26 February 2010

Harmonized Sales Tax A Concern For Ontario's Racing Industry

On July 1st this year, the new Harmonized Sales Tax (HST) will come into affect in Ontario. This could and probably will curb owner's behavior as they are the ones who will have their cash flow most affected by the new tax.

So far, the government has not made horse racing an exception in any way (at least to my knowledge).

The HST will replace the Goods and Service Tax (GST) and the sales tax. In Ontario, the GST is currently 5% (it was as high as 7% a few years ago) and the sales tax is 8%, so the HST is going to be 13%.

Outside of paying for tack and feed, the racing industry pretty has pretty much stays clear of sales taxes (though there are probably a few exceptions), however there is GST dollars flowing all over the place. One good thing is that most involved in the industry have a GST number, and at the end of the year, they can deduct what they spent on GST against what they received on GST. If one spends more than they received, they actually get a check cut and sent out to them by the government.

Some possible good news for horse owners in Canada.
A recent Canadian court decision could lay new groundwork allowing part-time horse owners to deduct all losses incurred against annual income tax.

A part time owner is someone who owns race horses and is trying to make money at it.
The new decision states that if someone spends "meaningful" time and horse racing is a "meaningful" part of their overall business, then one can deduct their entire losses against all business income even if it is higher than the $8,750 limit the government has set on horse ownership losses annually.

Many believe the $8,750 is too low and hasn't been adjusted for inflation in years, while most believe that there shouldn't be a limit. There is no such limit in the USA for instance.

The government has appealed the decision by the Federal Court of Appeal. So it is best to contact an accountant or lawyer as to how to deal with the current decision that is in the books.

It is important to understand that when GST is paid out, it takes money out of the cash flow and many times racing operation budgets are tight as they are.

Here is how it works for the various parties:

They receive GST based on what they get for mounts taken from the owner's account. If they received $70 for a mount that didn't hit the board, they'd receive an additional $3.50 for GST. A mount that wins and gets them $2000 for their 10% of the purse means that the owner also has to pay out an additional $100 in GST.
Jockeys pay out GST to their agents and on items like tack, maybe travel, etc.

It is important to note at this time that a recent court decision ruled that prize money received by jockeys, trainers and harness drivers is not GST exempt.

They receive GST from the owner on their training bill. Generally the monthly training bill includes their 10% fees on races where their horses finish first, second, or third as well as blacksmith charges, shipping (though the owner is billed directly in many cases for this), and of course their day rate, and other miscellaneous items in many cases.
The trainer pays GST for feed, tack, shipping (if the owner isn't billed directly), and other items.

The Owners
They receive GST when a horse is sold or claimed by someone who has a GST number.
The owners, however, get their cash flow clobbered monthly because of GST (even at 5%), as they pay it on training fees, shipping, blacksmith, the 10% they pay to trainers, the jockey fees, lasix fees, vet fees, boarding in the winter, and when they claim or buy a horse.

Today, if an owner claims a horse for $20,000, they have to come up with another $1,000 for GST. But come July 1st, they will now have to part with (at least temporarily), $2600 in HST.

When you take into account that owners pay out anywhere between $20,000-$30,000 a year for a horse that is training for around 8 months or so, that extra outlay of $1600 to $4000 per year (when taking into account the cost of buying or claiming a horse), it might be very easy to decide not to even bother owning a horse, or cutting back on how many horses one owns.

Yes, generally the owner can get most if not all of it back come the early part of the year, but current cash flow is a big part of owning horses, and the majority of owners are small (many are trainers as well who sometimes struggle to get by at smaller venues like Fort Erie to begin with). Even owners with deep pockets hate to operate in too much red when it comes to their cash flow.

Negative cash flow will likely lead to a lot less claims. Claims are good for the game, and are good for growth.

Horse racing in Ontario has a hard enough time attracting new owners. The implementation of the HST will deter potential owners even further, and some existing owners will cut back and maybe even disappear from the game.

Another thing that may occur is an enhanced underground economy where cash deals will become very appealing.

A question looms as to whether horsemen will be able to offset positive HST against negative HST money as before, since the HST now includes the sales tax component.

Jockey Simon Husbands sues the Ontario Racing Commission for $3 Million
He says that the decision to ban him a year for a questionable looking ride has ruined his career. The decision was overturned subsequently, but Husbands says too much damage was done by the time the suspension was rescinded.

I wrote my views on the decision to overturn the suspension here.

The race in question (keep your eye on the 3 horse, Bug's Boy):

Bug's Boy went on to have a very profitable 2009. He won a couple, ran second a couple more times, mostly for jockey Chantal Sutherland (who did whip the horse), and amassed over $75,000 in earnings for the year.

Byron King has produced a list of top synthetic sires
He purposely left off sires standing in California or Ontario because of inflated results. Surely, he could have devised a system to rate them in an apples to apples way. For example, using Beyer, Brisnet or Trackmaster speed figs.
Anyway, he ranks Candy Ride number one, Giant's Causeway is ranked second.

Big overhaul proposed in New Jersey: Cut racing dates in half, triple the purses
Hey, I have an idea, why not just race at one track every day and one track at night in all of North America. Great purses, great handle, low track expenses. Problem is that you don't need much of a breeding industry for that, not very many suppliers of feed either. Not too many jockeys, agents, owners, trainers, and of course very few grooms, hot walkers, track employees, etc, etc, etc.

It seems racing is trying to do everything BUT lower the price the public pays (THE TAKEOUT).

I believe that the current amount of horses, horsemen, track employees, races, racetracks, etc. is totally sustainable, if the industry wakes up and drops the takeout or embraces player reward/rebates/takeout adjustments. One legitimate visible horse race betting gambler who makes a living betting horses will almost certainly attract hundreds of potential new gamblers (and most will certainly lose money, but at least the chance is there to become a full time player, and that is what racing desperately needs in order to grow....much like the way it worked when poker took off.

Apparently, according to one the comments I received at Cangamble, harness racing legend Ron Waples was quoted on THE SCORE Monday night as saying that horse racing needs to cut takeout to compete with other forms of gambling.


RailbirdBrad said...

Simon Husband sues Woodbine?LOL,he went 2 -109 @ woodbine in 2009,then took his tack and skills to Philly and Aqueduct and promptly went 0-54,seems like he should be arrested for impersonating a Jockey!

Anonymous said...

Seems like every time in 2009 I bet on S/Husbands, he was left at the gate. After several such events, it was clear how foolish it was betting Mr. S/Husbands. Could his gate skills be the reason trainers avoided him? If he wins that lawsuit, I might consider suing him for losses incurred by his horrible rides.