Business and Property Income

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

155

CHA PTER 7

buSIneSS and

properT y I ncome

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

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

gains. We distingui sh 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 los ses arise from the d isposition

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

property. There are, however, a myriad of statutory r ules 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 busines s and others that apply only to

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

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

A. THE ME ANING OF “BUSINESS”

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

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

taking of any kind wh atever, 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, commercia l or f‌inancial. The traditional common law def‌i nition

of business is “anyth ing 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 Erich sen v Last:3

I do not think there i s any principle of law which lays dow n what

carry ing on of trade is. There are a multit ude of incidents which

together make the ca rrying on [of] a trade, but I k now of no one dis-

tinguish ing incident which makes a pr actice a carry ing on of trade,

and another practice not a ca rrying on of tr ade. If I may use the ex-

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

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

the trader has either m anufactured 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 pasti me. 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 disting uishes between com-

mercial and personal act ivities. 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 ta xpayer’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).