Citation: 2010 TCC 371
Date: 20100727
Docket: 2007-2652(IT)G
BETWEEN:
SERGE TURBIDE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR
JUDGMENT
Jorré J.
[1]
This
is an appeal from assessments for the 2001, 2002 and 2003 taxation years, in
which the appellant claimed a deduction for farming losses.
[2]
The
Minister of National Revenue (Minister) made assessments pursuant to section 31
of the Income Tax Act (ITA) and restricted the amount of the losses the
appellant could deduct from his other income.
[3]
The
appellant works in construction for the company "Les Entreprises
Fondatechnique, Inc." (Fondatechnique) in which he holds 98% of the
capital shares.
[4]
The
appellant was also active in horse racing, and it is admitted that is a
business. However, notwithstanding that admission, the respondent submits that
there is a personal element.
[5]
The
parties also agree that this is a farming business.
[6]
As
a result, the issue herein is whether section 31 of the ITA applies, limiting
the amount of farming losses that can be deducted from other income or whether
the appellant may deduct the total amount of the farming losses. There is no dispute
as to the amount.
[7]
The
relevant part of section 31 is:
31(1) 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, for the purposes of
sections 3 and 111 the taxpayer’s loss, if any, for the year from all farming
businesses carried on by the taxpayer shall be deemed to be the total of…
[8]
As
we will see below, the appellant's chief source of income was not derived
mainly from farming. As a result, section 31 will not apply if the evidence
shows that: the taxpayer's chief source of income was not farming.
[9]
For
the following reasons, I find that section 31 does not apply.
Applicable Law
[10]
Section
31 of the ITA is controversial. It has generated a rich case law, which has
recently been evolving. In Moldowan v. The Queen the Supreme
Court of Canada laid down the basic principles governing the application of section
31. Subsequently, those principles underwent an evolution with Gunn v.
Canada, a Federal Court of Appeal case.
Hershfield J. of the Tax Court of Canada conducted a thorough analysis of
the situation in Craig v. The Queen, which was
affirmed by the Federal Court of Appeal.
[11]
Hershfield
J.'s analysis can be found at paragraphs 41 to 72 of Craig, part of
which is reproduced:
The Moldowan Classification of Farmers
49 It would be helpful to set out an expanded reiteration of
the guiding principles in Moldowan that formulate three classes of
farmers:
(i) the class (1) farmer is, in today's
terms, one who meets the Stewart test for income from a business and who
has met the further criteria set for farmers who can claim their farm losses on
an unrestricted basis. They are farmers "…for whom farming may reasonably
be expected to provide the bulk of income or the centre of work
routine." [emphasis added]. They look to farming for their livelihood even
though there are years in which they sustain losses;
(ii) the class (2) farmer is one who passes
the Stewart test but who has not met the additional class (1) criteria;
(iii) in Moldowan, the class (2) farmer
is “the taxpayer who does not look to farming, or to farming and to some
subordinate source of income, for his livelihood but carried on farming as a
sideline business.” In this description, the second source is described as
“subordinate” even though quantitatively it would have to be the higher source
of income. If farming is merely a sideline activity then, relatively, the other
source will not be a “subordinate” activity (source of income) and cannot be
used in the combination test to prop up the sideline farming business as being
part of the two sources that together comprise a chief source;
(iv) this has been taken to mean that only one
of two sources can be predominant and that this source must be farming to avoid
the application of section 31 restricted loss treatment. While it is necessary
to appreciate that such predominance cannot be determined simply by dollar amounts,
it is this application of the combination test that would render it sterile if
applied strictly;
(v) the class (3) farmer does not meet the Stewart
test and is denied all losses under Moldowan.
50 Of importance in this reiteration of the Moldowan classes of farmers is
that it recognizes limits to the combination test being used as the vehicle
whereby a profitable source can be used to prop up an unprofitable farming
source so as to add it to the already identified class (1) group of farmers. It
is restrictive and seemingly, if not clearly, directs that farming must be the
chief source even in the combination test.
The Gunn Approach
51 In determining whether the farming activity is to be part of the
combination formula, we are instructed in Gunn at paragraph 83 to
consider that:
… the
combination question should be interpreted to require only an examination of
the cumulative effect of the aggregate of the capital invested in farming and a
second source of income, the aggregate of the income derived from farming and a
second source of income, and the aggregate of the time spent on farming and on
the second source of income, considered in the light of the taxpayer's ordinary
mode of living, farming history, and future intentions and expectations. …
52 My reading of this formulation of the combination test is that it
requires that the chief source factors being examined in respect of farming,
including potential profitability, be considered relative to the chief source
factors being examined in respect of the second source being included in the
combination. This is consistent with the directive in Moldowan that
profitability be assessed relatively.
53 The
challenge in Gunn is to assess how material the farming source
contribution must be to the aggregation formula. Other authorities suggest that
the contribution need not be quantitatively substantial (as held in Taylor
v. Canada and Kroeker).However,
in my view, it is implicit in Gunn that the farming source must make a
meaningful contribution to the aggregation formula so as to suggest that
farming is or has the potential to be a chief source.
The Gunn Construction
vs. The Moldowan Construction
54 Drawing from my reading of Gunn, it is clear to me that in
the combination test there is never a need to establish that farming will ever
provide the bulk of a taxpayer’s income or even that it will ever need to be
the predominant business or work activity of the taxpayer. As recognized in Gunn,
this invokes a more generous test than the Moldowan suggestion that
farming must be the chief source even in the combination test.
Recognizing that the tests in these cases are different, this Court has already
expressed conflicting views on whether Gunn is a binding authority in
the face of Moldowan.
55 Still, the factors
considered in Gunn also form part of the analysis in Moldowan. At
page 4, Dickson J. (as he then was) noted:
…The distinguishing features of ‘chief
source’ are the taxpayer’s reasonable expectation of income from his various
revenue sources and his ordinary mode and habit of work. These may be tested by
considering, inter alia in relation to a source of income, the time
spent, the capital committed, the profitability both actual and potential…
56 That is, the criteria or factors considered in identifying
a chief source in Moldowan, including, but not limited to profitability,
are not dissimilar from those relied on in the Gunn articulation of the
aggregation formula. In both cases the time spent, the capital committed, the
potential profitability and the taxpayer’s ordinary mode and habit of work are
the criteria for determining whether farming is more than a sideline business.
57 If that were the end of the comparison of the two cases,
one could conclude that Gunn is not at odds with Moldowan. That,
however, as noted, is not the end of the comparison. Contrary to Moldowan,
Gunn suggests that the activity propping up the farming income need not
be subordinate to farming but rather it suggests that the farming activity,
relative to the other source, must make a relevant or meaningful contribution
to the aggregation formula assessed by using the Moldowan criteria.
…
72 I am suggesting then that the test is whether the
taxpayer’s mode of operation has sufficient commitment and commerciality and
profit potential to be recognized as a chief source applying the Moldowan
commitment and profitability criteria. Looking at time spent, capital invested,
and a meaningful profit potential arising from a dedication to profitability,
the question of whether the taxpayer is recognizable as a committed, viable
commercial player in a genuine economic sector of the economy should be readily
answered. Such a test will not put recreational farmers in an advantaged
position.
[Footnotes omitted.]
[12]
In
view of the Tax Court of Canada and the Federal Court of Appeal decisions in Craig,
and the Court of Appeal decision in Gunn, the
applicable principles are summarized in paragraph 83 of Gunn, per
Sharlow J.:
83 …the combination question should be interpreted to require
only an examination of the cumulative effect of the aggregate of the capital
invested in farming and a second source of income, the aggregate of the income
derived from farming and a second source of income, and the aggregate of the
time spent on farming and on the second source of income, considered in the
light of the taxpayer’s ordinary mode of living, farming history, and future
intentions and expectations. This would avoid the judge‑made test that
requires farming to be the predominant element in the combination of farming
with the second source of income, which in my view is a test that cannot stand
with subsequent jurisprudence. It would result in a positive answer to the
combination question if, for example, the taxpayer has invested significant
capital in a farming enterprise, the taxpayer spends virtually all of his or
her working time on a combination of farming and the other principal
income-earning activity, and the taxpayer’s day to day activities are a
combination of farming and the other income-earning activity, in which the time
spent in each is significant.
The facts
[13]
The appellant
testified, as did Maximilien Bradette, racehorse trainer, and René Dufour,
auditor for the Canada Revenue Agency.
[14]
The parties agree that
the total cumulative amounts the appellant invested are:
|
Year
|
Race-horse business
|
Fondatechnique
|
|
|
|
|
|
2001
|
$4,202
|
$10,000
|
|
2002
|
$106,600
|
$10,000
|
|
2003
|
$237,069
|
$10,000
|
[15]
From 1994 to 2003, the
appellant received wages, dividends from Fondatechnique and gross and net
income from the race-horse business, as listed in the following table:
|
Year
|
Fondatechnique
|
Race-horse business
|
|
Employment income
|
Non-grossed-up dividends
|
Gross income
|
Net income
|
|
|
|
|
|
|
|
1994
|
$49,547
|
―
|
―
|
―
|
|
1995
|
$2,900
|
$20,000
|
―
|
―
|
|
1996
|
$28,000
|
$20,000
|
―
|
―
|
|
1997
|
$61,819
|
$40,000
|
―
|
―
|
|
1998
|
$83,890
|
$25,000
|
―
|
($3,482)
|
|
1999
|
$62,400
|
―
|
$3,094
|
($3,801)
|
|
2000
|
$61,200
|
$22,725
|
$69,361
|
($12,747)
|
|
2001
|
$39,600
|
$68,600
|
$193,166
|
($4,202)
|
|
2002
|
$63,600
|
$15,000
|
$301,063
|
($102,397)
|
|
2003
|
62 400 $
|
―
|
206 792 $
|
(130 469 $)
|
[16]
The racehorse business
began in 1998.
[17]
In 2002, Fondatechnique
had a gross income of around $804,000 and operating costs of around
$650,000, for a difference of around $150,000. In 2003, the gross income was
$840,000, and operating costs around $675,000, for a difference of around
$165,000.
[18]
The table below shows the
distribution of income from the race-horse business and the amounts of the
horse purchases:
|
Race-horse business
|
2001
|
2002
|
2003
|
|
|
|
|
|
|
Income other than sales
|
$58,741
|
$169,500
|
$137,427
|
|
Sales
|
$134,425
|
$131,562
|
$69,364
|
|
|
|
|
|
|
Horse purchases
|
$175,000
|
$273,687
|
$179,822
|
[19]
Fondatechnique's sales
figures were:
|
Year
|
Sales figures
|
|
|
|
|
2000
|
$580,070
|
|
2001
|
$711,350
|
|
2002
|
$804,505
|
|
2003
|
$853,899
|
As a result, the sales figures exceeded $1,000,000.
[20]
Fondatechnique operates
a drain-installation and building-waterproofing business. The company also
receives income from installing garage floors.
[21]
The appellant has been
active in the drains and waterproofing industry since the early 80s.
[22]
As the above-noted
figures indicate, Fondatechnique has been very successful.
[23]
The appellant's
brother-in-law had many racehorses and it was through his brother-in-law that
the appellant became interested in racehorses.
[24]
The appellant commenced
his farming activities with the purchase of a horse jointly with his brother‑in-law
in 1998.
[25]
In 2000/2001, the
appellant began investing more significant amounts in racehorses.
[26]
The evidence is
somewhat vague about the number of horses the appellant owned, because the
number varied not only from year to year but also during the year. Moreover, he
was the co-owner of some horses.
[27]
According to the
appellant, at some point, he had up to 15 horses. During discovery, in response
to written questions, the appellant answered that he had 11 horses in
2002-2001, 12 in 2001-2002 and 8 in 2002-2003. He did not specify whether these
numbers were the minimum, maximum or average for the year.
[28]
Nevertheless, the
appellant owned many horses and, according to Mr. Bradette, the appellant was
known, at one point, as being one of the five or six most important horse
owners in Montréal.
[29]
During the period in
question and later, the appellant hired Mr. Bradette to train his horses.
[30]
Mr. Bradette has had a
long experience in the horse industry. In the course of his career, he has done
almost everything in the industry; for instance, he has been an owner and a
driver. For a while, he was the director of the Quebec Trotting and Pacing
Association.
[31]
Amongst the tasks Mr.
Bradette carried out for the appellant, he trained the horses, conditioned them
and ensured that they were in good physical condition, veterinary care, liaised
with veterinarians, fed them and organized their travel.
[32]
Mr. Bradette hired other
persons to carry out some of the duties. As a trainer, he provided his services
to other clients, in addition to the appellant.
[33]
The appellant acquired
his knowledge of horses and racehorses through discussions with his
brother-in-law, Mr. Bradette and others. He also did research, in particular
from electronic sources. The appellant made major decisions in consultation
with Mr. Bradette (for example, as to the purchases of horses and the selection
of drivers).
[34]
The most disputed facts
in the evidence are those regarding the appellant's time commitments to
Fondatechnique and the racehorse business.
[35]
Mr. Bradette testified
that the appellant spent around 50 hours a week working for his racehorse
business, including work at home.
[36]
The morning of the trial, the appellant
gave an estimate of the time he devoted to the racehorses including time
helping at races, travelling for races outside Montreal and the time spent working from home. He estimated that he worked an
average of 47.5 hours per week, on an annual basis. In winter, he
spent more time on the horses than in summer.
[37]
At the hearing, he
estimated that he worked 40 hours a week for Fondatechnique, except in winter
when he worked only two hours a week.
[38]
However, the appellant
provided different figures before the trial. In discovery, the written answers state
that between 30 and 40 hours a week were spent working for the race-horse
business
and around 30 hours a week for Fondatechnique, except in winter when this
number dropped to around 10 hours.
[39]
The auditor testified
that the appellant told him he devoted 60 some hours a week to Fondatechnique
during the summer season from the end of March to November, and 30 some from
November to March. According to the auditor, the appellant told him he spent four
hours a day (28 hours a week) on the racehorse business in the summer season,
and a little more between November and the end of March.
[40]
Nobody kept a record of
the appellant's work hours and there is no clear evidence of the number of
hours he spent on Fondatechnique and the racehorse business.
[41]
However, since the
appellant gave his statements about the hours to the auditor in December 2004,
which is much closer to the years in question than the hearing of this case, I
am satisfied that his memory was more reliable at that time and I grant more
weight to the statements made then.
[42]
I find that, except
during the period of November to March, the appellant spent decidedly more time
on Fondatechnique than the racehorse business. However, from November to March,
he spent more time on the racehorse business.
[43]
Overall, for the entire
year, he devoted more effort to Fondatechnique than to the racehorse business.
However, he did allocate significant time to the horse business, on average 30
hours a week annually.
Analysis
[44]
Since it was admitted
that the appellant had a farming business, all that is left is the global
assessment of the indicia. The appellant's cash investment in the race‑horse
business was much greater that his investment in Fondatechnique. Although the
sales figure for the horse business was between a quarter and a third of that
of Fondatechnique, it is still an average of more than $230,000 per year.
Over the three years in question, the appellant regularly spent time on the
farming business throughout the year and this time, an average of around 30
hours a week, is significant.
[45]
In these circumstances,
according to the criteria in Gunn,
the section 31 restriction does not apply.
Conclusion
[46]
As a result, the appeal
is allowed with costs in accordance with Tariff B of Schedule II of the Tax
Court of Canada Rules (General Procedure), and the whole is referred
back to the Minister for reconsideration and reassessment, taking into
consideration the farming losses the appellant may deduct from his other income
are not limited by section 31 of the Income Tax Act.
Signed at Ottawa, Ontario, this
27th day of July 2011.
"Gaston Jorré"
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