Bert James (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Gibson J.—Toronto, May 30;
Ottawa, June 25, 1973.
Income tax—Horse racing losses—Whether a chief source
of income—Income Tax Act, sections 13(2), 139(1)(p).
For some years prior to 1967 appellant was actively
engaged as the controlling shareholder and executive officer
of a successful automobile sales company which became
dormant at the end of 1966. In 1967 he acquired race horses
and went into the horse racing business in a substantial way.
In 1967 and 1968 he sustained losses of over $200,000 in
his horse racing business. In computing his income for those
two years he deducted those losses from funds that were
paid to him in those years by the automobile sales company.
In subsequent years he earned substantial profits from his
horse racing activities.
Held, he was entitled to deduct the 1967 and 1968 losses
from funds paid to him in those years by the automobile
sales company. His "chief source of income" during 1967
and 1968 within the meaning of section 13 of the Income
Tax Act was a combination of his income from his horse
racing business and the automobile sales company.
INCOME tax appeal.
COUNSEL:
T. E. J. McDonnell for appellant.
W. J. A. Hobson for respondent.
SOLICITORS:
Osler, Hoskin and Harcourt, Toronto, for
appellant.
Deputy Attorney General of Canada for
respondent.
GIBSON J.—The appellant appeals from re
assessments for income for his taxation years
1967 and 1968. The appellant claimed he was
entitled to deduct losses from his horse racing
business from income he received from another
source. The Minister re-assessed the appellant
in the said years applying the provisions of
section 13 of the Income Tax Act on the prem
ise that the appellant's chief source of income
for the taxation years 1967 and 1968 was nei
ther farming nor a combination of farming and
some other source of income, and thereby lim-
ited the appellant's deductible loss from horse
racing to $5,000 for each of the said taxation
years. The appellant in fact had a net loss from
his horse racing activities of $110,043.64 in the
taxation year 1967 and $96,638.04 for the taxa
tion year 1968.
In the pleadings the Minister also raised
another issue, namely, that in any event the
expenditures of the appellant in the taxation
years 1967 and 1968 which resulted in the said
losses should be regarded as outlays on account
of capital for the purpose of enlarging perma
nently the appellant's entire profit-making
structure.
The appellant prior to 1967 had engaged full-
time in the new and used automobile sales and
service business through a limited company by
the name Bert James Chev-Olds Limited in
which he owned beneficially all the shares. That
company carried on business in the Windsor,
Ontario area. It was a successful business, com
menced in 1960, and by the end of 1967 had
accumulated a surplus of about $450,000.
In October of 1966, General Motors of
Canada Limited terminated the new car fran
chise of that company when the appellant, as
chief shareholder and executive officer of the
company, could not reach agreement with Gen
eral Motors of Canada Limited on the matter of
building new and more elaborate premises. At
that time, the company of the appellant was
operating in leased premises and the lease had
terminated, and when General Motors of
Canada Limited terminated the franchise the
appellant caused his car company effectively to
go out of business by the end of December,
1966. By that time, all of the assets of the car
company had been converted into cash, save
and except some accounts receivable and a few
other items; and there remained in the employ
of the car company only two employees,
namely, the office manager and one secretary.
Following that, in the years 1967 and 1968
the appellant went into the standard-bred horse
racing business in a most substantial way. The
commencement of this business actually was in
the latter part of 1966 when a contract was
made whereby three standard-bred horses were
taken in on a trade for a car. Although this
transaction was closed in about March, 1967, at
which time the appellant took title to these
horses in his own name, the arrangements were
made with his car company in 1966 for this so
that the horses never became part of the inven
tory of the car company.
During 1967 and 1968 the appellant expended
about $240,000 in the acquisition of standard-
bred race horses and this expenditure constitut
ed the main item which resulted in the said net
loss from the horse racing business of $110,-
043.64 and $98,638.04 respectively for the tax
ation years 1967 and 1968.
The funds used to purchase these race horses
were received by the appellant from his car
company. To obtain these funds, the appellant
merely caused them to be paid out to him from
the car company during the years 1967 and
1968 sufficient for such purpose. The balance
of the funds which remained in the car company
after 1968 the appellant caused to be paid out to
him in 1969 for a similar purpose.
In his income tax returns filed for the years
1967 and 1968, the appellant deducted the said
losses from horse racing in the taxation years
1967 and 1968 from the receipts of the funds
which he received from his car company.
In the taxation years 1969, 1970 and 1971 the
appellant further extended his race horse busi
ness, moving in 1969 to Avella, Pennsylvania in
the United States, adjacent to Meadows Race
Track, and this business, during those years,
made for the appellant very substantial profits.
As a consequence, the appellant became liable
for income tax to the United States tax authori
ties during the taxation years 1969 and
following.
The Minister did not make any determination
that the appellant's chief source of income for
the taxation years 1967 or 1968 was neither
farming nor a combination of farming and some
other source of income pursuant to the provi
sions of section 13(2) of the Income Tax Act.
Contrary to his pleading in paragraph 16 of
the Notice of Appeal, the appellant at this trial
conceded that his horse racing business was
"farming" within the meaning of section
139(1)(p) of the Income Tax Act.
The appellant also at the trial abandoned his
plea in paragraphs 13, 14 and 15 of the Notice
of Appeal to the effect that the receipts of
money in the taxation years 1967 and 1968
from the car company, Bert James Chev-Olds
Limited, were not income from a "source"
within the meaning of section 3 of the Income
Tax Act, and instead conceded that the moneys
or payments which he had received were
income from a source within such meaning.
In the result therefore, the issue in this appeal
in essence is limited to the meaning and applica
tion of section 13 to the facts of this case, plus
the additional issue raised by the pleadings of
the Minister in the defence, namely, as stated,
whether the expenditures, especially the expen
ditures made in the acquisition of race horses in
1967 and 1968, were or were not on capital
account.
The questions in issue in this appeal may
therefore be stated as follows:
(1) the parties agreeing and the Court finding
that the racing activities of the appellant
during the taxation years 1967 and 1968 con
stituted "farming" within the meaning of sec
tion 139(1)(p) of the Income Tax Act, the
question is whether such farming in those
years was a source of income to the appellant
within the meaning of the words "source of
income" in section 13 of the Income Tax Act;
(2) within the meaning of section 13(1) of the
Income Tax Act, for the purpose of determin
ing whether or not the limited deduction set
out in section 13(1) applies, whether in the
taxation years 1967 and 1968 the appellant's
"chief source of income" was farming or a
combination of farming and some other
source of income, or whether, instead, his
"chief source of income" was from Bert
James Chev-Olds Limited; and
(3) whether the amounts claimed by the
appellant as losses (arising in the main out of
expenditures made in acquiring race horses)
for the taxation years 1967 and 1968 were in
fact capital expenditures and therefore not
deductible or whether instead the amounts
expended (again, in the main, for the acquisi
tion of race horses) were expenditures for
inventory.
The relevant provisions of the Income Tax
Act, R.S.C. 1952, c. 148, are sections 12(1)(a),
12(1)(b), 12(1)(h), 13, 139(la)(a), 139(1)(p)(x)
and 139(1)(ae) and read as follows:
12. (1) In computing income, no deduction shall be made
in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of
gaining or producing income from property or a business
of the taxpayer,
(b) an outlay, loss or replacement of capital, a payment
on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as express
ly permitted by this Part,
(h) personal or living expenses of the taxpayer except
travelling expenses (including the entire amount expended
for meals and lodging) incurred by the taxpayer while
away from home in the course of carrying on his business,
13. (1) Where a taxpayer's chief source of income for a
taxation year is neither farming nor a combination of farm
ing 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 farm
ing and some other source of income.
(3) For the purposes of this section, "farming loss"
means a loss from farming computed by applying the provi-
sions of this Act respecting the computation of income from
a business mutatis mutandis.
139. (la) For the purposes of this Act,
(a) a taxpayer's income for a taxation year from a busi
ness, employment, property or other source of income or
from sources in a particular place means the taxpayer's
income computed in accordance with this Act on the
assumption that he had during the taxation year no
income except from that source or those sources, and was
allowed no deductions in computing his income for the
taxation year except such deductions as may reasonably
be regarded as wholly applicable to that source or those
sources and except such part of any other deductions as
may reasonably be regarded as applicable to that source
or those sources;
139.(1)...
(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 employ
ment under a person engaged in the business of farming;
(x) "loss" means a loss computed by applying the provi
sions of this Act respecting computation of income from a
business mutatis mutandis (but not including in the com
putation a dividend or part of a dividend the amount
whereof would be deductible under section 28 computing
taxable income) minus any amount by which a loss oper
ated to reduce the taxpayer's income from other sources
for purpose of income tax for the year in which it was
sustained;
(ae) "personal or living expenses" include
(i) the expenses of properties maintained by any person
for the use or benefit of the taxpayer or any person
connected with the taxpayer by blood relationship, mar
riage or adoption, and not maintained in connection
with a business carried on for profit or with a reason
able expectation of profit,
(ii) the expenses, premiums or other costs of a policy of
insurance, annuity contract or other like contract if the
proceeds of the policy or contract are payable to or for
the benefit of the taxpayer or a person connected with
him by blood relationship, marriage or adoption, and
(iii) expenses of properties maintained by a personal
corporation estate or trust for the benefit of the taxpay
er as one of its shareholders or beneficiaries;
Section 139(1)(p) of the Act uses the word
"includes" and therefore it enlarges the meaning
of the word "farming" and must be construed as
comprising the word "farming" in its dictionary
meaning and also comprising those things which
the section declares it shall include.
The concept of section 13 of the Income Tax
Act in its present form and in previous statutory
form has been judicially considered by this
Court on a number of occasions, as for example
in the following cases:
M.N.R. v. Robertson 54 DTC 1062; Steer v.
M.N.R. 65 DTC 5115; Wood v. M.N.R. 67
DTC 5045; M.N.R. v. Grieve Estate 59 DTC
1186; Simpson v. M.N.R. 61 DTC 1117;
C.B.A. Engineering Limited v. M.N.R. [1971]
F.C. 3; Dorfman v. M.N.R. 72 DTC 6131.
In M.N.R. v. Robertson, Potter J. reviewed
the statutory history of this section as it existed
up to the time of that case, which history will be
referred to later in the context of the factual
situation in this case. He commented on the
meaning of "source of income" and adopted the
words of Isaacs J. in Nathan v. The Federal
Commissioner of Taxation (1918) 25 C.L.R.
(Australia) 183 at p. 189 in reference to the
meaning of the word "source", that is to say:
The Legislature in using the word "source" meant, not a
legal concept, but something which a practical man would
regard as a real source of income. [Page 1068.]
Then, Potter J. made the following finding of
fact in that case, namely,
In the case under consideration the only income which the
respondent had was from her investments and the only
source of that income was the securities in which that
portion of her capital was invested. [Page 1068.]
In Dorfman v. M.N.R. (supra) Collier J. in
reference to the meaning of "source of income"
stated at page 6134:
I cannot accept the interpretation put by counsel for the
Minister in this case on the words "source of income": that
there must be net income before there can be a source. In
my view the words are used in the sense of a business,
employment, or property from which a net profit might
reasonably be expected to come.
In Steer v. M.N.R. (supra) Noël J., as he then
was, stated at page 5117 that prior to the year
1952 section 13 of chapter 52 of 1948 would
have operated to prevent a loss from one busi
ness reducing the appellant's income below his
income from "his chief source of income", but
that this rule was abrogated by section 4 of
chapter 29 of 1952 with the result that:
... the enactment and its repeal would now clearly indicate
that losses from one source are otherwise deductible in
computing income from all sources.
He stated that:
... Section 3 ... defines income for a taxation year as
being "income ... from all sources" for the year, which
concept necessarily involves the setting off of losses from
income sources for the year.
In other words, this is a single concept. It is not
merely the aggregation of one's incomes from
all sources from which there were incomes in
the year but it is made up of the gains from all
sources minus the losses from these sources or
the net income from all sources of income taken
together.
In other words, this statement of the law
expressly abrogated the view that there must be
"income" in the sense of profit to be a "source
of income" within the meaning of the Act.
In M.N.R. v. Grieve Estate (supra) Thurlow J.
noted that:
... It was conceded in the course of argument, and I think
quite properly so, that the taxpayer's chief source of income
was not farming, and the case was thus narrowed down to a
submission that the taxpayer's chief source of income was
in fact a combination of farming and investments. [Pages
1191-92.]
He then commented, as obiter,
. there does not appear to have been any connection or
relation whatever between his farming as a source of income
in any year and the estate or investments from which the
bulk of his income was derived ... (Emphasis mine).
In relation to these comments, namely, the
matter of whether or not there must be some
"connection" between the sources of income
before there can be a finding of fact that a
taxpayer's chief source of income was in fact a
combination of farming and some other source,
Thorson P. in Simpson v. M.N.R. (supra) at
page 1119 stated:
In view of my finding I need not deal with the submission
of counsel for the respondent that the expression "combina-
tion of farming and some other source of income" in section
13(1) must mean a combination of farming and some other
source of income that is physically related to farming
beyond saying that I do not see why there must be such a
limitation. The statement of the condition for the applicabili
ty of the section that the taxpayer's chief source of income
must be "neither farming nor a combination of farming and
some other source of income" is simply another way of
saying that the taxpayer's chief source of income must be a
source that is not only a source other than farming but is
also a source that is other than farming and some other
source of income taken together. The use of the word
combination does not, in my opinion, imply any more than
that. (Emphasis mine.)
Collier J. in Dorfman v. M.N.R. (supra) at
page 6134 in referring to these comments of
Thorson P. in the Simpson case stated:
... While Thorson, P. did not expressly rule on this argu
ment in the Simpson case, I adopt his comment at p. 1119
"—I do not see why there must be such a limitation."
The only statute reference to "connection"
existed, not in section 13 of the Act in its
present or predecessor statutory form, but
instead existed in the Income Tax Act, as will be
outlined hereunder, in section 3(f) of the 1919
Act and in the amendment to it by chapter 49,
section 2 of the Statutes of 1919, Second Ses
sion, as an addition to paragraph (f) of subsec
tion (1) of section 3 of the original Act (pre-
scribing limits to deductions from income
derived from the chief business, trade, profes
sion, or occupation of the taxpayer in determin
ing his taxable income) namely:
(paragraph (fl before the said amendment):
(f) deficits or losses sustained in transactions entered into
for profit but not connected with the chief business, trade,
profession or occupation of the taxpayer shall not be
deducted from income derived from the chief business,
trade, profession or occupation of the taxpayer in deter
mining his taxable income. (Emphasis mine.)
(the said amendment)
and the Minister shall have power to determine what
deficits or losses sustained in transactions entered into for
profit are connected with the chief business, trade, profes
sion or occupation of the taxpayer, and his decision shall
be final and conclusive.
In other words, this paragraph, as amended,
provided that losses sustained in transactions
entered into for profit "but not connected with
the chief business, trade, profession or occupa
tion of the taxpayer" (emphasis mine) could not
be deducted from the income derived from "the
chief business, trade, profession or occupation
of the taxpayer" for the purpose of determining
his taxable income.
This did not refer in particular to losses from
the business of farming, but applied to losses
from all other businesses of a taxpayer. A tax
payer was not permitted to deduct in 1919 any
losses suffered from carrying on any other busi
ness which was "not connected with the chief
business, trade, profession or occupation of the
taxpayer".
Such is the only reference in the Income Tax
Act from its inception to the necessity of there
being a "connection" between businesses for
the purpose of deducting losses;, and I find no
statutory authority for the proposition that in
order for it to be possible to make a determina
tion under section 13 of the Act, whether or not
the chief source of income for a taxation year of
a taxpayer is a "combination" of farming and
some other source of income that there must be
some "connection" between the business of
farming and the business from which such other
source of income is derived.
In C.B.A. v. M.N.R. (supra) Cattanach J. had
to decide this question, namely:
... whether the appellant was farming as part of its business
or as one of its businesses and consequently whether the
deductibility of its farming losses from income from other
sources is limited to $5,000 in accordance with the provi
sions of s. 13(1) of the Income Tax Act.
Before reaching the factual decision in that
case, Cattanach J. reviewed at page 9 the provi
sions of the Act generally and then discussed
what section 13 in particular contemplated. He
did so in these words:
In such consideration it is expedient to recall the basic
scheme of Part I of the Income Tax Act. That Part is divided
into Divisions: Division A provides for the liability for tax,
Division B provides for the computation of income, and
Division C provides for the computation of taxable income
which is defined in s. 2(3) as income for the year as
computed under Division B less deductions permitted by
Division C.
By s. 3 (which is within Division B) the income of a
taxpayer for a taxation year is its income from all busi
nesses. By s. 4 income for a taxation year from a business is
the profit therefrom. Therefore to determine the income of a
business, the profit therefrom must be determined which
involves the setting off against the revenue derived from the
business the expenditures laid out to earn that revenue.
Under Division B, the computation of income, Parliament
enacted s. 13 which is a special provision applicable to the
deductibility of farming losses where a taxpayer is engaged
in farming and the taxpayer's chief source of income is
neither farming, nor a combination of farming and some
other source of income.
Section 13 contemplates three possibilities:
(1) the farming losses of a full-time farmer where farming
is the chief source of income (or a combination of farming
and something else) in which event all losses are deductible,
(2) farming losses incurred in a farming operation with
the expectation of profit or the eventual expectation of
profit but where farming is not the taxpayer's chief source
of income, nor part of it, in which event the deductibility of
losses is limited by s. 13, and
(3) an operation which is in the nature of a hobby, pas
time or way of life, the losses from which are not deductible
being personal or living expenses.
It is clear, when the farming activity of a taxpayer falls
within s. 13, that Parliament must have intended that the
losses incurred in farming are not to be deducted except in
the manner and to the extent authorized by that section.
Such intention is evident from a reading of s. 13 with the
other sections of the Act. It is a specific section designed to
cover a specific set of circumstances in Division B dealing
with computation of income. Being a specific section it is
axiomatic that it takes precedence over a general section.
Section 3 of the Act clearly contemplates that a taxpayer
(which includes a company) may carry on more than one
business. In the present instance the Minister alleges that
the appellant had two businesses, one farming and the other
consulting engineering, whereas the appellant maintains
there was but one, that of consulting engineering.
Section 13(3) requires that a loss from farming shall be
computed by applying the provisions of the Act respecting
the computation of income from a business. When there is
more than one business, each business is a source of
income. Section 139(1a) off the Act directs that income from
a source is to be computed in accordance with the Act, that
is to say, by following the provisions of the Act applicable
to the computation of income from each source on the
assumption that the taxpayer had no income except from
that particular source. In so computing income from a
source the taxpayer is entitled to no exceptions except those
relating to that source.
Then in coming to the conclusion in that case
Cattanach J. found that:
The crucial issue, upon which the matter turns, is whether
what the appellant did constituted farming within the mean
ing of that word as used in s. 13.
Cattanach J. then found on the facts of that case
that the appellant was engaged in farming as
contemplated by the statute and that the appel
lant fell precisely within the provisions of sec
tion 13 of the Act.
So much for a review of the cases.
It is now proposed to review the legislative
origin and history of section 13 of the Act and
then to apply its relevant provision at the ma
terial time to the factual situation of this case.
The Income War Tax Act 1917, chapter 28 of
the Statutes of Canada of that year, by section 3
defined income and by subsections
(1)(a),(b),(c),(d) certain exemptions and deduc
tions therefrom were permitted. The deductions
are not relevant to this decision.
By chapter 25 of the Statutes of Canada,
1918, section 2 made certain amendments and
additions to said section 3 which are also not
relevant to this decision.
By chapter 55 of the Statutes of Canada,
1919, section 2 certain additions to said section
3 were made including paragraph () namely:
(j) deficits or losses sustained in transactions entered into
for profit but not connected with the chief business, trade,
profession or occupation of the taxpayer shall not be
deducted from income derived from the chief business,
trade, profession or occupation of the taxpayer in deter
mining his taxable income. (Emphasis mine.)
By chapter 49, section 2 of the Statutes of
Canada, 1919 (Second Session), said paragraph
(fl of subsection (1) of section 3 of the original
Act was added which reads as follows:
and the Minister shall have power to determine what deficits
or losses sustained in transactions entered into for profit are
connected with the chief business, trade, profession or
occupation of the taxpayer, and his decision shall be final
and conclusive.
Then by chapter 52 of the Statutes of Canada,
1923, paragraph (f) of subsection (1) of
section 3 was repealed and a new paragraph
reenacted in its place which read:
(f) In any case the income of a taxpayer shall be deemed
to be not less than the income derived from his chief
position, occupation, trade, business or calling, and for the
purpose of this Act the Minister shall have full power to
determine the chief position, occupation, trade, business
or calling of the taxpayer. Where a taxpayer has income
from more than one source by virtue of filling or exercis
ing more than one position, occupation, trade, business or
calling, then the Minister shall have full power to deter
mine which one or more, or which combination thereof
shall, for the purpose of this Act, constitute the taxpayer's
chief position, occupation, trade, business or calling, and
the income therefrom shall be taxed accordingly and the
determination of the Minister exercised pursuant hereto
shall be final and conclusive.
In the statute revision in 1927 by chapter 97,
R.S.C. 1927, these provisions in slightly differ
ent form were set out in section 10 thereof,
namely:
10. In any case the income of a taxpayer shall be deemed
to be not less than the income derived from his chief
position, occupation, trade, business or calling.
2. Where a taxpayer has income from more than one
source by virtue of filling or exercising more than one
position, occupation, trade, business or calling, the Minister
shall have full power to determine which one or more, or
which combination thereof shall, for the purpose of this Act,
constitute the taxpayer's chief position, occupation, trade,
business or calling, and the income therefrom shall be taxed
accordingly.
3. The determination of the Minister exercised pursuant
hereto shall be final and conclusive.
In The Income Tax Act 1948, chapter 52,
certain of the said provisions were not reenact
ed and those that remained, with some changes,
were reenacted in section 13 which reads as
follows:
13. (1) The income of a person for a taxation year shall
be deemed to be not less than his income for the year from
his chief source of income.
(2) The Minister may determine which source of income
or sources of income combined is a taxpayer's chief source
of income for the purpose of this section.
By section 4 of chapter 51 of the Statutes of
Canada, 1951, additions were made to section
13. Said section 4 reads as follows:
4. (1) Section thirteen of the said Act is amended by
adding the following subsections thereto:
"(3) 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 (after application of
the rule in subsection one) minus the lesser of
(a) one-half his farming loss for the year, or
(b) $5,000.00.
(4) For the purpose of subsection (3), a 'farming loss' is a
loss from farming computed by applying the provisions of
this Act respecting computation of income from a busi
ness mutatis mutandis except that no deduction may be
made under paragraph (a) of subsection (1) of section
11."
(2) This section is applicable to the 1949 and subsequent
taxation years.
From this recital of these provisions of the
Income Tax Act, it will be noted that beginning
with the amendment made by chapter 55 of the
Statutes of Canada, 1919, consideration was to
be given to the taxpayer's chief business, trade,
profession or occupation in determining his tax
able income and that deficits or losses sustained
in transactions entered into for profit, that were
not "connected" with the same, could not be
deducted for such purpose; that beginning with
the amendment made by chapter 49 of the Stat
utes of Canada, 1919 (Second Session), until
changed, the Minister had power to determine
what deficits or losses sustained were "connect-
ed" with the taxpayer's chief business, trade,
profession or occupation and that his decision
was final and conclusive; that by the amend
ment made by chapter 52 of the Statutes of
Canada, 1923, the income of a taxpayer was
deemed to be not less than that derived from his
chief position, occupation, trade, business or
calling and where a taxpayer had income from
more than one source by virtue of filling or
exercising more than one position, occupation,
trade, business or calling, the Minister had full
power to determine which one or more or com
bination thereof constituted the taxpayer's chief
position, occupation, trade, business or calling
and that his determination was final and
conclusive.
Analogous provisions were carried through
the revision of 1927 and were contained in
section 19 of chapter 97 of the Revised Statutes
of Canada, 1927.
Then, by the enactment of The Income Tax
Act, 1948, consideration was first given to the
taxpayer's chief source of income instead of his
chief position, occupation, trade, business or
calling but the provision permitting the determi
nation by the Minister to be final and conclusive
was not reenacted.
From the above, therefore it appears that in
1919 losses from businesses could be regarded
as part of the chief source of income even
though they produced no income. The only
requirement was that they had to be "connected
with the chief business, trade, profession or
occupation of the taxpayer" before they could
be deducted. There was no specific reference to
losses from the business of farming then. A loss
from the business of farming was in the same
category as a loss from any other business,
whether it was manufacturing, retailing or what
ever. What the statute prohibited was the
deduction of what might be called casual losses,
in the sense of not being "connected" with the
chief business, etc., of the taxpayer.
In The Income Tax Act, 1948, taxable income
of a taxpayer was premised on the sources of
income of the taxpayer rather than on his chief
position, occupation, trade, business or calling;
but this did not change the fundamental premise
in the Act since 1919 that there could be a
source of income in a taxation year without
actual income in the sense of profit from that
source, or, in other words, there could be a loss
from that source.
In considering the scheme of the Act as it
existed at the relevant time of this case, you
start with section 3 which prescribes that the
income of the taxpayer shall be his world
income from all sources. One of the sources of
income so prescribed is from all "businesses".
Section 139(la)(a) of the Act in referring to
income from a source says the same thing, that:
139. (la) For the purposes of this Act,
(a) a taxpayer's income for a taxation year from a busi
ness, employment, property or other source off income or
from sources in a particular place means the taxpayer's
income computed in accordance with this Act on the
assumption that he had during the taxation year no
income except from that source or those sources, and was
allowed no deductions in computing his income for the
taxation year except such deductions as may reasonably
be regarded as wholly applicable to that source or those
sources and except such part of any other deductions as
may reasonably be regarded as applicable to that source
or those sources;
From this it follows therefore, that every busi
ness must be regarded as a "source of income".
Then section 13(3) of the Act in defining
"farming loss" prescribes that it must be com
puted in the same way as computing income
from a business, that is, inter alia, by keeping in
mind that a "business" is a "source of income".
Section 139(1)(x) of the Act on the other
hand, defines "loss" generally applicable to any
business. That paragraph states that a loss shall
be computed by applying the provisions of the
Act respecting the computation of income from
a business.
Then section 3 of the Act, as discussed
heretofore, prescribes that for the purpose of
computing world income a taxpayer is entitled
to net his income from all sources, that is to
deduct his losses from all his sources from this
profit from all his sources. Being permitted to
net, it follows that every business of a taxpayer
is a "source of income" notwithstanding that a
particular business may not produce in a given
year any income in the sense of "profit" from
such business.
In the same manner as determined pursuant
to section 3, a "source of income" is determined
pursuant to section 13 of the Act. From this it
follows, putting it again in another way—there
may be a source of income in a taxation year,
notwithstanding that there may be no income.
The scheme of the Income Tax Act throughout
its legislative history prior to and up to the
enactment of section, 13 and as section 13 in the
form it had during the relevant taxation years in
this case, 1967 and 1968, support this view.
Section 13 in the form it had in 1967 and
1968 was put in the 1948 Act by amendment in
1951.
In the 1948 Act originally before the 1951
amendment, in the provisions dealing with
income from a taxpayer's chief source of
income or his income from any source, there
was no specific reference to the business of
farming as a source. The intent then was to limit
the deduction of losses that were not a chief
source of income. But there was no intention in
the 1948 Act to prescribe that where there was
a loss from a business for example, there was
no source of income therefrom.
In the 1951 amendment, there was added the
specific reference to farming. The effect of sec
tion 13 as amended in 1951, was that when a
taxpayer suffered a loss from his farming busi
ness and farming business was neither his chief
source of income, nor was a combination of
farming and some other source of income his
chief source of income, such a taxpayer was
restricted to the limited loss prescribed in sub
section (3). Therefore in 1951 a taxpayer was
subject to the general limitation in respect to
losses from business, but subsection (3) of sec-
tion 13 gave such a taxpayer a special conces
sion in respect to a farming loss.
In 1952 the statute was amended to its
present form. It now relates only to the business
of farming. And the general limitation respect
ing deduction of losses from any source not the
taxpayer's chief source of income, as prescribed
originally in the 1948 Act, no longer is the law.
Repeating, in the 1952 statute, section 13 of
the Act only refers to a farming loss and the
limitation of section 13 only applies when farm
ing is neither the chief source or a combination
of farming and some other source of income is
not the chief source of income of a taxpayer.
The first question of fact that must be
resolved in determining whether or not section
13 of the Act applies in any case, is whether or
not the taxpayer is "farming" as that term is
meant employing ' the usual dictionary defini
tions and including whatever additional meaning
may be contained in the statutory definition of
"farming" in section 139(1)(p) of the Act. And
the phrase "with reasonable expectation of
profit" employed in defining "personal or living
expenses" in section 139(1)(ae)(i) of the Act, is
only relevant or germane to the finding of fact
of whether or not such a taxpayer is "farming".
If the finding of fact is that the taxpayer is
farming, then "farming" being a business is a
source of the world income of that taxpayer as
prescribed in section 3 of the Act.
In other words, if it is resolved as a fact that a
taxpayer in a taxation year is "farming", then
"farming" is one of that person's businesses and
therefore a source of his income for the purpose
of section 3. As a consequence, whether or not
a taxpayer in carrying on his business of farm
ing has a reasonable expectation of profit or not
is irrelevant if a determination has been made
that such a taxpayer was "farming". Once
made, what expenses he incurred in doing what
he did in relation to his farming business could
not possibly be categorized as "personal or
living expenses".
Of course, it is relevant in the determination
of fact as to whether or not a taxpayer is in the
business of farming to consider exactly what
that taxpayer is doing and in a given case, if
what a taxpayer is doing indicates that he really
is incurring personal or living expenses, that
indicium alone may be the critical one in a
determination that such a taxpayer is not farm
ing. But the point to note is that the fact of
reasonable expectation of profit or not is one of
the indicia only to be considered in each case.
Recapitulating, if there is a finding of fact that
what a taxpayer is really doing when he is
incurring certain expenses is "farming" as statu
tory and dictionary defined, as stated, then that
finding imports the proposition that "farming"
is a business and being a business, it is a source
of income within the meaning of section 3 of the
Act.
Some of the relevant law for the taxation
years 1967 and 1968 therefore, may be re-stat
ed as follows:
1. It is a finding of fact in each case as to
whether a taxpayer's "chief source of
income" for a taxation year for the purpose
of section 13 of the Act is (1) farming, (2) a
combination of farming and some other
source of income, or (3) neither farming nor a
combination of farming and some other
source of income.
2. There does not have to be any "connec-
tion" between farming as a source of income
and some other source of income in order to
make a finding of fact that a taxpayer's "chief
source of income" was a "combination" of
"farming" and "some other source of
income" for the purpose of section 13(1) of
the Act.
3. A business is a "source of income". There
may be "a source of income" in a taxation
year notwithstanding that there may be no
"income" in the sense of "profit" from such
source.
4. The concept conveyed by the words "with
reasonable expectation of profit" in section
139(1)(ae) of the Act in defining "personal or
living expenses" (which by section 12(1)(b) of
the Act are deductible in computing income)
is one of the indicia to be employed in deter
mining whether or not a taxpayer in a given
taxation year is in the "business of farming".
But the converse is not true, i.e., the fact that
a taxpayer in a given taxation year or for
years before and after, had or appeared to
have no reasonable expectation of profit is
not proof in itself that he was not in the
business of "farming" if other indicia estab
lish or prove that such a taxpayer was in fact
in the business of farming.
5. If a taxpayer establishes or proves in fact
that he was in the business of farming in any
taxation year, section 13 of the Act is rele
vant, permitting him, if he has a loss there
from, either a full deduction of such loss, if
farming or a combination of farming and
some other source of income is not his chief
source of income, or the limited deduction of
loss prescribed in the section from the source
of the business of farming, as the facts of the
case may be.
So much for the law.
As to the facts, a careful review of all of the
evidence leads me to make the following find
ings of fact:
1. Up to and including the end of October,
1966, the appellant was engaged full-time in
the business of selling automobiles through
his car company.
2. After October 31, 1966 the car company
commenced not to be and by December 31,
1966 no longer was an active automobile
dealership business.
3. Commencing October 31, 1966 and
throughout 1967 and 1968 the appellant
engaged full-time in the business of horse
racing, buying, owning, racing and selling
horses, and during that time engaged in no
other business of any substance.
4. Specifically, an integral part of his horse
racing business is and was at all material
times the selling of horses.
5. The appellant financed the purchase of
horses with funds drawn by him from the car
company and by the end of 1968 he had
committed about $190,000 for this purpose
and by the end of 1969 he had paid out, and
committed for a similar purpose all the
remaining funds that were formerly in the car
company.
6. Although the appellant suffered losses in
1967 and 1968 from his business of horse
racing, he did earn substantial net profits
from this business in subsequent years.
The appellant, among other things, submitted
in respect of the two issues raised on this
appeal, the following:
(A) As to the issue of whether the claimed
losses (arising in the main in acquiring race
horses) are on capital or income account:
(1) The appellant, although he anticipated
having development costs in building up his
racing activities in the early years, such
should not be categorized as capital in nature
in that there is no proposition in law that
start-up costs are to be regarded as capital
costs ipso facto; instead the basic test in
determining whether the costs are on capital
or income account, is whether or not they are
made once and for all to create an asset of
enduring benefit to the business.
(2) All expenses, including the cost of acquir
ing the horses were current in nature; that by
its nature an integral part of the appellant's
horse racing business, either through the
mechanics of claiming or by the market facts
of the business generally, is the selling of
horses.
(3) The costs of buying horses should be
deductible in the years incurred as inventory
costs and as a consequence of deduction of
such costs, the appellant did in fact incur the
losses he reported in 1967 and 1968.
(B) As to (1) whether the business of "farm-
ing" of the appellant was a "source of income"
within the meaning of section 13 of the Act, and
(2) even if such a "source of income" whether
in the taxation years 1967 and 1968 the appel
lant's "chief source of income" was farming or
a combination of farming and some other source
of income, or whether, instead, his "chief
source of income" was from Bert James Chev-
Olds Limited:
(1) "Chief source of income" within section
13 of the Act means the business, employ
ment or property from which the bulk of the
taxpayer's income might reasonably be
expected to come.
(2) A business can constitute a source of
income even though it produces no income in
the sense of profit in a particular taxation
year.
(3) The business of farming of the appellant
was a "source of income" within section 13
of the Act and the combination of that source
and the car company source of funds was the
"chief source of income" of the appellant.
The respondent, among other things, submit
ted that the business of farming of the appellant
was not a "source of income" of the appellant
in the taxation years 1967 and 1968 within the
meaning of section 13 of the Act; that the
"chief source of income" was from the appel
lant's employment with Bert James Chev-Olds
Limited; and that in any event, the losses
claimed in the taxation years 1967 and 1968,
occasioned in the main by the expenditures in
the acquisition of race horses were on capital
account.
In coming to a conclusion in this case, I have
considered what the appellant did in respect to
his business of horse racing from 1966 to 1971.
In this initial period, which included the taxa
tion years 1967 and 1968, the appellant built up
an inventory of race horses and there were not
many sales of horses, only purchases, training
and racing of horses. But in the latter period
after the inventory was built up and a substan
tial number of the horses had been proven by
racing, there were many sales of horses result
ing in very substantial profits for the appellant.
In my view, in the taxation years 1967 and
1968, the appellant in purchasing race horses
was acquiring an inventory for such business;
that during those years his horse racing business
was a source of income within the meaning of
the Act; that the appellant during the relevant
taxation years reasonably expected that his
chief source of income would be from a combi
nation of his horse racing business and from the
funds in Bert James Chev-Olds Limited; and
that in fact in the taxation years 1967 and 1968
the "chief source of income" of the appellant
within the meaning of section 13 of the Act was
a combination of the horse racing business, a
farming business source, and Bert James Chev-
Olds Limited, another source of income of the
appellant.
In the result, therefore, the appeal is allowed
and the re-assessments are referred back for
further re-assessments not inconsistent with
these reasons.
Counsel may prepare in both official lang
uages an appropriate judgment to implement the
foregoing conclusions and may move for judg
ment in accordance with Rule 337(2)(b).
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.