In my last article, I described the limitations that the Canada Revenue Agency places on personal services businesses and the ability to claim the small business deduction for work done by a spouse for the incorporated farm business.
These limitations extend far beyond a personal services business to any line of activity done on the farm that is considered a related business. Income from each source must be reported separately.
It’s not unusual for farm families to add to farm income by producing crafts, jams or jellies, soaps or other artisan products for sale at farmers markets and fall fairs. Technically, all income from a hobby or business venture must be included, but claiming expenses and losses from these sources is challenging from a tax perspective.
The CRA considers these activities as personal endeavours, and the court makes a distinction between a commercial enterprise and a personal endeavour. Personal endeavours include “dabbling, hobby, pastime, amusement, indulgence, diversion, distraction, leisure and recreational activity.” They are considered to provide a personal benefit rather than a financial one.
In one case, the Supreme Court stated that commercial activity requires a subjective intention to profit and evidence of business-like behaviour in support of the intention. The court specifically noted four factors in determining whether the activity was a commercial one:
- The profit and loss experience in past years.
- The taxpayer’s training.
- The taxpayer’s intended course of action.
- The capability of the venture to show a profit.
In another case, the court decided that the taxpayer was not engaged in the pursuit of profit but rather in “the pursuit of lifestyle.”
The court hasn’t always abandoned the taxpayer, however. In two cases, the court found that if a personal endeavour is undertaken in sufficiently professional and business-like way, the activity may be considered a business activity for the purposes of the Income Tax Act. The activity in question was gambling, and the plaintiffs in those cases were considered to be professionals pursuing a profit-making livelihood from their personal endeavour.
So how are expenses reported? If the activity is considered to be a business-like one with the intention of making a profit, then all of the expenses may be claimed and any losses applied to other income.
If the activity is considered to be a personal endeavour or hobby, then the expenses are limited to income earned and losses are recognized or can’t be carried back or forward, as in the case of a business venture.
Grant Diamond is a tax analyst in Kelowna, B.C. with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.