Business and Property Deductions

AuthorVern Krishna
ProfessionProfessor of Common Law, University of Ottawa Barrister at Law
buSIneSS and
properT y dedu cT IonS
1) General Comment
We saw earlier that income from an off‌ice or employment is taxable on
a gross basis. In contr ast, income from business and property is tax able
on a net basis. Thus, we need to determine which expen ses are deduct-
ible from business and property revenues in order to ca lculate net prof‌it
for tax purposes.
The calculation of net prof‌it is a question of law. Nevertheless, we start
by looking to the tax payer’s f‌inancial statement s. We determine net prof‌it
according to commercial and accounting pri nciples to the extent that they
do not conf‌lict with the Act or judicial decisions. The court in R oy al Tr u st
explained the scheme for the deductibilit y of expenses as follows:
Thus, it may be stated categoric ally that in a ca se under the Income
Tax Act the f‌irst matter to be determined in dec iding whether an out-
lay or expens e is outside the prohibition of . . . [paragraph 18(1)(a)]
of the Act is whether it was made or i ncurred by the ta xpayer in ac-
cordance with t he ordinary pri nciples of commercial tr ading or well
accepted principles of busi ness practice. If it was not, t hat is the end
of the matter. But if it was, then the outl ay or expense i s properly de-
ductible unless it fal ls outside the expres sed exception of . . . [para-
graph 18(1)(a)] and, therefore, within its proh ibition.1
1 Royal Trust Co v MNR (1957), 57 DTC 1055 at 1060 (Ex Ct).
Income Tax L aw186
Figure 8.1 Overv iew of Structure
Computation of “prof‌it” under section 
Expense deductible by commercial principles?
Deductible unless prohibited Not deductible unless spe cif‌ically
e.g., ss , , ., ., . Authorized?
No deduction unless specif‌i cally
No deduction
No deduction
Specif‌ic authorization? s.
Business a nd Property Deductions 187
2) General Rules
To be deductible from revenue, in computing net prof‌it, an expenditure
must satisfy six basic tests. It must:
• Be incurred for the purpose of earning income;
• Be of an income nature and not a capital expend iture;
• Be reasonable in amount;
• Not be a personal expenditure;
• Not be expressly prohibited by the Act; and
• Not constitute “abusive” tax avoidance.
Apart from these six tests, there is no blanket public policy prohibition
on the deductibility of expenses.2
The above criteria serve purposes that are dif ferent from those that
generally accepted accounting and commercial principles serve. For
example, the requirement that an expenditure should be reasonable
in amount is not an accounting rule, but a constraint to protect the
government’s taxable base. The prohibition against the deductibilit y of
expenses t hat the statute specif‌ically proscribes allows the legislator to
use it to foster socio-economic and public policies. The anti-abuse rule
is intended as a broad “catch-all” clause for expenses that the legislator
did not proscribe more specif‌ically.
3) Purpose of Expenditure
An expenditure is deductible as an expense in computing income only
if one incurs it for the purpose of ear ning income.3 It is the purpose,
and not the result, of the expenditure that determines deductibility.
Thus, an expense for the purpose of earning income from a busines s
is deductible, regardless of whether it actually produces income. For
example, if a taxpayer incurs advertising expenses for the purpose of
promoting sales, failure of the adverti sing program to stimulate sales
does not disqualify the expenditure as a deductible expense.4
2 65302 British Columbia Ltd v Cana da, [1999] 3 SCR 804 [65302 BC Ltd].
3 Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], para 18(1)(a). This rule does
little more tha n reinforce subs 9(1), which states th at the income from a
business or prop erty is the prof‌it therefrom. To const itute an “expense,” the
taxpayer mu st be under an obligation to pay money to someone. A n obligation
to do something t hat may entail an expe nditure in the future is not a n expense;
see Canada v Burnco In dustries Ltd, [1984] CTC 337 (FCA).
4 See BC Electric Railway Co v MNR, [1958] CTC 21 (SCC) [BC Electric Railway]
(payments m ade by taxpayer to enable it to become m ore prof‌itable not deduct-

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