28 October 1999 External T.I. 9922965 - 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: Deductibility of expenses regarding proposed single purpose creative writing pursuit.

Position: Question of fact.

Reasons: Paragraph 18(1)(a) of the Act prohibits the deduction of expenses that are not made for the purpose of earning business income.

XXXXXXXXXX 992296

Wm. P. Guglich

October 28, 1999

Dear XXXXXXXXXX:

Re: Single Creative Writing Pursuit

This is in reply to your letter dated August 20, 1999, requesting an advance income tax ruling regarding your proposed single creative writing pursuit.

You indicate that you propose to write and publish a single literary creation as a personal interest ambition, without either the intention or the expectation of commercial gain. However, you recognize that there is some chance of the final outcome being profitable. You estimate this pursuit's associated financial outlays may be between $75,000 and $125,000, which would be spread out over a period of a number of years.

You requested assurance as to the treatment under the Income Tax Act of the expenses incurred and any profits or losses that may be realized. You referred to Interpretation Bulletins IT-504R2 Visual Artists and Writers and IT-334R2 Miscellaneous Receipts.

As stated in paragraph 7 of Information Circular IC70-6R3, (copy attached) confirmation of the income tax treatment of proposed transactions can only be provided by way of an advance income tax ruling. However, as stated in paragraph 15(j) of IC70-6R3, an advance income tax ruling will not be issued when the matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request. Among the examples given is the determination of whether or not a business will be carried on and whether there is a reasonable expectation of profit. Nevertheless, we offer the following general comments regarding your request.

Our Comments

As stated under the heading "summary" on page one of IT-334R2, this bulletin discusses the tax treatment of various receipts such as strike pay, gambling winnings and forfeited deposits. The only comments in IT-334R2 that may apply to your proposed writing activities are set out in paragraph 11. However, most of the comments in IT-504R2 would likely be applicable in your case, as this bulletin deals specifically with the determination of income, for income tax purposes, of a visual artist or writer.

If the creative writing pursuit constitutes the carrying on of a business, expenses incurred to earn income from that pursuit may be deductible to compute the income or loss from the business. Business is defined in subsection 248(1) of the Income Tax Act (the "Act") to include a profession, calling, trade manufacture or undertaking of any kind whatever and an adventure in the nature of trade but does not include an office or employment. Subsection 9(1) of the Act provides that a taxpayer's income for a taxation year from a business (self-employment) is the profit therefrom for the year. In calculating income (profit) of a business for the year paragraph 18(1)(a) of the Act prohibits the deduction of any expense or outlay that is not made or incurred for the purpose of gaining or producing income from the business.

Income from a writing pursuit that is a business would be included in computing income and any business loss for the year would be deductible from other income in the year. Generally, any unapplied business losses of a particular year may be carried back three years and forward seven years and deducted against any type of income for the year of loss application. On the other hand, if the writing pursuit does not constitute the carrying on of a business any losses resulting from such pursuit would not be deductible for income tax purposes. In addition, such losses cannot be deducted in computing income from other sources.

The concept of profit is critical in determining whether a taxpayer's activity or undertaking constitutes the carrying on of a business or is merely the furtherance of a hobby or interest of the taxpayer that is of a personal nature. Generally, any undertaking or activity that results in a profit or has a reasonable expectation of profit would be viewed as the carrying on of a business. Paragraphs 4 to 7 of IT-504R2 describe this aspect and the factors that are considered in determining whether or not an artist or writer has a reasonable expectation of profit. As stated in the bulletin, since a considerable period of time may pass before a writer becomes profitable the Department recognizes that a longer period of time may be required in establishing that a reasonable expectation of profit does exist. It is possible that a writer may not realize a profit during his or her lifetime but still have a reasonable expectation of profit. However, to have this reasonable expectation of profit the literary endeavors of the writer must be carried on in a manner such that, based on the criteria in paragraph 5 of IT-504R2, they may be considered for income tax purposes to be the carrying on of a business rather then a hobby. The determination of whether or not there is an expectation of profit in a particular case, is a question of fact which cannot be made in advance but can only be made after all the facts and details have been established and reviewed. Since this is the case for you, no clear cut answer can be given but you can be guided by the governing principles set out in the bulletin.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton
Manager
Business, Property and Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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