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Docket: 2003-2143(IT)I |
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BETWEEN: |
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LLOYD NUGENT, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on January 7, 2004, at Kingston, Ontario,
By: The Honourable Justice C.H. McArthur |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marlyse Dumel |
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JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1998 and 1999 taxation years are dismissed.
Signed at Ottawa, Canada, this 11th day of February, 2004.
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"C.H. McArthur" |
McArthur J.
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Citation: 2004TCC52 |
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Date:20040211 |
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Docket: 2003-2143(IT)I |
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BETWEEN: |
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LLOYD NUGENT, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
McArthur J.
[1] The issue in these appeals is whether the Appellant can deduct farming losses of $21,765 in the 1998 taxation year and $19,525 in the 1999 taxation year.
[2] The Appellant is a 75-year old retired employee of the Ontario Ministry of Transportation where he had worked for 35 years. Since retiring in 1989, he has worked for the Sutton Group as a real estate agent and now with the parts department of an auto garage. In addition to these activities, he kept and showed two or three standard breed horses known as Roadsters since at least 1987. He has a small barn with three stalls and his residence on 45 acres of land where he grows hay for the feeding and raising of his horses.
[3] He was raised on a farm where he gained his interest and love for show horses from his father. He is a member of the Ontario Federation of Agriculture and an active member of two horse-related associations. His daughter gratuitously assists him raising and training his horses. She is a full-time employee of the Ontario Health Insurance Plan.
[4] During 1998 and 1999, the Appellant owned two or three horses and participated in 20 different shows and fairs. I have no doubt that he works very hard on his horse farm and takes great pleasure in doing so. He is obviously a very healthy active man who has adopted this lifestyle as his pleasure in life.
[5] The Appellant kept no books or budget and inadequate records. The auditor for the Minister of National Revenue had to refer primarily to bank statements. The Appellant reported the following revenues and losses from the farm.
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Year |
Revenues |
Expenses |
Losses
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1987 |
$2,480 |
$6,410 |
$3,930 |
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1988 |
2,695 |
7,314 |
4,619 |
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1989 |
3,356 |
35,975 |
32,619 |
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1990 |
3,090 |
22,004 |
18,914 |
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1991 |
1,942 |
21,685 |
19,743 |
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1992 |
1,992 |
30,690 |
28,698 |
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1993 |
4,600 |
32,736 |
28,136 |
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1994 |
2,300 |
19,201 |
16,901 |
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1995 |
2,500 |
16,200 |
13,700 |
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1996 |
3,000 |
21,214 |
18,214 |
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1997 |
8,166 |
28,664 |
20,498 |
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1998 |
3,300 |
25,065 |
21,765 |
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1999 |
5,200 |
24,725 |
19,525
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$44,621 |
$291,883 |
$247,262 |
The farm revenues included the sale of hay, occasionally the sale of horses and prize money. In 1998, he had income of $1,000 from the sale of hay and $2,300 from Fall Fair Prizes. In 1999, his farm income was $1,200 from the sale of hay, $1,500 from the sale of a horse and $2,500 for Fall Fair Prizes. His average annual farm income over 13 years was about $3,500 and the annual expenses were about $24,500 or seven times the income with no end in sight.
[6] The Appellant acknowledged that annual revenues from the sale of hay could not exceed $5,000.[1] The maximum annual prize money available if he won every prize at the shows or fairs would be $10,000. He was not in the business of breeding horses and never received more than $2,800 from the sale of a horse. He stated that with increased provincial grants, the prize money available may increase but there was no clear evidence to assist his position. I agree with the Minister's conclusion that the farm as operated is not capable of making a profit.
[7] The Appellant has no plans to change his farm operation. His position essentially is based on articles from the Toronto Star and the National Post which include:
... September 28, 2001 Toronto Star, Canada Customs and Revenue Agency's own Collette Gentes-Hawn doing the talking "You might have earned $250,000.00 worth of a salary but you may also have had a business that had a loss of $250,000.00 or more. The business loss can then be deducted from income"
... "Business and investment losses can sometimes be high enough that no income tax need be paid even for high earners".
... Toronto Star May 22, 2001 issue article on page A6 entitled "Many Farms Pay Little Or No Tax. ... Almost two thirds of all business in Canada with annual revenues of less than 15 million paid not a dime of federal tax between 1995 and 1998".
... "Taxes are based on profits - not all companies are profitable".
... May 30, 2002 National Post. ... "Real estate investors appeared to win a major battle last week when the Supreme Court killed a key weapon for the nations tax collectors, reasonable expectation of profit (REOP)".
... Toronto Star article, paper dated December 4, 2002 ... "The revelation that half of all businesses in the Province are not filing tax returns"
He concludes that in view of the above statements by CCRA in the Toronto Star concerning its general policy in allowing business losses during the years in question, it was not only totally inconsistent but grossly unfair for CCRA officials to allow him to be singled out and not allowed to deduct the farm losses claimed in the relevant taxation years.
[8] I have no difficulty in finding a predominant personal element in the Appellant's farm operation. It is a true hobby. He does not conduct it as a business to earn income. He does not keep adequate books and records and has no business plans to improve a losing situation. Even if he won first prize money in all of the show competitions he entered,[2] sold a maximum amount of hay, and sold a horse each year, he could not make a profit based on his average expenses. He now has a daytime job in the parts department of an auto garage. Prior to this and upon his retirement, he worked as a commission real estate salesman. Also, he receives a pension of about $27,000 annually. His investment in farming includes a three-stall horse barn and hay growing acreage. He has no intention of expanding. He is satisfied with the status quo. It is clear that the Appellant does not have a business. His activity is a hobby and not a source of income within the meaning of sections 3, 4 and 9 of the Act. He supports himself and his hobby through his pension and his auto parts job.
[9] Having found that the Appellant's horse related activity is not a business, there is no need to proceed further. The Minister having relied solely on the position that the Appellant had no reasonable expectation of profit and the Appellant believing this to be the issue he had to face, I will deal with it briefly.
[10] The Supreme Court of Canada in Stewart v. The Queen, 2002 DTC 6969, modified the test set out in Moldowan v. The Queen, 77 DTC 5213, stating at paragraph 60 of Stewart:
In summary, the issue of whether or not a taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income. ...
The Supreme Court also stated in Stewart that the Moldowan factors can be taken into account when, as in the present case, there is a personal element involved. Those factors include (i) profit and loss experience in the past years; (ii) the taxpayer's training; (iii) the taxpayer's intended course of action; and (iv) the capabilities of the venture to show a profit and the reasonable expectation of profit.
[11] Applying the above factors to the present situation, I find that: (i) the Appellant's business has a history of 13 years of significant losses with no optimistic pattern and the percentage of losses to income has not diminished; (ii) the Appellant has never taken any formal training in horse raising and showing but he, no doubt, has a wealth of knowledge from the school of hard knocks; (iii) the Appellant has no intention of changing his course of action and he is quite prepared to continue his horse operation as he has over the past 13 years; and (iv) as stated earlier, there is no evidence to conclude other than that the Appellant's venture can never show a profit. The Appellant's statement that the prize money may increase is vague, unsupported and unreasonable. To conclude, the Appellant's business has a predominant personal element and clearly is not carried on in a sufficiently commercial manner to constitute a source of income within the meaning of sections 3, 4 and 9 of the Act.
[12] The appeals are dismissed.
Signed at Ottawa, Canada, this 11th day of February, 2004.
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"C.H. MArthur" |
J.T.C.C.
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CITATION: |
2004TCC52 |
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COURT FILE NO.: |
2003-2143(IT)I |
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STYLE OF CAUSE: |
Lloyd Nugent and Her Majesty the Queen |
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PLACE OF HEARING: |
Kingston, Ontario |
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DATE OF HEARING: |
January 7, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice C.H. McArthur |
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DATE OF JUDGMENT: |
February 11, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marlyse Dumel |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |