Running a money-losing business doesn't always mean you can claim tax losses

In the years in question, the taxpayer engaged in two so-called businesses that gave rise to his claimed business losses: a website business, and a painting and cleaning business. These businesses were in addition to his day job as a certified quality engineer for various auto industry suppliers. Each weekday, he commuted to and from his job in Oakville, Ont., leaving for work around 7 a.m. and returning home at 6 p.m. He ran his two businesses after hours and on weekends.

The goal of the taxpayer’s website business was to create a platform for individuals to market their homes and sell their personal items. His children were deeply involved in building the website, entering data, distributing flyers and putting up promotional posters. One of the children testified about both his own and his siblings’ involvement in a variety of web-related activities.

Despite the taxpayer’s “unbroken string of losses,” he was confident “there will be a time … to become (a) profitable business.” The judge was skeptical: “The basis for the (taxpayer’s) optimism remains unexplained, particularly since he had claimed a continuous series of losses on his tax returns as far back as 1993.” The taxpayer eventually closed his website in 2017 without experiencing a single profitable year.

This was the issue at the heart of a Tax Court decision in August involving a Brampton, Ont., taxpayer who was reassessed by the Canada Revenue Agency for claiming business losses of $55,728 for 2008, $37,975 for 2009, $41,229 for 2010 and $17,779 for 2011. The CRA disallowed these losses on the basis that the taxpayer had no source of income and, therefore, no true business.

The taxpayer conceded his painting and cleaning activities were not very active, and they ended in 2010.

The judge reviewed the case law, particularly a landmark 2002 Supreme Court of Canada decision that established the test to determine whether or not a taxpayer has a “source of income.” This is essential because to deduct a business loss, you must have a source of income. The highest court said the starting point was to ascertain whether a taxpayer’s activity was undertaken in “pursuit of profit” or was personal. Where there is a personal element, the activity must have a sufficient degree of “commerciality” to be considered a source of income.

This was the issue at the heart of a Tax Court decision in August involving a Brampton, Ont., taxpayer who was reassessed by the Canada Revenue Agency for claiming business losses of $55,728 for 2008, $37,975 for 2009, $41,229 for 2010 and $17,779 for 2011. The CRA disallowed these losses on the basis that the taxpayer had no source of income and, therefore, no true business or committed fraud” in filing his tax return.