Adventure Or Concern In The Nature Of Trade ' A Canadian Tax Lawyer's Guide

• Published date: 08 October 2020
• Subject Matter: Tax, Income Tax, Capital Gains Tax
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction - What is included in Business Income?

The Federal Income Tax Act ("Tax Act") outlines the sources of income that are taxable, including income from office employment, business, and property. The authority for taxing business income is found in Section 9(1) of the Tax Act, which states that "a taxpayer's income from business or property is the taxpayer's profit from that business or property for the year." Section 248(1) of the Tax Act defines "business" to include "a profession, calling, trade manufacture or undertaking of any kind whatever and ... an adventure or concern in the nature of trade." Generally, a taxpayer who carries out a trade or profession consistently for the purpose of earning profit is considered to earn business income. However, where a taxpayer carries out a specific type of transaction infrequently or even a single time, the transaction may be considered an adventure or concern in the nature of trade, which results in that income also being characterized as business income.

The reason this distinction matters is because it may be preferable to a taxpayer to characterize this type of transaction as a capital transaction to attract the lower tax liability of capital gains, particularly where the taxpayer has capital losses for the year. The CRA would generally prefer to characterize income as business income as opposed to capital gains, because business income is fully taxable whereas capital transactions are only 50% taxable. If you believe the CRA has incorrectly characterized capital gains as business income, please contact our top Toronto tax law firm to discuss your situation.

Differentiating Between Business Income and Capital Gains

Canadian courts have identified some of the factors that should be considered when determining whether transactions are adventures or concerns in the nature of trade, or if they have a capital nature. In Friesen v Canada, [1995] 3 SCR 103, the Supreme Court of Canada stated the first requirement for an adventure or concern in the nature of trade is a "scheme for profit-making," referring to the taxpayer's legitimate intention to earn profit from the transaction. In the leading case Happy Valley Farms Ltd. V. Her Majesty The Queen, (1986) 7 F.T.R. 3, the Federal Court of Canada, Trial Division, laid out six factors used by courts to differentiate between business and capital income. In that case the court held that a taxpayer who purchased 450 acres of farmland in 1969 and sold 400...