Paragraph 18(1)(a) - General limitation


Oriole Oil & Gas Ltd. v. The Queen, 91 DTC 5143 (FCTD)

After the two shareholders and principals of a private company decided to seek a purchaser for their shares, they entered into a contract with their company which provided for the payment of an annual salary to each of them for an extended period of time, and the payment of a "bonus" of 7 1/2% of the asset value of the company if there were to be a sale of the company's assets before the employee attained the age of 55. Martin J. found that these contracts were not bona fide agreements in light inter alia of the fact that the principals effectively ignored their terms. Accordingly, the company following the purchase of its shares was not permitted to deduct two payments of $500,000 which it made to each principal purportedly in satisfaction of their rights under the employment agreements.

The Queen v. MerBan Capital Corp. Ltd., 89 DTC 5404, [1989] 2 CTC 246 (FCA)

"Paragraph 18(1)(a) is not ... a provision which entitles a taxpayer to deduct an amount paid. Rather paragraph 18(1)(a), expressed in negative terms, limits the right to claim deductions."

Green Acres Fertilizers Services Ltd. v. The Queen, 79 DTC 5346, [1979] CTC 431, aff'd 80 DTC 6365, [1980] CTC 504 (FCA)

An argument, that the payment of premiums by a company in respect of life insurance policies, that were designed to fund a shareholders' buy-sell agreement, should be viewed as part of the company's executive compensation package, was rejected. The portion of the premiums that was not includable in the shareholder-executives' income pursuant to S.6(4) was held to be non-deductible.

Hutterian Brethren Church of Wilson v. The Queen, 79 DTC 5474, [1980] CTC 1, 79 DTC 5479 (FCA)

There was no statutory basis for an incorporated Hutterite colony to deduct the fair market value (as opposed to the cost) of services provided to it by its members.

Meteor Homes Ltd. v. MNR, 61 DTC 1001, [1960] CTC 419 (Ex. Ct.)

After noting that in a previous case, a payment made to shareholders had been found to be a capital receipt to them, and before finding that the same payment was non-deductible to the taxpayer, Kearney J. stated (p. 1005):

"The payment in question should be considered in relation to the instant taxpayer only, because cases can arise where payments may be deductible to the payor and not taxable to the payee, but I do not think that this is such a case."

See Also

Larkin v. The Queen, 2020 TCC 98 (Informal Procedure)

a geologist with no current income could deduct various expenses documented only in spreadsheets

A retirement-age geologist with decades of successful experience as a prospector, entrepreneur and inventor worked on a number of unsuccessful projects in and around his 2011 taxation year, e.g., seeking to apply novel techniques for exploiting graphite or nickel projects, and unsuccessfully bidding on an oil sands property and then a kerogen property, without generating any business revenue in his 2011 year.

Masse DJ nonetheless found that the taxpayer was carrying on business, stating (at para. 40):

… He certainly could demonstrate better business practices and I note that his record keeping leaves much to be desired but I still conclude that he conducted his activities with a level of commerciality sufficient to constitute a business. …. His ventures have seen prior successes and he … is continuing to pursue similar opportunities in hopes of repeating his prior success.

Although the taxpayer’s expenses were only documented in his spreadsheets (he did not provide any invoices, receipts etc.), Masse DJ allowed a significant portion of the claimed expenses – but disallowed others, for example, only allowing the expenses of the taxpayer’s cell phone but not his two land lines (stating, at para. 47, that “it is more reasonable to dedicate one telephone for … for business use.”)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit geologist with past successes but no current income was carrying on business 294
Tax Topics - General Concepts - Evidence spreadsheet was sufficient documentation of various claimed expenses 99

Ferguson-Neudorf Glass Inc v. The Queen, 2009 DTC 179, 2008 TCC 684

A fine which the taxpayer paid under the Occupational Health & Safety Act (Ontario) for the offence of failing "to provide information, instruction and supervision to a worker" following a death of a worker was found not to come within the "egregious or repulsive" conduct obiter dictum of the Supreme Court of Canada. Woods, J. noted that the Supreme Court had indicated that this exception from deductibility for fines arising from activities in the normal course of business would only arise in rare circumstances and that the Justice of the Peace who imposed the fine had stated that this appeared to be an isolated incident.

Stewart v. The Queen, 98 DTC 1600, [1998] 3 CTC 2662 (TCC)

The taxpayer financed virtually all of the purchase price of four rental units using borrowed money after reviewing offering documents that projected negative cash flow for approximately a 10-year period and a capital gain thereafter. After finding that the taxpayer had no intention to pay down principal, McArthur T.C.J. concluded that the acquisitions had been made without a reasonable expectation of profit.

Bellin v. The Queen, 95 DTC 729 (TCC)

The taxpayer, which had realized intermittent small profits from the operation of a small department store up until 1986, was found to no longer have a reasonable expectation of profit by 1991, when sales volumes had dropped by 75% and substantial operating losses were being generated. Before so concluding, Teskey T.C.J. stated in obiter dicta (at p. 730) that "when a profitable business falls into hard times, a taxpayer must have a reasonable period of time to attempt to bring the business back into a profitable operation before being abandoned".

Pioneer Designs Corp. v. MNR, 91 DTC 293, [1990] 2 CTC 2446 (TCC)

In finding that accrued bonuses were deductible as expenses (as opposed to being distributions of profit) notwithstanding that they were proportionate to the recipients' capital invested in the corporation, Garon T.C.J. stated (p. 300) that "the weight of the evidence is that the percentage ... shareholdings reflected the measure of the expected input of the directors to the management of the Appellant's business and affairs".

Lawrence v. MNR, 90 DTC 1491, [1990] 1 CTC 2567 (TCC)

The taxpayer, who acquired an interest in a MURB was unable to deduct his proportionate share of certain expenses paid by the vendors while the buildings were under construction or at the time of sale because none of such expenses had been incurred by the taxpayer. Instead, the amount paid by the taxpayer in respect of such expenses was part of the cost of the building.

Schuler v. MNR, 90 DTC 1078, [1990] 1 CTC 2264 (TCC)

It was found that the taxpayers were the beneficial owners of MURB properties during their construction phase and that the construction costs were incurred by the contractor as agent for the taxpayers, notwithstanding that the relevant agreement provided that title did not pass from the contractor to the taxpayers until the taxpayers had paid the purchase price in full. Accordingly, the taxpayers were entitled to deduct soft costs incurred in respect of the properties.

British Sugar Manufacturers, Ltd. v. Harris (1937), 21 TC 528 (C.A.)

A company, which was in financial difficulty, agreed to pay 20% of its net profits for a four-year period to creditors "in consideration of their giving to the Company the full benefit of their technical and financial knowledge and experience". In finding that deduction of these amounts was not precluded by a statutory prohibition against the deduction of payments made out of the profits or gains of a company, Sir Wilfrid Greene, M.R. stated (pp. 545-546):

"If a person purchases a share of profits, of course the profits paid to that person cannot be deducted ... . Now in the present case there is nothing approaching a purchase of a share of profits in that sense. It is not cash that passes in exchange for these profits; it is services, and the badge of such a contract is remuneration for services ..."

Union Cold Storage Co., Ltd. v. Adamson (1931), 16 T.C. 327 (H.L.)

The taxpayer leased lands and premises for a quarterly fixed rent subject to a proviso to the effect that if its profits for a calendar year were insufficient to make payments of certain interest and dividend payments, the rent would be abated to the extent of the deficiency. The Inland Revenue was unsuccessful in an assertion that the rental payments made by the taxpayer (including, for one year, rent in an abated amount) were non-deductible as being in the nature of a distribution of profits. Lord Warrington stated (p. 331):

"Whatever is the rent, after the application of that rebate, is still to be paid, and it seems to me it still remains an expense necessarily incurred in earning the trading profits of the Company."

Administrative Policy

AD-18-01: Taxable Benefit for the Personal Use of an Aircraft

non-deductibility where personal use of corporate aircraft by shareholders

After noting the distinction between personal use of a corporate aircraft qua employee and qua shareholder, CRA stated:

Where the benefit was conferred on account of shareholdings, the personal use portion of the aircraft’s operating expenses and capital cost expenses will be denied to the corporation, or related entity that incurred the expenditures, by virtue of paragraph 18(1)(a) of the ITA. To the extent that the benefit was conferred on account of employment, the operating and capital costs of the aircraft will generally be deductible to the employer. It is a question of fact whether the taxable benefit from the personal use of an aircraft was conferred on the individual on account of shareholdings or on account of employment.

1994 A.P.F.F. Round Table, Q. 9

"In the case of gift certificates given by a corporation to its clients, in order to ensure that the expense claimed is valid and that the amount has been accounted for or declared by the recipient, the Department requires, inter alia, the names and addresses of the client recipients, the date on which the gift certificates were given to them and the value of the gift certificates. If all this information is not available, deduction of all or part of the cost of the gift certificates must be disallowed."

88 CR - Q.60

Except where s. 7(3) is applicable, the issue of shares from treasury will generally represent the payment of an otherwise deductible expense.


Dionne, "Employee's Expenses for Setting Up Pension Plan Are Not Allowed as Deduction", Taxation of Executive Compensation and Retirement, May 1990, p. 282

RC's view that RRSP fees are deductible apparently does not extend to employer-sponsored retirement savings vehicles.