15,786.75 and $17,232.63 respectively.

In 1974 Reynald and Hubert Plante became partners in the purchase of a 157-acre farm without buildings located between St-Albert and Embrun, Ontario. The price of the farm was $40,000; a down payment of $5,000 was made and a first mortgage of $35,000 was obtained at an interest rate of eight %. The appellants stated that they purchased the farm with the intention of buying, training, breeding and racing horses.

Mr Hubert Plante has been interested in race horses since 1972 and had raced a horse he owned in Sudbury, Ontario. However, he sustained and claimed operating losses with this business.

In 1975 a stable for seven horses was built on the farm at a cost of $20,000; the current value of the stable is estimated at $35,000.

In 1976 Mr Reynald Plante’s house was built on the farm at a cost of $50,000; the appellant himself estimates the current value of the house at more than $100,000. A feedroom and a training track covering about thirty- five acres were also built on the farm at that time. It was alleged that the two appellants carried out most of the construction work themselves.

Horses, sulkies and all the equipment required for keeping and training race horses—including a horse trailer and tractors—were purchased. In addition to the eight acres on which the buildings were constructed and the thirty-five-acre race track, thirty acres were used as pasture for the horses. Some hay was grown but the rest of the 157 acres was rented to farmers to grow corn.

In his testimony, Mr Reynald Plante stated that he worked seventy hours a week on the farm and practised his profession twenty-five hours a week in his office which was located in his house on the farm.

Mr Hubert Plante, who has more experience with horses, spends forty hours a week looking after and training the horses. About ten times each month he enters his horses in races in Ottawa, Montreal and the United States and has earned some income from racing purses. Both witnesses stated that they usually kept three or four horses at a time on the farm. They had bought and sold some horses as they were looking for a horse which could be used for breeding their own line of race horses.

The witnesses stated that they had anticipated that it would be four or five years after operations began before they would make a profit from their business. The farming losses after depreciation amounted to $22,376.12 and $24,844.99 for the 1976 and 1977 taxation years respectively. The appellants claimed the full amount of losses from the business, each partner deducting half of that amount from his personal income.

By applying subsection 31(1) of the Act, the respondent reduced the deduction of losses to $5,000 for each of the years under review.

Section 31 reads as follows:

Loss from farming where chief source of income not farming.

(1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 his loss, if any, for the year from all farming businesses carried on by him shall be deemed to be the aggregate of

(a) the lesser of

(i) the amount by which the aggregate of his losses for the year, determined without reference to this section and before making any deductions in respect of expenditures described in section 37, from all farming businesses carried on by him exceeds the aggregate of his incomes for the year, so determined from all such businesses, and

(ii) $2,500 plus the lesser of

(A) /2 of the amount by which the amount determined under subparagraph

(B) exceeds $2,500, and

(b) the amount, if any, by which

(i) the amount that would be determined under subparagraph (a)(i) if it were read as though the words “and before making any deductions in respect of expenditures described in section 37” were deleted,

exceeds

(ii) the amount determined under subparagraph (a)(i);

and for the purposes of this Act the amount, if any, by which the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii) is the taxpayer’s “restricted farm loss” for the year.

As in William Moldowan v Her Majesty the Queen, [1977] CTC 310; 77 DTC 5213 (a decision of the Supreme Court of Canada), this case and other appeals on the same point can only be decided on the basis of all of the facts presented in evidence.

Although the incomes of the two appellants in the years under review came from sources other than their race horse business, I am prepared to accept that each of the appellants spent a great deal of his time maintaining and training their horses. I am also convinced that it was their intention to earn some income from this business by winning racing purses and by buying and selling horses. Moreover, I will agree that a certain amount of time is normally required before a new business is in a position to make a profit. Of course, a great deal depends on the type of business and the degree of risk inherent in its operation. Subsequently to the taxation years under review, the appellants decided to raise race horses. While the possibility of making a profit cannot be ignored, the risks inherent in breeding race horses and entering them in races are considerable and in my opinion affect the concept of what is meant by “a reasonable expectation” of making a profit from the operation of this type of business.

The evidence also showed that despite the construction of the stable and the training track and the purchase of the equipment required to train the horses, the item of greatest value on the part of the farm that was not leased to farmers was the personal residence of Mr Reynald Plante.

In Moldowan (supra), the facts of which are to my mind very similar to those of this case, Dickson, J stated at 315 and 5216 respectively:

In my opinion, the Income Tax Act as a whole envisages three classes of farmers:

(1) a taxpayer, for whome farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s 13(1) in those years in which he sustains a farming loss.

(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in subsection 13(1) in respect of farming losses.

(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farm activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

During the taxation years under review and until 1980, the appellants themselves did not expect their race horse business to provide the bulk of their income and they admitted that income from other sources had enabled them to start up the new business. Although the appellants had intended that the race horse operation should on day constitute their only source of income, in 1976 and 1977 they had not reached the point where they were able to earn a living from their horses and had still not reached that point in 1980. In my opinion, the appellants do not fall under the first class described by Dickson, J, and therefore the deduction of the full amount of operating losses cannot be justified.

On the other hand, the facts about the appellants’ activities and the hours they devoted to running their business show that their “business” cannot be considered a “hobby” that they practised solely for their own pleasure. The appellants cannot, therefore, be placed in the third class described by Dickson, J.

The facts show that the appellants clearly fall under the second class described by Dickson, J: that is, in the taxation years under review, the appellants carried on their operation as a sideline together with their profession or employment, which provided their chief source of income.

When the appellants’ race horse operation provides the bulk of their income or when it constitutes their only source of income—which is their Stated goal—the full amount of their operating losses will not be restricted by the provisions of section 31 of the Act.

Nonetheless, it would be incorrect to say that their goal was reached in 1976 and 1977. Moreover, the size and potential of the undertaking itself give rise to serious doubts with regard to the concept of a reasonable expectation of the business’s making a profit that would justify the losses sustained. In my opinion, not allowing the appellants to deduct any of their operating losses would be unwarranted, just as allowing them to claim the full amount would be premature. The respondent did not err in applying the restriction of business expenses to $5,000 to each of the appellants, since the business has not yet made any contribution to the appellants’ net income and since the profitability of the enterprise is still uncertain.

For these reasons, the appeals are dismissed.

Appeals dismissed.