Ernest C. Hammond (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Pratte J.—Vancouver, July 8;
Ottawa, September 24, 1971.
Income Tax—Income—Prize money realized by horse
owner from racing—Whether business or hobby—Deemed
windfall gains derived from hobby—Appeal allowed—
Income Tax Act, R.S.C. 1952, c. 148, secs. 3, 4, 139(1)(e).
The appellant appealed from reassessments made upon
him for the taxation years 1964, 1965 and 1966 for inclu
sion in income of amounts of $9,083.81, $28,543.13 and
$28,114.26 which were net gains that the appellant realized
during each of those years from racing a horse known as
"George Royal". The appellant claimed these amounts
represented windfall gains derived from a personal hobby.
Held, that the mere purchase and racing of a horse is not,
in itself, a trading venture because it is not normally made
with a view to profit. Therefore, prize money won by a
horse cannot be considered as income from a business
"except in exceptional circumstances showing that the
owner of the horse had so organized his activities that he
was in fact conducting an enterprise of a commercial char
acter". In this case, exceptional circumstances not having
been proved, the appeal is allowed.
INCOME tax appeal.
E. C. Chiasson and G. T. W. Bowden for
appellant.
T. E. Jackson for respondent.
PRATTE J.—The appellant appeals from
income tax reassessments made upon him for
the taxation years 1964, 1965 and 1966. In
these reassessments, dated April 27, 1970, the
Minister of National Revenue added to the
declared income of the appellant amounts of
$9,294.41 for 1964, $29,546.51 for 1965 and
$28,942.85 for 1966, which supposedly repre
sented the net gains that the appellant had real
ized during each of those years from racing a
horse known as George Royal.
In his notice of appeal, the appellant attacked
these reassessments on two grounds: first, that
his racing gains were not income and, therefore,
not taxable, and, second, that the amounts that
the Minister had added to his declared income
did not truly represent his net racing gains. Of
these two objections, however, the latter no
longer needs to be considered since the parties
agreed at the trial that the net profit made by
the appellant from racing the horse George
Royal amounted to $9,083.81 in 1964, $28,-
543.13 in 1965 and $28,114.26 in 1966. Conse
quently, only the first objection raised by the
appellant remains to be considered.
In his notice of appeal, the appellant sets out
as follows his reasons for contending that the
amounts added to his declared income are not
taxable income:
2. The aforementioned amounts added to the Appellant's
net income in 1964, 1965 and 1966 were derived from
successful races by the horse George Royal which the
Appellant acquired as a suckling in 1962 and in which the
Appellant had a half interest by way of co-ownership.
3. The Appellant acquired and raced the said George
Royal between 1963 and 1966 in pursuit of his chosen
hobby of owning and racing a horse or horses from which
he derived personal enjoyment and entertainment.
9. The Appellant says further that his gains from horse
racing were not derived from a commercial venture or
enterprise of raising and training horses to race but repre
sented windfall gains derived from a personal hobby under
taken by the Appellant with the dominant object of enter
taining himself.
In his reply to the appellant's notice of
appeal, the respondent says that, in reassessing
the appellant for the years 1964, 1965 and
1966, he acted upon the following assumptions:
6...
(a) The Appellant during and for some years prior to
relevant times has been engaged alone or with others in
the business of racing horses for profit.
(b) During 1964, 1965 and 1966 the Appellant was co-
owner of a race horse known as George Royal.
(c) Between May, 1963, and October, 1966, proceeds
from racing the horse George Royal amounted to
$279,482.00.
(d) The Appellant's share of the proceeds of horse racing
... is income within the meaning of that word as it is used
in the Income Tax Act.
It is therefore admitted that during the years
1964, 1965 and 1966, the appellant was the
co-owner of a very successful race horse
known as George Royal and that the various
amounts (as varied by the agreement made at
the trial) added by the respondent to the appel
lant's declared income for the years under con
sideration represent the appellant's share of the
prize money won by George Royal after deduc
tion of the legitimate expenditures made in con
nection with the racing of this horse. The issue
to be resolved is whether the appellant's share
of the net proceeds of racing this horse during
the period under consideration is income within
the meaning of that word in the Income Tax
Act, R.S.C. 1952, c. 148, secs. 3, 4 and
139(1)(e).
Counsel for the appellant and the respondent
agreed that the question whether or not prize
money won by horse racing is taxable income
admits different answers, depending on the
facts of each case; more precisely, counsel for
both parties agreed that such prize money is
income only inasmuch as the taxpayer's racing
activities are such that they can be considered
as a business.
The appellant, who lives in Vancouver, is
now 68 years old. He has always been interest
ed in sports and was even a football player for
many years. In 1933, he had to abandon foot
ball in order to join his father and brother in
running The Hammond Furniture Manufactur
ing Company, a family company which, apart
from being the second largest Canadian manu
facturer of wooden furniture, was also
involved, through various subsidiaries, in other
businesses like floor covering, upholstery and
bedding, plywood and lumber. To this new task,
appellant for many years devoted all his ener
gies, working from 16 to 18 hours a day. Short
ly before 1957, both the appellant's father and
brother died; and this loss, coupled with the
fact that appellant had apparently encountered
difficulties in dealing with labour unions,
prompted him to close down his various enter
prises. All this with the result that, at the begin
ning of 1957, the appellant had disposed of
nearly all the various businesses previously
operated by the Hammond Furniture Manufac
turing Company and its subsidiaries; he had
only retained the ownership of a large office
building and continued to operate the bedding
and upholstery section of his business (which,
sometime later in that year, he sold to former
employees of his for $250,000, payable by
monthly instalments of $1,150). This is not to
say that the appellant stood idle in the following
years. According to his testimony, he would still
have been very busy, specially from 1963 to
1966, looking after the administration of his
office building, working for an Australian furni
ture manufacturer and devoting much time to
the affairs of Western Mines Ltd., a company
of which he was a director. It is certain, though,
that the appellant had then reduced the pace of
his business activities as could be expected of
one who had suffered a stroke in 1962; in these
circumstances, one understands that the appel
lant, from 1964 to 1966, could spend much time
away from home following his horse wherever
it was raced. The appellant asserted, and there
is no reason not to believe him, that during all
those years he was in a good financial situation
and "was not relying on horses to make
money".
It is against this background that the appel
lant's horse racing activities must now be seen.
Until 1955, the appellant had never owned a
race horse but had attended the race track fre
quently. In that year, in order to enjoy the thrill
of betting on a horse of his own, he purchased
his first race horse. Since then, he has always
owned one. He would buy a horse, have it
trained and raced, and if it did not prove good
or did not please him for any other reason, he
would sell it or give it away before purchasing
another one. The appellant did not own a farm
where he could have kept his horses and he
knew nothing about horse training; all his
horses, therefore, had to be trained and looked
after by professional breeders and trainers.
Around 1962, the appellant, who, by that
time, had already owned 4 race horses, pur
chased a foal known as George Royal for a little
less than $3,500. He made arrangements with
one Robert Hall, a professional breeder who
owned a farm near Vancouver, to have his new
horse kept and trained. In order to induce Hall
to take good care of George Royal, he gave him
a one-half interest in it, with the understanding
that Hall would share in the cost of keeping,
training and racing the horse and also, eventual
ly, in the prize money that it would win.
Unexpectedly, George Royal developed into
a superior race horse. It proved so good when it
was raced in British Columbia that, late in 1963,
the appellant and Hall decided to send it to
California with a trainer and a jockey so that it
could compete against suitable rivals. In 1964,
1965 and 1966, George Royal was raced with
considerable success mainly in California and in
Ontario. In the fall of 1966, as the horse suf
fered from arthritis, the appellant and Hall then
decided not to race it any more. As the appel
lant was not interested in the breeding business,
he sold his one-half interest to a friend of
Hall's. In its rather short but highly fruitful
racing career, George Royal had won purses
totalling $335,000.
It was the appellant, apparently, who did the
administrative work that the racing of George
Royal involved. For instance, he insured the
horse and corresponded with the organizers of
the various races in which it was to participate.
The appellant did not keep detailed and com
plete records of the expenses made in connec
tion with his racing activities. However, he col
lected and preserved all that was published in
the newspapers concerning George Royal.
If the appellant's racing activities consumed
much of his time, specially in 1965 and 1966, it
is because, as I already said, he chose to follow
his horse wherever it went. As an example, the
appellant spent the winter months of 1965 and
1966 in California. These trips, which were
certainly expensive, were in no way necessary
since the appellant did not train nor race the
horse himself. The appellant followed his horse
because he liked it: thanks to George Royal he
had the occasion to associate with people that
he could not have met otherwise.
In support of his contention that the appellant
was engaged in the business of racing horses for
profit, respondent's counsel referred to well-
known authorities: Thomas Campbell v. M.N.R.
[1953] 1 S.C.R. 3; M.N.R. v. Taylor [1956-60]
Ex.C.R. 3; C.LR. v. Livingston (1926-27) 11
T.C. 538; Edwards v. Bairstow [1955] 3 All
E.R. 48. In my opinion, these precedents have
no application here. In all these cases the court
had to determine whether or not a gain resulting
from a purchase and a resale was income; but
such gains cannot be assimilated to prize money
won from horse racing. He who purchases and
later sells a commodity at a profit prima facie
acts as a trader; for this reason, even if this
transaction is an isolated one, it can very easily
be considered as an "adventure or concern in
the nature of trade". But if one succeeds in
realizing gains from horse racing, the situation
is altogether different. It is notorious that only
men of means can afford to own and run horses
for the very reason that normally one does not
reap profit from this form of entertainment. The
fact of purchasing and racing a horse is not, in
itself, a trading venture because it is not nor
mally made with a view to profit. For this
reason, purses won by a race horse cannot be
considered as income from a business except in
exceptional circumstances showing that the
owner of the horse had so organized his activi
ties that he was in fact conducting an enterprise
of a commercial character. In the present case,
no such exceptional circumstances having been
proved, I conclude that the appellant cannot be
considered as having been, during the years
under consideration, in the business of racing
horses for profit and that, therefore, his racing
gains during these years were not income.
The appeal will be allowed with costs.
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