Defining pre-business activity tax claims

When does a business become a business for tax purposes? This question is fundamental to knowing when to write off losses associated with a business activity against other income on your personal tax return.

Take the case of Patrick Walsh (Walsh v. the Queen, 2011 TCC 341), decided over the summer. Walsh claimed business losses in 2005 and 2006 of about $13,000 in each tax year.

Walsh claimed the losses ought to be deductible as they arose “in the course of the conduct of a business.” CRA maintained that the expenses incurred were “personal in nature and the asserted business activity had not yet commenced.”

Walsh was forced to retire from his chartered accountancy practice due to health issues. He tried to find a business compatible with his skills and health. In addition to his CA, Walsh holds economics, business and accounting degrees. He researched several opportunities before settling on trading forex contracts in the spot market.

In 2004, he purchased trading software and a new computer capable of supporting the “multiple and simultaneous tasks that the software permitted him to perform.” Walsh testified that in 2005 he didn’t enter into any real trades, while in 2006, he likely invested “only a few hundred dollars” in FX trading.

For those two tax years, Walsh kept proper accounting books and records and included the T2125, “Statement of business activities,” with his personal tax returns. The judge referred to Walsh as “a serious student of forecasting price movements in the currency markets using his educational background together with his understanding of the interaction amongst interest rate pressures, currency values, inflation, employment, balances of trade and like factors.”

But the issue was when Walsh actually entered into trading activity of his business. Was it as early as 2005 or 2006, which would let him claim his business losses, or was it later in 2008, when his losses started to decline?

The judge’s analysis turned primarily to the oft-cited 2002 SCC decision in Stewart, which looked at the intentions of a taxpayer when there is a “personal element” involved in a commercial activity.

A personal element does not merely include a “hobby type activity,” but may also include an “educational pursuit,” even if it is ultimately aimed at preparing the particular taxpayer for a subsequent business endeavour. The court said, “Developing the know-how to operate a specific type of business, which was the intention here, is personal development, not a commercial activity per se.”

As a result, the judge concluded that Walsh’s activities in 2005 and 2006 were not a source of income as they “did not yet reach the level of commerciality to justify a finding that a business had commenced. […] Preparations leading to creating a business activity are not themselves yet a business.”

Similar results were reached in other cases, concluding that “educating oneself as a preparation to the start-up of a business is essentially a personal activity and not a business activity.”

The judge found Walsh’s work in 2005 and 2006 was mostly geared to determining the business entry strategies, given the small amount of capital he put at risk in the years in question. Walsh admitted throughout his testimony that during these years, “he was at a pre-exploitation stage of the subject activity.” The court concluded that since the business had not commenced in 2005 and 2006, the losses from those years were not tax-deductible.

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.