A-332-95
| CORAM: DENAULT, J.A. |
DÉCARY, J.A.
ROBERTSON, J.A.
B E T W E E N:
PATRICIA WATT
amended at trial
PATRICIA WATT
BY HER EXECUTOR DONALD WATT,
Appellant,
-and-
HER MAJESTY THE QUEEN,
Respondent.
HEARD at Toronto, Ontario, Monday, September 22, 1997 and Wednesday, September 24, 1997.
JUDGMENT delivered from the Bench at Toronto, Ontario, on Wednesday, September 24, 1997.
REASONS FOR JUDGMENT BY: DÉCARY, J.A.
A-332-95
| CORAM: DENAULT, J.A. |
DÉCARY, J.A.
ROBERTSON, J.A.
B E T W E E N:
PATRICIA WATT
amended at trial
PATRICIA WATT
BY HER EXECUTOR DONALD WATT,
Appellant,
-and-
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered from the Bench, at Toronto, Ontario,
Wednesday, September 24, 1997)
DÉCARY, J.A.:
This is yet another "reasonable expectation of profit" case, involving what the Tax Court Judge described as:
| [...] a unique situation where entrepreneurial parents with substantial means seek to establish a business in the context of their daughter learning how to ride and jump horses leading to the highest of the world's competitive levels. |
The Tax Court Judge, when he delivered his reasons, did not have the benefit of the recent pronouncements of this Court in Tonn v. Canada1, Mastri v. Canada2 and Mohammad v. Canada3. Had he had Tonn before him, he perhaps would have expressed himself in a different way.
The appellant, essentially, argues that the Tax Court Judge erred in three respects in his approach: a) he erred in principle when he stated, at the outset of his reasons, that "when there has been no actual profit it would appear that fact alone is a presumption against a finding of a reasonable expectation of profit"; b) he allowed the "personal element" of the business to determine the outcome of the appeal; and c) he mischaracterized the nature of the taxpayer's business and in so doing, formed wrong conclusions that are not supported by the evidence.
With respect to the first alleged error, we agree with counsel for the appellant that such a statement does not find any support in the jurisprudence. Counsel for the respondent, while conceding that the statement was "an awfully strong statement", nevertheless, submitted that it did not have any impact on the judge's subsequent analysis of the evidence. We agree with counsel for the respondent. When we look at the reasons for judgment in their entirety, we are satisfied that the Tax Court Judge did not misapply the test as set out in the jurisprudence.
With respect to the second alleged error, a fair reading of Tonn4 and Mastri5 allows us to posit: a) that a personal element may coexist with a profit motive; b) that where a personal element exists, it will prompt the Court to apply the reasonable expectation of profit test more assiduously; and c) that where the personal element is "the dominant, motivating force"6, the taxpayer's burden may be considerably more onerous. In our view, the Tax Court Judge found, on the evidence before him, that a motive of personal benefit predominated in the circumstances and he applied the reasonable expectation of profit test in that context. He did not err in so doing.
With respect to the third alleged error, counsel for the appellant submits that the Tax Court Judge erred in referring to the taxpayer's business as a "comprehensive show jumping, training and stable business" and in concluding that "the development of a key rider in the absence of other significant business indicia (does not) support the conclusion of profit or a reasonable expectation of profit." In counsel's view, a business such as that of the appellant must develop a step at a time; the first step being the development of a key rider, and thus any losses sustained in the process of developing the key rider are to be considered as losses sustained during the start-up period of the business.
This submission is contrary to the evidence given by the appellant who described her alleged equestrian business as follows:
| An equestrian business is the acquisition and training of horses; the supplying of an environment for them; the facilities for them, resulting in the ability to take on students; that you can rent space in your barn, train the students, providing enough capital to go to shows; providing enough capital to buy new baby horses and turn them over, train them, turn them over. |
| It's a whole sort of rolling sort of thing. What you do need -- the one essential thing that you need is that one person, your kingpin rider, should have achieved some status in the world, so that other people will come to be trained." |
[A.B., App. II, at 294, 295]
(our emphasis)
Her expert witness, Mr. Ian Millar, testified that there were three things a successful equestrian business required, in order of importance: an accomplished participant who will be the actual rider/teacher/trainer, quality horses and appropriate facilities. In his view, to be an accomplished participant, a person must be riding successfully at the grand prix level of competition, which a person generally begins around the age of 18. Mr. Millar added that experience as a grand prix rider is critical and the age of the most successful grand prix riders in the world is age thirty and into the forties. (A.B., App. I, Vol. III, at 368-373, 386 and 413-415) It is worth noting that in the taxation years at issue, the appellant's daughter was between 13 and 15 years of age.
When the Tax Court Judge spoke in terms of "comprehensive show jumping, training and stable business", he was making an unassailable finding of fact. Furthermore, the evidence clearly indicates that during the taxation years at issue, the appellant's daughter was still far from being an "accomplished" rider, as that term was defined by Mr. Millar, and was very much at the beginning of her learning or training process. In the circumstances, it was very much open to the Tax Court Judge to conclude that "there could not be a business as envisaged by the Appellant" and that "the direction towards creating a business was started but for the years in question all or most of the necessary ingredients were not there."
What the Tax Court Judge in effect found, based on the evidence, was that the appellant's business, in the years 1986, 1987 and 1988, was not structured, organized, manned, financed and planned in such a way as to be found to be reasonably capable at that time of yielding a profit in due course. In other words, it was open to the Tax Court Judge to find, with respect to the taxation years in question, that the start-up period of the appellant's business " "a grace period for emerging operations", to use the words of Linden J.A. in Tonn7 " had not yet begun. In Landry v. The Queen8, this Court has determined that a grace period cannot last forever. What the present case is about is when does the grace period actually and realistically start. It seems to us that the start-up period, in a case such as this one, can only begin, not when the rider is reasonably expected to become an accomplished rider, but when she has become one, assuming, of course, that all other necessary ingredients are in place at that time. Until then, the cost of training the rider can only be described as training expenses prior to the day the business is commenced. As Mr. Millar himself pointed out, when asked "how would a rider be developed?", the rider "would go to a business that teaches riding, training, horse care, horse management" (A.B., App. I, vol. III at 379). We note that as late as 1991, i.e. three years after the taxation years at issue and at the time the appellant's daughter started training at Millar Brooke Farm, Ian Millar's farm, her father still considered her daughter to be at "the university of the horse." (A.B. App. I, vol. I at 97) Pursuing such teaching and training endeavours is akin to attending university; it is premature, at that early stage, to speak of a business let alone one which has a reasonable expectation of profit9.
The appeal will be dismissed with costs.
"Robert Décary"
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
COURT NO: A-332-95
| STYLE OF CAUSE: PATRICIA WATT amended at trial |
| PATRICIA WATT BY HER |
EXECUTOR DONALD WATT,
- and -
| HER MAJESTY THE QUEEN |
DATE OF HEARING: SEPTEMBER 22, 1997 and
SEPTEMBER 24, 1997
PLACE OF HEARING: TORONTO, ONTARIO
REASONS FOR JUDGMENT BY: DÉCARY, J.A.
Delivered from the Bench at Toronto, Ontario
on Wednesday, September 24, 1997
APPEARANCES:
Ms. Deborah E. Palter
Ms. Catherine E. Willson
For the Appellant
Ms. Margaret J. Nott
For the Respondent
SOLICITORS OF RECORD:
Catherine E. Willson
346-67 Mowat Avenue
Toronto, Ontario
M6K 3E3
For the Appellant
George Thomson
Deputy Attorney General
of Canada
For the Respondent
FEDERAL COURT OF CANADA
Court No.: A-332-95
Between:
PATRICIA WATT amended at trial
| PATRICIA WATT BY HER |
EXECUTOR DONALD WATT,
Appellant
- and -
| HER MAJESTY THE QUEEN |
Respondent
REASONS FOR JUDGMENT
__________________
1 [1996] 2 F.C. 73 (F.C.A.).
2 (27 June 1997), A-650-96, A-651-96 (F.C.A.), [1997] F.C.J. No. 880 (QL).
3 (28 July 1997), A-652-96 (F.C.A.), [1997] F.C.J. No. 1020 (QL).
4 Supra, note 1.
5 Supra, note 2.
6 Tonn, supra, note 1 at 98.
7 Supra, note 1 at 107.
8 (1994), 94 DTC 6624 (F.C.A.), (1994), 173 N.R. 213 (F.C.A.).
9 Note: see Daley v. M.N.R. (1950), 50 D.T.C. 877 (Ex. Ct.); Rolland v. M.N.R. (1987), 87 D.T.C. 341(T.C.C.); McClure et al. v. M.N.R. (1988), 88 D.T.C. 1504 (T.C.C.).)