Joseph Shiewitz v. Minister of National Revenue, [1979] CTC 2291, 79 DTC 340

M J Bonner:—The appellant appeals from assessments of income tax for the 1973 to 1976 taxation years, both inclusive. The assessments were made on the basis that the deduction of losses from the appellant’s horse racing business was restricted by the provisions of subsection 31(1) of the Income Tax Act.

The sole issue raised by the pleadings was whether the appellant’s chief source of income at the relevant times was a combination of farming and employment.

The appellant is a Toronto businessman. He owns and has for several years owned a company engaged in the business of painting high-rise apartment buildings. The company employs a full-time manager. The appellant’s work with that company occupies only six to eight hours a week. During the years in question the appellant received management salary and loans from the company as detailed in paragraph 2(c) of the reply to notice of appeal.

In addition the appellant received income from his father-in-law’s company, Exclusive Paints Limited, during the years 1974, 1975 and 1976 in the amounts of $5,450, $8,525 and $6,000 respectively. Although the respondent attached some significance to this fact I do not regard it as having any great bearing on the outcome. The payments were received for services rendered during the period when the appellant’s father-in-law was unable to look after his business due to absence on vacation or illness. During these periods the appellant did not devote much time to Exclusive. He was there at the beginning and the end of the day only. At other times that business was run by employees.

The appellant gave careful and detailed evidence that plainly showed that he devoted approximately forty hours a week to his horse racing activities, not counting the time he spent at races. He studied pedigrees and track records. He was present when horses were training. He arranged for medical care and breeding of his animals. The selection of studs to service his brood mares required a great deal of study. He devoted time to the study of races in which his horses were entered. He arranged for shipment when the horses were racing out of town and he supervised the treatment of his animals during the cooling down period after a race.

Although exact figures were not established, it appears that the appellant’s investment in horse racing exceeded his investment in his painting business. Despite the appellant’s efforts the horse racing activities produced losses during each of the years 1967 to 1976. Those losses totalled $87,701.01.

In 1975 and 1976 the number of races run appears to have declined to three and two respectively. In 1976 the appellant earned no revenues, either from winnings or from the sale of horses.

The appellant explained that he enjoyed horse racing activities and he asserted that it could be a profitable business but that he had suffered some bad breaks. He gave examples. In one case a horse threw its head back in the starting gate, breaking the bone in its neck. The broken bone severed a blood vessel and the horse bled to death. In another case the horse for which the appellant had been offered $20,000 was being examined by a veterinarian prior to breeding. During the examination the rectum of the horse was punctured and she died. In another case the appellant said that he and one Harvey Tanenbaum entered into an agreement to buy a horse in equal partnership. Mr Tanenbaum was to make the claim. He did so but, so the appellant said, Mr Tanenbaum breached the agreement and decided to keep the horse. That horse became a three-year old champion worth $100,00. In another case the mare was bred to a horse whose stud fee later rose to $7,500, but the foal was lost.

The appellant lost an unspecified amount of money in 1977. He stated that his accountants had not completed the statements for 1978, but he believed he made a profit in that year. His revenues in that year, he said, had increased to $24,000.

The plain fact that the appellant devoted the preponderance of his time and effort to his horse racing activities does not lead to a conclusion that the appellant’s horse racing activities were a business. Clearly, horse racing activities are “farming” and can be a business, but if those activities are to be regarded as a source of income or a business the appellant must illustrate the presence of a reasonable expectation of profit.

A recurrent theme in the appellant’s evidence was that horse racing is hazardous and if it were not for bad breaks it might have earned profits for him. This argument strikes me as one involving circular reasoning, particularly in a pursuit as risky as horse racing.

Had the appellant demonstrated that he had identified the risks, and had he indicated that he undertook to pursue a plan for management of the risks or the minimization of the risks, his assertion that there was a reasonable expectation of profit would not have struck me as being little more than wishful thinking.

The unbroken string of losses in all years prior to 1976, and the absence of any evidence indicating the formation and implementation of a plan to bring about a change leads me to the conclusion that on the balance of probabilities the appellant had no reasonable expectation of profit during any of the years in issue.

The presence or absence of reasonable expectation of profit is an issue to be determined by objective test and not in reliance on objective expressions of optimism, however sincere. It therefore appears to me that the appellant falls in the third class of farmers described by Mr Justice Dickson in William Moldowan v Her Majesty the Queen, [1977] CTC 310 at 313; 77 DTC 5213 at 5216. In consequence, the farming losses are not deductible. It has not been shown that the assessments in issue are too high and in the result the appeal must be dismissed.

The respondent invited me, if I were to reach this conclusion, to send the assessment back to the Minister to enable the assessment of more tax. To do so would be tantamount to allowing the Minister to appeal to this Board from his own assessment. This Board has no jurisdiction to entertain such an appeal. In the result, the appellant’s appeal will be dismissed.

Appeal dismissed.