McCleary Drope v. Minister of National Revenue, [1978] CTC 2639, [1978] DTC 1483

The Chairman:—This is the appeal of McCleary Drope from an income tax assessment whereby the Minister of National Revenue disallowed, as being personal expenses, the amount of $3,558.54 claimed by the appellant in the 1973 taxation year as farm expenses.

The appellant’s contention in his notice of appeal is summarized as follows:

A summary of the facts and grounds upon which the appeal is founded is as follows:

1. Mr Drope started the breeding of show horses with the object of producing a strain of these animals which would be successful in the show ring.

2. With success a market for his horses would be created.

3. He was aware that it would take considerable time to perfect the breed.

4. He was prepared to change his lifestyle of earning a living as the farm became more successful.

5. He engaged in the operation only after taking advice from professional horsemen which indicated that his ultimate prospect of profitability was good.

6. The farm was only sold when a job at the University of Manitoba became available. This job has since not materialized.

7. We direct the Board’s attention to the case of Wilfred Brick of the city of St Mary’s heard before the Tax Review Board on March 25, 1974.

The basis on which the appellant was assessed is:

REPLY TO NOTICE OF APPEAL

STATEMENT OF FACTS:

(a) The appellant, at all material times during the 1973 taxation year was employed as a teacher at Fanshawe College;

(b) no portion of the expenses claimed by the appellant in the 1973 taxation year, were made or incurred for the purpose of gaining or producing income from the business of raising horses;

(c) the aforesaid amount constituted: expenses for the maintenance of a farm property by the appellant for the use or benefit of the appellant or any person or persons connected with the appellant by blood relationship, marriage, or adoption, and the property was not maintained in connection with a. business carried on for a profit, or with a reasonable expectation of profit.

Evidence:

In 1970 the appellant, who described himself as an artist and a “scrambler”, was teaching sculpturing at Fanshawe College. In that year the appellant, who had been raised on a farm, purchased an abandoned farm of some 6 A acres which included a house and two garages and decided to go into the horse raising business. To that end he renovated the garages turning them into a box-stall barn and a foaling stall. The farm was refenced, hay pastures were organized and a deep well was installed for water supply.

The appellant’s intention of breeding, raising and selling horses as a means of earning additional revenue allegedly came as a result of consultation with professional horsemen in the area. Prior to 1973, the appellant had purchased a few horses of inferior quality, but when the appellant’s daughter was seen to have qualities in handling horses, the appellant’s idea was to move into the raising of thoroughbred horses, train them, attend horse shows and sell the horses. The appellant alleges that his ultimate aim was to acquire, by breeding or purchase, a sizeable herd of thoroughbreds and move his operation to the Western Provinces.

The appellant’s teaching assignments at the College were for two to three days a week and he also worked in his studio at home leaving him sufficient time to look after the raising and training of his horses. It is my understanding that the daughter entered the appellant’s horses in several horse shows in the period of and subsequent to the pertinent taxation year.

From the Statement of Income and Expenses of McCleary Drope (McCleary Farms) Exhibits A-1 and A-3, the records show that the appellant had, on the farm, at least eight horses and one foal in the years 1973-1974. The expenses incurred in 1973 for the purchases of horses, for repairs and the drilling of a well, among others, resulted in a loss of $4,617.08. The restricted farm loss of $3,558.54 claimed by the appellant was disallowed by the Minister.

The appellant’s salary as a teacher at Fanshawe College was $11,633.32 for 1973, and he also earned additional income of $3,383.95 from sale of his artwork and other activities related to his art.

On the basis of the evidence adduced and the financial circumstances of the appellant, it is very unlikely that he would have purchased and kept up to eight horses merely as a hobby, either for himself or for his daughter. The appellant’s declared intention of buying, breeding thoroughbred horses, training them, attending horse shows and seeking out market for the horses is, in my opinion, credible and indeed born out by the facts. I believe that the appellant’s horse business was carried on for a profit and did have a reasonable expectation of profit and in that sense distinguishable from the case of William Moldowan v Her Majesty the Queen, [1975] CTC 323; 75 DTC 5216.

In 1973 the appellant’s horse business income was $150; in 1974 it was $865; in 1975 it was $4,200. It is my understanding that subsequent to 1975, the market for show horses fell and the appellant ceased his horse raising business and sold all the horses he had, save one. I am satisfied that in the 1973 taxation year that the appellant was operating a horse raising business which had a reasonable expectation of profit for future years.

The appeal is therefore allowed and the matter referred back to the Minister for reassessment on the basis that the appellant is entitled to a restricted farm loss of $3,558.54.

Appeal allowed.