SERGE TURBIDE, Appellant, v. HER MAJESTY THE QUEEN,, 2011 TCC 371

Docket: 2007-2652(IT)G BETWEEN: SERGE TURBIDE, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on March 5 and 6, 2009, at Montreal , Quebec. Before: The Honourable Justice Gaston Jorré Appearances : Counsel for the appellant: Pierre Archambault Counsel for the respondent: Dany Leduc ____________________________________________________________________ JUDGMENT According to the attached Reasons for Judgment, the appeal from the assessments made pursuant to the Income Tax Act for the 2001, 2002 and 2003 taxation years is allowed, with costs in accordance with Tariff B of

Schedule II of the Tax Court of Canada Rules (General Procedure) and the case is referred back to the Minister of National Revenue for reconsideration and reassessment; it will be taken into consideration that 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 , Canada , this 27th day of July 2011. "Gaston Jorré" Jorré J. Translation certified true on this 28 th day of October 2011.

François Brunet, Revisor 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 [1] [ 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 [2] 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 [3] . Hershfield J. of the Tax Court of Canada conducted a thorough analysis of the situation in Craig v. The Queen [4] , which was affirmed by the Federal Court of Appeal. [5] [ 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 [6] , 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 [7] 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 [8] : 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. [9] [ 18 ] The table below [10] 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. [11] [ 20 ] Fondatechnique operates a drain-installation and building-waterproofing business.

The company also receives income from installing garage floors. [12] [ 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. [13] [ 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. [14] [ 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. [15] [ 36 ] The morning of the trial, [16] 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. [17] 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. [18] [ 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 [19] and around 30 hours a week for Fondatechnique, except in winter when this number dropped to around 10 hours. [20] [ 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. [21] [ 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. [22] 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 [23] , the

section 31 restriction does not apply. [24] 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" Jorré J. CITATION: 2011 TCC 371 COURT FILE NO.: 2007-2652(IT)G STYLE OF CAUSE: SERGE TURBIDE v. HER MAJESTY THE QUEEN PLACE OF HEARING: Montreal, Quebec DATE OF HEARING: March 5 and 6, 2009 REASONS FOR JUDGMENT BY: The Honourable Justice Gaston Jorré DATE OF JUDGMENT: July 27, 2011 APPEARANCES: Counsel for the Appellant: Pierre Archambault Counsel for the Respondent: Dany Leduc

COUNSE L OF RECO RD: For t he appellant: Name: Pierre Archambault Firm: Dunton Rainville Montreal (Québec) For the respon dent: Myles J. Kirvan Deputy Attorney General of Canada Ottawa , Ontario