In a February 19, 2020 Tax Court of Canada case (Hurwitz vs. H.M.Q., 2018-406(IT)I), at issue was whether the taxpayer (H) had a source of income in respect of his abstract photography endeavor. For the two years in question (2013 and 2014), H earned gross income of $5,000 and $10,000 but had net losses of $30,000 and $50,000 respectively. While revenues were generated from the rental and sale of photographs, the primary product was a $650 photograph collection book entitled “The Gryphons of Paris”. In making the determination, the Court reviewed the following factors:
History of profit and loss – While 236 books were sold in 2006, only six were sold over the two years examined. The gross revenue of the undertaking never approached 10% of the total expenses. The possibility of future profit was remote, if not impossible.
Training and education – H was a retired concert musician who did not have formal training in photography. Intended course of action – The Court noted that there was no business plan, diaries of business meetings, trip itineraries and related details, follow-up emails/correspondence, budget projections, or travel logs.
Books and records – There were no books or records produced for the hearing other than a contract for photographs to be used in the office of a professional services firm. In other words, there were insufficient systems and tracking of accounts and invoices. Taxpayer loses The Court noted that the endeavor may have approached a level of commerciality in the past, but that had long since vanished by 2013 and 2014. As there was no material evidence of commercial effort for the years in question, the Court determined that there was no source of business income against which to deduct the expenses.
What can we learn from this case? It is important to support your business with proper documentation. We’ve seen a few cases recently where CRA is denying losses from businesses that show a history of losses with no documentation to support the possibility of future profit.
