Thompson v. R., [1999] 1 CTC 2284

O’Connor T.C.J.:

These appeals were heard at St. Catharines, Ontario on September 3, 1998 pursuant to the Informal Procedure of this Court.

The principal facts and issues involved are summarized in the following allegations in the Reply to the Notice of Appeal:

2. In computing income for the 1991, 1992 and 1993 taxation years, the Appellant claimed restricted farming losses in the amounts of $8,747, $8,748 and $8,747, respectively, and for the 1994 taxation year, the Appellant reported net income from farming in the amount of $18,743 against which he claimed non capital losses carried-forward, from prior years’ farming losses, in the amount of $18,743.

3. The Minister of National Revenue (the “Minister”) assessed the Appellant as filed, for the 1991, 1992, 1993 and 1994 taxation years by Notices of Assessments dated July 15, 1992, June 24, 1993, June 9, 1994 and June 22, 1995 respectively.

4. The Minister reassessed the Appellant for his 1991, 1992 and 1993 Returns of income, by concurrent Notices of Reassessment dated May 23, 1995 and the 1994 Return of income, by Notice of Reassessment dated March 4, 1996.

5. In reassessing the Appellant for the 1991, 1992, and 1993 taxation years, the Minister of National Revenue (the “Minister”) disallowed the restricted farming

losses claimed,...

6. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant was employed by Allstate Insurance Co. of Canada and reported employment income from that source, in the amounts of $83,366, $77,821, $91,413 and $84,584 for the 1991, 1992, 1993 and 1994 taxation years, respectively:

(b) the Appellant claimed farming losses from the 1988 taxation years as follows:

YEAR TOTAL FARM		RESTRICTED	FARM LOSS
	LOSS	PORTION	CLAIMED
1988	$13,327	$8,327	$5,000
1989	$15,545	$6,795	$8,750
1990	$15,280	$6,530	$8,750
99]	$14,995	$6,248	$8,747
1992	$14,997	$6,249	$8,748
1993	$14,993	$6,247	$8,746

(e) the Appellant reported gross farming income in the amounts of $2,675, $1,181, $4,375 and $6,037 in the 1991, 1992, 1993 and 1994 taxation years, respectively;

(j) the Appellant did not have farm losses available to carry forward to the 1994 taxation year:

Further facts are as follows. The limited farm losses claimed relate to the activities of breeding, training and racing standardbred horses. The Appellant has always been interested in horses. During the years under appeal he owned a training license. Further, up until 1993 he also had a driving license. He was a member of the Canadian Trotting Association and the Canadian Standardbred Horse Society. Apparently he was a member of the first association to permit him to own and train horses and of the second association to breed horses.

In 1982 the Appellant and his family moved to a home on a 20 acre farm which he owned and which is located approximately ten miles from the town of St. Catharines where he performed his duties as an insurance agent. On the farm are a barn and stalls to accommodate four horses.

The Appellant was born in 1936 thus making him 52 in 1988. He testified that he feared the Government of Ontario was going to take over the automobile insurance business which might have led to an early retirement from his insurance activities. He sought an alternative source of income and thought that breeding and racing standardbreds might be the answer.

The Appellant started his breeding operation in 1988 by purchasing two three-year-old mares. He bred these to a local stallion at relatively low stud fees ($300 to $400). He chose that stallion because he liked his blood-lines. The Appellant formulated a six year plan in 1988 aimed at profitability in 1994. He explained the reasons for that long period including the length of time from breeding the mares to when their foals could be expected to race, the risks of not getting sound foals and of injury and the uncertainties inherent in breeding of getting mares in foal. Although foals were produced by the first two mares, they were not acceptable and the mares were sold, one in 1990 and the other in 1991. In 1989 the Appellant bought another mare, named Oprah, for $2,000. The Appellant considered that mare to be royally bred but she was not a racing prospect because of a leg problem. Oprah had one foal in 1991 and another in 1994. The Appellant also owned or leased other inexpensive horses from time to time. One type was referred to as “chanceys” meaning essentially unproven as racers. He needed to have such horses mainly to keep his trainer’s license in force. It was these other horses who produced the small purses in the years in question, the Appellant never having raced a foal bred by him.

The Appellant did not have training facilities on his farm and consequently had to go to a training centre for that purpose.

As to the time involved, the Appellant testified that his mandatory hours with respect to the insurance business were only 16 hours per week but that he actually spent approximately 30 to 40 hours a week on insurance business. The time required for the horses was 50 to 60 hours a week and the Appellant was assisted in this by his son, his daughter and his son-in-law.

As to finances, the Appellant was able to secure a line of credit with a local bank in the amount of $50,000. He drew on this line of credit and applied the monies to the standardbred activity.

The Appellant relied heavily on the advice of his rather large accounting firm with respect to the preparation of income tax returns and the claiming of restricted farm losses. On their advice he switched from a cash basis of reporting to an accrual basis.

In the years 1991 through 1994 the Appellant reduced his actual losses by including inventory valuations in the calculation of net income. The inventory valuation in 1994 was large, namely $48,193.34. This contributed largely to producing farming income in 1994 of $18,743 against which the Appellant applied unused farming losses of previous years in the amount of $18,743. The Appellant explained that the inventory figure was reasonable considering mainly the value of Oprah and the foal born to Oprah in 1994. No appraisals were submitted. This foal, who in 1998, is four years old, has not yet raced.

The Appellant had no written plan for his operations but had the six year plan in his mind as described above.

Submissions of the Appellant (L0/R3280/T0/BT0) test_marked_paragraph_end (434) 1.023 0462_7741_7911

The Appellant submits that he is entitled to the limited farm losses, that he is clearly not simply a hobby farmer given his ownership of the farm, the resources committed, the time put in by himself and his family and his knowledge of and interest in horses. He acknowledges that his profit and loss picture has been grim over the years but explains that in a high-risk business such as breeding and racing standardbreds it only takes one really good racing animal to turn the picture around entirely.

Submissions of the Respondent (L2/R3118/T0/BT0) test_marked_paragraph_end (1622) 1.023 0463_1117_1289

The Respondent submits that the Appellant had no plan and no business with a reasonable expectation of profit. He refers to the tests in Moldowan v. À. (1977), 77 D.T.C. 5213 (S.C.C.), and concludes that the Appellant is a thirdclass farmer, 1.e., simply a hobby farmer with no real expectation of profit. As to the valuation of the inventory of horses in 1994, counsel for the Respondent submits that there was no appraisal and one cannot simply accept the large inventory valuation selected by the Appellant and his accountants.

Analysis (L4/R4932/T0/BT0) test_marked_paragraph_end (240) 1.030 0463_3335_3501

Section 31 of the Income Tax Act ^Acf) limits farming losses to a formula amount where a taxpayer’s chief source of income is neither farming nor a combination of farming and some other source of income. Further, subsection 248(1) of the Act makes it clear that “farming” includes “livestock raising” and “maintaining of horses for racing”. Section 31 has kept the courts busy for many years and it is clear that each case must be decided on its own set of facts. Farming activities may fall within one of three categories as defined by the Supreme Court of Canada in Moldowan. Dixon J., at 5216 stated:

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

(1) a taxpayer, for whom 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) [now s. 31 ]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 s. 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 farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

The purpose of section 31 was analyzed by the Federal Court of Appeal in À. v. Donnelly where, in a judgment dated October 15, 1997 [reported (1997), [1998] 1 C.T.C. 23 (Fed. C.A.)], Robertson, J.A. said:

As is well known, section 31 of the Act is aimed at preventing “gentlemen” farmers who enjoy substantial income from claiming full farming losses: see The Queen v. Morrisey, supra, at 5081-82. More often then [sic] not it is in- voked in circumstances where farmers are prepared to carry on with blatant indifference toward the losses being incurred. The practical and legal reality is that these farmers are hobby farmers but the Minister allows them the limited deduction under section 31 of the Act. Such cases almost always involve horsefarmers who are engaged in purchasing or breeding horses for racing. In truth, there is rarely even a reasonable expectation of profit in such endeavours much less the makings of a chief source of income.

As is established by section 18.28 of the Tax Court of Canada Act, a judgment of this Court under the Informal Procedure is not a precedent. Thus, I am not bound by the judgment of Judge Lamarre dated October 12, 1994 in which, in a similar fact situation, she disallowed the Appellant’s claim for losses in 1989 and 1990.

In my opinion, one must look at all of the aspects of an operation to determine into which category a particular farmer fits. One must also consider the risky nature of a standardbred operation and how, as the Appellant explained, one good horse can make a tremendous difference to the profit picture. Again, consideration must be given to the resources involved and the time devoted by the particular farmer to the operation. In the present case the Appellant had his own farm, was actively involved in the purchasing and selling of horses and the breeding operations, had licenses as a trainer and driver (until 1993) and had the resources to operate the business. He lived on the farm where the horses were mainly stabled and he and his family devoted considerable time to the horses. He has a keen interest in bloodlines and chooses the matings of his mares. How can such a person be considered as a “gentleman” or “hobby” farmer as described by the Federal Court of Appeal in Donnelly? His involvement in the activities of the farm operation was considerable. The monies devoted to the farm operations were significant. Although he sustained losses, that reason alone is not sufficient to establish that the Appellant must be considered as a hobby farmer with no reasonable expectation of profit.

In my opinion the Appellant clearly carried on farming as a “sideline business” and, as stated in Moldowan, is entitled to the limited farm losses he claimed in 1991, 1992 and 1993. Moreover, he had restricted, i.e., unused farming losses which he could, under section I 1 1 of the Act carry forward to the 1994 year. As to the 1994 inventory valuation used by the Appellant, his was the only evidence before me and his reasons for the high valuation are accepted.

Consequently, the appeals are allowed and the matter is referred back to the Minister for reconsideration and reassessment on this basis.

Appeal allowed.