Canada Revenue Agency Wins Case Against Taxpayer Over Business Write-Offs

The Canada Revenue Agency (CRA) has successfully contested a taxpayer’s claim for business losses, asserting that the individual improperly wrote off personal expenses within his Amway business. This ruling emerged from a recent Tax Court decision regarding the taxpayer’s claims for the years 2019 and 2020.

The taxpayer began his Amway venture in April 2019, dedicating approximately 15 to 20 hours weekly alongside his full-time role as an account administrator for a property management company. His sales approach included meeting potential customers online and in person, promoting Amway’s household products such as shampoo and multivitamins. The taxpayer typically set prices to earn a “premium” of 5% to 10%, occasionally reaching 15%.

During the years in question, he claimed $3,150 in gross revenue for 2019, against expenses totaling $6,404, leading to a net business loss of $3,254. In 2020, he reported gross revenue of $5,556 alongside a larger net business loss of $12,684. Following these reports, the CRA reassessed his tax returns, arguing that his Amway activities lacked the characteristics of a genuine business endeavor.

The judge referenced a key 2002 Supreme Court of Canada decision, which established criteria to identify a taxpayer’s “source of income.” This criterion necessitates that activities are conducted with a view to making a profit. The CRA characterized the taxpayer’s Amway involvement as largely personal, suggesting it resembled “a hobby with a business flair.”

In his defense, the taxpayer insisted that his Amway activities were entirely aimed at generating revenue. He had engaged in leadership training and paid fees for multiple workshops and seminars. The judge, however, assessed that the modest earnings—totaling $8,706 from approximately 70 sales to fewer than 40 customers—did not correspond to the extensive time and resources dedicated to the business.

The judge noted that despite the taxpayer’s claims of using his cellphone 70% of the time for business-related communication and driving over 6,000 kilometers for business purposes, the overall evidence suggested a stronger personal motivation behind his activities. The judge highlighted that the taxpayer’s accounting practices were questionable, as he failed to account for the cost of the Amway products sold.

This oversight raised concerns about the commercial viability of his operations. In reality, had he included the cost of goods sold, his gross revenue would have been around $9,000, with a gross profit of less than $1,000 after expenses exceeded $25,000. The ruling concluded that such a significant loss relative to sales without a clear path towards profitability indicated a lack of commercial intent.

As a result, the judge dismissed the taxpayer’s appeals, affirming that his reported losses for 2019 and 2020 were indeed non-deductible. This case serves as a reminder for individuals running side businesses to ensure their operations are conducted with the intention of profit, as failing to do so could lead to denied claims and reassessments by tax authorities.

Jamie Golombek, managing director of Tax & Estate Planning with CIBC Private Wealth in Toronto, emphasizes the importance of understanding the tax implications associated with side businesses. His insights reflect the complexities involved in tax deductions and the necessity of maintaining clear, commercial practices when engaging in entrepreneurial activities.