Self-employment or part-time business

CRA denial of losses from self-employment or part-time business. 

Often times taxpayers who have employment income will start a part-time business in order to earn additional income. As may be the case when starting any business, an individual may end up investing more in the business than they are able to reap in income early on. This creates a loss, which in many cases, can be used to reduce all other sources of taxable income for the taxpayer (employment, investment, etc.).

CRA has taken a closer interest in these cases as they allow for a taxpayer to reduce their taxable income when claiming a loss. According to CRA, “Business income includes income from any activity you carry out for profit or with reasonable expectation of profit. A business includes any of the following: a profession, a calling, a trade, a manufacture, an undertaking of any kind, an adventure or concern in the nature of trade”. This statement introduces an interesting concept – reasonable expectation of profit.

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This may seem like a subjective judgement call, but we can rely on a recent court decision to provide more clarity:

A taxpayer was employed full-time at a Federal government agency, while running a part-time business approximately 10 hours per week. This taxpayer ended up losing money every year for several years, and the losses were claimed against the other sources of income. After reviewing the facts, the Tax Court of Canada found that the taxpayer’s business was not sufficiently commercial, and had a significant personal element, and as a result it did not constitute a “source” of income. The losses were denied. The decision was brought to the Federal Court of Appeal but was upheld, the judge stating that the business was not clearly commercial in nature and that it was not carried on with a view of making a profit.

While business losses can certainly be legitimate, we should always be aware of how CRA and the Tax Courts perceive them. As always, make sure any business expenses being claimed can be justified if ever challenged. You should be able to provide a clear connection from an expense directly to how it was incurred in order to generate or earn revenue and profit (future or current). The more personal elements that are related to an expense raises the likelihood of being challenged. Items such as meals and entertainment, travel and vehicle expenses must clearly be tracked and documented as to how they relate to your self-employed income earning activity.