• Richard Fonagy

Are You Running a Hobby or Business?

Expectation of profit where there is no hobby element does not appear to be required:

So what does the Stewart case actually say? First, while it is clear that, following Stewart, Mr. Robinson does not need to have a reasonable expectation of profit from his activities for them to constitute a source of business or property income, the activities must be in pursuit of profit. Yet, in Stewart, the Supreme Court of Canada stated that the “pursuit of profit” source test will require analysis only where there is some personal or hobby element to the activity in question:

[5] It is undisputed that the concept of a source of income is fundamental to the Canadian tax system; however, any test which assesses the existence of a source must be firmly based on the words and scheme of the Act. As such, in order to determine whether a particular activity constitutes a source of income, the taxpayer must show that he or she intends to carry on that activity in pursuit of profit and support that intention with evidence.

The purpose of this test is to distinguish between commercial and personal activities, and where there is no personal or hobby element to a venture undertaken with a view to a profit, the activity is commercial, and the taxpayer's pursuit of profit is established. However, where there is a suspicion that the taxpayer's activity is a hobby or personal endeavour rather than a business, the taxpayer's so-called reasonable expectation of profit is a factor, among others, which can be examined to ascertain whether the taxpayer has a commercial intent.

“The following two-stage approach should be employed to determine whether a taxpayer's activities constitute a source of business or property income:

(i) Is the taxpayer's activity undertaken in pursuit of profit, or is it a personal endeavour?

(ii) If it is not a personal endeavour, is the source of the income a business or property?

The first stage of the test is only relevant when there is some personal or hobby element to the activity. Where the nature of an activity is clearly commercial, the taxpayer's pursuit of profit is established.

There is no need to take the inquiry anyfurther by analyzing the taxpayer's business decisions. However, where the nature of a taxpayer's venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner.”

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