Donald Carom v. Minister of National Revenue, [1977] CTC 2085, 77 DTC 67

The Assistant Chairman:—Donald Carom, a medical doctor who practised his profession in the City of Windsor, Ontario, has appealed to this Board from an assessment for tax for the 1974 taxation year. The doctor prepared and filed his income tax return on the basis that his net income for the year 1974 was arrived at by deducting from his income from other sources, a loss of $5,523. This loss was the result of the excess of expenses over revenue which the doctor paid as his share of the expenses in connection with race horses. The doctor, with respect to one race horse in 1974, had two partners, Dr David Fisher and Dr George Stecko,- both medical practitioners, and with respect to a second horse had as a partner Dr Fisher. The Minister, after examining the return of the appellant, disallowed the amount claimed as such a deduction. The T7W-C carried the following statement: ‘‘Since you were not carrying on a business, the farm loss claimed in the amount of $5,523.00 has been disallowed.” The doctor duly objected, and by notification dated June 7, 1976, the Minister confirmed the assessment on the basis that the amount of loss claimed by the doctor was a personal or living expense within the meaning of paragraph 18(1 )(h) and section 248 of the Income Tax Act. While the appellant in his Notice of Appeal took four alternative positions with respect to the loss, two of those were abandoned at the commencement of the hearing. The main contention of the doctor at the appeal was that he was entitled to the restricted deduction contained in subsection 31(1) of the Income Tax Act as amended by Statutes of Canada 1970-71-72, c 63. The contention of the Minister was that there was no reasonable expectation of a profit from the horse-racing activity of Dr Carom and, consequently, the expenses were personal or living expenses and so non-deductible. The appellant took an alternative position: namely, should it be that he is not entitled to the restricted deduction permitted by subsection 31(1), then he is entitled to a capital loss as a result of the disposition of the horses in 1974 in an arm’s length transaction.

As to background generally, the doctor has practised his profession for some 15 years. While virtually all his time was devoted to the practice of his profession, he had other personal interests and business interests. He has hobbies such as stamp collecting, flying aircraft and operating model railroad trains. He has investments in the form of an interest, through a corporation, in the ownership of a building and a travel agency. In addition, he deals in commodity futures. Of course the doctor, in the presentation of his case, takes the position that in the year under appeal, 1974, he had a business activity in the form of operating race horses.

From 1968 to the early part of 1977, the doctor has owned or had an interest in five different horses. In 1968 he, with two others, for a short period of time owned a horse, and his recollection was that his share of the expenses in that year was about $600. The doctor stated that he considered that his interest was not a business interest but a hobby interest and the loss incurred in connection with that horse was not a business loss. The doctor apparently, from around 1968, has had a keen interest in horses and has read considerable material relating to them. In October 1973 the appellant, with Dr Fisher and Dr Stecko, purchased at the Liberty Bell Sale in Pittsburgh, Pennsylvania a standard- bred filly named Ambro Party for a purchase price of $7,000. In making their purchase they were assisted by a trainer who was knowledgeable as to horses. It should be mentioned that, according to the appellant, Dr Fisher was an experienced horseman. Ambro Party, after its purchase in 1973, was boarded and stabled in Windsor and, through 1974, was kept eligible for various major stakes in North America. The horse in 1974 was kept in training although it did not race. In October 1974 the horse sustained a chipped bone in the hock and the appellant concluded, as a result of that injury, the horse would not attain the potential which he believed it had, and in that month he sold his interest to Dr Fisher.

In November of 1973 the appellant, with Dr Fisher, purchased a second horse, also a standard-bred, named Mighty Almahurst. This horse had previously raced and won purses totalling approximately $6,000. It had however sustained, in the course of its career, a broken Knee which was subsequently pinned. After a thorough examination of the horse and an examination of the X-rays of the broken knee, the decision was made that the horse still had a useful career ahead of it and it was purchased. The reason for purchasing the horse was that the appellant and his associate believed that that horse could promptly be entered into races and, the chances are, earn purses which would offset the expenses incurred in bringing Ambro Party along to the time when it too could race. In 1973 Mighty Almahurst did not race for the appellant and his associate, nor did it in 1974 as, in training in 1974, it re-injured the same knee and they decided to dispose of the horse, which they did in 1974. In acquiring both Ambro Party and Mighty Almahurst, considerable attention was paid to the sire and dam to ensure that the horses had the potential to become good standard-bred horses. In addition, after legislation was passed in Ontario to encourage the breeding of horses in that province, a good horse could be bred or put out to stud, and in this fashion earn considerable money for the owner. This could only happen if the horse had won many races which gave it a name a person would want as the sire or dam for his horse. The appellant mentioned that he had this in mind, as well as the racing of the horses, when he acquired his interest. After the sale of Ambro Party and Mighty Almahurst in 1974, the appellant did not own a horse or an interest in a horse until late 1975. It is to be noted that the only revenue received in 1974 by the appellant was revenue arising from the sale of the two horses which had been purchased in 1973 to race and win purses and even to breed. The claim was that his interest in the horses was acquired for two purposes: namely, to win purses at races, and fees on breeding. There was no evidence that fees were ever received from breeding of the horses, and no purse had been won until 1976.

In November of 1975 the appellant, with Mr Herb Swinhoe who, if I recall correctly, was a trainer in the Windsor area and knowledgeable with respect to horses, bought a horse known as Dandy Dagger. In 1976 this horse raced as a 2-year old and won approximately $5,600 in purses. It has a good lineage. They have been offered about $20,000 for the horse but they have refused to sell it. It was purchased for about $2,500. In February of 1977 the appellant purchased yet a further horse who was 8 years old at the time. He immediately started to race the horse and, in three races to date it has not as yet won a race for him.

While the appeal relates to the 1974 taxation year, the appellant had a loss in 1973 as well as in 1974 and it could be that in 1976 there might be a small profit or even a small loss from the horse-racing activity. It is to be noted that no reference was made to 1975. The horses in which the appellant had an interest in 1974 were disposed of before the end of 1974 and no further interest in horses was acquired by him until November 1975. The appellant explained that in that period of time he was looking around at other horses to ensure his next selection would be a good one. The appellant stated that he devoted some 8 to 12 hours a week to horses—usually Saturday mornings would be devoted to that activity by attendance at the barn, rubbing the horses down, seeing the trainer train the horses, etc. He spent considerable time reading about horses so that he would be in a position to buy a good horse should a good one come along. He is a member of various US and Canadian trotting associations. His horses are stabled at a farm in the Windsor area under the supervision of a trainer who is also the trainer of many other horses of other clients. The appellant himself does not own a farm. While initially the financial records in connection with the horses were kept by Dr Fisher, at the present time the appellant has an accountant maintaining the records. It is noted that the two horses purchased in 1973 cost the appellant slightly in excess of $5,000. His share of the maintenance expense in 1974 was approximately $8,000. Dandy Dagger, in a few races late in 1976, won approximately $6,700. It is to be noted that, to date, this is the only horse in which the appellant has had an interest which has won a purse. I assume his associates’ share of the maintenance cost of the horses in 1974 was approximately the same as the appellant’s share, so that, to have broken even, purses of about $20,000 would have had to be won.

The appellant contends that he was in the business of farming in so far as race horses were concerned in 1974 and is entitled to the restricted deduction contained in subsection 31(1) of the Income Tax Act. Farming is defined in subsection 248(1) as follows:

“farming” includes tillage of the soil, livestock raising or exhibiting, maintaining

of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping ?f bees, but does not include an office or employment under a person engaged in the business of farming;

The Minister takes the position that the expenses claimed are personal or living expenses the deduction of which is prohibited by paragraph 18(1 )(h), which paragraph reads as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

“Personal or living expenses” is defined in the definition subsection 248(1) as follows:

“personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

((b) and (c) are irrelevant to this appeal). The position of the Minister is that the expenses claimed by the appellant in 1974 are personal or living expenses as they were expenses of properties not maintained by the appellant in connection with a business carried on for profit or a reasonable expectation of profit.

Counsel for the appellant contended that this matter should be looked at, in effect, commencing late in 1973 and continuing up to the date of the hearing. With that global picture, he submitted, one could readily conclude that, within the definition of “farming”, the appellant was farming in 1974. It was pointed out that for a 12- or 13-month period commencing in November 1974 the appellant owned no horses, and so how could it be said that he was farming in that period. The explanation given, as mentioned in the evidence, was that the appellant spent some of that period of time directing his mind to the horses he would like to acquire to continue the horse-racing business and, even though he had no horses in that period, he was still in the farming business. The contention of the appellant is that he falls within the ambit of subsection 31(1) and as such is entitled to the restricted farm loss. His position is the second of the three possibilities Mr Justice Cattanach sets forth in CBA Engineering Limited v MNR, [1971] FC 3 at 10; [1971] CTC 504 at 510; 71 DTC 5282 at 5286:

farming losses incurred in a farming operation with the expectation of profit or the eventual expectation of profit but where farming is not the taxpayer’s chief source of income, nor part of it, in which event the deductibility of losses is limited by Section 13, . . .

The Minister’s position is that, since there is no reasonable expectation of profit from the venture, the expenses of the venture are personal or living expenses and therefore their deduction is prohibited by paragraph 18(1)(h). No other position was taken on behalf of the Minister so that, should I find his position cannot be supported, then the claim of the appellant should be allowed and he should be permitted the restricted deduction pursuant to subsection 31(1).

Mr Justice Addy in the case of Donald Preston McLaws v Her Majesty the Queen, [1976] CTC 15; 76 DTC 6005, held that, in the circumstances of that case, McLaws had a reasonable expectation of profit. At pages 18-19 [6007-8] Addy, J states as follows:

The only remaining point to decide is whether it was an operation being Carried on with a reasonable expectation of profit. In other words, whether it falls in the second or in the third of the three categories mentioned in the CBA Engineering case, supra. Whether or not there was a reasonable expectation of profit is to be determined by an objective test and for that reason the actual performance of the partnership from a profit and loss standpoint over a period of years is a very important consideration. However, the status, capacity, experience, interest and actions of the partners are also to be taken into account especially in trying to establish whether the undertaking is a hobby or a commercial venture. As to its financial success, the partnership, since its inception, never showed a profit. This is illustrated by Exhibit 1 filed at trial. Yet, having regard to the total income and expenditures of the partnership, the losses were not unreasonable and very little additional luck in the various races by the partnership horses would have resulted in a favourable balance sheet. It is also important to note that the evidence established that the partnership was breeding horses in an attempt to build up its stable and improve the breed in order to attain greater success in racing, with resulting profits. There was also evidence adduced, which I accept, to the effect that the partnership broke up subsequently, in 1972, because there was a difference of opinion between the plaintiff and the other partners as to the amount of money which should be invested to immediately increase the number of racing horses held and thereby apparently improve the chances of the operation being a profitable one. The mere fact that the horse-racing enterprise was not an immediately profitable one is not too important if there is a prospect of profits being produced eventually as the operation improves. The question is whether there is a reasonable expectation of profits and the expectation need not relate to the immediate future. As to this, see R v Douglas C Matthews, [1974] CTC 230; 74 DTC 6193. In this respect the case at Bar is quite distinguishable on the facts from the case of Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417, where it was held that the operation did not have any commercial characteristics. The taxpayer who was living on the farm had expended some $50,000 during six years with a total return of only some $4,500. It was held that the expenditures were living expenses as the racing and selling of horses in this case constituted solely a hobby and formed in no way an enterprise with profit as one of the motivating factors.

The learned judge, after considering the activities of that appellant and his associates, the period of time the partnership existed, and the amounts involved, concluded that they “continued in their partnership for the purpose of making a profit from their race horses’’.

In Donald A Holley v MNR, [1973] CTC 539; 73 DTC 5417, Sweet, DJ found, in the circumstances of that case, that the expenses were personal or living expenses and so upheld the assessment.

Considering the activity which existed in the McLaws case and the background of the parties involved, it is a different case from the instant appeal. Since in the Holley case the Court agreed with the Minister that that appellant did not have a reasonable expectation of a profit and held the expenses to be personal or living expenses, it seems to me that the “business activity’’ in this present appeal is much less than that activity in the Holley case.

The result is that the appellant is not entitled to the restricted business loss permitted by subsection 31(1) and, in this respect, the appeal is dismissed.

As mentioned, the appellant contended in the alternative that if he were not entitled to the restricted business loss permitted by subsection 31(1) he did have a deductible capital loss on the sale of his horses.

The submission was that the horses were capital property of the appellant as that term is defined in subsection 248(1) and section 54 of the said Income Tax Act. Paragraph 54(b) says:

(b) “capital property’’ of a taxpayer means

(i) any depreciable property of the taxpayer, and

(ii) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer;

Paragraph 39(1 )(b) states what a taxpayer’s capital loss for the year is and excludes depreciable property as well as property described in subparagraph (a)(i), (ii) or (iii) of subsection 39(1). Counsel continued that a horse is not within the ambit of “depreciable property’’ as defined in paragraph 13(21)(b) as nowhere in the Regulations is an allowance on account of a horse provided for and, since the horse was not depreciable property and since it is not within the ambit of subparagraph 39(1 )(a)(i), (ii) or (iii), the appellant suffered a capital loss.

In reply to this submission, counsel for the Crown referred to paragraph 54(f) and subparagraph 40(2)(g)(iii) and contended that, if it were held (as I now have held) that the expenses relating to horses were personal or living expenses, then the property with respect thereto was “personal-use property’’ within the meaning of paragraph 54(f) and, pursuant to subparagraph 40(2)(g)(iii), the loss on the disposition of personal-use property is nil. I accept the submission of counsel for the Crown. The horses, or the interests in horses, acquired by the appellant I have held were not acquired by the appellant to use in a business as, in the circumstances of this appeal, there was, in my view, no reasonable expectation of a profit and, consequently, the expenses in connection therewith were personal or living expenses. Personal-use property as defined “includes” certain items and it would seem, in the circumstances, that the horses would fall within the segment of the definition that reads:

and ‘‘personal-use property’’ of a partnership includes any partnership property that is used primarily for the personal use or enjoyment of any member of the partnership or for the personal use or enjoyment of one or more individuals each of whom is a member of the partnership or a person related to such a member;

I would dismiss the appeal.

Appeal dismissed.