The Pursuit of Profit Test and Losses in Canadian Tax Law
The Canada Revenue Agency (CRA) often denies losses by asserting that the taxpayer’s activity is not a business but a hobby. A Toronto tax lawyer can help you challenge these assessments using the pursuit of profit test.
The test comes from the Supreme Court of Canada case Stewart v. Canada.
Under Stewart, the focus is on whether the activity is undertaken in pursuit of profit or is merely personal in nature. If the activity is commercial, then the taxpayer’s business losses may be deductible, even if there’s no reasonable prospect of profitability.
The Stewart Framework
The Court in Stewart provided a two-stage analysis:
- Is the activity undertaken in pursuit of profit, or is it personal?
- If it is not a personal endeavour, is the source of income from a business or property?
If the activity is personal (e.g., a hobby), then losses are not deductible. If it is clearly commercial in nature, the analysis stops there, and the losses are deductible. When the activity has both personal and business elements, we must determine whether it is carried out in a sufficiently businesslike way to support a profit motive. The Court in Stewart rejected the idea that a “reasonable expectation of profit” should always be part of the test, focusing instead on whether the activity is commercial in substance before moving into an analysis of any personal element involved.
When Does This Apply?
This issue often arises in cases where a taxpayer runs a side business, such as a horse farm, art studio, or rental property, and reports losses. If CRA believes the activity is not truly commercial, it may deny the losses.
In Stewart, the taxpayer was a full-time lawyer who purchased four condominium units and claimed rental losses. The CRA argued that the rental activity was not a legitimate business. The Supreme Court disagreed, confirming that the activity was clearly commercial and that profit expectation was irrelevant once that was established.
Factors That Show Commercial Intent
When an activity has a personal aspect, such as owning a vacation property or raising animals, courts will examine whether it is conducted in a businesslike way. Factors include:
- A business plan or formal accounting system;
- Time and money invested;
- Use of professional advice;
- Training;
- Marketing and advertising; and
- Repetition and continuity of the activity.
No single factor is determinative. The key is whether, taken together, they show a genuine profit motive.
Why This Matters
If the CRA reassesses you and denies your business losses on the basis that your activity is a hobby, the Stewart test is your best defence. Whether you’re renting properties, running a small farm, or operating a side business, your losses may still be deductible if the activity is genuinely commercial.
A Toronto tax lawyer can help analyze the facts, prepare legal submissions, and deal with CRA or the Tax Court.
Kirshen Tax Law Can Help
If CRA has denied your business losses and claimed your venture is a hobby, we can help. Kirshen Tax Law regularly represents taxpayers in CRA disputes and Tax Court appeals where the pursuit of profit is at issue. We’ll assess your case, defend your commercial intent, and work to reinstate your deductions or losses.
Contact us today for a free consultation with a Toronto tax lawyer.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.