DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Deducting Business Losses? Make Sure You’re In Business!

In Canadian Income Tax, Losses on December 10, 2009 at 12:36 pm

It is said that everyone has at least one great song inside of them. Thinking of going into the music business? Got that CD in the works? Got a few good songs to record? Those costs can add up. Studio time, CD packaging, travel expenses, etc. Would you like to deduct your expenses for tax purposes? Consider the case of Singh Binning.

The recent case of Binning v. The Queen (2009 DTC 1311) highlights the logical notion that in order to deduct business losses, you must have an actual business.

More specifically, the law has always been predicated on the idea that, to deduct losses, there must be a business and a reasonable expectation of profit.

In Binning’s case, he was employed full time as a supervisor in a lumber mill in Ontario, but managed the less-than-bourgeoning music career of his brother back in India. He financed the production of an album and two music videos in New Delhi, paying close to $100,000 which he reported as business losses over five years from 2001 to 2005. A good chunk of these expenses were for travel, and there were ostensibly no revenues to speak of during that period.

Financing a music star in India - There has to be some semblance of a business

The Supreme Court of Canada, in the case of Stewart v. The Queen (2002 DTC 6983) set out a twofold test to determine the deductibility of business losses, as follows:

Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income…

The Tax Court in Binning summarized this case as follows

…there is an absence of the businesslike conduct that one would expect if this were a profit-seeking venture. There is no plan. There is no evidence of efforts to try to make sure the business becomes profitable or to ensure that royalties are in fact being received. All of this is incompatible with there being a source of income…

Binning’s tax losses were denied.

So if you’re a parent of a child who wants to make it in the entertainment industry, instead of deflating his ego by telling him he lacks the talent, you can try discouraging him by presenting a dissertation on the law on tax losses. That should bring him to his senses!

Leave a Reply

Your email address will not be published. Required fields are marked *