The taxpayer (Mr. Brown, a lawyer) together with his wife (an artist) formed a numbered company (owned on a 51/49 basis) in 2010 to operate a new art gallery. However, when his wife took ill a few months after the opening, Mr. Brown began to provide significant management services, and the board of the numbered company agreed that he would be paid a management fee equal to 20% of the amount by which the gallery’s annual revenue exceeded $100,000. For the years in issue (2011 to 2013), no fee was generated, and Mr. Brown claimed non-capital losses for those years of $90,696, $115,200 and $113,932, respectively.
In reversing the Tax Court and in finding that the non-capital losses were deductible, Webb JA noted that, under Stewart, the test of whether “the activity is being carried out in a commercially sufficient manner to constitute a source of income” (Stewart, at para. 60) was only engaged “if there is a hobby or personal element to the activity in question” (Brown, at para. 26), and stated (at paras. 27, 29):
… Mr. Brown’s decision to provide these management services as a result of his wife’s inability to continue to manage the gallery, does not mean that there is a personal or hobby element to his management services activity … .
A person’s personal motivation or reason for conducting an activity cannot, in and of itself, result in there being a personal or hobby element to the activity. It is possible to find a personal reason why any person is carrying on a particular activity. …
Since there was no personal or hobby element in Mr. Brown’s management activity, the only relevant test to be satisfied under Stewart was that such activity was being undertaken in pursuit of profit, as to which Webb JA stated (at para. 43):
By providing the management services that allowed the gallery to continue to operate until it could generate sufficient revenue to cover all of its expenses, Mr. Brown’s intent was to allow the gallery to generate revenue which, in turn, would generate the management fees payable to him, and hence, profit for his management services activity.