Philrick Limited v. Minister of National Revenue, [1973] CTC 2095, 73 DTC 92

The Assistant Chairman:—This is the appeal of Philrick Limited from an assessment of the 1967, 1968, 1969 and 1970 taxation years which was heard at Toronto on March 30, 1973.

The points to be determined in this appeal are—first whether the chief source of the appellant’s income in the years pertinent to this appeal was from farming or from a combination of farming and some other source of income, and secondly whether the allocation by the respondent of one-half of the management salary of the appellant company’s sole shareholder to farming operations was legally justified.

Philrick Limited was incorporated on June 5, 1957. At that time 50% of the shares were held by Herbert Richards and 50% by William Phillips. On June 1, 1959 Mr Richards, having purchased all of Mr Phillips’ interest in the company, became the beneficial owner of all issued and outstanding shares of the appellant company. The company was then engaged in the purchase and the development of land in the Haliburton and Kawartha areas of Ontario, the subdivision of the land into cottage lots and the sale of these lots with or without cottages erected thereon.

In 1961 Mr Richards bought two horses which were boarded out. From that time on Mr Richards’ intentions were to phase out the “land and cottage business’’ and make a living on the breeding and the racing of horses. For this purpose Mr Richards purchased a farm and a stable with fourteen stalls built in it and constructed a half-mile jogging track. The number of horses kept by Mr Richards was continually increasing.

In 1967 Mr Saunders, a real estate agent who was closely associated with Mr Richards, convinced the latter to buy land for cottage development in Deer Bay Reach, Buckhorn area, and Mr Richards’ cottage business continued until 1970 when all the cottages were sold. During that period Mr Richards acquired other horses and bred and raced them. In 1969 another farm was leased on which there was a better track and most of Mr Richards’ time was devoted to the horses. No land for the development of cottage lots was purchased by Mr Richards subsequent to 1970.

From the financial statements filed by the company with its income tax returns, the following figures were extracted for the years pertinent to this appeal:

Cottage Property Business

	1967	1968	1969	1970
Gross sales	$166,078	$135,678	$233,004	$205,170
Cost of sales	83,929	86,344	114,484	87,748
Gross profit	82,149	49,334	118,520	117,422
Operational Expenses	38,835	31,128	72,979	48,473
Net profit	43,314	18,206	45,541	68,949
	Farm Operations
	1967	1968	1969	1970
Expenses	17,183	26,720	28,180	55,423
Income (purses)	1,987	8,458	3,038	1,719
Loss	(15,196)	(18,252)	(25,142)	(53,704)

It is to be noted that although, from evidence adduced to the effect that most of Mr Richards’ time was devoted to the horses, all of the managerial salary was charged to the cottage property business. and none to the farm operations. The losses of the farm operations were deducted from the net profits of the “cottage property business”.

The Minister disallowed the deduction on the grounds that the only source of income for the years under appeal was from the sale of lots and that no income was derived from the farm operations—so the appellant’s chief source of income was neither from farming nor a combination of farming and some other source of income.

The appellant’s farming operations date back to 1961 and no evidence was produced to indicate that income was ever derived from these operations. There is no doubt in my mind, however, that in the years pertinent to the appeal the appellant was operating a racehorse farm but it certainly cannot be held that the operation of the farm was the chief source of the appellant’s income. Nor, in the circumstances, can it be held that the main source of the appellant’s income was a combination of farming and some other source of income because no income was derived from the horse farm up to and including the years pertinent to the appeal.

The fact that Mr Richards was contemplating the eventual phasing out of the cottage business does not alter the fact that the appellant company’s sole income in the years 1967, 1968, 1969 and 1970 was exclusively from the cottage business. The facts of the case would indicate that Mr Richards’ intention was to invest in and to operate the horse farm exclusively on a full-time basis, and no doubt his main source of income will eventually be from the horse farm or from a combination of the horse farm and some other source of revenue, but in the years pertinent to the appeal this was certainly not the case.

On the basis of the facts pertinent to the years under appeal, I hold that the main source of the appellant company’s income was neither farming nor a combination of farming and some other source of income, but was exclusively from the appellant company’s cottage business and the deductible farming losses of the appellant company are subjected to the limitation of section 13 of the Income Tax Act.

Considering the allocation to the horse-farm operations of one-half of Mr Richards’ managerial salary which had been wholly charged to the cottage business, it seems to me that because most of Mr Richards’ time was admittedly devoted to the horses, the equal division of his managerial salary between the “cottage business” and the “horse farm” is not only an equitable, but a generous, allocation of Mr Richards’ salary and should not be altered.

For these reasons the appeal is dismissed.

Appeal dismissed.