30 May 2012 Ministerial Correspondence 2012-0442371M4 - Pursuit of Profit vs. Personal Endeavour

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: How an activity undertaken for profit is distinguished from a personal endeavour for income tax purposes.

Position: A personal endeavour is an activity primarily undertaken for pleasure, entertainment, or enjoyment rather than for profit, business, or commercial reasons.

Reasons: Court cases.

XXXXXXXXXX
House of Commons
Ottawa ON K1A 0A6

May 30, 2012

Dear Colleague:

Thank you for your correspondence of March 28, 2012, written on behalf of your constituent, asking how an activity undertaken for profit is distinguished from a personal endeavour for income tax purposes.

A number of court cases have considered this issue. Some terms used by the courts in reference to a personal endeavour include: dabbling, hobby, pastime, amusement, indulgence, diversion, distraction, leisure, and recreational activity. In Kinsey versus The Queen [2002] 4 CTC 2580, the court found that, in the activity the respective taxpayer was engaged in, “the predominant purpose was not the pursuit of profit, but the pursuit of lifestyle.” A personal endeavour is undertaken to provide a personal benefit rather than a financial one; in other words, a personal endeavour is an activity primarily undertaken for pleasure, entertainment, or enjoyment rather than for profit, business, or commercial reasons.

In Stewart versus The Queen 2002 SCC 46, the Supreme Court stated that “in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention.”

Generally, the courts look for distinctive marks of commerciality or badges of trade in attempting to determine if an activity is commercial or personal. In Moldowan versus The Queen 77 DTC 5213, the court listed four possible factors to consider in making its determination:

• the profit and loss experience in past years;
• the taxpayer’s training;
• the taxpayer’s intended course of action; and
• the capability of the venture to show a profit.

The courts have also been clear on the fact that, if one derives enjoyment from one’s work, this does not necessarily mean the work cannot be a business. In Li versus The Queen 2008 TCC 175, the court observed that “the Appellant is very proud of his invention, but taking pride in his invention and wanting to bring a product to market does not make this a personal endeavor.” Similarly, in Wadley versus The Queen 2006 TCC 440, the court stated that the fact that Mrs. Wadley “took personal pleasure and pride” in a particular activity did not “diminish the potential of such an activity to become, ultimately, a profitable venture.” Finally, in Martin versus The Queen 2003 TCC 155, the court indicated:

[18] The existence of a personal element must be put in perspective. There is frequently a personal element in the carrying on of a commercial enterprise in the sense that the person derives great personal satisfaction from the activity. This does not make the activity any the less a business. Professional artists, photographers, writers, musicians (and sometimes even lawyers) no doubt derive great satisfaction from what they do but if their activity is commercial and is intended to yield a profit it is nonetheless a business. It is only where the personal element so overshadows any element of commerciality as to substantially displace it that one may conclude that the activity is merely a hobby and is not a business at all.
…
[22] The appellant’s activity here has the necessary ingredients of commerciality to make it a business - the commitment of substantial capital, the organized and businesslike way in which records are kept and the devotion of enormous amounts of time by the appellant and his wife and, in earlier years at least, his sons as well as the intent to earn a profit. Perhaps some people might see Mr. Martin’s hopes as overly optimistic or even ill conceived but if an intent to earn a profit is a necessary ingredient in a business it certainly exists here.

Therefore, it is clear that if a personal endeavour or hobby is pursued in a sufficiently commercial and businesslike way, it can be considered to be a business activity, which is a source of income under the Income Tax Act.

I trust that the information I have provided is helpful.

Yours sincerely,

Gail Shea, P.C., M.P.

Andrea Boyle
(613) 952-8808
2012-044237