Stroud – Tax Court of Canada applies the Moldowan REOP tests for GST/HST purposes

Moldowan indicated that an activity should have a reasonable expectation of profit (REOP) to qualify as a business, and suggested that, in determining whether there is a REOP, the “following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.”

Although the relevance of REOP for ITA purposes was subsequently restricted by Stewart, in the meantime, the ETA definition of “commercial activity” was enacted, which excludes, in the case of an individual, “a business carried on without a [REOP].”

After reviewing the unsatisfactory evidence presented by the taxpayer, who had reported very large losses (with meagre documentary support) from a racehorse farm and modest profits from his law practice (in years before he was disbarred), Spiro J stated:

Having applied the criteria … in Moldowan, I find that each factor (other than time spent), weighs heavily in favour of the conclusion that the Appellant did not carry on his farm business with a reasonable expectation of profit.

As the taxpayer did not have a commercial activity, his input tax credit claims were properly denied.

Neal Armstrong. Summary of Stroud v. The Queen, 2022 TCC 86 under ETA s. 123(1) – commercial activity.