October 07, 2011

Bert James (Appellant) v. Minister of National Revenue (Respondent)

73 DTC 5333
Federal Court-Trial Division
June 25, 1973

Deductions — Former car dealer — Losses from racehorse business — Limitation of section 13 — Combination of farming and other source of income — Chief source of income defined — Income Tax Act, R.S.C. 1952, ss. 13(1) and (2) and 139(1)(p) [see ss. 31(1) and 31(2) and 248(1) of the new Act].

Prior to 1967 the appellant was successfully engaged in selling new and used can through a company in which he owned all the shares. However, in late 1966, he got out of this business and went into the horse-racing business. During 1967 and 1968 the appellant spent about $240,000 to acquire horses. For those taxation years he deducted the losses of his racing operations (totalling more than $200,000) from the receipts of money he had received from his car company. In 1969 he moved to the United States where he extended his racing business and made substantial profits. The Minister reassessed the appellant for 1967 and 1968 and disallowed the losses he had deducted, arguing that the appellant’s chief source of income for the years at issue was neither farming nor a combination of farming and some other source of income and, consequently, that the appellant’s deductible losses were limited by section 13 of the Act. Alternatively, the Minister claimed that the expenditures in question should be regarded as capital outlays for the purpose of enlarging the appellant’s entire profit-making structure. The appellant objected.

Held: The appeal was allowed. The appellant was entitled to deduct the full amount of all losses he had sustained on his racehorse business in 1967 and 1968 as found in section 13 chief source of income” means the business, employment or property from which the bulk of a taxpayer’s income might reasonably be expected to come. A business can constitute a source of income even though it produces no income in the sense of profit in a particular taxation year. Thus, the appellant’s business of farming (i.e., his racehorse operations) was a “source of income” within the meaning of section 13 and the combination of that source and the car company source of funds was his chief source of income”. As for the Minister’s alternative submission the expenses incurred by the appellant in acquiring his horses were current — not capital — in nature and therefore deductible as such. In purchasing the horses the appellant was acquiring an inventory for his business, not a capital asset.