William Moldowan v. Her Majesty the Queen, [1974] CTC 638, 74 DTC 6496

Kerr, J:—This is an appeal from the judgment of the Tax Review Board which dismissed the plaintiff’s appeal in respect of reassess- ments for his 1968 and 1969 taxation years whereby the Minister of National Revenue limited to $5,000 in each of those years deductions claimed by the plaintiff as losses suffered in a horse-racing business.

In his statement of claim the plaintiff says that he was actively engaged in the business of training and racing his own horses and boarding and training horses owned by other persons, and that he suffered losses of $21,097.46 in 1968 and $20,609.69 in 1969 in his horse-racing business, that the said losses were farming losses and that his chief source of income in the said years was farming or a combination of farming and some other source of income within the meaning of subsection 13(1) of the Income Tax Act, RSC 1952, c 148 and amendments, and accordingly that the losses should be allowed in full in determining his income for those years.

The defence states that the Minister in so reassessing the plaintiff acted, inter alia, upon the following assumptions:

(a) in 1968 the Plaintiff reported $1,750.00 as income from employment in Active Trading Ltd, investment income in the amount of $8,822.43 and $12,500.00 income representing profit on a real estate transaction;

(b) in 1969 the Plaintiff reported $17,833.40 as income from employment and $17,048.65 as income from investments;

(c) the Plaintiff was, during the years relevant to this appeal, maintaining horses for racing and was therefore engaged in farming within the meaning of that word as used in the Income Tax Act;

(d) the Plaintiff had no taxable income from farming either in the years under appeal, or in the three taxation years preceding those under appeal.

The defendant also says that the plaintiff was farming within the definition of farming in paragraph 139(1)(p) of the Income Tax Act, and submits that his chief source of income during the taxation years in question was neither farming nor a combination of farming and some other source of income, and therefore the plaintiff was entitled to deduct a farming loss limited to $5,000 in each of the taxation years 1968 and 1969, pursuant to the provisions of section 13 of the Income Tax Act.

Section 13 and paragraph 139(1)(p) of the Act read as follows:

13. (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, his income for the year shall be deemed to be not less than his income from all sources other than farming minus the lesser of

(a) his farming loss for the year, or

(b) $2,500 plus the lesser of

(i) one-half of the amount by which his farming loss for the year exceeds $2,500, or

(ii) $2,500.

(2) For the purpose of this section, the Minister may determine that 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.

(3) For the purposes of this section, “farming loss” means a loss from farming computed by applying the provisions of this Act respecting the computation of income from a business mutatis mutandis.

139. (1) In this Act,

(p) “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 of bees, but does not include an office or employment under a person engaged in the business of farming;

The plaintiff has been actively engaged in horse-racing from at least as far back as the early 1960’s, and in his taxation years 1968 and 1969 he was buying and selling race horses, training, raising and boarding race horses and engaged in horse-racing. He originally started racing with one or two horses and subsequently bought numerous race horses, as shown in Exhibit P-5, which shows about 53 horses bought during the years 1962 to 1969, at a total cost of about $183,463. He owned all the horses outright, except for several whose ownership he shared with other persons. He bought the horses at auctions and privately and through claiming races. He raced his horses at race tracks in British Columbia and eastern Canada, and in eastern and western. United States, including well-known tracks in Ontario, Seattle, Oakland and Florida. He sold and disposed of the horses from time to time. Exhibit P-5 also includes a schedule of purses won by the horses to a total of $184,018, the largest year being 1966 when the purses amounted to $29,558.

In the early years the plaintiff boarded his horses. with one Mr T Fenton, who had a farm and trained and cared for race horses, but in 1966 the plaintiff decided to dispose of his interest in a company, by which he was employed, Active Trading Ltd, and to expand his horse-racing activities, so he leased an acre of a farm adjoining the Lansdowne Race Track in the Municipality of Richmond, which rented acre contained a small house, a corral and about 25 to 30 box stalls for horses, in reality a horse farm; he engaged Fenton as a trainer and paid him $300 per month, plus 10% of purses won; he also paid boys who exercised the horses. He had necessary facilities at the Lansdowne farm for his expanded business. In 1968 he had five clients for whom he boarded and trained horses, fees for boarding being $80:to $100 per month, and for training $9 to $10 per day. He testified that he expected to be able to make a profitable living from his expanded operations and hoped to expand them further.

In the years 1960 to 1967 the plaintiff was employed by the. said Active Trading Ltd and received salary in those years ranging from $11,500 to $15,900. He sold his 50% interest in that company in 1967 for $150,000, receiving $50,000 cash, with the remainder payable at the rate of $5,000 per month for the next 20 months. In 1969 he received salary amounting to $17,833 from Cascade Fasteners Ltd, a company that he started in 1968 and later sold. He also started another company, Cascade News, in 1967, whose business was the distribution of racing forms in British Columbia, and he received dividends from that company.

Exhibit D-3 is a summary of the plaintiff's income for the years 1960 to 1972, as follows:

There is no dispute as to the figures. They indicate that the plaintiff’s horse-racing activities realized a profit of $1,593 in 1963 and $1,368 in 1964, but in every other year in the period 1962 to 1969 he sustained losses totalling almost $55,000, the greatest being about $21,000 in each of those years.

The plaintiff testified as to the amount of time he devoted to his horse-racing business, going to his horse farm and attending races.

After his large farming losses of about $21,000 in each of the years 1968 and 1969 the plaintiff started to taper off that business and he discontinued his Lansdowne operations and sold its equipment, and he has disposed of nearly all his horses, having only one or two in 1974.

Answers given by David K Patmore, on his examination for discovery as an officer of the Crown, were introduced in evidence on behalf of the plaintiff. The answers indicate that in the years concerned the plaintiff was considered to be running a farming operation but as he had no taxable income in those years or in the previous 3 years from that farming business his chief source of income was considered to be neither farming nor a combination of farming and some other source of income.

It was said at the trial that the Minister did not make a formal determination under subsection 13(2) of the Act that the plaintiff’s chief source of income in the years in issue was neither farming nor a combination of farming and some other source of income. But this Court may do so if the evidence warrants it. See Vincent v MNR, [1966] CTC 147; 66 DTC 5123. toes

The evidence satisfies me that in the years 1968 and 1969 the plaintiff was operating a business of buying and selling race horses, boarding and training race horses owned by other persons, and racing his own horses, and that he was doing so not as a hobby but in the course of a commercial enterprise with a view to profit; and that he was “farming” within the meaning of section 13 and paragraph 139(1)(p) of the Income Tax Act.

There remains the question whether the plaintiff’s “chief source of income” for the taxation years 1968 and 1969 was “neither farming nor a combination of farming and some other source of income”. If the answer is in the affirmative, subsection 13(1) of the Income Tax Act applies to limit the deduction of his farming loss to $5,000 in each of those years. If the answer is in the negative, he is entitled to deduct his entire farming loss.

In the period 1960 to 1972 the plaintiff had profits from his horses and racing of $1,593.44 in 1963 and $1,368.64 in 1964, but he had losses in all the other years, including $8,504.75 in 1967, followed by the large losses in 1968 and 1969, then further losses as he phased out his racing business.

In the years 1962 to 1967 the plaintiffs income from other than “farming” is shown in Exhibit D-3. In none of those years can it be said that his chief source of income was farming or a combination of farming and some other source of income. I hardly think that it can be said to have been otherwise in 1968 and 1969. He had leased the Lansdowne premises on a monthly tenancy and has prospects of some income from boarding and training horses for other persons, but if there was to be substantial income it would have to come from his trading in horses and winning of purses in racing, activities that were fraught with hazards and uncertainties, as he well knew from previous experience. He was optimistic of success, but although it was a potential source of income I do not think he could reasonably look to or depend upon it, either alone or in combination with some other source of income, as his chief source of income in any of the years ahead, including the years 1968 and 1969. In my opinion, his chief source of income for the taxation years 1968 and 1969 was neither farming nor a combination of farming and some other source of income, and therefore subsection 13(1) of the Act applies to limit deduction of his farming loss to $5,000 in each of those years.

The appeal is therefore dismissed with costs.