E. Lynne White and William E. White v. Her Majesty the Queen, [1996] 1 CTC 2634 (Informal Procedure)

Teskey J.T.C.C.: - Both appellants elected to have the appeals heard pursuant to the informal procedure in their Notice of Appeal, wherein they appeal their assessments of income tax for the years 1990, 1991 and 1992.

These appeals were heard on common evidence.

Issue

The sole issue before me is whether a dog breeding enterprise known as Whitcam Dobermans had a reasonable expectation of profit.

Facts

It was acknowledged by the Respondent that both appellants are equal partners in the enterprise and that they had no argument as to the amount of the claimed expenses nor as to their nature.

The appellants are husband and wife. The wife is 43 years of age and the head cashier for Canada Safeway in Brandon, with an annual salary of $30,000. She obviously is the driving force behind the enterprise and has become quite skilful at breeding, showing and training Doberman Pinschers ("Dobermans"). Her salary has kept the enterprise afloat and sustained it from the continuous losses suffered since inception in 1988.

The gross revenue, expenses, net losses or income before capital cost allowance or expense charges for the office use in the home or the grounds, from 1988 to 1994, are as follows:

Net Profits

Gross

Year	Revenue		Expenses	WL.
1988	$	0	$ 5 720.59	($5 720.59)
1989	$	0	8 445.50	< 8 445.50)
1990			11 236.29	(10 636.26)
		600.00
1991		3 725.00	18 120.49	(14 395.49)
1992		5 800.00	18 489.95	(12 689.65)

1993	5 775.00	5 745.39	29.61
1994	8 330.00	7 032.69	1 297.31

Home expenses has never been added to the expenses until 1993 when in their T1 tax returns, a small portion was used to wipe out the modest profit shown above. In 1994, they again used a small portion of their in-home office expenses in their T1 tax returns to reduce the profit to $900 and both declared one-half as income that year. If the full in-house office expenses together with the kennel’s area and Capital Cost Allowance was charged, there would not have been a profit in 1994 and the losses in each year would have been greater.

The gross income for 1995 will be very modest as no puppies will be available for sale and the only income will be from stud fees and the occasional showing and training fees, the result being that another substantial loss will be sustained.

The wife started training Dobermans in 1982, attending dog shows and showing dogs. In 1985, she received a male dog as a birthday present. In 1988, the appellants applied for their kennel name and acquired what they called a foundation bitch.

The wife attended numerous shows and acquired the knowledge of what characteristics was in a champion dog and how to produce good dogs.

The wife stated that she only purchased one female in 1988 as that was all they could afford and that she felt it would be easier to develop their own bloodline this way.

Dobermans have a very short life span and their active breeding span is from two years of age to six years of age. Thus there is only four years of reproduction. Although dogs cycle twice a year, they are bred only once a year. Four litters from a female is the maximum. The puppies are not delivered to their new owners until they are 12 weeks old. At present, non show puppies, i.e. puppies sold as pets, sell for $750 and the rest are sold for approximately $900, a few for more.

The appellant said she had a list of 18 buyers for different configurations and sexes for future puppies and that it may take longer than a year to clear this list.

Since this enterprise was started, they have had six litters of puppies born out of ten attempted breedings.

The appellant hopes to produce a profit in 1996 as the expected litter for this fall will be available to sell and they hope to breed three females for delivery of puppies in 1996. The overall success ratio on breeding so far has been 40 per cent. Out of three breeding attempts in 1995, only one bitch is going to produce puppies, and how many may be born dead, let alone be marketable, has yet to be ascertained. Thus, 1996 could produce an optimum of 28 saleable puppies, but on the other hand it may be as low as 10. In 1994, the appellant’s dogs had three litters, two good and one full litter had to be destroyed. The 1994 year did not produce a profit as defined in Moldowan. I know that 1995 will not produce a profit. The 1996 year may produce a profit or it may not. Because of the high risks involved and the history of this enterprise, I am not prepared at this time to make a finding that 1996 will produce a profit as defined in Moldowan.

I feel that I must say that even if the appellant had convinced me that 1996 would produce a profit, I still would have to determine if the expenses for the years 1990, 1991 and 1992 are legitimate start-up costs as alleged by the appellant.

There is no question that losses for a start-up period are available to a taxpayer starting a business venture.

I believe though that I must look at the venture in each year to see if the venture as structured in that year could produce a profit.

The venture as structured in each of the years before me could not have produced a profit. There simply were not enough female dogs producing enough puppies to bring in enough income to make a profit. There does not appear to be a valid reason why the appellants did not have sufficient puppies at least in 1991 and 1992 if they had desired. Thus, I am drawn to the conclusion at least up to the end of 1992, the dog venture was a hobby and as structured in those years, could not have produced a profit.

It may well be that another court at another time may determine that a business did commence in a subsequent year to 1992 and by that time, 1996 will either be a completed reality or a proper pro forma statement may convince a court that a profit will be made and that it is just not a fond hope.

The appellant gave evidence that they do not intend to expand the business any further and thus the extrapolation of sales by 150% a year as done by Edward Neufeld, rendered his opinion worthless to the Court. He said he would recommend a loan to the appellants of $15,000 to $20,000. Of course, all institutions would lend the appellants this amount of money on request as they are both hard working frugal citizens, who do not believe in borrowing money, and who own their home free and clear. Their assets would satisfy a lender, not the dog venture, for a loan. His testimony was worthless.

The appeals are dismissed.

Appeals dismissed.