Brown – Federal Court of Appeal finds that the higher Stewart hurdle for an activity with a “personal element” is not engaged merely by a personal reason for the activity

The taxpayer (Mr. Brown, a lawyer) together with his wife (an artist) formed a numbered company to operate a new art gallery. However, when his wife took ill a few months after the opening, Mr. Brown began to provide significant management services, and agreed with the company that he would do so in consideration for a management fee equal to 20% of the amount by which the gallery’s annual revenue exceeded $100,000. For the three years in issue, no fee was generated, and he claimed significant non-capital losses for those years.

In reversing the Tax Court and in finding that the non-capital losses were deductible, Webb JA noted that, under Stewart, the test of whether “the activity is being carried out in a commercially sufficient manner to constitute a source of income” was only engaged “if there is a hobby or personal element to the activity in question,” and stated:

… Mr. Brown’s decision to provide these management services as a result of his wife’s inability to continue to manage the gallery, does not mean that there is a personal or hobby element to his management services activity … .

A person’s personal motivation or reason for conducting an activity cannot, in and of itself, result in there being a personal or hobby element to the activity. It is possible to find a personal reason why any person is carrying on a particular activity. …

Neal Armstrong. Summary of Brown v. Canada, 2022 FCA 200 under s. 3(a) – business source.