Written on behalf of Feigenbaum Consulting
One of the benefits of being successful in business is having the extra income to invest money that you’ve made into other areas. In a recent decision issued by the Tax Court of Canada, a successful business person used the profits from his business to offer interest-bearing loans to third parties. When two of his borrows defaulted on his loans, he sought to deduct his losses as business losses. However, the Minister of National Revenue said those losses came from his own capital and not a business venture.
Oil and gas success leads to money lending
The appellant started working in the oil and gas industry in 1978 and started his own pipe company in 1990. It was very successful from the start, and he worked day-to-day at the company until 2004 at which time he began to reduce his day-to-day presence. By 2006 he started looking for other ways to invest his income.
He used word-of-mouth marketing in the Calgary area to promote his willingness to loan money to potential borrowers. He said he hoped to develop this business into something that would generate a steady stream of income. He said he kept a low profile in regards to the business and did not intend to compete with traditional lending institutions such as banks. He also testified that he worked three-four hours per day and did not keep logs or records.
Borrowers default on loans
Two of the appellant’s customers were themselves lenders of money. When they defaulted, he was left with over $13 million in losses. He claimed these losses as business losses.
The court noted that the Income Tax Act defines “business” as a “profession, calling, trade, manufacture or undertaking of any kind whatever.” This is a very broad definition, though, and more is needed to determine if income derives from business or not.
The court stated there are factors that can suggest an activity is not a business, such as a lack of advertising and promotion to actively seek out new clients, the lack of an accounting system, and the absence of screening new clients. On the other hand, raising money to run an operation can indicate something is a business.
Was the appellant’s money-lending operation a business?
The court was sympathetic to the financial loss incurred by the appellant, calling them unfortunate. However, the court found that he was not in the business of lending money. This finding was made because there was no indication that the operation was a business. He used his own money for the loans, the loans were not secure, and he did not keep records or advertise the business. His loans were also negotiated verbally and terms and payment plans varied amongst clients.
The court added that the appellant has a successful track record in business, and despite that he did not run his money-lending operation in a way that suggested he considered it a business. As a result of this, his appeal was dismissed and he was unable to write off his losses as business losses.
Contact the experienced tax law team at Feigenbaum Law for information on how we can help you reduce your overall tax burden, shield your business from liabilities and avoid pitfalls that result from improper tax planning. We provide full tax services with respect to your cross-border business initiatives. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the US, Canada and around the world. Contact us at firstname.lastname@example.org, or call us at (905) 695-1269 or toll free at (877) 275-4792 to learn more about how we can help.