Boles v The King: Is Your Side Hustle A Taxable Business?
In a recently published decision concerning the case of Boles v the King, 2024 TCC 167, the Tax Court of Canada (the “TCC”) provides further guidance and clarification on how to determine whether an activity constitutes a “business” from which income is taxable and losses are deductible.
In this case, the appellants were employed as lawyers, but also pursued various dog-related activities, including raising dogs for pedigree breeding and for entry in dog shows. The expenses incurred by the appellants significantly exceeded the revenues in all of the disputed tax years. The CRA denied that these activities were a source of income on the basis that they were a hobby. This resulted in the denial of over a million dollars in claimed business losses.
Statute Bar
The first issue that the TCC had to determine was whether the CRA was prohibited from reassessing some of the disputed tax years on the basis that they were statute-barred. The Income Tax Act (“Act”) prescribes a normal reassessment period of three years from the date of a notice of assessment. A taxpayer may only be reassessed outside of this this year period where the taxpayer made a “misrepresentation” attributable to “neglect, carelessness, or wilful default, or any fraud”. In reopening a statute-barred tax year, The burden of proof is on the Crown to prove that this condition is met.
In deciding this issue, in addition to various other cases, Justice Sommerfeldt refers to the seminal Supreme Court decision in Stewart v the Queen, which prescribes a two-part test which asks:
- is the activity undertaken in the pursuit of profit or is it a personal endeavour; and
- if the activity is not a personal endeavour, is the source of income a business or property?
The second prong of this test is determined by asking whether a venture, viewed objectively, was carried out a business-like, commercial manner.
This test illustrates that the question of whether a “business” exists is a question of mixed law and fact. The decision states at paragraph 51 that “an income tax return expressing a reasonable filing position, founded on a bona fide belief in the return’s correctness, and involving a determination of mixed fact and law, might not constitute a misrepresentation”.
The TCC found that the Minister had not met its burden of proof, as the appellants’ filing position was reasonable, despite the fact that they had incurred significant losses. The decision refers to the fact that start-up losses are common in many business ventures. A difference of opinion between the CRA and the taxpayer is not sufficient to amount to a misrepresentation, as long as the taxpayer’s filing position is reasonable.
The decision also reiterates that statute-barring occurs on an issue-by-issue basis. Where the Minister meets the requisite burden, reassessment is permitted only to the extent that the reassessment relates to the identified misrepresentation.
Business or Hobby?
For the tax years where a statute bar does not apply, the appellants had the burden of proof to demonstrate that the dog-related activities were carried out in a sufficiently commercial manner to constitute a business.
In applying the test outlined in Stewart, the court lists various factors to be considered in determining whether objective standards of business-like behaviour are met the following:
1. The Profit and Loss Experience
Substantial losses suggest that a venture lacks commerciality. This consideration is independent of the limitation on the deductibility of expenses where they are excessive and unreasonable.
2. The Taxpayer’s Training
Where a taxpayer has either formal professional training in the subject matter of their venture, or other substantial experience, it suggests that a venture was a commercial pursuit.
3. The Capacity of the Venture to Show a Profit
Where a venture is highly risky, it may still be a commercial pursuit if it has real potential for great profit over a longer time horizon.
4. Both The Intended and Actual Course of Action
Relevant considerations include:
- Business Plan and Goals: Ideally, a commercial venture will have a written business plan and goals to turn a profit. In the case of a sole proprietorship or a small family venture, a verbal plan may be sufficient.
- External Financing: Seeking or obtaining external financing from a commercial lender is an indicia of commerciality.
- Budgeting and Expense Management: A formal written budget, as opposed to making budgetary decisions as issues arise, is indicative of commerciality. Business-like expense management generally requires spending to be commensurate to revenue. Maintaining a separate bank account for the venture is ideal.
- Risk Management: Obtaining insurance and adopting other risk management practices are consistent with business-like behaviour.
- Advertising and Marketing: A business will ideally have a short-term and long-term marking strategy.
- Record Keeping: A business should keep separate and particularized records for all of its affairs – this includes an accurate and well-maintained general ledger.
- Business Strategy: Commerciality implies a business strategy that is consistent with advancing the venture’s bottom line.
- Redirection, as Needed: When a venture is conducted in a sufficiently commercial manner, its proprietors are expected to adapt the venture’s business plan to changing circumstances.
In Boles, the TCC ultimately ruled that the dog-related activities were not a source of business income. This conclusion was precipitated by the fact that the appellants consistently incurred losses over many years, financed the venture via credit card, and adopted only rudimentary budgeting, recordkeeping, and marketing practices.
Conclusion
The upshot of this decision is that a taxpayer seeking to deduct losses from their “side hustle” should ensure that they are conducting themselves in a business-like manner and maintain meticulous documentation of the foregoing. On the flipside, if a taxpayer is profiting from their side hustle, they risk being reassessed for unreported income and this reassessment is likely to hold if this pursuit is being conducted in a business-like manner.
Boles v the King required a six-week trial and relied on over 54 binders of evidence provided by the appellants. Determining whether a venture constitutes a “business” requires a thorough case-by-case analysis and an assessment of the applicable statutory and case law. For this reason, taxpayers are well advised to consult with a tax professional to properly plan their affairs or when contesting a CRA audit/reassessment.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Matthew Pollock
