28 October 1999 External T.I. 9923105 - DEDUCTIBLE EXPENSES

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: Requested information about the expenses that may be deductible in respect of a proposed undertaking.

Position: General comments provided.

Reasons: Question of fact whether proposed undertaking will constitute the carrying on of a business.

XXXXXXXXXX 992310

Wm. P. Guglich

October 28, 1999

Dear XXXXXXXXXX:

Re: Deductible Expenses

This is in reply to your letter of August 5, 1999, requesting information about expenses that may be deductible in respect of your proposed undertaking.

Your undertaking will consist of the collection of information about the XXXXXXXXXX of Canada. You intend to record, document, analyse, format, restructure, editorialize and publish all the information that you are able to assemble and collect. Anticipated gross revenues and income will be derived from the sale ofXXXXXXXXXX information, the sale of published books and lectures to interested persons.

You propose to purchase, rent or lease a motor home which you will drive to gather information. The motor home will be equipped with a computer system to record store, sort, reproduce and display information. The motor home would be used to conduct the interviews and to display the types of new information and programs that you have accumulated, recorded and published.

As stated in paragraph 4 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

Section 9 of the Income Tax Act provides that a taxpayer's income for a taxation year from a business (self-employment) is the profit therefrom for the year. 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. Paragraph 18(1)(a) of the Act requires that in order that expenses be deductible, they must be made or incurred for the purpose of earning business or property income. Business is defined in subsection 248(1) of 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. Generally, any undertaking or activity of a taxpayer that results in profits or has a reasonable prospect of profits would be viewed as the carrying on of a business. On the other hand, where the activity or undertaking has no reasonable expectation of producing profits, a business would not be considered to have been carried on and any resulting loss would not be recognized for income tax purposes.

Whether or not a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. The relevant factors to be considered in making such a determination will differ with the nature and extent of the activity or undertaking. Some of the factors which may be relevant in determining whether or not a taxpayer has a reasonable expectation of profit include:

• the amount of time devoted to the activity or undertaking,
• the amount of revenue from the activity or undertaking,
• the type of expenditures claimed and their relevance to the taxpayer's endeavour,
• the taxpayer's qualification in the particular field of endeavour,
• membership in any professional association relating to the undertaking, and
• a business plan relating to growth, promotion, etc.

No particular factor described above is more important than another and no one factor determines whether or not an activity is a business carried on for profit or with a reasonable expectation of profit. All relevant criteria are considered together in making a determination and a taxpayer's failure to meet any one particular factor will not in itself preclude the taxpayer's activities from qualifying as a business.

On the basis that you will be carrying on a business, we offer the following general comments:

• For a general discussion on the costs of the motor home, which is used as a mobile office, that may be deducted, we suggest that you review Interpretation Bulletin IT-521R Motor Vehicle Expenses Claimed by Self-Employed Individuals (copy attached). It discusses the deduction for both capital cost allowance and operating expenses. You will note that if the mobile home is also used for personal use, the costs must be prorated between the business and personal use.
• Operating expenses of the motor home, incurred for the purpose of earning income may be deductible in computing income from the business. If the motor home is used for business and personal use, the expenses must be allocated and only the business portion would be deductible.
• Fifty percent of the cost of meals, when you travel for the purpose of earning business income, may be deductible. Whether in a particular case, meal expenses were incurred for the purpose of earning income or whether they were personal and living expenses is a question of fact, which can only be determined after all the facts and details have been established and reviewed. Some of the factors that may be considered include, whether you travelled outside the metropolitan or municipal area where your place of business is located and, the period of time you will be away from the metropolitan or municipal area.
• We are not aware of any delayed and then accelerated business expense write-offs.

We trust our comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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