The taxpayer, who earned approximately $700,000 per year from his law practice in addition to realizing substantial stock option benefits from serving as a director, was able to deduct over $200,000 per annum from his horse racing operation for the two years in question given that he invested substantial capital in the operation in addition to spending a significant part of his daily work routine on supervising the operation.
The Supreme Court of Canada affirmed that the taxpayer's losses were not limited under s. 31(1). The Court reversed its prior decision in Moldowan on the basis that Moldowan effectively read the combination test out of s. 31(1). Rothstein J. stated (at para. 30):
[Subsection 31(1)] is clear that two distinct exceptions to the loss deduction limitation can be identified. A judge-made rule that reads one of the exceptions out of the provision is not consistent with the words used by Parliament.
Having dispensed with Moldowan, the Court affirmed the trial judge's finding that the taxpayer's chief source of income was from a combination of farming and his law practice. Rothstein J. stated (at para. 41):
I do not think that characterization of farming changes under the combination test. The provision still contemplates that the taxpayer will devote significant time and resources to the farming business, even if he or she will also devote significant time and possibly resources to another business or employment. It seems to me that, as long as the taxpayer devotes considerable time and resources to the farming business, the fact that another source of income produces greater income than the farm does not mean that such a combination is not a chief source of income for the taxpayer.