Section 4

Subsection 4(1) - Income or loss from a source or from sources in a place

Administrative Policy

7 June 2017 CPTS Roundtable, 2017-0695131C6

Q.5 - application of Scales test to determining whether there is a separate business

Although CRA noted that the determination of whether a person is carrying on a single business or multiple separate businesses is a question of fact, it indicated that in the context of Reg. 1101(1):

We do acknowledge that, in the oil and gas industry, it is common for businesses to acquire properties and dispose of non-core properties on a continual basis. Generally, the acquisitions and dispositions during the normal course of business would not be considered acquisitions or dispositions of separate businesses.

Before so concluding, CRA stated:

There are substantial jurisprudence and pronouncements from the CRA (including IT-206R) which would assist in this determination. The case Scales (H.M. Inspector of Taxes) v. George Thompson & Company, Limited (1927), 13 TC 83 (Eng. KB) (“Scales”) sets out the test for the determination of whether certain operations are a separate business. The test in this case has been adopted by the Canadian courts. Also, the Federal Court of Appeal in Du Pont Canada Inc. v. The Queen, 2001 DTC 5269 (FCA) set out a number of additional factors for this determination.

Paragraph 2 of Interpretation Bulletin IT-206R draws from the Scales case and states that sufficient interconnection, interlacing or interdependence between the operations would point to the operations being the same business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Proceeds of Disposition Q.1 - Daishowa extends beyond reforestation and reclamation obligations only on a case-by-case basis 213
Tax Topics - Income Tax Act - Section 66 - Subsection 66(15) - Canadian Resource Property - Paragraph (d) Q.2 - a Canadian resource royalty interest requires a right to “take production” 135
Tax Topics - Treaties - Income Tax Conventions - Article 13 Q.3 - Canada-U.K. Treaty does not exempt shares deriving their value from Canadian oil and gas licences – even where the Canadian business is carried on “in” them 193
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) Q.4 - by analogy to mining, hydrocarbons may be similar properties 348
Tax Topics - Income Tax Regulations - Regulation 1101 - Subsection 1101(1) Q.5 - normal course dispositions of oil and gas properties generally are not of a separate business 131
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 26 Q.7 - refinery catalysts are Class 26 property 87
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 49 Q.8 - taxpayers generally have the documentary evidence on hand to allocate costs between pipelines and pipeline appendages 117

Paragraph 4(1)(a)


Where a taxpayer has a particular source of income, such as a business, s. 4(1)(a) requires among other things that the income from that source be computed only on the basis of taking deductions that may reasonably be regarded as being wholly applicable to that source. (The provision also refers to the potentially intractable concept of there being more than one source of income "in a particular place," and stipulates the same wholly-applicable rule respecting deductions in computing income from those sources in the particular place.) The Interprovincial Pipe Line case indicated that the purpose of what now is s. 4(1)(a) was "to prevent a taxpayer who might be engaged in two separate businesses not related to each other by reason of their nature from taking into account losses or expenses incurred in one in computing the taxable income of the other." (Note that s. 4(3) effectively reversed the actual finding in this case, although not this dictum.)

Where the taxpayer is earning business income, the application of s. 4(1)(a) will depend on whether the taxpayer is viewed as carrying on more than one business. Various cases addressing this issue are discussed below and at s. 111(5)(a). One of the early Canadian cases is Utah, where two operations were found to be separate businesses because there was no inter-connection, interlacing or interdependence of the two operations. This interconnection test is adopted in IT-206R. Conversely, in Du Pont, manufacturing divisions were found to be one business in light inter alia of the centralized management and financing of the divisions.

Operations of both selling and leasing equipment of the same general type have been found to be one business (CAE, Canadian Kodak) even where, for accounting purposes, profits from the two operations were separately shown (Gloucester). An operation of leasing two lines of products was also found to be a single business (Hickman Motors). An operation of using equipment (e.g., computer equipment) to the public when such equipment is not used in a business (e.g., an insurance business) of the taxpayer can constitute a separate business (London Life).

It is likely that operations, of the same character and with common management, carried on at different locations will be found to be one business (see Randall).

Expenses incurred with a view to potentially earning income from a business generally will be considered to applicable to that business even though, with the benefit of hindsight, they did not contribute to the success of that business (e.g., a loss from fraud, see Ruff).


Dupont Canada Inc. v. Canada, 2001 DTC 5269, 2001 FCA 114

centralized operation

A sale by the taxpayer, a manufacturer, of most of the assets of its explosives manufacturing operation in Nipissing was found not to be a sale of a separate business in light of the fact that such division and other manufacturing operations were operated through the provision (principally in Mississauga) of centralized services, including all borrowing and financing, cash management, foreign exchange management, the granting of credit, invoicing of customers, collection of accounts, purchasing, processing of supplier invoices and preparation of expense reports. It also was important that the Du Pont brand name and trade marks were used consistently for all of the taxpayer's products, but they ceased to be an attribute of the explosives manufactured at the explosives plant after the sale; and that there was cross-selling of products of the different divisions. Because the depreciable assets that were sold were included in the same class as depreciable assets retained by the taxpayer, the recaptured capital cost allowance realized by the taxpayer was reduced accordingly.

Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336, [1998] 1 CTC 213

integrated farming equipment and auto leasing

The taxpayer, which at all relevant times had been engaged in the leasing of cars and trucks, received on the winding-up of its subsidiary heavy duty equipment that the subsidiary had been renting-out, and then transferred that same equipment to another subsidiary of the taxpayer five days later. L'Heureux-Dubé J. found on the evidence that the taxpayer during that five-day period was engaged in one business, rather than two businesses, i.e., "a single integrated business of sales, servicing, leasing and rental of cars and trucks, and of construction, forestry and rock-drilling equipment".

Engler v. The Queen, 94 DTC 6280, [1994] 2 CTC 64 (FCTD)

channels expense deductions

Before going on to find that the taxpayer had a reasonable expectation of profit with respect to one of his businesses for only one of the taxation years in question, Joyal J. stated (p. 6281) that:

"... section 4 of the Act, in establishing the 'sourcing' or 'matching' principle in the determination of any income or loss, limits considerably the more imaginative ways in which a taxpayer may lump all his income from all sources and deduct all his expenses from these sources and consolidate his return accordingly."

Gulf Canada Ltd. [previously Gulf Oil Canada Ltd.] v. Her Majesty The Queen and Gulf Canada Resources Ltd. [previously Gulf Oil Canada Ltd.] v. Her Majesty The Queen, 90 DTC 6622, [1991] 1 CTC 99 (FCTD), aff'd 93 DTC 6123 (FCA)

It was found that ss.124.1 and 124.2 established specific rules for computing income which related to production, and that the general "income from source" rules in ss.3 and 4 accordingly did not apply.

In responding to a submission that "production" simpliciter could not be a "source" of income, Hugessen J.A. stated (p. 6127):

"When Parliament has described 'production' as being a 'source', as it clearly has in sections 124.1 and 124.2, it must be understood as the business of production."

Macmillan Bloedel Ltd. v. The Queen, 90 DTC 6219, [1990] 1 CTC 468 (FCTD)

Interest on employee advances, overdue trade accounts, loans to customers, and working capital advances to subsidiaries, gave rise to income from the taxpayer's logging operations, whereas money on short-term deposits constituted income from a separate non-logging source.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles 16
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) loss on forward contract to lock in Canadian dollar cost of U.S.-dollar borrowing was issue expense 191
Tax Topics - Income Tax Regulations - Regulation 700 - Subsection 700(1) 118

Pe Ben Industries Co. Ltd. v. The Queen, 88 DTC 6347, [1988] 2 CTC 120 (FCTD)

see also C.N.R. v. MNR, 88 DTC 6340, [1988] 2 CTC 111 (FCTD)

An operation of trucking goods and materials from a railway yard to a Syncrude plant pursuant to a 5-year contract was held to be a separate business from the taxpayer's general oil field transportation business.

Excelsior Life Insurance Co. v. The Queen, 85 DTC 5164, [1985] 1CTC 213 (FCTD)

An argument of the Crown, that segregated funds and non-segregated funds of life insurers are to be equated with "sources" of income under s. 4(1), was rejected. The income of the two funds had common sources such as interest, dividends, royalties and rentals.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Scheme 42

Klie v. The Queen, 81 DTC 5061, [1981] CTC 154 (FCTD)

Rentals which a farmer obtained by leasing shorefront lands to tenants who built cottages on those lands, were held to be receipts from his farming business rather than from a separate business.

"[T]his source of casual or incidental income and expenses of his farming business is an example of a commonplace situation that obtains in respect to farming operations on farms bordering on lakes and rivers in Canada."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 31 - Subsection 31(1) 62

Randall v. Minister of National Revenue, 67 DTC 5151, [1967] CTC 236, [1967] S.C.R. 484

The management by the taxpayer and his brother of horse racing activities at tracks in Vancouver and Portland, Oregon were found to be one business:

"The income of that business from the various geographic bases was income from the business as a whole just as the business of a bank or any other enterprise which has branches in many areas remains one business and not many separate businesses, each to be dealt with separately." (p. 5153)

Interprovincial Pipe Lane Co. v. Minister of National Revenue, 59 DTC 1229, [1959] CTC 339, [1959] S.C.R. 763

Before finding that s. 127(1)(av) of the 1948 Act did not apply to require the deduction of interest on general corporate borrowings of the taxpayer from its interest income on a loan to a U.S.subsidiary (so as to deny a foreign tax credit for US withholding tax levied on such interest income), Locke J. stated (p. 1233) that the provision was intended:

"to prevent a taxpayer who might be engaged in two separate businesses not related to each other by reason of their nature from taking into account losses or expenses incurred in one in computing the taxable income of the other."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) corporate-level borrowing did not relate to investment in sub 209

Canadian Kodak Sales Ltd. v. MNR, 54 DTC 1194 (Ex Ct)

The taxpayer, whose business was to purchase photographic equipment from affiliates and sell them to customers, in 1940 acquired the business of another affiliate, which consisted of leasing out "recordaks" (i.e., machines which took reduced photographs and microfilms of documents) to customers for all of the economic life of the recordaks. In 1951, the taxpayer informed its customers that they now could purchase the leased recordaks, and in 1951 and 1952, 40% and 5%, respectively, of the customers did so.

The resulting gains were taxable in light inter alia of the recordak division being part of the taxpayer's business of exploiting photographic equipment.

See Also

Pavages Vaudreuil Ltée v. Agence du revenu du Québec, 2021 QCCQ 3890

an operation of washing, sorting and crushing aggregate was separate from a road construction operation

In addition to being involved in construction (maintenance of roads, streets and bridges), the taxpayer owned several natural gravel quarries and sand pits and processed sand, river gravel, crushed stone and earth for sale to third parties and for use in its construction operations. It purchased three pieces of equipment for use exclusively for the handling of materials already gathered by a cable shovel in connection with the washing, sorting and crushing of the various products.

In order for the purchases to have generated an investment tax credit for Quebec purposes, they were required inter alia to qualify as Class 29 property, i.e., they were required to have been acquired for use primarily in the manufacturing or processing of goods for sale. Under the Quebec equivalent of Reg. 1104(9)(c), “manufacturing or processing” was deemed to exclude “construction."

In finding that this exclusion did not apply because the taxpayer’s construction and processing operations were distinct, Bourgeois JCQ noted that the operations’ respective customers differed, the processing occurred at sites distinct from the situs of the construction projects, only 27% of the processed product was used in the construction operation, the two operations could have been operated independently of each other, and there was separate accounting. The appeal was allowed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 1104 - Subsection 1104(9) - Paragraph 1104(9)(e) operation of washing, sorting and crushing aggregate was separate from operation of extracting the aggregate 264
Tax Topics - Income Tax Regulations - Regulation 1104 - Subsection 1104(9) - Paragraph 1104(9)(c) operation of washing, sorting and crushing aggregate was separate from a road construction operation in which 27% of the product was used 263

Ferme Lunick Inc. v. Agence du revenu du Québec, 2020 QCCQ 1703

a farm with a substantial potato-bagging operation carried on a single farming business

The taxpayer operated a four-employee 1500-acre farm that produced potatoes, grains, market garden and dairy products, as well as a 10+-employee processing operation housed in four buildings on the farm, that purchased, sorted, washed and bagged potatoes before their sale. Whether various equipment purchased for use in the processing operation qualified for a tax credit for purchases of Class 29 property used in manufacturing or processing turned on whether an exclusion, from what otherwise would qualify as manufacturing or processing, for the carrying on of a farming or fishing business, applied.

Forlini JCQ confirmed the ARQ position that this exclusion applied given that this was a “vertically integrated” business in which the farming operation “sold” all of its potato production to the processing operation, carried on at the same location, and the processing operation acquired 90% of its purchases from the farming operation. The facts that there was separate accounting for the two divisions, and that each division had a substantial scale of operations, rather than being merely ancillary to the other, did not carry the day. Forlini JCQ concluded (at para. 85, TaxInterpretations translation) “that Lunick Farm carries on a single farming business.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Manufacturing or Processing - Paragraph (a) potato sorting, cleaning and bagging operation was integrated with the farm on which it was housed 321

Coop de travailleurs en serres Belle-de-Jour v. Agence du revenu du Québec, 2019 QCCQ 6609

use of greenhouses to further grow flowers before use in making floral arrangements was separate from the taxpayer’s greenhouse plant-growing farming business

The taxpayer used approximately 20% of the area within greenhouses to grow cucumbers or other vegetables, or flowers, from seed for sale as grocery items or as little plants that could be transplanted. The taxpayer also annually produced about 85,000 floral arrangements in pots, which it sold to retailers such as Costco. To this end, it purchased already-grown flowers from other growers, and maintained them in its greenhouses pending its use of them for incorporation into the floral arrangements. Between 2012 and 2014, it constructed a biomass system for heating the greenhouses.

Gibbens JCQ found that this system qualified as a Class 29 property that entitled the taxpayer to investment tax credits, i.e., it was used primarily for the manufacturing or processing of goods for sale. After finding that the floral arranging activity was manufacturing or processing, she went on to find that the floral-arranging activity was a separate business rather than being part of the taxpayer’s (greenhouse) farming business, stating (at para. 68, TaxInterpretations translation):

Nothing otherwise suggests that the two activities were dependent one on the other. In particular, the floral arrangements were manufactured exclusively from already-grown plants that had been purchased by the Coop from third-party suppliers and not from flowers that the Coop had grown for sale as small plants to be transplanted.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 greenhouse heating equipment was used in non-farming manufacturing of floral arrangements 414
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Farming use of greenhouses to further grow flowers before use in making floral arrangements did not constitute farming 163

Atlantic Packaging Products Ltd. Atlantic Produits D'Emballage Ltée v. The Queen, 2018 TCC 183, aff'd 2020 FCA 75

prior filing positions contradicted position that tissue division was separate business

The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco under s. 85(1) for Newco shares and sold the Newco shares to Cascades. CRA assessed on the basis that the sale of the Newco shares was on income account. The only issue before Graham J was whether s. 54.2 deemed the Newco shares to be capital property, which required that the drop-down transaction be considered to be the transfer of substantially all the assets of an active business.

Graham J found that "the test in section 54.2 is intended to be a somewhat flexible test but … there is no reason not to consider the fair market value of the assets when applying the test.” From the FMV perspective, the transferred assets represented about 68% of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. He also was receptive to arguments that, given the flexibility of the test, he should also consider whether the dropped-down assets represented “the heart of the business of the Tissue Division,” but did not find any such indication on the evidence.

Accordingly, s. 54.2 did not apply, and it was unnecessary for him to go on to consider whether the Tissue Division was a separate business or merely a division of a larger business. However, Graham J stated (at para. 9):

[H]ad I had to decide this issue, the inconsistent filing positions taken by the Appellant would have hurt its case. The Appellant had a history of treating its operations as a single business when claiming capital cost allowance. The Appellant continued that single-business approach when determining the cost of the assets that were rolled into 722, yet treated the Tissue Division as a separate business when selling the common shares that the Appellant received from 722 on that rollover. I would have struggled with an outcome that gave the Appellant the benefit of single-business treatment for all of its prior tax years and for the first part of the sale transaction, yet gave it the benefit of separate-business treatment for the second half of that same transaction. Either the Tissue Division was a business or it was not. The Appellant should not have had it both ways.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54.2 s. 54.2 did not apply to the drop-down of under 68% of the assets of a business division to a Newco for Newco shares 710

Leekes Ltd v HM Revenue & Customs, [2018] EWCA Civ 1185

acquired business was segregated from its expanded component

A British taxpayer (Leekes) carrying on a retail trade through four stores acquired, for nominal consideration, all the shares of another company (Coles) carrying on a similar retail trade through three stores, and then effectively wound-up Coles so as to carry on the operations of the three former Coles’ stores directly. At issue was whether a provision which provided that Leekes (viewed as the successor to the Coles’ trade) could deduct any amount for which the predecessor (Coles) would have been entitled to relief if it had continued to carry on the trade, permitted Leekes to deduct its losses from continuing to carry on the three former Coles’ stores from its profits from operating its four “old” stores.

In finding that such relief was unavailable, Henderson LJ stated (at para. 27):

[T]he words "the trade" can only refer to the trade previously carried on by Coles. They cannot refer to the enlarged trade carried on by Leekes, because that trade had never been carried on by Coles, and Coles cannot therefore be deemed to have continued to carry it on. … [I]t is necessary to ascribe a deemed continuity to the former trade of Coles, although it now forms part of the merged business carried on by Leekes, and relief may only be obtained if and to the extent that Leekes then derives trading income from the former Coles trade.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) - Subparagraph 111(5)(a)(ii) ability of successor to apply predecessor losses to income from same trade did not extend to profits from an enlarged trade 457

Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131, aff'd 2017 FCA 3

foreign source interest reduced by related expenses

The Crown brought a motion under Rule 58(1) for determination of questions of law respecting the application of Art. XXII(2) of the Canada-Brazil Treaty to the assumed situation of a Canadian resident taxpayer (who earns income from other sources that is taxable in Canada) earning bond interest arising in Brazil which is taxed in Brazil under Art. XI of the Treaty and with the taxpayer being deemed by Art. XXII(3) to have paid Brazilian tax equal to 20% of the gross bond interest arising in Brazil. The Crown position was that the maximum foreign tax credit available to the taxpayer under Art. XXII(2) was equal to the actual Canadian tax payable on the bond income arising in Brazil, which in its view must take into account applicable expenses incurred by the taxpayer to earn the income. The taxpayer’s position was that this credit instead equalled the Canadian tax rate multiplied by the gross amount of the interest. Art. XXII(2) provided:

The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.

In the course of accepting the Crown’s interpretation, Paris J stated (at para. 29):

IPL2 stands for the proposition that...gross income from a source in a particular location must be reduced by any deduction that may reasonably be regarded as applicable to that source. Tax is then computed on this net amount... . While the Treaty does not explicitly set out that Canadian tax be computed in this manner for the purposes of Article XXII(2), it is implicit in the phrase “income tax as computed before the deduction is given” which appears in Article XXII(2).

He went on to state (at para. 89):

Since the income derived from Brazil by the Canadian resident taxpayer in the hypothetical fact situation is from a source in a particular place, …the taxpayer would be required to compute income from that source as provided for in subsection 4(1)… first on the assumption that the taxpayer had no income or loss except from sources in Brazil, and second, that the taxpayer was allowed no deductions in computing income except those that may reasonably be regarded as wholly applicable to that source and except such part of any other deductions as may reasonably be regarded as applicable thereto.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income 594
Tax Topics - Treaties - Income Tax Conventions OECD commentaries applied to Brazil (not an OECD member) 231

Kruger Incorporated v. The Queen, 2015 DTC 1127 [at 788], 2015 TCC 119, rev'd 2016 FCA 186

paper manufacturer's large-scale options-trading operation was a separate business

The taxpayer ran, along with its subsidiaries, a lumber and paper goods business with annual sales of approximately $2.5 billion. In response to the group's accounts receivable being denominated in foreign currencies, the taxpayer began trading options. The trading quickly expanded, with one currency trader and three bond and security traders. The team's stated objective was to mirror, on a smaller scale, the "same sort of structure" as the trading flow of TD Bank.

In the course of finding that the taxpayer could treat its options as inventory (and hence claim losses in the year in question based on a decline in the value of its portfolio), Rip J found that the taxpayer's trading activities constituted a business. He noted, for example, the scale of operations (it was the third- or fourth-largest currency options trader in Quebec), and its conduct generally reflected a business enterprise entirely separate from its manufacturing business (para. 38).

See summary under s. 9 –timing.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) options contracts purchased, but not those written, were inventory 200
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory options contracts purchased, but not those written, were inventory 122
Tax Topics - Income Tax Act - Section 9 - Timing realization principle applied to FX options written by taxpayer 307

Ruff v. The Queen, 2012 TCC 105

The taxpayer, a lawyer, was bilked of $400,000 by scam artists, posing as clients, who induced him to incur "processing " fees in connection with the recovery of a supposed container in the Ivory Coast containing US$8.5 million of cash.

Before finding that deduction of the taxpayer's outlays was barred by s. 67, Webb J. found that the outlays arose out of activities (seeking to act as a trustee for supposed clients) that were undertaken as part of his law practice and, thus, related to a source of income (that business).

CAE Inc. v. The Queen, 2011 DTC 1362 [at 2031], 2011 TCC 354, aff'd 2013 DTC 5084 [at 5944], 2013 FCA 92

The taxpayer manufactured flight simulators which it used to provide flight training services directly or which were leased by it to airlines for their training purposes (coupled in many instances with a sale of the simulator to a third party). Jorré found (at para. 71) that the taxpayer's flight training and leasing/sale operations were part of a single civil aviation simulator business.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Stare Decisis 205

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. Although Paris J accepted the Crown's submission that the property, if acquired, would have represented a source of income that was separate from the two rental properties already held by the taxpayer, the property to be acquired already represented a source of income at the time the taxpayer agreed to purchase it. 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".

Tinhorn Creek Vineyards Ltd. v. The Queen, 2005 TCC 693

viticulture and estate winery one business

In finding that the taxpayer’s winemaking was linked to viticulture and was an integral part of its (estate winery) farming business, Campbell J stated (at paras. 25-26):

The winemaking is so directly tied to the activities in the vineyard that the Appellant cannot go to outside parties to purchase grapes because it produces "estate bottled wine". …

It is in the vineyard where most of the employees are hired, where most of the equipment is required and used, where the labour expenses are the highest, and where the majority of the acreage is used. …[T]he vineyard activities and operation are an integral part of the operation and the very foundation upon which the winery is able to produce and bottle its estate labelled wine.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) - Paragraph 28(1)(b) winemaking an integral part of viticulture operation 239

The Queen v. London Life Insurance Co., 90 DTC 6001, [1990] 1 CTC 43 (F.C.A)

The taxpayer had excess computer capacity that was needed to meet peak demands of its life insurance business but not otherwise, and which it provided for a fee to a wholly-owned subsidiary for sale by the subsidiary to the public. It was found that the taxpayer was engaged in a business separate from its life insurance business with respect to its dealings related to this excess computer capacity.

Re Seagrams Distillers (Ontario) Ltd. (1985), 54 OR (2d) 289 (Ont. D.C.)

The businesses of subsidiaries acting as sales organizations for their parent, a distiller, were found to be an integral part of that distilling business.

River Estates Sdn. Bhd. v. Dir. Gen. of Inland Revenue, [1984] BTC 20 (PC)

Since there was some doubt as to whether or not a forestry operation and a tree plantation operation were separate businesses, it was not unreasonable of the special commissioners to conclude that the taxpayer carried on separate businesses.

Re Aluminum Co. of Canada Ltd. (1984), 46 OR (2d) 614 (HC), aff'd 54 OR (2d) 249 (Ont. D.C.).

The business of one company does not embrace the business of a second company if the second company is not the agent or puppet of the first and is not under the direct management and control of the first. The business of one subsidiary of Alcan International Ltd., which consisted of providing research and development services for a fee to affiliated companies, was distinct from the manufacturing business of another subsidiary of Alcan International Ltd. [C.R.: "Tax Avoidance"]

Gloucester Railway Carriage and Wagon Co., Ltd., [1925] AC 469, [1925] UKHL TC_12_720 (HL)

The taxpayer manufactured railway wagons, which it sold outright (outright or under hire purchase agreements) as well as letting out wagons on simple hire (i.e., no purchase options). After the First World War there was a great scarcity of wagons and the taxpayer decided to sell all the wagons which were being hired out. The Special Commissioners had stated that "we are unable to draw the very sharp line which we are asked to draw between wagons sold, wagons let on hire purchase and wagons let on simple hire...." Before concluding that the gain on this sale was a taxable profit, Lord Dunedin stated (at p. 474):

The hiring accounts were kept separate, but is was all one business.

Administrative Policy

23 April 2019 Internal T.I. 2018-0750821I7 F - Revenu d’emploi d’un Indien

employee leasing-out generally considered to be a separate business

The employer is located on a reserve and carries on a construction business. In addition, the employer provides employee lease-out services as to approximately 10% of its total activities. Is the Indian employee’s income from the latter exempt? CRA stated:

In the case of a corporation, some of whose activities are employee lease-out services, that is, that the employee's services are retained by that corporation but the employee's duties are performed, in whole or in part, for another organization …, it is necessary to determine whether the corporation is carrying on a separate business … because … the employment income of an Indian from each of the businesses of such a corporation is … a separate property for the purposes of … section 87 … .

[A] corporation's employee lease-out services generally do not relate to its activities other than the provision of employees. As a result, we are of the view that employee lease-out services should generally be considered a separate business from other activities of the corporation.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Indian Act - Section 87 employee lease-out servicing activity does not give rise to exempt income if only connection to reserve is employer residence 258

2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.4, 2016-0674831C6 F - Changement d'usage - duplex

apportionment of operating expenses of duplex used both personally and for rental income
essentially the same as 2015-0589821E5 F

The owner of a duplex consisting of two identical units occupies the first unit and rents out the second. Subsequently, he incurs significant capital expenditures in renovating the second unit, so that its relative value increases. How should property expenses be apportioned? CRA responded:

Where an expense is incurred in respect of all of a property of which only a part is used for the purpose of gaining or producing income, the expense will be apportioned between the two parts of the property so that only the part of the expense that can reasonably be considered to have been incurred in order to gain or produce income may be deducted. Where a taxpayer rents out part of the property in which the taxpayer lives then, as set out in Guide T4036, Rental Income, the taxpayer may use the leased area or the number of rooms leased in the building to apportion the taxpayer's expenses, provided the allocation is reasonable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) substantially renovating the personal-use portion of a rental property (without changing floor areas) generally would not engage the change-of-use rules 243
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property duplex is single property 51

22 September 2016 External T.I. 2015-0594721E5 F - Inventory of animal meat

meat processing operation included in farming business if incidental

Although it stated that the question of whether a processing operation was part of a farming business was a question of fact, CRA indicated that a livestock farmer’s operation of turning his animals into ground or cut meat would be part of his farming business (so that the inventory of such processed meat was eligible for exclusion from his income under the s. 28 cash method of accounting) provided that the processing operation was “incidental to the farming activity” and the income therefrom “not materially significant in relation to the income from farming.” It was assisted in this regard by Tinhorn Creek, where the Tax Court “concluded that winemaking was linked to viticulture and was an integral part of the taxpayer's farming business.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) - Paragraph 28(1)(b) processing meat can form part of a farming business 225

S4-F11-C1 - Meaning of Farming and Farming Business

Separate v. same business

1.23 Where a taxpayer carries on a farm operation together with a non-farm operation, it is a mixed question of fact and law whether the operations are considered one business or separate businesses. Whether these are part of the same business depends upon the connection, interlacing, dependence, and unity, of the operations. For example, in the case of an estate winery, the winemaking activities could be so interlaced with the vineyard operation that both are considered parts of one farm operation, starting with the grape growing to the commercialization of the grapes by producing wine. ...

Different farm activities are usually one business operation

1.24 ... [D]ifferent farming activities of a taxpayer are generally considered part of the same business operation, even if they are conducted in different places.

Incidental activities

1.25 Certain non-farming incidental activities may be considered part of a farming business where:

  • the activities are related to the taxpayer's other farming activities;
  • the activities are on a small scale. Consider, for example, the labour and capital invested; and
  • the income earned in the activities is incidental to the taxpayer's farm revenue.

1.26 Incidental in this case means a subordinate or minor relationship compared to the farm activities. ...

7 May 2014 Internal T.I. 2014-0528251I7 - Surface Rentals for Wind Farms

wind farm rentals as incidental to farming business

Would income received by a farmer for the rental of land to a wind farm developer for the purpose of constructing and operating a wind farm be properly included in farming income. After noting that "generating electricity from a "wind farm" does not meet the definition of 'farming' in subsection 248(1)," CRA stated:

[W]hether or not the income from… the other activities can be included in the taxpayer's farming income generally depends on whether the other activities are considered to be incidental to the taxpayer's farming operations, or are, in fact, a separate business. …

The expression "incidental" implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether particular activities are incidental to the farming operation would include the quantum of income generated, the scale of operations and the relative capital or labour invested in the non-farming activity.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Farming wind farm not a farm 99

19 November 2013 External T.I. 2013-0510351E5 - Steel Tanks and Oak Barrels of a Winery Business

grape farming and wine production separate

The taxpayer in 2013-0503311E5 carried on a wine-making business that involved both farming activities (i.e., growing grapes) and non-farming activities (i.e., producing wine for sale). Its fermentation tanks and barrels were considered to likely qualify for class 29 purposes as property used primarily in the manufacturing or processing of goods for sale. In clarifying that the exclusion in Reg. 1104(9) of "farming" from "manufacturing or processing" did not apply, CRA stated:

[G]enerally where a farmer or farming corporation separates the activities of farming and the processing of farm products, the CRA will essentially consider the processing activity to be a distinct business from that of farming provided that there is a clear delineation of the income from each business activity, and that the income from the processing business is properly calculated and is not eligible for any of the special sections in the Act dealing with income from a farming business (such as the cash method of computing income in section 28…).

13 June 2012 External T.I. 2012-0440381E5 - Application of Income Tax Regulation 2602

Where a US-resident hockey player plays for a team that has a permanent establishment only in Ontario but he performs his duties of employment in part at arenas outside Ontario and outside Canada, s. 4 will require a reasonable allocation of his employment income to Canada as only the portion earned in Canada must be reported under s. 115(1)(a)(i). "The income allocation is usually calculated on a per diem basis."

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2602 - Reg. 2602(1) allocation to hockey venues 62

29 February 2012 External T.I. 2012-0435151E5 - Installation of Solar Panels

Respecting the question as to whether income earned by an individual taxpayer from the sale of electricity generated from a solar photovoltaic system to the Ontario Power Authority would be included in the computation of the income of the taxpayer from his business of operating a roofing business, CRA stated:

The CRA will generally consider income from activities undertaken outside the normal business operations of a taxpayer to be from the same business if the activities are incidental to the taxpayer's normal business operations and the income generated by these activities is not material in relation to the taxpayer's business revenue. The expression "incidental" is not defined in the Income Tax Act...but implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity.

Words and Phrases

20 January 2010 Internal T.I. 2009-0348571I7 - Interest Rate Swaps and Resource Profits

a Canadian resource corporation in the ordinary course of business had borrowed under long-term financings and entered into interest rate swaps (apparently to change its effective interest expense from a floating to fixed rate). The taxpayer submitted that payments made under these swaps did not reduce its resource profits because the swaps represented separate sources of income.

The Directorate advised the large case file manager that the payments made (or received) under the swaps should be sourced to the resource business in the course of which the borrowings had been made even though those borrowings had been repaid. Among other factors, in the financial statements the swap payments were treated as adjustments to the interest expense, and "resource activity" is defined in Reg. 1206(1) to include activities that are "ancillary to, or in support of" a qualifying production activity (para. (g)) and activities taken "as a consequence of" such production activity (notwithstanding the production activity may have ceased.)

27 August 2008 External T.I. 2008-0287951E5 F - Entreprises distinctes

a chain of retail stores operating under the same rules and procedures likely would be a single business

A corporation operating a chain of boutique stores sells the assets of one such boutique including the customer list. Regarding whether this should be treated as the sale of a separate business (so that there would be a separate eligible capital amount calculation), CRA reiterated the indicia in IT-206R, and stated:

We have also previously expressed our opinion, in situations where geographically distinct operating centres operated under the same rules and procedures, that they were considered to be a single business on the same basis as a bank operating various branches.

Hoffman v. MNR, 50 DTC 284 … found that two hardware stores operating in two cities with potentially different customer bases could not be considered separate businesses.

24 June 2005 External T.I. 2004-0109201E5 F - Professions libérales - Travaux en cours

income from a professional practice includes income from a secondary non-professional activity if the practice is a single business

Can a partnership make the s. 34 election where it carries on a single business but earns income from two types of activities, one of which is not one of the listed professions? CRA responded:

[W]here a taxpayer carries on a single business, the taxpayer would generally be able to make an election under section 34 if the principal activity of that business is the practice of one of the professions referred to in that section. The question of whether the principal activity is the practice of one of the professions covered is a question of fact. However, certain criteria such as the distribution of income, assets and workforce of each activity will be considered in making that determination.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34 a professional partnership carrying on a secondary non-professional activity may make the election 124

30 September 2004 Internal T.I. 2004-0083301I7 F - Entreprises distinctes

2 different centres were branches of the same business

In finding that it was highly likely that the different centres owned by a corporation represented the same business, the Directorate noted that the centres offered the same range of services to clients, under similar rules and terms, so there was a high degree of correlation and intertwining. It appeared that the corporation was running the same business through two or more operations in multiple locations, as with a bank or any other business that has multiple branches.

17 June 2004 External T.I. 2003-0045411E5 F - Entreprise de placement déterminée

business carried on through partnership is separate from similar business carried on directly by partner

Xco co-owns several rental properties (in the commercial sector) in co-ownership with other taxpayers with which it deals at arm's length and earns property management fees from the co-owners. In the context of determining whether Xco employs more than 5 full-time employees in its business having regard to such exception under the specified investment business exception, is a similar business carried on by Xco through a partnership (the “Partnership”) considered to be a business carried on by Xco that is separate from the business carried on directly by it? CRA stated:

[W]here a corporation owns an interest in a Partnership, we are of the view that the business of the Partnership is a separate business from the other businesses that the corporation carries on directly or as a co-owner. …

[I]n a situation where the Partnership employs more than 5 full-time employees in its business, the corporation is considered to employ more than 5 full-time employees in that business and thus the corporation meets the exception described in paragraph (a) of the definition of SIB.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business - Paragraph (a) partnership business is transparent but separate from similar business carried on directly 181
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business - Paragraph (b) para. (b) may not apply where the SIB is carried on through a partnership 276


The disposal of machinery would be considered as related and attributable to a mining business for purposes of ss.9 and 18(1)(a) even though such business was inactive and there were no mining operations.

88 CPTJ - Q.23

All amounts must be related to a source of income to be deductible under the Act. If there is no potential source of income, there is no deduction.

IT-206R "Separate Businesses" 1 January 1995

2. Whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations. The fact that the business operations of a taxpayer are of different natures, for example manufacturing and selling, does not preclude them from being the same business if there is a sufficient interconnection, interlacing or interdependence between the operations.

3. When determining the degree of interconnection, interlacing, or interdependence between simultaneous business operations, factors to be considered could include, but are not to be restricted to, the following:

  • (a) The extent to which the two operations have common factors that may be pertinent. For example do the two operations have the same: processes, products, customers, services offered to customers, types of inventories, employees, machinery and equipment.
  • (b) Whether the operations are carried on in the same premises. For example, if a hardware store and a sporting goods store are operated in two distinct locations, it is possible that they should be looked upon as separate businesses, but if they are in one store, it is almost certain that they are one business.
  • (c) One operation may exist primarily to supply the other. An example of this might be the carrying on of market-garden operations chiefly for the purpose of supplying a hotel with fresh produce; in these circumstances, the two operations likely should be regarded as one business, even if a small amount of the market-garden produce is sold elsewhere.
  • (d) Whether the operations have differing fiscal year-ends.
  • (e) Whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether separate complete sets of records are maintained throughout the year; if the latter, too much weight should not be given to the possible merging of the results into one statement at the year-end for tax and other reporting purposes.

Paragraph 4(1)(b)

See Also

Nonis v. The Queen, 2021 TCC 31

s. 4(1)(b) requires allocation of employment income based on situs of physical work

The taxpayer, Mr. Nonis, who was a U.S. resident, had been employed as the general manager of the Toronto Maple Leafs pursuant to an employment contract entered into in 2013. For his 2013 and 2014 taxation years, Mr. Nonis included in his Canadian returns a pro-rated portion of his employment remuneration based on the number of days spent in Canada performing services to earn such income, and this was accepted by CRA. On April 12, 2015, his employer notified him that no further active services were required of him in order to fulfill his contract, and Mr. Nonis returned permanently to the U.S. However, under his contract, he continued to be entitled to remuneration for a number of years thereafter. In filing his returns for 2015 and 2016, Mr. Nonis used the same proration formula based on his days of service in Canada: 37 days for 2015; and zero days for 2016. The Minister reassessed Mr. Nonis on the basis of using the days of service that had been accepted for 2013 and 2014.

After finding that Mr. Nonis continued to be an employee after his “termination” (albeit, with virtually non-existent duties), Bocock applied the principle (at para. 59) that, under “paragraph 4(1)(b) of the Act, if a taxpayer works partly in Canada and partly in another country in the same taxation year, the taxpayer’s taxable Canadian income for the year is the amount earned while working physically in Canada” – so that Mr. Nonis’ reporting based on the 37 and 0 days of service in Canada was correct.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(2) - Paragraph 115(2)(c.1) a U.S. resident avoided Canadian tax on employment income from a Canadian employer when he ceased performing active duties 502

Administrative Policy

9 February 2012 External T.I. 2008-0280941E5 F - Foreign sourced income - transportation

s. 4(1)(b) generally applied on a jurisdictional basis

Canco, which carries on a freight transportation business in Canada and the U.S., is subject to New York State franchise tax. CRA noted that in determining the “qualifying income” of Canco:

The general rules for determining the source of income, losses and deductions provided for in paragraph 4(1)(b) must therefore be applied, all as specified in subsection 4(3). Paragraph 4(1)(b) could be textually interpreted to require the computation of items of income distinctly with respect to each of the places where the business of a taxpayer is carried on. In practice, however, this provision is generally applied to allocate the income, losses and deductions of a taxpayer on a jurisdictional basis.

… The allocation method adopted must generally be established in a reasonable and appropriate manner depending on the taxpayer's business location. It must also be applied consistently by the taxpayer for as long as it carries on its business. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) incidental business activities in jurisdiction may not constitute carrying on business there 51
Tax Topics - Income Tax Act - Section 126 - Subsection 126(9) s. 4(1)(b) applied for s. 126(9) purposes 161
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Business-Income Tax NY franchise tax qualified as an income tax only if it was not based on non-income specified minimums 238

3 November 2008 External T.I. 2008-0278431E5 F - Déménagement hors Canada du siège soc. de société

s. 4(1)(b) requires allocation between Canada and another country on basis of relative profit contribution

In the context of a general discussion of consequences where there was an acquisition of control of a corporation incorporated in Canada in 2005 and with a start-up Canadian manufacturing operation in Canada, as well as research and development performed there, but with a shift of its sales and administrative functions to a non-resident location, CRA stated:

Paragraph 4(1)(b) effectively requires a non-resident corporation to allocate its profits between Canada and another country in a manner that reflects the contribution to profits of the activities of each jurisdiction. The Act does not contain a more detailed methodology than paragraph 4(1)(b) of the Act for allocating profits between jurisdictions. However, even if sales are made from the head office, much of the revenue will be allocated to Canada as a result of development and manufacturing operations. You may find useful information for calculating the portion of the income and expenses of the business carried on in Canada in the Commentary on Article 7 of the 2008 OECD Model Tax Convention.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) OECD Commentary informs allocation of sales through non-resident office to Cdn manufacturing operation 172
Tax Topics - Income Tax Act - Section 250 - Subsection 250(5) central management and control test overridden 122
Tax Topics - Income Tax Act - Section 127 - Subsection 127(9) - Investment Tax Credit - Paragraph (a.1) ITC potentially available to a non-resident corporation carrying on business in Canada 97


Markovitz, "Permanent Establishment - Home Office Relations", International Tax Planning, 1996 Canadian Tax Journal, Vol. 44, No. 4, p. 112.

Subsection 4(2)

Administrative Policy

18 June 2015 External T.I. 2015-0578071E5 F - Reimbursement of overpayment of QPIP benefits

s. 60 deduction denied for repayment of previous income inclusion

After becoming a non-resident of Canada, the taxpayer was required to repay excess benefits received by her in a previous year pursuant to the Quebec Parental Insurance Plan and included when received in her income under s. 56(1)(a)(vii). In finding that she was not entitled to a deduction (under s. 60(n)(v.1)), CRA stated:

[T]he application of the Act does not generally allow [non-resident] taxpayers to claim a deduction under paragraph 60(n)….

Generally, [ss. 2(3) and 115(1)] imply a computation with respect to specified sources of income, while allowing certain deductions to be claimed. In this context, subsection 4(2) provides that the deductions allowed by section 60 do not enter into the computation of the income or loss from a specific source. Subsection 4(3) does not provide any exception to this general rule….

Subsection 4(3) - Deductions applicable


Interprovincial Pipe Line Company v. Minister of National Revenue, 68 DTC 5093, [1968] CTC 156, [1968] S.C.R. 498

The enactment of s. 139(1b) (now s. 4(3)) required the taxpayer to net related interest expense against interest income receivable by it from its U.S. subsidiary for purposes of computing the foreign tax credit available to it with respect to U.S. withholding taxes exigible on the interest income receivable by it from the U.S. subsidiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) s. 4(3) requires netting of interest expense 62

Administrative Policy

S5-F2-C1 - Foreign Tax Credit

Provided that s. 4(3) is satisfied, "allocation of expenses to a source of gross income in a particular foreign country for financial statement purposes is normally accepted for the purpose of computing a foreign tax credit for that country" provided this is done consistently (para. 1.86).

In allocating interest expense, a specific tracing method may be appropriate where the borrowed funds are used for identifiable purposes. Where there is a general purpose borrowing, allocation among countries based on relative asset values may be appropriate. The situs of security may not be relevant (para. 1.87). Provided that the overall limitations (e.g., under the rental property restriction rules) are respected, "capital cost allowance deductions may be arbitrarily allocated" amongst countries (para. 1.88).