Paragraph 18(1)(a) - General limitation

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.”)

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.

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.

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".

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".

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.

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.

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 ..."

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."