Betting on horse racing has always been a game of risk and chance.
According to the Canada Revenue Agency (CRA), it is equally risky, at least from a tax perspective, if you own racing horses or train and ride them. Two court cases prove the point.
In one case, a lawyer bought, sold and raced horses. The CRA determined that the venture was only eligible for a restricted farm loss deduction for 2006.
On appeal to the Tax Court of Canada, the taxpayer demonstrated that he spent a considerable amount of time on the horse racing venture, invested a significant amount of capital, and did so only for the potential of meaningful profit.
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These are considered benchmarks or tests that determine, in the eyes of the court, that this is indeed a genuine farm business that could be considered a chief source of income rather than a sideline business.
It also helped that in recent years, the taxpayer realized two consecutive profitable years from his farming operation.
The court found in favour of the taxpayer. But the race isn’t over yet.
The CRA is taking the case to the Federal Court of Appeal, not willing to cash in the taxpayer’s ticket for claimed deductions for full farm losses in the earlier year.
In the other case, a taxpayer was assessed GST on his share of purse money paid out by race tracks under Ontario Racing Commission regulations. The taxpayer provided driver and training services for race horses and received a five percent share of the purse money from race tracks for his efforts. The taxpayer claimed that this was a share in prize money and therefore GST-exempt.
The CRA claimed that the taxpayer was being paid for a taxable service.
The taxpayer won the case, but the crown appealed the decision.
In the appeal, the court found that the original ruling was in error.
The lower court decision assumed that the five percent amount was a legitimate share of the total prize money. Instead, the appeal court found that the total prize was given to the owner, who then shared some of that amount with the driver-trainer as a fee for services rendered.
The court agreed with the CRA’s position and the taxpayer was liable for the five percent GST.
The only consolation the taxpayer can take from this decision is that it related to income earned before the 13 percent harmonized sales tax came into effect in Ontario July 1.
Larry Roche is a tax analyst with Farm Business Consultants Inc. Contact: fbc@fbc.ca or 800-860-7011.
