Business and Property Income

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 155-183

155

CHAPTER 7

buSIneSS and

properT y I ncome

All income for tax purposes is calculated by source. In this chapter we

look at three sources: business income, investment income and capital

gains. We distinguish between the three sources of income so that we

apply the proper rules to each.

The general feature of business income is activity (a combination of

labour and capital); capital gains and losses arise from the disposition

of property; and investment (property) income is the passive y ield from

property. There are, however, a myriad of statutory rules that modify

each of the three sources.

Although most of the rules in subdiv ision (b) apply to both business

and property income, the two sources of income are dist inct. There are

some rules that apply only to business and others that apply only to

property. Hence, we start with the distinction between “business” and

“property” and then move to “capital gains.”

A. THE MEANING OF “BUSINESS”

The Actdoes not def‌ine “business.” Subsection 248(1) merely says that

“business” includes a profession, calling, trade, manufacture or under-

taking of any kind whatever, and, for most purposes, also includes an

adventure or concern in the nature of trade.1

1 Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], subs 248(1) “business”; see s 253

for an extended mea ning of “carrying on b usiness” as it relates to non-re sidents.

Income Tax L aw156

Generally, “business” refers to activity — whether economic, indus-

trial, commercial or f‌inancial. The traditional common law def‌inition

of business is “anything which occupies the time and attention and

labour of a man for the purpose of prof‌it.”2 As the English Court of Ap-

peal said in Erichsen v Last:3

I do not think there is any principle of law which lays down what

carrying on of trade is. There are a multitude of incidents which

together make the carrying on [of] a trade, but I know of no one dis-

tinguishing incident which makes a practice a carrying on of trade,

and another practice not a carrying on of trade. If I may use the ex-

pression, it is a compound fact made up of a variety of incidents.

A “trade” is the business of selling goods, with a view to prof‌it, that

the trader has either manufactured or purchased.4

The quintessential ch aracteristics of busine ss are activity, enterprise,

entrepreneurship, commercial risk and the pursuit of prof‌it. “Business”

implies activity and prof‌it motive.5 The pursuit of prof‌it differentiates a

trade or business from a hobby or pastime. Thus, the f‌irst question to

determine is whether the ta xpayer undertakes the activity in pur suit of

prof‌it or as a personal endeavour or hobby. Pursuit of prof‌it, and not its

actual realization, is the key element in distinguishing between com-

mercial ventures and hobbies.

Paragraph 18(1)(a) restates the necessity of the prof‌it motive test in

a negative way: a taxpayer is not entitled to deduct an expense unless

she incurs the expenditure for the purpose of gaining or producing

income from a business or property.

The purpose of the pursuit of prof‌it distinguishes between com-

mercial and personal activities. Hence, one looks to see if there are

indicia of commerciality or badges of trade. The test has relevance only

if there is some personal or hobby element to the taxpayer’s activity. It

2 Stewart v Canada, 2002 SCC 46 [Stewart]; see also Smith v Ande rson (1880), 15

Ch D 247 at 258 (Eng CA); Terminal Dock and Warehouse Co v MNR, [1968] 2 Ex

CR 78, [1968] CTC 78 (Ex Ct), aff’d (1968), 68 DTC 5316 (SCC).

3 (1881), 4 TC 422 at 423 (Eng CA).

4 Grainger & Son v Go ugh, [1896] AC 325 (HL).

5 See, for example, Fleming v MNR, [1987] 2 CTC 2113 (TCC) (university profes-

sors did not have ex pectation of prof‌it in publishing re search); Shaker v MNR,

[1987] 2 CTC 2156 (TCC) (keen desire, talent and deter mination did not neces-

sitate reas onable expectation of prof‌it in an unde rtaking); Kusick v MNR (1987),

[1988] 1 CTC 2052 (TCC) (taxpayer changed ty pe of business, obviously

realize d no chance of prof‌its); Ianson v MNR (1987), [1988] 1 CTC 2088 (TCC)

(horse racing c arried on as hobby); Issacharoff v MNR (1987), [1988] 1 CTC

200 6 (TCC).