How to deal with business losses

Given the choice, an investor trading in stocks or bonds would prefer to have profits from the sale of securities taxed on the capital account because only 50% of net capital gains are taxable. If those same profits are taxed on the income account, however, 100% of the gains are taxed as business income.

But what happens when someone ends up with significant losses?

This question was at the centre of a court case involving Om Mittal (Mittal v The Queen, 2012 TCC 417), an engineer who worked for Shaw Canada from 1998 through 2012. On his 2006 and 2007 tax returns he claimed he was a securities trader. So he deducted trading losses as business losses in both years — $35,226 in 2006 and $23,659 in 2007.

Canada Revenue Agency denied these were business losses. It reassessed him, saying they should be classified as capital losses, which are deductible only against capital gains. The CRA argued Mittal was “neither a trader nor engaged in an adventure in the nature of trade.”

In court, Mittal produced a business plan he prepared in 2005 for his security trading business. It discussed personal goals and included a mission statement; it also itemized financial and time commitments.

One goal was to devote an average of 25 hours per week to trading and stock analysis. He also set specific “drawdown rules.” For instance, he would “stop trading immediately if the account balance exceeds a 50% drawdown of base capital and review what went wrong.”

In court, Mittal described himself as a workaholic. He logged the time he spent on trading and research, which confirmed he put in an average of 25 hours per week.

He financed his trading activity using $100,000 of his own savings and non-interest bearing demand loans from his two sons (one for $41,000 and the other for $10,000). Mittal also invested over $700,000 on behalf of various family members.

He produced records of his trades for 2006, which revealed positions in Canadian blue chips. They were sold either the same day or within a few days. For the year, Mittal did 160 trades worth $3.2 million over 60 days. In 2007, he made only 29 trades over 10 days, most of them in the first three months of the year. Mittal justified the lower volume by citing worries over the U.S. market and household debt, which he claimed were validated by the subsequent financial meltdown of 2008.

Finally, Mittal testified he intended to rely on trading as his business upon retirement.

The issue before the judge was whether in 2006 and 2007 Mittal could be considered either a trader in securities or as engaging in “an adventure in the nature of trade.” Both permit him to write off his losses against other sources of income.

Cases of this kind come down to: frequency of transactions; duration of holdings; intention to acquire for resale at a profit; nature and quantity of securities; and time spent.

The judge concluded Mittal should be allowed to claim business losses and ordered the CRA to reassess him.

He wrote, “The overall impression is of an individual spending a great deal of time, energy and money in a very organized and businesslike fashion in investing in the stock market, to the extent that he intended this to be his retirement business. Unfortunately for Mr. Mittal, it proved not to be as lucrative as he had hoped. Being unsuccessful, however, does not make it any less an adventure.”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.