Source: https://taxinterpretations.com/tax-topics/income-tax-act/section-3
Timestamp: 2019-04-22 02:57:02+00:00

Document:
S. 3(a) requires the inclusion in income for purposes of the Act of income from sources inside and outside Canada "including, without restricting the generality of the foregoing" the taxpayer's income from each office, employment, business or property. Detailed provisions of the Act govern the determination of whether an amount is income from one of these sources. Accordingly, the situation may arise where a taxpayer receives an amount which might appear to have the character of income but where the amount is not included in income from one of the specifically enumerated sources. It is not clear whether such an amount can be included in income as being income from a source other than one specifically enumerated in s. 3 (Schwartz - see also Curran).
Somewhat similar to the mooted proposition that amounts from an unenumerated source of income are not income, is the better established proposition that receipts may not be income if they represent an unexpected windfall (see Cranswick) or otherwise are not earned (see Fries, Fortiono, Atkins) or do not have any source (see Bray v. Best, Fogazzi - although this latter case is inconsistent with other receipts-of-crime cases (see s. 9 - exempt receipts) and Humphrey).
Expenses incurred with a view to potentially earning income from a business generally will be considered to applicable to that source even though, with the benefit of hindsight, they were unproductive (e.g., a loss from fraud, see Ruff).
In my view, express exclusions of this type only confirm an already-present rule. In this regard, the subjecting to tax under the Act of a “taxpayer,” applies in the singular (section 3). Nothing permits the belief that the legislator intended that the same income would be taxable in the hands of more the one taxpayer… . The same dividend cannot be simultaneously received by two persons.
An award of "additional interest" received by taxpayer pursuant to s. 66(4) of the Expropriation Act (Alberta) (a provision which required repayment of such amount in circumstances where an expropriating authority offered less than 80% of the amount ultimately awarded and the Expropriation Board was of the opinion that such lower figure was due to the fault of the expropriating authority) did not, by its nature, constitute compensation for the lands that had been taken, nor compensation for the loss of use of money. Instead, its true nature was in the nature of a punitive damage award intended to discourage token or unrealistic payments from being tendered. Accordingly, the payment was simply a windfall and, therefore, not income under s. 3(a).
The majority and the minority, both in obiter dicta, disagreed on whether income that was not from a source specifically identified in s. 3 could be included under s. 3(a) as income from some other source.
"So not only must the word 'income' be given its ordinary meaning, the law also requires that a 'source' be identified with the receipt. If no source can be identified, (and assuming there has been no disposition of property for capital gains purposes) then the receipt will not be included in income ... If 'income' is to be interpreted by 'the ordinary concepts and usages of mankind' I would suggest that the ordinary person would have difficulty in accepting the proposition that stolen money is income."
Amounts received by an employee of the Saskatchewan Liquor Board from the Saskatchewan Government Employees' Union (the "SGEU") in consideration of his agreement in support of a strike by government employees who were not Liquor Board employees, to withdraw his services from the Liquor Board, were not taxable to him as income from a source.
Before dealing specifically with the interpretation of s. 63(2), MacKay J. found (p. 6572) "that the word 'income', both in its ordinary usage and that employed in the context of the Act imputes the existence of a positive amount" and found, with respect to section 3 "which is the closest thing to a definition of 'income' under the Act" that "the very explicit use of the words 'remainder, if any' in the final phrase of the section truly mandates the existence of something positive before the taxpayer can be said to have income for purposes of the Act" (p. 6572).
In a joint venture agreement it was agreed that an individual member of the joint venture ("Laxton") would be paid an annual management fee equal to $450,000 minus the product of the Bank of Montreal prime rate and the amount of interest free loans made by the joint venture to Laxton. Imputed interest on interest-free loans made to Laxton by the other members of the joint venture (who previously had borrowed from the Bank) was included in his income as "amounts" of income (which were defined in s. 248(1) as value of rights or things). "[T]he interest free loan ... was linked to and was in reality part of the overall management fee arrangement in favour of the Appellant."
In finding that the payment to the taxpayer was a windfall that was not includable in his income, LeDain J indicated (at p. 6076) that the only possible source of the payment received by the taxpayer was his shares, and that the payment was not income because it was not typical of what is typically earned by shares, i.e., dividends, and it was in fact a payment "of an unusual and unexpected kind that one could not set out to earn as income from shares, and it was from a source to which the respondent had no reason to look for income from his shares."
Damages for wrongful dismissal were not income.
"It is true that in order to fulfill his obligations under the contracts the appellant was obliged to resign his position with Imperial Oil Limited and thereby gave up not only the annual salary, a like amount which he was to receive, but also his pension rights and further prospects. However, the payment of $250,000 was made for personal service only and that conclusion really disposes of the matter as it is impossible to divide the consideration."
Graham J found that a status Indian, who earned exempt income from employment and non-exempt investment income, could only deduct a registered pension plan contribution in computing his employment income (and not from his income generally), so that the deduction effectively was denied. Before so concluding, Graham J referred (at paras15, 20) with approval to the statement in the dissenting reasons of Iacobucci J in Hickman Motors (also picked up in FLSmidth) that there was a “requirement to segregate income according to various sub-sources” (e.g., to distinguish the income arising from each business, property or employment of a taxpayer).
A subdivision property of the taxpayer, a developer, was blockaded by Six Nations protesters. To diffuse the conflict, the Ontario government passed a by-law prohibiting any use of the property (rendering it valueless), and then agreed to pay the taxpayer $15,800,000 in exchange for relinquishing its rights to the property and under a court order against the protesters, and for a release.
Henco's business was destroyed. By the time it struck an arrangement with Ontario, Henco had no value as a business ... : there could not be and there was not a source of income. The capital receipt was non-taxable.
The evidence shows that the appellant did operate a business, or at least, that the purchase of the trees constituted a business activity. The appellant's sole purpose, when he participated in Mr. Maheux's project, was to resell the 750 trees for a profit. That was the only way he could profit from his investment. Accordingly, I conclude that the expenses were business expenses.
Sheridan J. permitted the taxpayer's rental losses from the studio apartment she had purchased in a condominium near a ski resort. Her personal use of the apartment in any given year never exceeded 10% of the days she had it available, and she otherwise left it to a management team in order to collect business income. While the taxpayer's business judgment was questionable in the circumstances (having failed to predict the increasing competition for rental units in the area and the extent of the expenses involved in the business of renting), it was not for the Minister to second-guess the taxpayer's business judgment.
On the question of whether there was a reasonable expectation of profit, Sheridan J. noted that the taxpayer in the present case ought to be held to a lesser standard than the taxpayer in Stewart. Mr. Stewart was an experienced businessman who had held senior positions in the Toronto Transit Commission, while the present taxpayer was a registered nurse who had previously rented out her house's basement suite for a few years. Moreover, as the units in the building all had a third-party manager, the operation "did not lend itself to the same level of active involvement that Mr. Stewart enjoyed in his business venture. It is against this factual backdrop that the Appellant's conduct in the face of losses must be considered" (para. 14). It was reasonable for the taxpayer to rely on management's assurances that the situation would improve.
The taxpayer, a lawyer, was bilked of $400,000 by scam artists, posing as clients, who induced him to incur "processing " fees in connection with the recovery of a supposed container in the Ivory Coast containing US$8.5 million of cash.
Before finding that deduction of the taxpayer's outlays was barred by s. 67, Webb J. found that the outlays arose out of activities (seeking to act as a trustee for supposed clients) that were undertaken as part of his law practice and, thus, related to a source of income (that business).
[C]learly, the remaining disputed flight expenses relate directly to the business income of the business ventures. The expenses were incurred to make the business ventures profitable. Yes, that might yield at some future point dividend income, but the direct cause and effect link is between the expenses and the business income of the business property ventures, not the relationship with any property source of income.
"I think it may be a little unrealistic to say that the appellant here continued in 2002 and subsequent years, to carry on the business that she carried on in 1997 to 2000, simply by reason of her complying with the restitution order".
The amounts paid by her pursuant to the restitution order were not deductible in computing her income.
Lump sums received by individual vendors of shares in consideration for their entering into non-competition agreements with the purchaser were characterized as being for their surrender of a potential source of profit and, therefore, represented capital receipts that were not taxable under s. 3.
Rip TCJ. applied the principle in the Ansell Estate case (66 DTC 5508) that "when amounts are withdrawn from a trust they are capital except for the amount of any income that has been earned by the trust in the year of payment" in finding that withdrawals by the taxpayer from his U.S. IRA were not taxable to him.
"It is a well established principle deriving from the nature of income tax as an annual tax, that a receipt or entitlement arising in a year of assessment is not chargeable to tax unless there exists during that year a source from which it arises." A payment which the taxpayer received on the winding up of trusts which had been established for employees of a subsidiary before the taxpayer was transferred to the parent were not taxable under Schedule E (albeit, they were taxable as retirement payments) because he had ceased to be employed.
The source of services fees received by two brothers from a company that was controlled by them and engaged in the farming business was farming. The source of income "originated from farming, even though some of this income may have been channelled to defendants through a corporation which has an independent existence".
Collier J. indicated (at p. 6134) that the words "source of income" in s. 13(1) of the pre-1972 Act (now s. 31(1)) "were used in the sense of a business, employment, or property from which a net profit might reasonably be expected to come".
This was followed by 20 March 2013 Internal T.I. 2013-0480201I7 F, which is similar but somewhat more detailed.
[W]ith respect to the amount … for pain and suffering under paragraph 53(2)(e) of the Canadian Human Rights Act … this amount qualifies as general damages received in connection with a human rights violation and may therefore be considered to be unrelated to the employment of the Workers. Consequently, the amount … would not have to be included in the computation of the income of the Workers.
[I]f it is not social assistance included in income under paragraph 56(1)(u), [it] would likely not be included in income of the client under any other provision of the Act.
[T]he collection of information by the witness for the SQ is the provision of a service. Thus, the witness will be considered to be carrying on a business… .
[However] a witness is placed under the protection of the SQ where there are legitimate concerns as to his and his family's security. In such a situation…the payments received or receivable from the SQ do not result in enrichment of the witnesses thus protected and do not represent a source of usual and recurring income for them. Consequently…the portion of the payment (other than living expenses) tied to the expenses incurred for the protection of the witness and his family is generally not taxable as it does not represent a social assistance benefit under paragraph 56(1)(u) and does not represent income from a source under section 3.
1.1 For tax purposes, section 3 brings into income a taxpayer's income from all sources inside or outside of Canada, whether or not the particular source is enumerated in section 3…. In addition, section 3 and various other sections of the Act describe specific sources of income and the specific rules applicable in determining taxable capital gains and allowable capital losses. In the case of hobbies, neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h).
h )the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.
i) The factors above are based on those set out in the decision of The Queen v. Cranswick,  CTC 69, 82 DTC 6073 (F.C.A.).
1.4 ...Amounts received as gifts, that is, voluntary transfers without consideration and which cannot be attributed to an income-earning source, are not subject to tax in the hands of the recipient.
1.5 ...[V]oluntary payments (or other transfers or benefits) received by virtue of a profession or in the course of carrying on a business are taxable receipts.
Example 2Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1).
… Gambling - even regular, frequent and systematic gambling - is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances. Leblanc v. The Queen, 2006 TCC 680, 2007 DTC 307.
1.14 There are some exceptional cases, which are noted in Leblanc, where gambling activities have been held to be taxable. However, these cases relate to taxpayers who applied inside information, knowledge and skill to their activities. For example, in Luprypa v. The Queen,  3 CTC 2363, 97 DTC 1416, a pool player who in cold sobriety would challenge inebriated pool players to a game of pool was held to be taxable on his winnings.
the extent of the taxpayer's gambling activities, including the number and frequency of bets.
1.42 Amounts paid to taxpayers that are a return on their investment should be included in the taxpayer's income. This was confirmed by the Federal Court of Appeal in The Queen v. Johnson, 2012 FCA 253, 2013 DTC 5004.
Former employees of Canco or of its subsidiaries are creditors of Canco, following Canco going into CCAA proceedings, by virtue of having been covered under private health services plans of Canco.
IT-232R3 "Losses - Their Deductibility in the Loss Year or in Other Years"
Losses, to the extent they do not reduce income to nil, must be used in the loss year or forfeited.
"For the purpose of paragraph 3(a) a flow-through share is a source of property income. However, when the share is held in conjunction with the business carried on by the owner, it would be a source of income from that business. In computing income for the purpose of paragraph 3(a) of the Act, a Canadian resident shareholder may deduct renounced Canadian exploration expenses to the extent permitted by subdivision E of the Act and in so doing may create a non-capital loss".
Strike pay is non-taxable even if the member performs picketing duties as a requirement of membership in the union.
Union members who recieve a portion of the strike fund when they lose their jobs as the result of automation or a plant closure will not be taxable on the payment.
A flow-through share is a source of income for purposes of s. 3(a) and, accordingly, the deductions of CEE under s. 66.1(3) and CDE under s. 66.2(2) related to those shares would be referrable to a source of income and a non-capital loss could be created.
A taxpayer (which is not a principal business corporation) may deduct CEE or CDE without restriction to its income so as to create a non-capital loss provided that the deduction under s. 66.1(3) or 66.2(2) is referable to a source that is business or property. For purposes of s. 3(a), flow-through shares constitute a source.
Where CEE is renounced under a flow-through share structure (either directly or where CEE renounced to a limited partnership is allocated to its partners) the resulting CEE claims can give rise to a deduction for the year from business or property pursuant to paragraph 3(a).
Where a JEC renounces CEE to its parent corporation, which is not a principal business corporation and has no resource property or resource business, the parent corporation will be able to claim CEE in computing its income for a year from business or property pursuant to paragraph 3(a). If the CEE is renounced through a flow-through share structure, the answer is the same.
ATR-40 (18 March 1991) "Structured Settlements"
Description of the non-taxable receipt of periodic payments for damages in a personal injury case.
"In order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit."
Joel A. Nitikman, "Reasonable Expectation of Profit - Where Are We Now?", Business Vehicle, Vol IV, No. 3, 1998, p. 204.
One of the sources of income enumerated in s. 3 is a business. Based on a dictum in the Moldowan case, many subsequent cases found that a taxpayer was not carrying on a business if there was no reasonable expectation that the activities in question would generate a profit. The Stewart and Walls cases placed a significant limitation on this doctrine: if the activities in question do not contain significant elements to suggest that they are a hobby or other personal pursuit, then the reasonable-expectation-of-profit test should not be applied to find that the activities do not qualify as a business. The Walls case also found (consistently with Ludco) that the activities can qualify as a business even if they would not have been engaged in but for a tax motivation (but cf. where tax motivation is the only element - Caputo).
Various criteria that might be applied to determine whether a concern has a reasonable expectation of profit were listed in the Moldowan case, and quoted and applied in numerous subsequent cases. Where the activity requires the incurring of substantial and extended losses before profitability may be achieved, the test may still be satisfied (Kuhlman, Madronich). It has been suggested that a reasonable expectation of only nominal profit may be sufficient to satisfy the test (Donnelly, Timmins).
A draft proposal (draft s. 3.1) to enact a statutory reasonable-expectation-of-profit test that is more exacting than the jurisprudential test described in the paragraph above is under further review by the Department of Finance.
Two of the taxpayers (“Ludmer” and Steinberg”) were invested along with family, friends and acquaintances (all resident in Canada) in a BVI company (“SLT”) whose investments were managed by a non-resident hedge fund manager (“GAM”). When GAM proposed that SLT be merged with another fund managed by GAM in which non-residents were investors, it was agreed that, in light of the merged fund being subject to a higher level of fees than those to which SLT had been subject, that a Bermuda company owned indirectly by two Steinberg and Ludmer non-resident trusts would receive annual “fees” from the time of the 1994 merger that effectively represented a rebate of the higher fees imposed on the Canadian investors (although they were described to be consideration for services that, in fact, were never provided). This arrangement was replaced in 2007 by a new agreement in which the “fees” were paid directly to two newly-established Canadian-resident family trusts.
The argument put forward by Bowman that they are “nothings” for Canadian tax purposes because they are merely reputational payments arising in a non-business circumstance may ultimately be upheld by the Tax Court, but it is not so clear at this stage as to render the CRA’s position unreasonable.
the taxpayer's cutting back on other work and income during poker wins was no indicator of running a business with a reasonable expectation of profit.
The taxpayer's degree in mathematics and experience with various forms of gambling were not a sufficient basis to reverse the trial judge's finding that the taxpayer's gambling losses were not incurred as part of a business, given evidence that the taxpayer's principal motivation in gambling was thrill-seeking and that he lacked any systematic gambling practice or methodology (for example, a portion of his losses were incurred on slot machines).
The taxpayers claimed deductions relating to their investments in purported partnerships whose purported business would be the production of sound recordings. In fact, the bulk of the moneys invested were simply re-routed into the pockets of the fraudulent promoters, and the small amounts which were not so diverted were spent on window-dressing to give the appearance of business activities by the partnerships.
This is not a case of a business that suffered losses because it was ill conceived or poorly managed, and the tax authorities are second guessing the business acumen of a taxpayer. This is a case where, in fact, there was no business. There were no business expenses.
The taxpayer was a co-owner in a clothing manufacturing company. He acquired a gem inventory over several years. A business contact informed him of an interested offshore purchaser, and offered to sell the gems on his behalf at approximately a tenfold profit in exchange for substantial up-front fees, variously described as performance bonds, insurance, shipping, sales commissions and administration charges.
The business contact was a rogue, and absconded with the fees, which exceeded $1.6 million, and the gems. The Minister allowed a business loss for the gems but not for the professional fees.
A fraudulent scheme from beginning to end or a sting operation, if that be the case, cannot give rise to a source of income from the victim's point of view and hence cannot be considered as a business under any definition.
The taxpayer was not entitled to deduct losses from an alleged business as an artist given the finding of the trial judge (supported by the evidence) that his endeavours had a personal element and were not carried out in a commercial manner.
The Tax Court had correctly found that the taxpayer, who worked as a full-time employee, was not using his residence in connection with an auto sales business. As there was a personal element in his use of the residence, it was appropriate for the Tax Court Judge to apply the reasonable expectation of profit test.
The fact that a rental property of the taxpayer had formerly been his home and that he used the property as collateral for a line of credit pertaining to his realty business were not elements sufficient to make the taxpayer's dealings in respect of the property something other than a commercial activity. Accordingly, the trial judge erred in applying the reasonable expectation of profit test to find that the property did not constitute a source of income to the taxpayer.
The taxpayer, who derived personal benefits from the ownership of a two storey residence containing four bedrooms by having her family live on the premises with her, was correctly found to not have a reasonable expectation of profit given that she did not advertise, she took no steps to rent a vacant room when her mother died, she experienced expenses that consistently exceeded her rental income, and her calculations as to future profitability were not realistic.
There was a personal element in the acquisition by the taxpayer of a cottage property close to that of his parents, and the Tax Court judge had properly considered all the evidence, including the fact that interest payments on the mortgage substantially exceeded gross rental revenue, in concluding that the taxpayer did not have a reasonable expectation of profit from the operation of renting the property.
The manner in which a full-time employee of BC Rail conducted a fishing guide activity from which he reported revenues under 5% of expenses was not necessarily incompatible with an intention to pursue profit. The decision of the Tax Court Judge was set aside and the matter remitted for decision by a different judge.
The Tax Court Judge did not commit a reviewable error when he found that the taxpayer's activities lacked commercial flavour and that the taxpayer was not engaged in farming activities to make a profit, but primarily to provide food for his table. As such, his activities did not amount to a business.
The trial judge had not erred in finding that a property owned "under" a partnership of the taxpayers, which was rented at a significant loss to their handicapped son, was not operated with a reasonable expectation of profit.
A limited partnership that had purchased mini-warehouses was found to have a source of income for purposes of s. 9 of the Act with respect to the resulting storage park operation, given that there was no evidence of any element of personal use or benefit in the operation. The Court noted that "although we state in Stewart supra, at para. 55, that reasonable expectation of profit may be used as one factor in making the overall determination as to whether or not the taxpayer's activities are personal or commercial, where, as here, the activities have no personal aspect, reasonable expectation of profit does not arise for consideration."
In addition, "although the respondents in this case were clearly motivated by tax considerations when they purchased their interests in the Partnership, this does not detract from the commercial nature of the storage park operation or its characterization as a source of income ... ."
There was no evidence that the taxpayer had acquired condominium rental units for his personal benefit. Accordingly, his property rental activity was clearly a commercial activity, so that it was a source of income. Only where the nature of a taxpayer's venture contained elements which suggested that it could be considered a hobby or other personal pursuit did it become necessary to establish that the taxpayer had an objective intention of profit and that there was evidence of businesslike behaviour which supported that intention.
"Viewing the appellant in his own right, it is inescapable that he had no reasonable expectation of profit from his own transactions; no source of income and therefore no basis for deducting expenses."
"There is no indication that the Amway distributorship was being operated for any non-business motive. In the circumstances, the reasonable expectation of profit test should be applied sparingly and not to second-guess the business judgment of the appellant."
An operation of the taxpayer in renting or trying to rent out two units and a spare room in his Burlington home was not engaged in with a reasonable expectation of profit given the predominance of the personal element (the spare room was rented to the babysitter, and in order to protect his children he sometimes limited his rental income) and the fact that the pro rata portion of the mortgage interest alone exceeded the rental income.
The Court affirmed a finding of the Tax Court that partnerships in which the taxpayer invested did not have a reasonable expectation of profit in light of the commercially unrealistic nature of the arrangements they had entered into including the lack of clarity that even if the entity from which they had acquired a royalty produced a "mega hit", either partnership would be in a position to claim any benefit from it.
The realization of profit from its rental operation was found not to motivate the partners of a limited partnership in which the taxpayer was a limited partner given the heavy debt load which was projected to remain undiminished throughout the first ten years of its operation. In the case of a second partnership in which the taxpayer was a limited partner such an expectation is found to be present given that the partnership enjoyed profits in two of the three years in issue.
The Court reversed a finding of the trial judge that a husband and wife team of practising physicians were not engaged in operating an "English riding" school and raising horses for competition in jumping events with a reasonable expectation of profit. The trial judge erred in finding that love for one's work attracted the scrutiny mandated by the Tonn case; in second-guessing the business decisions made by the taxpayer; and in failing to recognize that a minimum of five or six years was needed in the best of circumstances for such an activity to become profitable.
The taxpayer had acquired a co-ownership interest in a residential property by assuming his share of a first mortgage and borrowing money for the balance of the purchase price. Mogan T.C.J. had applied s. 67 to disallow the deduction of the interest paid on the personal loan, and found that, after such adjustment, the taxpayer had a reasonable expectation of profit. Before going on to find that such resort to s. 67 was improper, Robertson J.A. noted (at p. 5506) that where a property has been acquired on which the interest expenses exceed the revenue, "the taxpayer must establish to the satisfaction of the Tax Court that he or she had a realistic plan to reduce the principal amount of the borrowed monies", and further stated (at p. 5510) that "the judicial doctrine of reasonable expectation of profit and the concept of reasonable expenses under section 67 of the Act are to be invoked and applied independently of one another".
"The taxpayer need only show that there is or was an expectation of profit, be it $1 or $1 million. It is well recognized in tax law that a 'reasonable expectation of profit' is not synonymous with an 'expectation of reasonable profit'."
In finding that the taxpayer could not deduct the costs incurred by her in seeking to develop her daughter (who was in the taxation years in issue between 13 and 15 years of age) as an Olympic-calibre equestrian show jumper, Décary J.A. stated (at p. 5461 that "the start-up period, in a case such as this one, can only begin, not when the rider is reasonably expected to become an accomplished rider, but when she has become one", and that "until then, the cost of training the rider can only be described as training expenses prior to the day the business is commenced".
The Court reversed a finding of the Tax Court judge that the taxpayers were entitled to deduct their net loss from a rental property notwithstanding that they had no reasonable expectation of profit. The reference in the Tonn decision to applying the Moldowan test "sparingly" where, for example, there was no personal element in the venture, meant only that the judge should apply the reasonable expectation of profit test less assiduously than he or she might do if such a factor were present. There also was no basis for postulating (as alleged by the Crown in this case) that the Court in Tonn had confused the concept of deductibility of an expense with the concept of deductibility of rental losses from income derived from other sources: it recognized that the latter was the issue before it.
Before finding that equipment that the taxpayer received on the winding-up of one subsidiary and held for five days before transferring it to another subsidiary satisfied the income-producing purpose test in Regulation 1102(1)(c), the L'Heureux-Dubé J. stated that the income-producing purpose test in Regulation 1102(1)(c) and paragraph 18(1)(a) was distinct from the reasonable expectation of profit test, which was principally directed at differentiating between a business and personal pursuit, and was not suited to determining whether a particular item of expense was deductible.
Major J. stated, in an obiter dictum (at p. 6120) that "in the long line decisions that distinguish a 'business' from a 'hobby', it has been consistently held that where the activity in question falls outside the definition of 'business', any profits recognized are not subject to tax under s. 3."
Pratte J.A. noted (at p. 6067) (and Linden J.A. concurred at p. 6069) that the reasonable expectation of profit doctrine had no application where it was admitted that the taxpayer's activities were a business.
"is a useful tool by which the tax-inappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less that competent."
In finding that the taxpayer operated his farm in his 1986, 1987 and 1988 taxation years with a reasonable expectation of profit Jerome A.C.J. noted that the farm showed a profit in 1992 and presumably would have continued to do so had it not been for severe drainage problems, and that the taxpayer in 1981 and 1982 had spent an amount approximately equal to the cost of the land in rehabilitating the land (which Jerome A.C.J. characterized (p. 6640) as "the act of an individual who has a long term commitment").
"It is possible for someone, with the best will in the world, to practise an activity that takes all his or her time and that activity may still not be a business".
A condominium rental unit located at Paul Lake, near Kamloops, was found to have been purchased in December of 1980 with a reasonable expectation of profit. Unfortunately, three months later, a condominium association was formed in the complex and one of its first steps was to pass by-laws prohibiting short-term rentals by owners, or occupation by children under 12 years. Furthermore, the local economy suffered a significant decline.
"... where the business venture, under normal circumstances, would have realized a profit but fails to do so because of a dramatic change in conditions, a taxpayer should be granted a reasonable period of time in which to ascertain that no income is likely to be earned."
"... although a profit, expressed in percentage terms as a return on investment, on energy and time and effort expended, might not be of a nature to invite a take-over bid ..., the test of reasonableness is met if a profit has been realized."
An employee of M.L.W. Bombardier who only visited his farm once a week except on summer vacations, and whose farming operation suffered consistent and significant losses, was not able to deduct any portion of such losses from his employment income.
The taxpayers, who were full-time employees of the federal government, were found not to have engaged in the leasing of a yacht with a reasonable expectation of profit given the minimal income generated (revenues were approximately 1/3 of the interest expense and were also significantly less than capital cost allowance claims) and given that the chartering of the yacht in the Lake Ontario region rather than in the Caribbean ensured that revenues could only be generated for part of the year.
A full-time teacher was prohibited from deducting losses incurred in automobile performance rallying in the absence of any record of achieving profit over the life of the venture, the relatively small size of purses, the difficulties of obtaining sponsors and the lack of evidence of systematic planning on her part.
A teacher who earned approximately $1,000 per year in farm revenues in the taxation years in question was unsuccessful in deducting farm losses arising from expenses of approximately $8,000 per year. The taxpayer's professed expectations of profit reflected "invincible optimism".
The taxpayer, who in his 1978 and 1979 taxation years was a full-time employee in a potash mine, was found not to be carrying on a thoroughbred horse breeding and raising operation with a reasonable expectation of profit in light of the facts that he did not achieve a profit in any of the subsequent taxation years (up to 1986) in evidence, with the exception of a small gain in 1985 (attributable to an accounting change), his lack of formal training in horse breeding, and the fact that he did not begin investing more money and time in the operations until subsequent taxation years.
A husband and wife, who were full-time employees, and who in 1981 purchased farmland which required considerable work before it would become suitable for farming, were able to establish that the farming operation would be a paying proposition once the mortgage was paid off and that the complete liquidation of the mortgage was at all times their goal. The considerable delay before the farm became profitable was attributable to some unexpected setbacks in 1984. Accordingly, losses which they incurred in 1981 and 1982 were deductible subject to the $5,000 limit in s. 31(1).
The taxpayer was found to have held his condominium with a reasonable expectation of profit after the time that he abandoned his intention to hold it for use as a residence notwithstanding that during the taxation years in question he was unable to rent it out.
The taxpayer, who worked full time as a co-ordinator of special education but had a passion for flying, purchased a high performance aircraft and made it available to various flying academies. Revenues which he received from the academies consistently were small in relation to the expenses borne by him (including maintenance expenses, interest and CCA) and, in fact, a large portion of the revenues were attributable to his personal use of the plane, for which he paid regular rates to the academies.
Muldoon, J. held that the taxpayer's projections of profitability had been unrealistically optimistic and "that personal use was the principal reason for the plaintiff's acquisition of the aeroplane. The leasing business venture was his means of supporting his own flying of that high-performance aircraft."
The taxpayer's tree farm was found to have a reasonable expectation of profit in light of the reforestation operation being undertaken in a systematic way and in accordance with accepted reforestation practices. "The fact that the ultimate harvest from the anticipated crop was some thirty or forty years removed does not operate, in my view, to make the operation less of a business and more of a hobby."
A campground operation on land in the Calabogie area of Lanark which an Ottawa resident with a full-time job had originally purchased as a holiday property was found not to be run as a business in light of its under-capitalization, the lack of any concerted effort to obtain anything approaching full occupancy, and the result of revenues as low as 1% of reported expenses.
Although the taxpayer purchased a 48-foot diesel cruiser with a sincere belief that he eventually would make a financial success of an operation of chartering the vessel, he was unable to provide objective evidence that this expectation was reasonable.
The taxpayer, who at all relevant times had a full-time job, purchased 1/2 of his father-in-law's run-down 200-acre farm in 1975 with the intention of farming in co-operation with him. However, his father-in-law was forced to retire completely from farming in 1977 as a result of a severe stroke and a plunge in cattle prices, and the taxpayer was forced during 1978 to 1983 to use his land for cash crops. Despite persistent losses until 1986, the taxpayer was held to have a reasonable expectation of profit, and his 1979 and 1980 losses were deductible subject to the s. 31(1) limit. "Unlike other businessmen, a farmer cannot simply change his location or line of products as the market shifts. He is restricted to dealing in what the land can produce, and his choices in that regard are determined by available capital."
London Life provided excess computer capacity to its subsidiary ("LDS") and charged LDS a fee that was calculated so as to avoid any profit or loss on the basis of accounting prescribed by the Superintendent of Insurance for life insurance companies. Since this basis of accounting still permitted London Life to realize a profit on a more normal basis of accounting, London Life had a reasonable expectation of profit from the arrangement and for purposes of the Act properly characterized the revenue from LDS as income from a business.
Two spouses, who carried on a truck repair service and an accounting service for truckers, were held not to be carrying on a small operation of breeding and training horses with a reasonable expectation of profit, and accordingly were not permitted to deduct their losses for 1981 and 1982. Revenues as a percent of expenses ranged from 0% to 68% over the period 1977 to 1985, substantial annual expenses were built into their operation in the form of mortgage interest expenses and the contracting out of training (necessitated by their lack of background in the training of horses), and there was no clear plan for making the operation profitable.
The taxpayer failed to establish that he acquired two Florida condominium units with a reasonable expectation of profit. One unit showed losses for both of the years that he held it and with respect to the other unit, in only two years, 1982 and 1985, had there been sufficient return for CCA to be deducted (one criterion for reasonable expectation of profit being the probability of the venture, as capitalized, to show a profit after the deduction of CCA). Nothing turned on the fact that the plaintiff made no personal use of one of the units.
A taxpayer's expenses may be deductible even if "there is neither immediate income nor an immediate source of income in his business." In the Trial Division, McNair stated, obiter: "Expenditures that are part of a taxpayer's working expenses and that are laid out as part of the process of profit earning are deductible in the year in which they are made, even though no profit results therefrom. Nor is there any limitation as to time in s. 18(1)(a) to prevent the deduction of such expenses against income in other years than that in which the expenditure was made."
A part-time farmer who realized farming losses for his 1977-1980 taxation years which were approximately twice his revenues was prohibited from deducting those losses. He had no background in horse breeding, he devoted little time to his operation, there was no evidence of any plan wherein he indicated how he expected ever to make a profit from his operation and he had had consistent losses from the farm since 1968.
A full-time professor at the University of Prince Edward Island who purchased an 117 acre farm 7 miles away in dilapidated condition, built his home there and during each of the following 5 years earned farming revenues equal, at most, to 20% of his expenses, was held not to be engaged in farming with a reasonable expectation of profit. His losses were non-deductible.
Dickson, J. stated that "if the taxpayer in operating his farm is merely indulging in a hobby with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred ... [W]hether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance."
An unsuccessful 8-year search by the taxpayer for buried pirate treasure was a business rather than a hobby.
An operation of breeding and keeping horses for racing purposes was held to be carried on as a commercial venture and with a reasonable expectation of profit rather than as a hobby of the partners. The partners were successful businessmen with relatively little personal interest in horse racing (suggesting that they had not entered into the venture for amusement) and "very little additional luck in the various races by the partnership horses would have resulted in a favourable balance sheet".
The taxpayers worked full time but stated that they were building up a dog kennel business, which they had started in 1999, in order to supplement their income when they retired. Their losses for their 2010 to 2012 taxation years, in which they had revenues of about $2,000 per year and claimed expenses of between $13,000 and $22,000 per year, were denied. In 2010, they lost their prize dog, and thereafter only had two dogs, who were not registered and, therefore, could not be shown. They had the capacity to accommodate two dogs in addition to their own two dogs.
Regarding the capability to make a profit, the Savages produced no financial forecast setting out projections of revenue… . I was left with no appreciation of how, in its current form, the operation could possibly make a profit.
[F]or the years in question and up to the present, I could at best describe them as dabbling, which certainly smacks more of a hobby than a business.
A senior employee who, in the somewhat distant past, had also been a shareholder, received damages following his termination, and pursuant to a court-mediated settlement agreement, that were well in excess of the going rate for compensation in lieu of notice of 18 months, and received a T4 that treating the full amount as a taxable retiring allowance. D’Auray J treated the portion of the damages in excess of 18 months’ salary as a non-taxable receipt given her characterization of his claim against his former employer as being grounded principally in oppression as contemplated in the CBCA and her finding that, indeed, he had been oppressed a lot.
[A] participant in a Ponzi scheme is conned by the promoter into investing in something fake. A participant in a pyramid scheme is conned by the promoter into believing that the scheme will actually work and that he or she will profit through his or her own efforts [in recruiting “sales” people lower in the pyramid].
In 2011, the taxpayer lost his job at a radio station as a sports broadcaster. He started blogging on the Maple Leafs with a view to generating revenues from advertisers, and used his severance package to cover expenses (amounting to $37,000 in 2012) including paying a consulting firm to design a professional website and travel expenses associated with following the team for their away games. During the period under review (being the first 18 months of the blog/website), there was only one sponsor, who paid $7,500.
C Miller J found that there was a personal element to the activities of the taxpayer, who was a sports fan, also stating (at para. 20) that "'blogging' is by its nature as much a recreational pastime as possibly a commercial practice."
However, notwithstanding that the taxpayer had not actively pursued finding sponsors an focused on his website's content, C Miller J allowed the taxpayer's losses as business losses given that the period under review was the start-up phase, this activity was an extension of his previous experience, and his course of conduct was "not so devoid of commercial reasoning to conclude the venture was personal and nothing more" (para. 30).
Even in combination these findings do not to my mind amount to such organisation as to constitute a trade, profession or vocation.
The taxpayer innocently advanced $800,000 to a corporation ("TransCap") which was engaged in a Ponzi scheme. He received $408,000 in total, styled as interest under promissory notes and loan terms which it had issued to him, including $156,000 in the year in issue, before the scheme collapsed.
C Miller J found that the $156,000 (which originally had been reported as interest) was not income. In distinguishing Johnson, he noted (at para. 13) that the funds were not invested as stipulated so that the "$156,000 payment ... was not derived as contracted," and (at para. 19) made "a distinction between earning income based on a fraudulent act or illegal activity versus a finding that the contract itself is a fraud," stating that in the latter situation there is no source of income.
Each appellant (along with 600 other taxpayers over several taxation years in the 1980's) bought units in a limited partnership. Each of the 36 limited partnerships was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") engaged in marketing activities and purchased a smaller yacht to be used for the provisioning of supplies to the envisaged fleet, and belatedly bought two more yachts, although none of the yachts was acquired by any particular partnership (paras. 348, 402). As the unit purchases were mostly financed with interest-bearing promissory notes of the investors which were not paid, the capital raised was grossly insufficient for accomplishing the marketed objectives. Rossiter ACJ found (at para. 113, see also paras. 280, 261, 352) that "any yacht building and charter development efforts by OCGC and its related companies were mere window-dressing [to induce further investments]" and characterized the arrangements as a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).
[T]he OCGC yacht chartering business was a fraudulent scheme from beginning to end throughout which the investors' contractual rights were not respected. As such, per... Johnson and Hammill, it cannot give rise to a source of income ... and cannot be considered a business under any definition.
A Barbados corporation ("PIN") allegedly developed marketing software. It did business mainly through franchise arrangements, under which it would often operate the franchisee's franchise as an agent. The taxpayer was one such franchisee. He covered the $200,000 franchise purchase price with a promissory note at 7.5% interest.
The Minister disallowed all the taxpayer's business deductions in connection with the franchise, on the basis that there was no business activity, and that the franchise and note were shams entered into predominantly for tax reasons. In the alternative, the deductions were unreasonable.
Bédard J disagreed. A thorough review of the evidence showed extensive and varied development efforts that were founded on a serious business plan. Accordingly, the expenses were also reasonable.
When his daughter was nine years old, the taxpayer created the "Tennis Mania LP," which used the funds contributed by him to reimburse him for expenses incurred by him in connection with her training and development as a tennis player. Over a 10 year period, the partnership generated no revenues, and the professed objective of receiving a share of her future professional earnings was not binding on her.
Masse DJ found (at para. 22) that the partnership activity was not "being carried out ... in a sufficiently commercial manner so as to constitute a source of income," so that the purported losses allocated to him by the partnership were not deductible in computing his income.
There is no commerciality or businesslike activity here. There is simply someone looking [unsuccessfully] for work.
The taxpayers held a rental property, which they intended to use to assist refugees coming to Canada. Campbell J. found that their expenses in connection with the property, including mortgage expenses, were not deductible. As there was a personal element involved in operating the rental property, the appropriate test was pursuit of profit (para. 12), and the sporadic nature of the rental activity and the lack of business-like behaviour with respect to the property did not suggest that profit was being pursued.
The absence of a business plan specific to the business activities of the appellant and her spouse is also not determinative because they were following the plan proposed or imposed by the Advantage Conferences to the letter.
The only evidence is that he lost money, consistently throughout the year, and he has not demonstrated the venture has a capacity to show a profit.
Evidence demonstrated that the taxpayer lacked any formal or otherwise meaningful poker training, had no business plan, lacked discipline (he abandoned his strategy of playing low-stakes games against inebriated players after three months, to his detriment), failed to manage risk (he maxed out his credit cards to cover the losses), and had a personal element (he had been a hobby player for years) - all these factors contradicted there being a reasonable expectation of profit.
The taxpayer did not have a reasonable expectation of profit in various business activities. She did not invest enough time in her flight instruction business to even cover the costs of maintaining her pilot certification. Her revenue as a church organist did not cover her transportation expenses. Her biography on an early Canadian female aviator was more in the nature of a project undertaken for personal interest, given that the book had already taken her four years, she had yet to complete a first draft, and there was no reasonable prospect of readership large enough to turn a profit.
The taxpayer could not claim a loss on the cottage he rented out. He used the cottage personally, and his rental activities did not demonstrate a pursuit of profit. D'Arcy J. remarked at para. 22: "It appears to me that the combination of a a very high rental rate and a limited target market of friends and relatives resulted in the rental of the cottage not having the capacity to show a profit."
The taxpayers rented out the upper floor of a residential property to their disabled son at a minimal rent which helped to defray operating costs, which would have been too low to permit the generation of a profit. In finding that the resulting rental losses were non-deductible, Favreau, J. stated (at para. 14) that "the rental activities were not carried out on a commercial basis and hence cannot be a source of income for the purposes of the Act".
In investing in a partnership the taxpayer had no intention of deriving any profit whatsoever and his only motivation was to generate a tax refund to himself. Accordingly, the taxpayer did not operate a business in respect of the partnership, and his losses were not deductible.
A tax shelter arrangement under which the taxpayer agreed to pay licence fees for the right to market customer loyalty cards in specified areas was not a business in light of the fact that no marketing or other business activity actually occurred.
The taxpayer, who rented out a property to his parents at a modest monthly amount, without any rental increases from 1997 to 2002, so that it was impossible to cover the major expenses associated with the property, was unable to demonstrate that his predominant intention in renting the property was to profit from that activity.
A real estate agent who showed persistent losses and who in the taxation years in question earned minimal revenue from his activity was found not to be engaged in his activity in a commercial manner or with businesslike behaviour, with the result that his claimed losses were non-deductible.
The two taxpayers, who together won over $5.5 million during a four year period from playing sports lottery parlay games, were found to not be subject to tax under s. 9 on those winnings and to have realized the gains as exempt capital gains under s. 40(2)(f). Bowman C.J. found that the large number of bets placed by them was not itself indicative of anything other than a tendency to bet heavily and accepted expert testimony that given the rigid game structure, artificial winning caps and the minimal impact (if any) of sports-related knowledge, sports lottery parlay games offered overwhelming odds against players succeeding on a regular basis, so that they could not reasonably expect to earn a profit. The taxpayers were not professional gamblers who assessed the risks, minimized them and relied on inside information and knowledge and skill but, instead, would more accurately be described as compulsive gamblers.
The taxpayer's a farming loss of $26,142 was allowed given that the only reason for the disallowance of the loss given by the Minister was the reasonable expectation of profit doctrine, and it was not pleaded as an assumption or as an additional reason that there was any personal element in the taxpayer's farming operation. Bowman A.C.J. further indicated that although the taxpayer's farming operation was a commercially unsuccessful farming operation, it was not a hobby or engaged in to satisfy purely personal as opposed to commercial goals.
"Any realistic analysis of what the CCRA was doing in this case makes it crystal-clear that it was in essence disallowing the interest expense because it did not result in the production of net income. This is precisely the approach rejected by the Supreme Court of Canada in Ludco."
Before finding that the taxpayer was entitled to deduct losses incurred by him in operating a yacht for charter in the Caribbean, Bowman A.C.J. noted that there is no personal element, that "the Minister should not second guess the appellant's business judgment", that the taxpayer was entitled to a reasonable period to get the business established, that the utilization by the taxpayer of accelerated capital cost allowance could not be used to enhance the Minister's reasonable expectation of profit argument, and that there was nothing irrational, absurd or ridiculous in the taxpayer's expectation of profit.
"Whatever else may be said about 99% financing of an investment, it certainly cannot be said that its result is that the vehicle in which the taxpayer has invested did not carry on a business ... . Where there is no personal element and a genuine business exists the NREOP doctrine has no application ... . To use it to restrict the deduction of interest that is specifically permitted by paragraph 20(1)(c) ignores not only the plain meaning of that paragraph, but the highest pronouncements as to the purpose of the interest deduction ..."
The taxpayers and other Canadians purchased a 99% interest in a partnership ("CL 1") which, in turn, owned a 99% interest in a Texas general partnership "(CL A") that had constructed a luxury residential condominium apartment complex in Dallas. In finding that the taxpayers had no reasonable expectation of profit from their investment in CL 1, Beaubier T.C.J. noted that CL A had lost over $59 million in about four years and that the taxpayers had no right to reduce the costs of CL A given that all decisions regarding management of the partnership were required to be made by unanimous written consent of the partners.
"To conclude that a reasonable businessman would have decided otherwise, on these facts, would be tantamount to allowing Revenue Canada to substitute its decision for that of the Appellants, to refuse to consider the economic situation facing the Appellants at the time they made their decision or to penalize honest business decisions that have not, to this date, been shown to have been erroneous."
The taxpayer was not entitled to deduct her losses from operating a bookstore and selling religious artifacts. Her initial purpose in starting the operation was not to make a profit but to propagate the Roman Catholic faith and in the years in question she did not take measures such as charging an adequate mark-up or reducing expenses to deal with her operating losses. Beaubier T.C.J. stated (at p. 742) that "it is hard to find a reasonable expectation of profit if the Appellant does not set out to make a profit".
The taxpayer, who had a successful medical practice, was unable to deduct any of his losses incurred in respect of an import/export business given that the expenses were inordinately high and no income was received. Brulé T.C.J. stated (at p. 1732): "There must be income, or the possibility of income to come, before there can be a reasonable expectation of profit."
A partnership in which the taxpayer allegedly invested as a general partner was found not to have a reasonable expectation of profit and, therefore, to not be carrying on a business given that the venture had very limited prospects of success (it was "pitifully undercapitalized", the business in question, i.e., distribution of musical records was difficult to break into and the personnel involved had little experience), and the venture was structured so as to not produce substantial profit for the partnership even if excessive sales forecasts were achieved.
It was not appropriate for the Minister to aggregate the small operating profit realized by the taxpayer in renting out a basement apartment in her home with the operating results of a second property which she had not acquired for personal use but was unsuccessful in renting out, in assessing whether she had a reasonable expectation of profit with respect to a combined operation.
Viewing each property separately, she clearly had a reasonable expectation of profit with respect to her basement apartment, whereas it was not appropriate to apply the concept of reasonable expectation of profit to the second property because there is no hobby or personal use aspect to its acquisition. In any event, she planned not only to rent it out but to turn it to account by sale at the earliest possible opportunity (as evidenced by her listing of the property for sale even before she took possession).
"I do not believe that the taxpayer's previous profit and loss experience in a totally different business has any bearing ... . The denial of the business losses after only six months of operation seems more motivated by the type of business the Appellant was carrying on than whether it was capable of profitability."
[T]o the extent that there was no personal aspect to the activities undertaken by the participant, the latter acted, in our opinion, pursuant to business or services contracts. In some specific cases, if there was a personal aspect to the activities of the participant, we are still of the opinion that the activities were undertaken in a sufficiently commercial way so that there was a source of income and that the activities surrounding participation in this clinical research study were undertaken in order to make a profit (the promoter agreed to pay "compensation" and to cover all costs and expenses related to the study.
# 2007-022925 and # 2004-0107761E5 … stat[ed] that in situations similar to those of Ms. Maurice [2001 DTC 3710] and Ms. Pellerin [2006 DTC 3341], the amounts received in respect of home assistance would not be taxable. Similarly, in situations involving home-based personal assistance services provided between spouses, we are of the view that the amounts described above (reimbursements and/or allowances) paid by the SAAQ and received by a taxpayer providing personal assistance to her husband, a victim of an automobile accident, do not have to be included in the computation of her income.
1.20 In order to determine if a farming business exists, it is important to consider whether the farming activities are undertaken in pursuit of profit, or whether they are simply a personal endeavour. This is consistent with the approach taken by the Supreme Court of Canada in Stewart v Canada,  2 S.C.R. 645, 2002 DTC 6969 and Walls v Canada  2 S.C.R. 684, 2002 DTC 6960. Where there is a personal element to the farm activity, it must be determined if the operation is carried out in a sufficiently commercial manner. If it is, the income or a loss from the activities is generally considered to be from a business and will be treated as such for income tax purposes.
Although an individual’s activity, which he engaged in in order to generate funds for recreational activities, hade a certain level of commerciality and entailed the monthly tabulation of results by him, they likely did not constitute a business in light inter alia of repeated losses, the absence of intention to increase the scale of his activities, what appeared to be below-market charges by him. As the activity was a hobby allowing the taxpayer to raise money rather than being a source of income, his expenses were non-deductible, and his revenues non-includible, in computing his income.
[R]emuneration that is quite unrepresentative of the services rendered would not be taxable. However, when it is significant enough to influence the participation of the volunteer, it generally will become taxable as employment or business income.
In this case, in the absence of remuneration…the volunteers would be neither employees nor independent contractors. Consequently, the allowance would not be taxable… .
…[W]here rent does not represent a source of income (e.g., where below market rent is charged to a related person…) no income need be reported and no expense may be claimed by the owner… .[However] a non-resident does not have to have a source of income in order to be taxed [under Part XIII] on the payments or credits which such person receives from Canada.
See summary under s. 212(1)(d).
Paragraph 5 of IT-490 indicates that where a person occasionally gives help to a friend or neighbour in exchange for something, the value of the goods or service received would not be taxable unless the person made a regular habit of providing such services for cash or barter. …CRA does not have general guidelines on when a taxpayer is bartering as a regular habit.
[A]mounts that a parent or spouse receives to take care of a child or a spouse represents taxable income for the year from an office, employment or business. However, for situations similar to the cases noted above, the CRA's position is that the amounts do not have to be included in income. It is not clear to us whether the situation described is sufficiently similar to those situations.
[W]here the principal source of income of a taxpayer is on-line poker games (as compared to other taxpayers who are employed full time and indulge in poker in their free time), such taxpayer is considered to derive business income from such games.
In Johanne Maurice v. The Queen, 2001 DTC 3710, Mrs. Maurice was receiving amounts in her capacity as a tutor for home help services she personally provided to her mentally incompetent daughter, a minor. In that case, the judge concluded that these amounts were not taxable because the appellant had a support obligation to her daughter and she did not intend to make a profit in this particular situation.
…[T]he CRA's position is that the amounts received by a parent or spouse to care for a child or a spouse represent income derived either from a business or from an office or employment. However, in situations similar to those of Ms. Maurice and Ms. Pellerin, the position of the CRA is that the amounts received in respect of home help do not have to be included in the income computation of the person who receives them.
Comments on Tonn, Mastri, Mohammad and Kaye cases.
"The Department recognizes that a start-up period often involves incurring extra costs in order to get a business up and running but taxpayers should not assume that two or three years of start-up costs will automatically be accepted."
The CRA's general position is to apply the "reasonable expectation of profit" test to determine whether a taxpayer has a source of income within the meaning of the Income Tax Act when the activity in question has some personal or hobby element. Where the commercial activity in question does not involve any personal element, that criterion will not generally be applied.
According to the jurisprudence, the elements that can support this intention are the profit and loss statements for previous years, the taxpayer's training, the path the taxpayer intends to follow and the taxpayer’s ability to earn a profit from the taxpayer’s activities. Of course, this list is not exhaustive.
Although the question of whether an amateur athlete practises the athlete’s sport for profit is a question of fact, we have no hesitation, in the light of the facts you have presented to us, to conclude that the Athlete in this case carries on a business through the Athlete’s sports activities.
Discussion on whether certain swap transactions were entered into for the purpose of producing income in a situation where the swap contracts were entered into with related persons and they were terminated early giving rise to a termination payment.
Where as a result of a temporary move to another city, an employee rents out his house at a rent which is less than the expenses of maintaining the property, the taxpayer will not be entitled to claim a rental loss assuming that there is no reasonable expectation that the rental operation will show a profit after expenses.
The test of reasonable expectation of profit is applied at the level of the partnership, not at that of the partners. Therefore, in the case of a limited partner in a film partnership, the application of the reasonable expectation of profit test is ascertained with regard to the net before-tax revenues resulting from the commercial expectation of the film, rather than with reference to the after-tax return at the partner level.
(d) the extent of the taxpayer's gambling activities, including the number and frequency of bets.
In determining whether an activity has a reasonable expectation of profit, discretionary deductions should be considered if they are relevant in computing "profit" as determined under GAAP.
List of criteria that are applied in assessing whether an enterprise has a reasonable expectation of profit.
"Only when a taxpayer as established a clear and consistent record of accomplishment in poker will there be sufficient evidence to take the position that he or she has the requisite skill or knowledge to ensure profitability," so as to make the winnings taxable.
John Saunders, "The Empire Strikes Back - The Rebirth of the Reasonable Expectation of Profit Test", 2003 British Columbia Tax Conference Report.
Joel A. Nitikman, "Reasonable Expectation of Profit - Where Are We Now?", Canadian Current Tax, Vol 8, No. 8, May 1998, p. 81.
John R. Owen, "The Reasonable Expectation of Profit Test: Is There a Better Approach?", 1996 Canadian Tax Journal, Vol. 44, No. 4, p. 979. [cited in the Hickman Motors case, supra, at p. 5373].
Silver, "Great Expectations: Are They Reasonable?", 1995 Corporate Management Tax Conference Report, c. 6.

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