Start-Up and Liquidation Costs


Greenway v. Canada, 96 DTC 6529 (FCA)

Various conditions contained in an agreement for the acquisition of a MURB development by co-investors including the contractor's undertaking to obtain zoning and planning permissions, arrange financing, obtain a MURB certificate and convey title, did not represent conditions precedent the non-fulfilment of which would result in nullity of the agreement. Accordingly, various soft costs incurred by the investors after the effective date of the agreement were currently deductible by them.

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Tax Topics - General Concepts - Effective Date 72

MNR v. Poulin, 96 DTC 6477, 204 N.R. 376 (FCA)

business does not cease if still dealing with consequences of business acts

Before finding that a real estate agent could not deduct legal expenses incurred in defending a suit alleging fraud and misrepresentation while negotiating a real estate transaction, and with the damages being paid by the agent three years after he ceased to act as a broker, Marceau J.A. stated that the agent “cannot be considered to have ceased his activities as a broker as long as he was engaged in completing the things he had done in carrying on his profession, even though at that point he was no longer carrying on business and could no longer act on behalf of clients.”

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Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees fees incurred in unsuccessful defence of damages claim are deductible if sued-upon conduct necessary for profession's conduct 140

Duthie Estate v. The Queen, 95 DTC 5376, [1995] 2 CTC 157 (FCTD)

The taxpayer commenced to use personal-use capital property in connection with a real estate development business at the time he made a decision to proceed with the development of the property as a condominium project and retained architects, project managers and other professionals to assist with the development plans.

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Tax Topics - General Concepts - Estoppel 87
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) contradictory assessments may be necessary 99
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) change of use when project manager retained 130

Fearn v. The Queen, 95 DTC 5052, [1995] 1 CTC 127 (FCTD)

The taxpayer acquired an island with the intention of developing an observatory resort on the site for amateur astronomers and built a cottage, jetty and windmill on the property to this end. However, before proceeding further, he abandoned the project due to potential liability concerns and agreed in a separation agreement with his wife to sell the island.

In concluding that the associated expenses (primarily interest expenses) were non-deductible notwithstanding that the taxpayer did not make any personal use of the island and ultimately established a profitable observatory resort in Arizona, Joyal J. found that the project never went beyond the preparatory stage, that it did not have a reasonable expectation of profit and that the disallowed expenses did not relate to a business.

Merchant v. The Queen, 84 DTC 6215, [1984] CTC 253 (FCTD)

Expenditures incurred by the taxpayer in an unsuccessful attempt to gain the leadership of the Saskatchewan Liberal Party were non-deductible. Although Reed, J., was prepared to proceed on the assumption that his earnings as party leader, if he had won, would have been income from a business, she basically accepted the Crown's contention that the campaign expenses were too remote from the amounts that later would have been paid to him as party leader. There was a lack of continuity between the activity of running for the leadership and operating as leader, and it was not in the hands of the leadership candidate to determine whether he would ever get into the business of being leader.

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Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Office specified amount per sitting may be sufficient 102
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions "means" is exhaustive 55

The Queen v. Dorchester Drummond Corp. Ltd., 79 DTC 5163, [1979] CTC 219 (FCTD)

The defendant company bought land with the intention of building a highrise office building thereon, but instead operated a parking lot on the property until a City bylaw prohibited the operation of parking lots in the area. Property taxes were deductible expenses even after the company ceased to derive revenues from the property. The company never entirely abandoned its desire to develop the land as a revenue producing property, and it derived interest from loans (the making of loans being part of its business).

The Queen v. Huxtable, 77 DTC 5251, [1977] CTC 364 (FCTD)

An amount paid by the taxpayer ("Bedford") to the purchaser of its only asset - a ship - to give the purchaser an allowance in respect of the anticipated cost of a quadrennial survey which it might be required of the purchaser to have done, was non-deductible. "[T]he amount was not allowed or paid to enable Bedford to continue to operate the ship, and the transaction in which the amount was allowed or paid was not a transaction in the course of the business. It was a transaction that disposed of the assets employed in the business and put an end to it."

MNR v. M.P. Drilling Ltd., 76 DTC 6028, [1976] CTC 58 (FCA)

The taxpayer was incorporated in 1963 for the primary purpose of marketing liquified petroleum gases in the Pacific Rim, and incurred substantial losses due to substantial expenditures on feasibility studies before it was determined, over two years later, that carrying out the original plan would not succeed, and the taxpayer commenced a profitable drilling business.

Urie, J. stated: "I cannot agree that because the Respondent had not generated any revenue, let alone profit, makes it any less 'the process of operation of a profit making entity' ... . [I]f the expenditures were made for the purposes of earning income ... they were proper expenses to be chargeable against income whether or not any income resulted from such expenditures."

The Queen v. MacIntyre, 75 DTC 5240, [1975] CTC 429 (FCA)

ACTRA, of which the taxpayer was a self-employed member, entered into agreements with various producers under which the producers made contributions to ACTRA's disability insurance plan on behalf of the members which the producers engaged. The premiums paid on behalf of the taxpayer were not deductible because they were incurred for assurance in respect of a period of total disability, which would entail a period of suspension or termination of his business, and they accordingly were not insurance against loss of earnings from the business.

See Also

Tournier v. The Queen, 2018 TCC 229 (Informal Procedure)

file storage fees incurred after business cessation were deductible

The taxpayer was a retired member of the Nova Scotia Barristers Society who ceased to practise law in 2013. Her claims in her 2015 return for file storage fees of $1200 were denied on the basis that she had no income from the provision of legal services and operated no business in that year. In allowing her cliams, Bocock J stated (at paras. 12 and 13):

… [T]he Lawyers Insurance Association of Nova Scotia (“LIANS”). LIANS recommends that client files be retained, depending on type, for 3 to 25 years. Moreover, there are elaborate and precise directives for files which may be scanned, may be destroyed and must be kept indefinitely. … [T]he files should be readily available where necessary and needed to mitigate legal liability arising from premature destruction, mindful of relevant limitation periods. …

Both the past accrual of future record keeping services, the file storage, and the need to protect presently her insurance coverage for past legal services all represent the enduring and current provision of legal services (“continuing services”) beyond the temporal period in which the income was received: the year in which it was otherwise earned and recorded. Put another way, the continuing services provided by Ms. Tournier in 2015 were referable and connected to the income earned in previous years. This is consistent with the notion of unavoidable expenses necessarily expended in future years referable to previous income contemplated in the cases of Poulin, Raegele and Langille.

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Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose expenses incurred after business cessation were deductible 86

Hébert v. The Queen, 2018 CCI 48

attempted sale of assets previously used in an active business represented the continued carrying on of that business

In the 12 months preceding its dissolution, essentially the only activity of a corporation was unsuccessful attempts to sell of its remaining stock of equipment. Ouimet J found that since such stock related to its previous commercial activity of selling (and repairing) such equipment, the efforts in trying to sell that stock represented the continued carrying-on of that business, notwithstanding that no sales were made. Accordingly, the loss sustained by him on the corporation’s dissolution qualified as a business investment loss.

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Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation corp qualified as SBC where only business activity was unsuccessful efforts to sell its stock of equipment 362
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) 147

Standard Life Assurance Company of Canada v. The Queen, 2015 DTC 1113 [at 687], 2015 TCC 97

starting a business entails taking "serious and continuous steps" to implement the "essential elements" of the business's goals

Prior to the introduction of mark-to-market rules in 2007, the taxpayer (which to that point only carried on its life insurance business in Canada) attempted to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which provides that where a Canadian life insurer also carried on business in another country and "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.

Pizzitelli J found that the taxpayer did not commence to carry on business in Bermuda until 2008 when it "started serious efforts to be able to carry out a life reinsurance business, including the essential elements of sales, marketing, and hiring qualified staff, all of which in fact led to the Appellant applying for and receiving changes to its licence which allowed it to do business with unrelated persons… result[ing] in the execution of at least 5 life reinsurance contracts with unrelated parties from 2009 to 2011." Conversely, desultory and isolated acts before then including hiring a bookkeeper (purportedly the general manager but with no underwriting experience and very little to do) and entering into two reinsurance treaties with affiliates in March 2007 (but with one of them backdated to December 2006) and obtaining a licence whose scope was inconsistent with that of the purported business "were designed to give the appearance the Appellant was carrying on such business for profit, when in fact, its only supportable purpose was to obtain a tax benefit" (para. 160), namely, to mitigate "the pending changes to the Act as a result of mark to market rules effective January 1, 2007 that would have required it to realize a capital gain on its investment assets up to their fair market value" (para. 161). Accordingly, "its actions were nothing more than ‘window dressing'" (para. 156), i.e., "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayers intention for entering into the transaction" (para. 158).

See summary under s. 138(11.3).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Window Dressing acts purporting to evidence a Bermuda business were window dressing 205
Tax Topics - Income Tax Act - Section 138 - Subsection 138(11.3) property of a newly multinational insurer is neither "designated" nor "not designated" in the preceding year, but rather outside the scope of s. 138 604

Morris v. The Queen, 2014 DTC 1149 [at 3481], 2014 TCC 142 (Informal Procedure)

rental operation commenced with repairs and touch-ups

In August 2009 the taxpayer's wife purchased a home, which had been their principal residence, from the taxpayer in order to convert it to rental property. They implemented substantial touch-ups on the property and rented it for four months starting in December 2010 before it was sold in 2011. The taxpayer claimed losses for 2009 and 2010, which arose from deducting (post-acquisition) mortgage interest, property taxes, insurance and utilities. The Minister denied the deduction of these expenses (whose claiming by the taxpayer rather than his wife was not discussed) on several grounds, including that a rental operation had not commenced until towards the end of 2010.

In allowing the taxpayer's appeal, Campbell J noted the concession in the Minister's pleadings that the taxpayer and his wife were renovating the property between August and December 2009.

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Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) repairs/cosmetic touch-ups 151

Beauregard v. The Queen, 2014 DTC 1015 [at 2560], 2013 TCC 287 (Informal Procedure)

aborted office leasing business was still a source of business losses

The taxpayers acquired a lot in order to build a health complex. Unable to secure any lease commitments, they abandoned the project and sold the lot. The Minister argued that the taxpayers had not yet started up a business, and that their sole purpose in acquiring the lot was a subsequent sale of the property.

Favreau J found that the taxpayers seriously intended to build and operate and office building. The loss on the lot itself was capital in nature, but the related expenses were deductible as business losses.

Tri-O-cycles Concept Inc. v. The Queen, 2013 DTC 1084 [at 467], 2009 TCC 632

lengthy development period preceding first revenue

The taxpayer was wholly owned and directed by an individual ("Brisson"), and employed Brisson at $50/hour to develop prototypes of pedal and steering systems for adult tricycles. The Minister disallowed the taxpayer's claimed scientific research and experimental development credits, as well as claimed input tax credits and business expenses, on the basis that the taxpayer's activities were merely preliminary to setting up a business - that it had not yet put into place a structure for the business it wished to carry on.

Paris J found that the taxpayer had been carrying on a business and allowed the taxpayer's appeal. He stated (at para. 24):

The fact that the Appellant had no revenues in 2002 and 2003 is not determinative of whether a business had begun operating. It must be kept in mind that by its very nature the Appellant's business, that is, the development of a new product, involves a longer start-up time than is necessary for other kinds of businesses.

Many of the Minister's arguments related to whether operations were carried on in a commercial manner. Stewart establishes that commerciality is only relevant where the business has a personal element (para. 26).

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Tax Topics - Income Tax Act - Section 67 66

Kuhlmann v. The Queen, 2011 DTC 1297 [at 1675], 2011 TCC 410 (Informal Procedure)

The taxpayer and his wife carried on a consulting business through a partnership. They taxpayer subsequently became employed by the partnership's principal client, but his employment was terminated after a change in management. Various expenses incurred after the termination were deducted in computing the losses from the partnership. In denying these deductions, Bowie J. found that the partnership had ceased to be a source of income as (para. 7)

There is no commerciality or businesslike activity here. There is simply someone looking [unsuccessfully] for work.

Walsh v. The Queen, 2011 DTC 1249 [at 1419], 2011 TCC 341 (Informal Procedure)

The taxpayer, who had degrees in economics, business and accounting, retired from chartered accountancy for health reasons and proceeded to set up a securities trading business. He spent several years training, and researching technology and tools. Hershfield J. denied the taxpayer's purported business losses for those years. While it was clear that the taxpayer's intentions of beginning a business were genuine, he was well qualified, and the expenses were reasonable, Hershfield J. found (at para. 11) that "a continuing and underlying theme in all of Mr. Walsh's testimony [was that] Mr. Walsh was in school throughout the period under appeal." The taxpayer had conducted a few trades in 2006, but the total amounts were in the hundreds of dollars and were essentially "practice exercises" (para. 12).

Accordingly, the taxpayer's activities "did not yet reach the level of commerciality to justify a finding that a business had commenced" (para. 18).

Génier v. The Queen, 2011 DTC 1058 [at 317], 2011 TCC 641

The taxpayer ceased regular operation of her retirement home business, and took five years to sell the property. She deducted related expenses for that period, including interest, property taxes and utilities. In allowing the deduction of these expenses, Boyle J. remarked at para. 29:

It is simply incontrovertible that the general rule is that business closing costs are deductible business expenses.

And at para. 32:

Once it is established that [taxpayers'] business or investment activity is a source of income from a business or property, their risk/reward analysis, risk tolerance, judgment and decisions are not generally open to be challenged by the CRA... .

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Tax Topics - Statutory Interpretation - Business Judgment 196

Hayter v. The Queen, 2010 DTC 1176 [at 3395], 2010 TCC 255

The taxpayer sustained a total loss with respect to a joint venture to buy laptops and resell them at a gain, given that a purported vendor of the laptops was engaged in fraud. The taxpayer's loss was a fully deductible loss given that he and his co-venturer attended meetings with the seller's representatives and were not mere passive investors.

However, in another transaction with the same vendor, the loss was a capital loss and not a fully deductible loss given that the taxpayer played no active role and had no knowledge of the details of the transaction, which suggested that there were no indicia of a business.

Langille v. The Queen, 2009 DTC 1431, 2009 TCC 398

In 1988 the taxpayer decided to discontinue the operation of the largest dairy farm in Nova Scotia and over the following period of over 10 years disposed of the land in a piecemeal fashion while earning modest sharecropping revenues and incurring losses. His losses for the 1999 to 2001 taxation years were deductible in computing his income given that "as a general rule, there was no reason that business shut down or termination expenses incurred post-closure of operations cease to be deductible business expenses in ordinary commercial and business-like circumstances" (para. 14).

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Tax Topics - Income Tax Act - Section 9 - Timing 45

Caballero v. The Queen, 2009 DTC 1360, 2009 TCC 390

fledgling business should entail "serious and reasonable continuous efforts to begin normal operations"

Various professional expenses that the taxpayer incurred with respect to a proposed venture of providing on-site mobile message therapy services to corporate clients through massage buses were found to have been incurred in connection with a business given that (para. 11):

In this case it seems clear that Mr. Caballero's business efforts went well past the contemplation stage and he was pursuing the essential preliminaries, not merely hopefully reviewing business possibilities. He was making serious and reasonable continuous efforts to begin normal operations.

However, given that (para. 14) expenditures for the creation of a business entity or structure are on capital account, they qualified as eligible capital expenditures rather than as fully deductible expenses.

Dubois c. La Reine, 2007 DTC 1534, 2007 TCC 461 (Informal Procedure)

Before going on to find that legal fees incurred as a result of a cancellation by the taxpayer of an agreement to purchase a building were capital expenditures, Paris J. rejected a submission that they should not be considered to have been incurred in connection with a source of business. A business commenced where some significant activity was undertaken as "an essential preliminary to normal operations" (para. 14) and (at para. 16) "in the case at bar, the Appellant promised, in an enforceable contract, to purchase the building, and that is an essential preliminary to the operation of the property".

Humphrey v. The Queen, 2006 DTC 2730, 2006 TCC 168 (Informal Procedure)

The taxpayer was assessed for amounts that she embezzled from her employer in 2000, declared bankruptcy because of this claim against her and, after her discharge (without having paid any of the assessment), began pursuant to a court order paying back to her employer the amount she had taken. In finding that the taxpayer was not entitled to deduct these amounts in computing her income from a business, Bowman C.J. stated (at p. 2733) that "I start from the premise that income from criminal activity is income from a business" and that (at p. 2734) that it is "settled law that a business continues to be carried on so long as the obligations arising out of the business remain unfulfilled" but went on to state:

"I think it may be a little unrealistic to say that the appellant here continued in 2002 and subsequent years, to carry on the business that she carried on in 1997 to 2000, simply by reason of her complying with the restitution order".

The amounts paid by her pursuant to the restitution order were not deductible in computing her income.

Boulanger v. The Queen, 2003 DTC 1277 (TCC)

A corporation had been incorporated for the purpose of developing a business that offered various services in the automotive field and it had bought land for that purpose, but the only activities carried on by it consisted of the production of preliminary sketches, supported by a construction progress report, for which no contract had been entered into.

As the corporation had not established a sufficient organizational structure to commence activities relating to the operation itself, it did not qualify as a small business corporation.

Raegele v. The Queen, docket 2001-3048(IT)I (Informal Procedure)

deductible repair expenses incurred after rental operations cesased

In finding that the costs of restoring a house, which had been left by the tenants in filthy condition and after rental operations had ceased, were deductible, Miller J stated (at para. 22):

[C]ommon sense and ordinary commercial and accounting principles support the Appellant's position that expenses incurred, during a wind-up phase of a rental property business, to repair damages caused by a former tenant, are legitimate deductible business expensese.

Harquail v. The Queen, 99 DTC 1318 (TCC)

Whether shares sold by the taxpayer qualified as qualified small business corporation shares turned on whether a subsidiary was engaged in an active business at the relevant times. The subsidiary had rights to a waterfall site that could be developed for the production of electricity. Although various activities, such as negotiations, took place during the relevant period, Garon T.C.J. found that the subsidiary had not actually started to carry on business given that in order for a decision to be made to proceed with the proposed venture, it was necessary first to obtain the agreement of Hydro-Quebec to purchase electricity at an acceptable price, which had not yet occurred.

MacDonald v. The Queen, 98 DTC 1177 (TCC)

The taxpayer, who worked as a full-time locomotive engineer, was not able to deduct losses from a proposed sawmill operation given the length of time it took to commence operations (over 10 years, and after the taxation years in question) the undercapitalization of the project, and the failure during the years in question to hire the necessary manpower to commence operations.

Neeb v. The Queen, 97 DTC 895 (TCC)

The taxpayer incurred legal expenses in defending against narcotics charges. Before going on to find that these expenses were non-deductible on other grounds, Bowman T.C.J. rejected a Crown submission that they were non-deductible because they were incurred after the narcotics business had ceased, stating (at p. 903) that the Emerson case (86 DTC 6184) had "no application to the case of liabilities that arise directly from a business that was carried on but that are asserted after that business had ceased".

Samson et Fréres Ltée v. The Queen, 97 DTC 642 (TCC)

Dussault T.C.J. found that the taxpayer, which had carried on a meat processing business, had ceased to carry on that business by the second anniversary of the destruction of virtually all its equipment by fire because no decision had yet been made as to whether to acquire the assets and personnel necessary to start up again. Accordingly, various expenses were non-deductible. He stated (at p. 645):

"... For a business to exist and to have commenced, one must have gone beyond the stage of merely intending to commence it. ... The essential elements relating to the very structure of the business, that is the necessary financing, assets and labour, must have been sought out and brought together before it can be stated that the business exists and that it has commenced."

Heinze v. The Queen, 97 DTC 5219 (FCTD)

The taxpayer acquired farmland and buildings for $130,000 and rented the farm out at $2,500 per year with the intention that they would not farm the land until after a mortgage on the farm for $80,000 was paid off in approximately three years' time. S.20(2) applied to deny the deduction of interest and property taxes on the property given that they were not in the farming business in the relevant years.

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Tax Topics - Income Tax Act - Section 18 - Subsection 18(2) 70

Vogel v. The Queen, 96 DTC 1321 (TCC)

A corporation which previously had earned income from commissions by negotiating contracts for various commodities and that prior to the taxation year in question had become insolvent and reported to the Alberta Corporate Tax Administration that it had ceased operations nonetheless was found to be carrying on business because it still had assets, liabilities and contracts to pursue and some minimal expenses had been incurred as it tried to negotiate contracts on a local basis in Alberta. Accordingly, losses sustained by the taxpayer on loans made to the corporation qualified as business investment losses.

Grocott v. The Queen, 96 DTC 1025, [1996] 1 CTC 2311 (TCC) (Informal Procedure)

The taxpayer, after moving to Toronto, made vigorous but unsuccessful attempts attempts to rent out his former principal residence in Sarnia. In finding that various expenses of the taxpayer such as utilities, insurance, realty taxes and advertising were non-deductible, Bowman T.C.J. found (at p. 1026) that the taxpayer's "proposed rental operation never got off the ground" and that "a mere intention to rent it out does not, in itself, convert an asset originally acquired for personal reasons to a rental property, even if attempts to rent it are made".

Solnicka v. The Queen, 95 DTC 652 (TCC)

Although the taxpayers were unsuccessful in renting out a house in their 1989 year, they were able to deduct related expenses incurred in the year up till the date on which they listed the house for sale. The expenses incurred thereafter were characterized as capital outlays for the maintenance of the property with a view to its sale and, therefore, were non-deductible.

Watt Estate v. The Queen, 95 DTC 423 (TCC)

Boarding fees, training fees, entry fees and transportation expenses incurred by the taxpayer for the purpose of developing her teenage daughter's abilities as an equestrian show jump rider were found to be personal in nature rather than being incurred in relation to the development of a show jumping, training and stable business of the taxpayer.

James v. The Queen, 95 DTC 394, [1995] 1 CTC 2024 (TCC)

After the taxpayer entered into an agreement entitling him to sell advertising and distribute a specified magazine in his particular area, nothing further was done by him or by a marketing company that supposedly was to sell advertising on his behalf. Accordingly, a sum that he paid as an advance against royalties did not relate to any business carried on by him and, therefore, was non-deductible.

Gulf Canada Resources Ltd. v. The Queen, 95 DTC 5189, [1995] 1 CTC 334 (FCTD), partially rev'd 96 DTC 6065 (FCA).

Before going on to find that the taxpayer's interest in the Syncrude project did not constitute a "source" of income for its 1978 taxation year, McKeown J. stated (at p. 5202):

"In my view, a 'source' of income comes into existence only when all of the activities making up the 'source' are being carried on ... . I find that in 1978 Syncrude was not capable of being operated on a scale which could be expected to be profitable in 1978 or the near future."

Words and Phrases

Gartry v. The Queen, 94 DTC 1947, [1994] 2 CTC 2021 (TCC)

In finding that the expenses of various categories of work done on a vessel before the vessel sank and before the taxpayer acquired title to it, were deductible except to the extent that they were capital expenditures, Bowman T.C.J. stated (p. 1949):

"... Where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started. ... The appellant had borrowed money, agreed to buy the boat, and arranged for a crew, obtained the necessary licences, arranged with a substantial number of owners of boats with "G licences" to utilize the services when the boat became available, arranged and paid for modifications to be made to the boat and placed insurance. In my view the business had been commenced and was well underway when the expenses in question were incurred."

Fortin v. MNR, 94 DTC 1603, [1993] 2 CTC 3009 (TCC)

Expenses claimed by the taxpayer as soft costs in respect of condominium investments were found to have been incurred prior to the date of acquisition of the condominiums (notwithstanding that they were paid as "adjustments" at the time of closing), with the result that they were non-deductible to the taxpayers.

ELB Productions Ltd. v. MNR, 91 DTC 1466, [1991] 2 CTC 2661 (TCC)

In finding that a franchise fee paid by the shareholder of the taxpayer prior to its incorporation was not deductible by the taxpayer, Bowman J. noted (p. 1469) that it was not:

"suggested that the payment was made as agent for the as yet non-existent Appellant, assuming such a relationship can exist as a matter of law. Even if that evidentiary hurdle had been surmounted I would still have been obliged to dismiss the appeal on the basis that the payment was essentially anterior to the commencement of a business which, as it turned out, never did commence (see Daley v. MNR, 50 DTC 877)."

M.R.T. Investments Ltd. v. The Queen, 75 DTC 5224, [1975] CTC 354 (FCTD), aff'd 76 DTC 5156 (FCA)

Walsh, J. stated obiter that where a company has been incorporated but does not actually commence operations on any extensive scale until some years thereafter, it is not carrying on an active business.

Godden v. A. Wilson's Stores Ltd. (Holdings) (1962), 40 T.C. 161 (CA)

The taxpayer paid the sum of £1,900 to the manager of its rubber plantation a few days before it completed the sale of the rubber plantation to arm's length purchasers. Such sum was paid in settlement of the manager's right to six months' notice of termination of his employment contract.

In finding that this sum did not represent "money wholly and exclusively laid out or expended for the purposes of the trade", Upjohn L.J. stated (p. 174):

"[T]his payment was not made for the purposes of the trade they were going to carry on; it was to get rid of a possible lawsuit after discontinuance."

Clevite Development Ltd. v. MNR, 61 DTC 1093 (Ex. Ct.)

Royalty income of the taxpayer from foreign patents was found to be income from a business as opposed to a mere property holding notwithstanding that it had no business operations to speak of, because previously the patents had been held in connection with a manufacturing operation that the taxpayer had disposed of and because the licences required the taxpayer to assist the licensees (although, in fact, such support was provided by a foreign parent of the taxpayer).

C.I.R. v. Anglo Brewing Co., Ltd. (1925), 12 T.C. 803 (K.B.D.)

Prior to ceasing trading operations on November 30, 1921, the taxpayer made (or made provision for the payment of) various ex gratia payments to its employees. In finding that these amounts were not deductible, Rowlatt J. indicated (at p. 813) that it could not be found that "the payments were made for the purposes of the trade, because that must mean for the purpose of keeping the trade going, and of making it pay" whereas here "the purpose was to wind it up".

Administrative Policy

3 December 2015 External T.I. 2015-0618981E5 - Deductibility of run-off insurance premiums

post-retirement insurance premiums deductible where relate to pre-retirement advice

Professionals who carried on a business will, upon retirement, pay premiums for “Run-off Insurance” to address any negligence claims made post-retirement. Would the premiums be deductible from the professional’s business income in the year paid, even though the professional may no longer have a continuing source of income? After referring to Poulin, CRA stated:

[T]he fact a taxpayer no longer carries on a business will not preclude the taxpayer from deducting Run-off Insurance premiums in the year they are paid, provided the insurance only relates to advice or work the professional did pre-retirement during the ordinary course of the professional’s business operation.

24 April 2012 Internal T.I. 2011-0400671I7 F - Honoraires professionnels

fees incurred by individual before intention to form a corp did not qualify as pre-incorporation expenses

Corporation A was owned equally by a holding company for Mr. B (Corporation B), Mr. A and Mrs. A. In the context of a dispute with Mr. and Mrs. A, Mr. B retained Advisor A through Advisor A’s corporation (Corporation C) to provide professional services with a view to buying out Mr. and Mrs. A and then engaged Fonds de Solidarité FTQ ("FTQ") to provide a financing commitment. After Mr. B sent Mr. A and Mrs. A an offer to acquire their shares, the latter invoked a shotgun clause entitling them to instead purchase Corporation B’s shares on the same terms.

Mr. A, Mrs. A and Mr. B then agreed to a reorganization of Corporation A which inter alia resulted in some of its shares now being now being held by a newly-incorporated corporation of Mr. B (Corporation D) and some held by Mr. B directly, with those same shares then being disposed of by them to Mr. and Mrs. A.

Corporation C invoiced Corporation D for its success fee, invoiced Mr. B, and a law firm (Advisor B) that initially had been retained by Mr. and Mrs. A billed Corporation D for professional services rendered pursuant to Mr. B’s prior agreement (in connection with the agreement with Mr. and Mrs. A respecting the reorganization) to assume a portion of the firm’s fees. Can Corporation C recognize such fees?

After referring to s. 123.7 et seq. pf the Quebec Companies Act (providing inter alia that “A company is bound by any deed performed in its interest before its constitution provided it ratifies the deed within 90 days after its constitution”), the Directorate stated:

Where there is no legislation similar to the Quebec Companies Act, the Canada Revenue Agency ("CRA") will normally accept newly incorporated corporation recognizing transactions prior to its incorporation if the … conditions, as set out in … IT-454 [para. 3] are met … .

[I]t may be difficult to claim that these expenses can be deducted by Company D, on the grounds that it is not clear that Mr. B intended, when entering into the agreements with these two parties, to form Company D nor that the latter was the entity that was to deduct the fees. …

With respect to the fees paid to Advisor B, the situation is, in our view, somewhat different because, based on the facts you have provided, Corporation D was formed as soon as the mandate was granted to Advisor B. At that level, we are more inclined to think that the fees paid to Advisor B may be recognized by Corporation D, or at least that portion of the fees attributable to shares of Corporation B held by Corporation D.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) meaning of “benefit” 153
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) tax planning fees paid to joint counsel qualified as a disposition expense 137

IT-364 "Commencement of business operations"

IT-454 "Business transactions prior to incorporation"

IT-417R "Prepaid Expenses and Deferred Charges" under "Pre-Production or Start-Up Cost of a New Business"


Walker, "Adoption of Pre-Incorporation Expenses", Canadian Current Tax, December, 1989:

"it is clear that IT-454 represents a departure from the existing caselaw."

Accounting Pronouncements

CICA Emerging Issues Committee, EIC-27 "Revenues and Expenditures During the Pre-Operating Period"