O'Connor T.C.J.:
1 The issue is whether the Appellant in 1991 and 1992 is entitled to deductions of the entire amounts of certain business losses from his involvement in a business of buying and selling Arabian horses or must his losses be restricted to the limited amounts provided for in subsection 31(1) of the Income Tax Act (Act), as contended by the Minister of National Revenue (Minister).
2 In December 1989, the Appellant and his wife purchased fractional interests in four Arabians mares from Silver Unicorn Inc. (Unicorn). Three other persons purchased the remaining fractional interests in those mares.
3 In December 1990, the Appellant and his wife converted or swapped their said fractional interests in the two mares for a 100% interest in an Arabian stallion and an Arabian filly. Unicorn maintained the horses at all relevant times for a fee.
4 The Appellant in the years 1991 and 1992 was a licensed physician and derived substantial income from that occupation.
5 The horse operation produced no revenues in 1989 through 1992. The Appellant claimed as a deduction his share of the losses incurred in 1991 being $28,753.46 which includes an amount of $12,697.00 interest on monies borrowed to purchase the horses and $12,882.55 in 1992 consisting entirely of interest on the monies borrowed to purchase the horses. The Appellant paid no horse expenses in 1992 other than the said interest because Unicorn had defaulted in carrying out its duties.
6 The two horses of the Appellant and his wife were moved to Florida where litigation against Unicorn ensued. This litigation involved other investors. The Appellant did not participate. The litigation resulted in several horses including the two horses of the Appellant and his wife, being ultimately included in a forced sale. No proceeds from this sale were paid to the Appellant and his wife. The Appellant had wanted to have the horses registered in the names of himself and his wife but for various reasons this never occurred and probably was the reason why the horses were included in the forced sale notwithstanding the beneficial ownership thereof by the Appellant and his wife.
7 The Appellant did some research into his potential investment in Arabian horses and concluded that it would be a profitable investment. He derived no personal enjoyment from the horses having visited the farm where they were kept on only one occasion. It is clear that he was definitely a passive investor in the horse operation.
Submissions of the Appellant
8 The Appellant's submissions can best be summarized by quoting from his Notice of Appeal:
8. This was clearly a business venture with reasonable expectation of profit for the following reasons:a. The principal amount involved was substantial.
b. There was no involvement from the taxpayer or any of his family members.
c. No farm land or horse racing was involved.
d. A professional horse farm was hired.
e. The horses were purchased as inventory with the intention to sell later at a higher price.
f. The prices of the horses according to my researched information was clearly indication that the venture was highly profitable. (The information were previously submitted to Revenue Canada).
g. The normal cost of this business, as quoted by the Timberholme Arabian Farm in British Columbia (Financial Post articles July 3, 1989) included: sale commission of 10%, boarding fee of about $5700 a year and breeding fee of $7500. The fees charged by the Silver Unicorn Inc. were in line with the other Arabian horse farm.
h. The projection I used to analyze the profitability of the business was very conservative and realistic. The projection based from promotion of this kind of business were usually 3-4 times higher than my own estimation. (Information previously submitted)
9 The Respondent submits that the horse operation consisted in “farming” as that word is defined in subsection 248(1) of the Act, that the Appellant's chief source of income was neither farming nor a combination of farming and some other source of income and consequently the Appellant is restricted to the amounts provided for in subsection 31(1) of the Act.
Analysis and Decision
10 Subsection 248(1) of the Act defines “farming” 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 of bees, but does not include an office or employment under a person engaged in the business of farming.
11 Subsection 31(1) of the Act limits the deduction of farming losses based on a formula, the result of which, if that subsection is applicable, is that the Appellant's permitted deductions would be $8,715 in 1991 and $7,691 in 1992. These are the amounts which the Minister has allowed.
12 There is little doubt that the Appellant's chief source of income was not farming nor a combination of farming and some other source of income. From his own testimony it is clear that the Appellant's involvement in the horse operation, with the exception of the monies invested, was, for all intents and purposes, nil. Further, the horse operation produced no income whereas his physician income was considerable.
13 The question thus becomes, was the operation “farming”? The definition in subsection 248(1) is an inclusive one, i.e. it extends the normal meaning of farming to certain activities that might be borderline, such as maintaining of horses for racing. That is not an issue here as the horses were not maintained for racing purposes. However, the definition does include the words “livestock raising”. I have little doubt that the normal meaning of the word “farming” would include the operations carried on by Unicorn on behalf of the Appellant. Any such little doubt is moreover removed because the operation surely consisted of “livestock raising”.
14 The Appellant argues that his was a mere passive investment and therefore he was not carrying on personally a farming operation.
15 A similar argument was advanced in a very similar case, namely Levy v. Minister of National Revenue (1990), 90 D.T.C. 6346 (Fed. T.D.). The taxpayer in that case had used an argument similar to that of the Appellant in this case. Rouleau, J. of the Federal Court - Trial Division stated as follows at page 6350:
The words “carried on by him” cannot be said to have the same meaning as “actively engaged”. In fact, I am confident in saying that an investment of capital, plus contributions towards expenses and a fee for care and maintenance, does constitute carrying on business.
The jurisprudence is clear that business may be said to be “carried on” by a taxpayer, even though the actual work is undertaken by another, when the taxpayer invests capital only with a view to sharing the proceeds...
16 It may seem unfair to certain taxpayers that farming losses must be restricted as provided in subsection 31(1) whereas the restrictions do not apply to any other business. Moreover, it may seem unfair because perhaps if the Appellant had acquired shares in a corporation carrying on a farming business, he would not be restricted by subsection 31(1) if the shares suffered a loss. Notwithstanding these concerns, parliament has enacted the subsection and it must be applied where its conditions are satisfied. In my opinion the subsection clearly applies in the present case.
17 This result will not please the Appellant. However, I would point out that the Appellant may have been fortunate in that the Minister at least allowed him the restricted farm losses contemplated in section 31. The following general commentary contained in CCH Canadian Tax Reports, Vol. 2 p.7703/4 bears this out.
The Department, in Interpretation Bulletin IT-322R (¶5675), and the Supreme Court of Canada in Moldowan v. The Queen, 77 D.T.C. 5213, recognize that a taxpayer who is engaged in farming operations may fall into one of three classes. These are as follows.(1) The taxpayer for whom farming may reasonably be expected to provide the bulk of his income or the centre of his work routine. Such a taxpayer who looks to farming for his livelihood is free of the limitation in section 31 and may deduct the full amount of a farming loss from other income.
(2) The taxpayer who does not look to farming or to farming and some subordinate source of income for his livelihood but carries on farming as a sideline business. Such a taxpayer must operate the farm with a reasonable expectation of profit but devote the major part of his time and effort to other business or employment. Such a taxpayer is entitled to the deduction of farm losses subject to the limitations set out in section 31.
(3) The taxpayer who does not look to farming or to farming and some subordinate source of income for his livelihood and who carries on farming activities with no reasonable expectation or profit. The losses sustained by such a taxpayer are considered to be personal or living expenses as defined in subsection 248(1) and not deductible.
Whether a taxpayer has a reasonable expectation of profit from his farming operations is an objective determination to be made from all of the facts. Some of the criteria to be considered are the extent of activity in relation to businesses of comparable nature and size, the amount of gross revenue from farming in relation to the relevant expenses, time spent in the operation as compared to other income earning activities, the profit and loss experience in the past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.
Once it is determined that a taxpayer has a reasonable expectation of profit from farming and thus is carrying on a farming business, it is necessary to determine whether farming either alone or in combination with another source of income, constitutes the taxpayer's chief source of income. It has been determined in the decided cases that the use of the word “combination” in subsection 31(1) does not require any connection by way of physical relationship or integration or interconnection between farming and the subordinate activity which provides another source of income. However, it has also been indicated that “combination” does not mean the simple addition of two sources of income for any taxpayer. In the Moldowan case, Dickson, J. indicated that this is both a relative and objective test:
It is decidedly not a pure quantum measurement. A man who has farmed all his life does not cease to have his chief source of income from farming because he unexpectedly wins a lottery. The distinguishing features of “chief source” are the taxpayer's reasonable expectation of income from his various revenue sources and his ordinary mode and habit of work. These may be tested by considering, inter alia, in relation to a source of income, the time spent, the capital committed, the profitability both actual and potential.
Similarly, the reference in section 31 to a taxpayer whose source of income is a combination of farming and some other source of income was interpreted as contemplating a man whose major preoccupation is farming but recognizing that such a man may have other pecuniary interests as well, such as income from investments, or income from a sideline employment or business. For example, a full-time farmer may obtain employment during the winter months when farming does not demand a significant portion of his time. Such subsidiary or auxiliary interests do not necessarily make section 31 applicable to the taxpayer.
18 In conclusion, for the above reasons the appeals are dismissed.
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