Part-time advisor’s business income doesn’t justify ‘staggering’ expenses

This article appears in the March 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Some so-called financial advisors only dabble — either part-time or sporadically — selling the odd mutual fund, seg fund or term policy to clients who are often family or close friends.

This can be problematic, however, when expenses are wildly disproportionate to the amount of income earned from a part-time advisory business.

Take Peach v the Queen (2020 TCC 12), a tax case decided in January involving a Newfoundland and Labrador advisor who has operated his “financial consulting” business since 1999. The stated objective of his business is to sell mutual funds and life insurance, but it’s never earned a profit and revenues have never exceeded $1,900.

In nine taxation years since 1999, the advisor’s business revenues were less than $800, and his expenses exceeded revenues by a substantial amount every year.

In 2011, the advisor deducted expenses of over $19,600 while gaining no new clients and earning one $27 commission, the judgment said.

“In comparison to his $27 commission, the expenses claimed are staggering — a multiple of more than 720 times his commissions,” the judge pointed out. “At the lowest point of revenue, his claimed expenses reached their highest ever.”

The Canada Revenue Agency (CRA) reassessed the advisor’s 2011 return, allowing him to deduct expenses of $3,715, resulting in a loss from the business of $3,688. While the CRA did not dispute that the advisor had a business, it nonetheless disallowed $15,951 in expenses on the basis they were not incurred for the purpose of earning income or were not reasonable in the circumstances.

The taxpayer, who also worked as a guidance counsellor in Northern Canada for approximately seven months in 2011, described his client base as approximately 35 people, two-thirds of whom were family and longtime friends. The taxpayer testified that, in 2011, while he gained no new clients and spent very little time on the business, he drove almost 4,600 km for business purposes.

The advisor’s expenses for 2011 included significant expenses for meals and entertainment, travel, an office, and a vehicle and its capital cost allowance. At the trial, the advisor was unable to explain the business rationale for a number of these expenses.

When asked about the purchase of an iPod, for example, the taxpayer “could not remember or explain” how it was related to his business. He also couldn’t explain a Canada Border Services Agency import fee, admitting that he had no clients outside Canada.

The advisor also spent more than $200 on birthday cards, birthday cakes, children’s T-shirts, tickets to a Christmas show, ice cream and alcohol. When questioned about the business rationale, the taxpayer said they were gifts to clients and their children “to show appreciation.”

The judge concluded that the gifts “were motivated primarily by personal relationships rather than business considerations,” and not incurred “for the purpose of earning income.”

The judge similarly questioned the advisor’s meal expenses and travel costs. “I am skeptical that five trips [to the office of an affiliated organization] in December, including one in the week between Christmas and New Year’s and one on a Saturday, were necessary or even desirable,” the judge wrote.

As to the quantum of meal expenses, the judge concluded that it was “not reasonable to spend hundreds of dollars on meals to earn a $27 commission.”

The judge denied all of the advisor’s additional travel expenses, automobile expenses and office expenditures beyond what the CRA was prepared to allow, and confirmed the CRA’s reassessment for these expenses.

“I am satisfied that no commercially minded business person would continue to incur expenses in the amounts [the advisor] claims to have done year after year, were such business person in [his] circumstances,” the judgment said.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Private Wealth Management in Toronto

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.