Horse Drivers Win Remuneration, Not Prize Money: Canada v J Hudon Enterprises Ltd
Earlier this month, the Federal Court of Appeal (“FCA”) released its decision in Canada v J Hudon Enterprises Ltd, 2010 FCA 37, a case that asks whether, in the context of horse racing, the proportion of prize money awarded to drivers and trainers after a successful performance at the track is subject to GST.
Race tracks offer a prize, known as purse money, to each of the top five finishes in a horse race. Under an agreement with the race track, the horse owner typically gets 90% of the purse money, while the driver and trainer each get a 5% share. (Unlike jockeys, who sit on the horse itself, horse drivers mount a two-wheel cart pulled by a horse; this is called “harness racing.”)
The respondent, a firm representing horse drivers and trainers in Ontario, argued that the payments that they receive constitute prize money, which is not subject to GST. It relied on section 188(2) of the Excise Tax Act, RSC 1985, c E-15, which exempts from GST liability any “prize” given to a “competitor” in a “competitive event.” Revenue Canada argued that the 5% share that a horse driver or trainer gets after a successful race is not a prize, but a remuneration for services rendered to the horse owner.
The Judicial Decisions
While the Tax Court of Canada (“TCC”) found that the horse driver and trainer were “competitors” and that their share in the winnings constituted a “prize” (see 2008 TCC 348), Stratas J.A. of the FCA reversed that decision and found in favour of Revenue Canada. He wrote that TCC had erred in writing that the horse owner, driver, and trainer were joint winners in the purse money; indeed, “the only evidence on this point supported a finding that the purse money belonged only to the horse’s owner.” The mere fact that the driver and trainer of a horse get paid only if they win the race does not, in itself, make these payments “prizes.” They may still be remuneration for services rendered, under a compensation scheme based on performance or result.
Stratas J.A. wrote that, to determine whether a payment is a “prize” under section 188(2),
…it is necessary to determine the true nature of the payments and … what property or services are being sold, transferred, bartered, exchanged, licenced, rented, leased, given or disposed for the payments. … Some useful circumstances to examine include the purpose behind the payments, the true relationships among the parties, and any agreements, laws and regulatory provisions that apply.
Both the regulatory framework and the wording of the contracts between the race tracks and horse racing participants suggested that the 5% payments to drivers and trainers were better characterized “as fees, contingent on success, that are intended to remunerate … for services rendered to owners” than as prize money. Rule 18.11 of the Ontario Racing Commission’s Rules of Standardbred Racing states that purse money is payable to owners, and that the driver and/or trainer’s “fees” are deducted from that amount:
18.11 Where an agreement exists between a recognized harness participants’ association and a racing association, drivers’ and/or trainers’ fees may be deducted from the purses payable to owners and paid to the drivers and/or trainers within 30 days. A copy of such agreement must be filed with the Commission.
The race track does not therefore reward “purse money” to drivers and trainers, but merely deducts their fees from the purse money and remits it to them on behalf of the horse owner. The contract between the respondent and the race tracks also use the term “drivers’ fees” and refers to purse money “won by horses,” not by drivers, suggesting that the payments that drivers receive are not prizes, but payments for services. Having found that the drivers’ and trainers’ respective shares in purse money constitute fees for services, the court concludes that they do not enjoy GST exemption under section 188(2) of the Excise Tax Act.
While the court’s reasoning is sound, it does seem rather strange that horse owners get a competition “prize” while the horse driver and trainer, the individuals who actually put in the effort to win the competition, get a “payment for services rendered” that is subject to GST. This is incongruent to other professional racing sports like auto racing. Since Stratas J.A. bases his decision on a somewhat literal reading of the Rules of Standardbred Racing and the contract between the race tracks and race participants, horse owners (who, as recipients of the drivers’ and trainers’ services, are the ones responsible for paying the GST) may want to reword their agreements with race tracks and lobby the Ontario Racing Commission to change the wording of the rules, so that compensation to drivers and trainers can be characterized better as divvying up prize money.