7 May 1998 External T.I. 9807235 - REASONABLE EXPECTATION OF PROFIT

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Reasonable expectation of profit
Making payment arrangements. waiver of interest

Position:

Whether a taxpayer has a reasonable expectation of profit is a question to be determined after a careful review of the facts. A waiver of the interest, and terms of payment for the taxes owing, can be granted by the Department in certain circumstances. Again, the particular facts of the case have to be reviewed.

Reasons:

		980723
XXXXXXXXXX 	N. Mondou, M.Fisc.
(613) 957-8961

May 7, 1998

Dear Sir:

Re: Reasonable expectation of profit to carry on a business

This is in reply to your letter dated March 16, 1998. In a telephone conversation (XXXXXXXXXX/Mondou), you explained that you would like to know whether XXXXXXXXXX, which is a corporation that you control and fund with money you receive from a wage loss replacement plan, has a reasonable expectation of profit for tax purposes. You also wish to know what arrangements may be available for the payment of income taxes you personally owe.

The determination of whether a taxpayer has a reasonable expectation of profit is a question of fact that requires a detailed review of the taxpayer’s particular circumstances. This determination is made by the tax services offices. Also, as taxpayers’ circumstances may change, this issue has to be reviewed over time. Thus, a finding that a reasonable expectation of profit exists in a given year does not bind the Department for prior or subsequent years.

We would therefore recommend that you contact an officer of the tax services office of your area to discuss the particular factual situation of your company and determine with him or her whether a reasonable expectation of profit exists. The following comments are therefore of a general nature only.

The courts have decided that where a taxpayer does not have a reasonable expectation of profit, there is no business; the expenses are then personal and not deductible. In making a determination as to whether a taxpayer has a reasonable expectation of profit, many factors have to be taken into consideration. The following criteria were suggested by the courts as a guideline, but the list is not exhaustive and the importance of a particular factor will vary according to the nature and extent of the undertaking:

a) profit and loss experience in past years;

b) the taxpayer’s training;

c) the taxpayer’s intended course of action; and

d) the capability of the venture as capitalized to show a profit after deducting capital cost allowance.

Some of these factors may be addressed in a business plan. You may therefore wish to prepare one before meeting with the officer of the tax services office.

We are enclosing for your information a copy of our Guide for Business and Professional Income - 1997 (T4002). Although this guide concerns individuals, some of the comments made in it apply to corporations as well. We also attach a copy of our T2 Corporation Income Tax Guide (T4012) which will provide you with additional details with respect to corporations. You may also wish to obtain from the tax services office a copy of our Guide for Canadian Small Businesses - 1997 (RC4070).

Finally, in circumstances where there is an inability to pay the tax owing, the Department may consider waiving all or part of the interest assessed. We are enclosing for your information a copy of the Information Circular 92-2 which explains the procedure to obtain such a waiver. Also, in some circumstances, the Department will allow a taxpayer some time to pay the tax owing as a result of an assessment or reassessment. Again, you should discuss this possibility with the officer of the tax services office as a decision in this respect will require a careful review of your circumstances.

We trust that these comments are of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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