Date: 20010515
Docket: 2000-4852-IT-I
BETWEEN:
DON COBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the years 1990 to 1998.
[2] Only the years 1991, 1992, 1993 and 1996 are properly before the court. The appeals for 1990, 1997 and 1998 are quashed because no notice of objection was filed. The appeals for 1994 and 1995 are also quashed because the notice of objection was filed outside the 90 day period and it is now too late to apply for an extension of time.
[3] I have in other cases criticized the excessive use of the expression no reasonable expectation of profit ("NREOP"). It is often ritually chanted as a substitution for analysis. This does not however mean that the concept can be ignored in an appropriate case. Where losses are consistently incurred for 10 or 20 years with no indication that the end is in sight the notion of NREOP may be of some limited utility in cases where it is alleged that an activity is in reality a hobby rather than a business.
[4] The appellant in the years in question was a public school principal and has had a distinguished career in education. He retired in 1995.
[5] He bought his first horse in 1964. In 1972 he bought some land in King Township. Since that time he has bought, raised, sold, bred, raced and shown horses. He is extraordinarily knowledgeable about horses, and has bought and sold many horses over the years, some of which have won races. At no time since the beginning of his involvement with horses has he ever shown a net profit.
[6] The following table sets out the losses which he has incurred between 1987 and 1998.
YEAR GROSS INCOME NET FARMING LOSSES
1987 $15,000 ($12,995)
1988 $36,120 ($10,063)
1989 $ 6,310 ($25,727)
1990 $ NIL ($33,876)
1991 $ 4,464 ($36,470)
1992 $ 4,169 ($35,045)
1993 $ NIL ($24,868)
1994 $ NIL ($18,539)
1995 $ 8,925 ($12,260)
1996 $ 1,700[1] ($16,729)
1997 $ NIL ($12,978)
1998 $ 4,050 ($16,230)
[7] Even before 1987 he was losing money on the horse operation.
[8] To his credit the appellant claimed expenses very conservatively and claimed only the restricted farm loss under section 31 of the Income Tax Act.
[9] Nonetheless, I have concluded that where losses extend over the period that these do with no likelihood of coming to an end in the foreseeable future this cannot really be regarded as a business. No reasonable businessperson having regard only to the possibility of profit would continue to put money into this operation. Sooner or later one must decide to cut one's losses and give up what is patently an uneconomic endeavour. I do not think that it is realistic or reasonable to go on incurring losses of this magnitude with no end in sight. To expect to write off such losses against other income is equally unrealistic. This activity is in my view a hobby, not a business.
[10] The only reservation I have about this conclusion is the decision in Kuhlmann et al. v. The Queen, 98 DTC 6652, where the Federal Court of Appeal, in an oral judgment reversed a finding of fact of this court and held that two wealthy medical practitioners, husband and wife, were entitled to write off against the income from their practice of medicine, enormous losses incurred in raising, racing and breeding horses.
[11] What I said about Kuhlmann in Rai v. The Queen, 99 DTC 562 at 564, is equally applicable here.
[15] I would have had no difficulty in dismissing the appeal based on the evidence and the cases I have cited above, as well as the many other cases that have been decided in this area of the law. Nonetheless, the recent decision of the Federal Court of appeal (Décary, Létourneau, JJ.A. and Chevalier, D.J.A.) in Kuhlmann et al. v. The Queen, 98 DTC 6652 could arguably be taken as overruling all previous decisions of all courts on the question of reasonable expectation of profit. The Federal Court of Appeal stated at page 6656 that:
Both counsel agreed that for an expectation of profit to be reasonable, it had to be not "irrational, absurd and ridiculous". In the case at bar, the burden was on the Minister to establish on a balance of probability that the expectation of profit was irrational, absurd or ridiculous. Clearly, in our view, the Minister did not succeed and the Tax Court Judge could not have found otherwise had he applied the proper legal principles.
[16] In that case two medical persons who had extremely high incomes claimed enormous losses from the horse business. Mogan, J. had held that the respondent (who bore the onus of proof because of a change of approach taken at trial) had met the onus of proof and established a prima facie case that the activity had no reasonable expectation of profit, and was operated for personal satisfaction rather than for profit.
[17] The Federal Court of Appeal in an oral judgment from the bench allowed the appeal.
[18] The decision essentially overruled a finding of fact made by the trial judge based on his appreciation of the evidence.1
[19] If it is now a principle of law, following Kuhlmann, that a taxpayer can establish that he or she, in carrying out what purports to be a commercial activity, had a "reasonable expectation of profit", and therefore a business, by simply showing that the expectation was "not irrational, absurd and ridiculous". I would have to allow this appeal, because Mr. Rai's expectation of earning profits was neither irrational, absurd nor ridiculous. It is not unheard of for people to make money raising and racing horses. Depending on the circumstances, the chances of earning a profit may be, I should think, easily as good as they are in many other risky enterprises such as drilling wildcat wells, or prospecting for gold. Nonetheless, I think that for a business to exist there has to be something more than an absence of irrational, absurd and ridiculous expectations. I do not read the Kuhlmann decision as suggesting otherwise.
[20] I would prefer to read the passage quoted from the Federal Court of Appeal decision as reflecting the possibly hasty adoption of a proposition agreed to by counsel and therefore not thoroughly explored in argument rather than the enunciation of a new principle that in effect overrules over twenty years of jurisprudence.
[21] The appeals are dismissed.
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1 It is well settled that an appellate court should treat findings of fact by a trial judge with great deference, and should not interfere with such findings unless they are palpably wrong, perverse or based on no evidence. Schwartz v. The Queen, [1996] 1 S.C.R. 254 at 278-283; Beaudoin-Daigneault v. Richard, [1984] 1 S.C.R. 2 at 8-9; Janiak v. Ippolito, [1985] 1 S.C.R. 146 at 151; MDS Health Group Ltd. v. R., [1997] 1 C.T.C. 111 at 115; Flexi-Coil Ltd. v. R., [1996] 3 C.T.C. 57 at 60; cf. Cana Construction Co. v. The Queen, [1996] 3 C.T.C. 11, per Décary, J. (dissenting) at 13.
[12] I have concluded that Mr. Cober was not engaged in a business. Rather his activity in raising, racing, showing and breeding horses was a hobby.
[13] The appeals from assessments for 1991, 1992, 1993 and 1996 are dismissed. The other appeals are quashed.
Signed at Toronto, Canada, this 15th day of May 2001.
"D.G.H. Bowman"
A.C.J.