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Docket: 2002-3672(IT)I |
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BETWEEN: |
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CHARLES JOHNSON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeals heard on common evidence with the appeals of Darol N. Johnson (2002-3673(IT)I) on March 4, 2003 at Edmonton, Alberta
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Before: The Honourable Judge L.M. Little |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Galina M. Bining |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed.
Signed at Vancouver, British Columbia, this 21st day of March 2003.
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"L.M. Little" |
J.T.C.C.
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Docket: 2002-3673(IT)I |
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BETWEEN: |
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DAROL N. JOHNSON, |
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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 common evidence with the appeals of Charles Johnson (2002-3672(IT)I) on March 4, 2003 at Edmonton, Alberta
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Before: The Honourable Judge L.M. Little |
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Appearances: |
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Agent for the Appellant: |
Charles Johnson |
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Counsel for the Respondent: |
Galina M. Bining |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed.
Signed at Vancouver, British Columbia, this 21st day of March 2003.
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"L.M. Little" |
J.T.C.C.
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Citation: 2003TCC152 |
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Date: 20030321 |
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Dockets: 2002-3672(IT)I 2002-3673(IT)I |
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BETWEEN: |
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CHARLES JOHNSON, DAROL N. JOHNSON, |
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Appellants, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] The appeals were heard on March 4, 2003 in Edmonton, Alberta on common evidence.
[2] The Appellant, Charles Johnson ("Charles") testified that he has been active in thoroughbred horse racing for a number of years.
[3] In 1982 Charles purchased a thoroughbred racehorse in a claiming race.
[4] In 1984-85 each of the Appellants owned a one-quarter per cent interest in a racehorse and two other individuals owned the remaining 50% interest in the racehorse.
[5] In 1986 each of the Appellants acquired a 50% interest in a racehorse by the name of "Gold Too". Gold Too ran in a number of races over the years. Gold Too gave birth to the following:
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Date |
Name |
Sex
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1996 |
Golden Starlette |
Female |
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1998 |
Golden Mist |
Female |
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1999 |
Native Navigator |
Male (Gelding) |
[6] Charles said that the horse racing activity is operated as a partnership by Cee and Dee Holding Co. (the "Partnership") with his son Darol Johnson. Each partner holds a 50% interest in the Partnership.
[7] Charles said that the horse racing activity may be summarized as follows:
(a) Gold Too ran in a number of races over the years and was disposed of in 1999;
(b) Golden Starlette's first race was in September 2000. However she developed a knee problem and was unable to compete in any other race;
(c) Golden Mist's first race was in 2001; and
(d) Native Navigator's first race was in 2002.
[8] Each of the above horses won money at various races. However, in most cases the purses were not that large. Charles said that the Partnership no longer owns a racehorse. Charles also said that unless he and his son are allowed to deduct their losses they will not own race horses in the future.
[9] From 1987 to 2000 the Appellants reported the following income or losses from the horse racing activity:
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Taxation Year
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Income from horse racing
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Charles Johnson |
Darol Johnson |
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1987 |
($3,226) |
($1,613) |
($1,613) |
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1988 |
($5,720) |
($2,860) |
($2,860) |
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1989 |
$1,184 |
$ 592 |
$ 592 |
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1990 |
($3,050) |
($1,525) |
($1,525) |
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1991 |
($13,262) |
($6,631) |
($6,631) |
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1992 |
($7,508) |
($3,754) |
($3,754) |
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1993 |
($6,562) |
($3,281) |
($3,281) |
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1994 |
($6,138) |
($3,069) |
($3,069) |
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1995 |
($4,996) |
($2,498) |
($2,498) |
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1996 |
($10,682) |
($5,341) |
($5,341) |
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1997 |
($10,258) |
($5,129) |
($5,129) |
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1998 |
($8,956) |
($4,478) |
($4,478) |
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1999 |
($20,684) |
($10,342) |
($10,342) |
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2000 |
($18,349) |
($ 9,175) |
($ 9,175) |
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($118,207) |
($59,104) |
($59,104) |
(Note: Total losses suffered over the years amounted to $119,391 and income received in 1989 was $1,184.)
[10] The Partnership does not own a farm where the horses are boarded in a stable.
[11] The Partnership does not have any capital invested in equipment or buildings other than a Dodge Caravan.
[12] The Partnership does not train the horses but trainers are hired.
[13] The Minister of National Revenue (the "Minister") did not reassess the income tax returns of either of the Appellants for the 1987 - 1998 taxation years.
[14] By Notices of Reassessment dated the 7th day of March 2002 the Minister reassessed the Appellants' 1999 and 2000 taxation years to disallow the following losses:
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Charles Johnson |
Darol Johnson
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1999 |
$10,342 |
$10,342 |
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2000 |
$ 9,175 |
$ 9,175 |
B. ISSUE
[15] The issue is whether each of the Appellants should be entitled to claim the losses suffered from the horse racing activity in determining their income for the 1999 and 2000 taxation years.
C. ANALYSIS
[16] In order to determine whether the horse racing activity constituted a source of income for the Appellants I have reviewed the decision of the Supreme Court of Canada in Moldowan v. The Queen, 77 DTC 5213. In that case Dickson J. (as he then was) referred to the definition of "farming" in section 139(1)(p) of the Income Tax Act and said at page 5215:
In maintaining horses for racing, the appellant was "farming" for the purposes of the Act.
Mr. Justice Dickson said at page 5216:
In my opinion, the Income Tax Act as a whole envisages three classes of farmers:
(1) a taxpayer, for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine. Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of s. 13(1) in those years in which he sustains a farming loss.
(2) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business. Such a taxpayer is entitled to the deductions spelled out in s. 13(1) in respect of farming losses.
(3) the taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby. The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.
[17] I also refer to a recent unreported decision of the Federal Court of Appeal in Clarita Jarquio v. The Queen. In that case Mr. Justice Sexton, speaking for the Court, said at page 3:
... In Stewart v. Canada, 2002 DTC 6969 the Supreme Court modified the test set out in Moldowan v. The Queen [1978] 1 S.C.R. 480. In Stewart the Supreme Court said at paragraph 60:
In summary the issue of whether or not the taxpayer has a source of income is to be determined by looking at the commerciality of the activity in question. 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.
[7] The Court, in Stewart, held that in determining whether there was a sufficient degree of commerciality in situations where a personal element is involved, the Court can take into account the factors set out in Moldowan such as profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capabilities of the venture to show a profit, and the reasonable expectation of profit.
[8] The Tax Court judge found that the Applicant derived personal benefit from the ownership of the property by having her family live on the premises with her. The evidence supports this conclusion.
[9] It was therefore proper for him to consider then, whether the Applicant had a reasonable expectation of profit, along with other factors mentioned in Moldowan. ...
[18] Charles testified that he has always been interested in attending horse races as a hobby even before he purchased his first racehorse in 1982. Charles said that his son Darol frequently attends horse races. This interest in horse racing would meet the test of a personal element or hobby.
[19] I will now examine the other tests as outlined in Moldowan.
A. Profit and Loss Expenses in Past Years
As noted above, the Appellants suffered a loss in each year from 1987 to 2000 except for the year 1989 where they each realized a profit of $592. From 1987 to 2000 each of the Appellants claimed losses of $59,104 and reported income of $592 in 1989. A reasonable person would not operate a business where losses were suffered consistently over 14 years (with the exception of 1989 when a small profit of $592 was realized by each Appellant).
B. The Taxpayers' Training
Charles said that he worked in the building supply business for over 27 years and he worked for 13 years with the Department of Education. There was no evidence presented to indicate that either taxpayer had any specific training in horse racing or in horse breeding other than the general knowledge that someone would acquire over the years.
C. The Taxpayers' Intended Course of Action
Charles said that he and his son were attempting to develop a "winning" stable of racehorses.
Charles said that in his opinion it takes "luck" in order to succeed in the horse racing activity. In this situation he said that he and his son were not that lucky. Charles referred to horse racing and said "At the end of the day horse racing is a gamble".
D. The Capability of the Venture to Show a Profit (or reasonable expectation of profit)
As is noted above the horse racing activity generated losses of $119,391 from 1987 to 2000 and income of only $1,184 in 1989. I am not satisfied from the evidence that was presented to me that the venture could ever produce a profit.
[20] I have concluded that the Appellants were pursuing a personal hobby in their horse racing activity and the activity was not undertaken with a reasonable expectation of profit.
[21] The appeals for the 1999 and 2000 taxation years are dismissed.
Signed at Vancouver, British Columbia, this 21st day of March 2003.
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"L.M. Little" |
J.T.C.C.
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CITATION: |
2003TCC152 |
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COURT FILE NOS.: |
2002-3672(IT)I, 2002-3673(IT)I |
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STYLE OF CAUSE: |
Charles Johnson and Her Majesty the Queen Darol N. Johnson and Her Majesty the Queen |
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PLACE OF HEARING: |
Edmonton, Alberta |
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DATE OF HEARING: |
March 4, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge L.M. Little |
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DATE OF JUDGMENT: |
March 21, 2003 |
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APPEARANCES: |
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For the Appellants: |
Charles Johnson |
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Counsel for the Respondent: |
Galina M. Bining |
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COUNSEL OF RECORD: |
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For the Appellants: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |