Principal Issues: Will the CRA issue guidelines to determine whether there is a "business"?
Position: No.
Reasons: See the Act and caselaw. As broadly defined as possible.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2019
2019 APFF CONFERENCE
Question 17
Concept of business in the Income Tax Act
The concept of business is defined in subsection 248(1) and states that a "business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.” The concept of an active business is also defined in subsection 248(1), with the definition stating that “in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business.”
The concept of business is used in different forms in the Income Tax Act, for example in the concepts of business income, carrying on a business and active business. The word "business" is also used alone in certain places in the Income Tax Act, for example in subsection 84(2), section 120.4 under the definition of related business or section 249.1 under the definition of fiscal period. The concept of income from a business is used in the computation of a taxpayer's income, principally in section 3, subsection 9(1) and section 12.
The concept of active business is used in various places in the Income Tax Act, for example in the definition of qualified small business corporation share for the purposes of the capital gains deduction in section 110.6 where the shares in question must, among other things, be issued by a corporation at least 50% of the fair market value of whose assets is attributable to assets used in an active business carried on by the corporation. This expression is also used in section 125 for the purposes of the small business deduction.
In Technical Interpretation 2012-0445341C6, the CRA explained that the word "business" used in subsection 84(2) should be understood broadly, in accordance with the definition of business in subsection 248(1). According to this technical interpretation, the use of a term such as "active business" restricts the meaning of the word business, depending on the facts and circumstances of the situation. For example, with respect to subsection 84(2), since the word "business" is used alone, the CRA stated in this technical interpretation that it would not differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property.
Under this interpretation, the definitions of "business income", "carrying on business" and "active business" in the Income Tax Act and the jurisprudence sometimes clarify, but never fully embody the broader concept of business.
The Stewart v. Canada decision (footnote 1) clarified that the traditional sense of the word "business" applied in the Income Tax Act in addition to the definition in subsection 248(1), i.e. “anything which occupies the time and attention and labour of a man for the purpose of profit is business.” The definition in subsection 248(1) is therefore not restrictive, but rather includes certain concepts that are not understood in the traditional sense of business.
In determining whether income is derived from a business, the Canadian Marconi decision (footnote 2) indicated that there is a rebuttable presumption that where the taxpayer is a corporation, its income is derived from carrying on a business. It seems clear that a business must exist in order for the taxpayer to earn business income, in other words, business income is income that the taxpayer derives from the taxpayer’s business. By contrast, a taxpayer may earn other types of income from a business other than business income, such as income from property.
To earn income from a business, a taxpayer must have carried on the business. Carrying on a business is not defined in the Income Tax Act. According to Interpretation Bulletin IT-364, a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, IT-364 states that it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. The Timmins decision (footnote 3) clarifies that a business is carried on by a taxpayer who either carries on a business in the ordinary sense of the words or who carries on one or more activities described in the definition of business over time.
The Ollenberger (footnote 4) and Weaver (footnote 5) decisions both state that under the definition of active business in the Income Tax Act, any business is considered to be an active business unless it qualifies under the definitions of specified investment business or personal services business. Sharlow JA indicated in the Weaver decision that in determining whether a business is a specified investment business, one must not look at the level of activity that is necessary to carry on the business, but rather at the legal characterization of the income that the business is expected to derive principally from it. The Weaver decision also explained that the legal characterization of a business as a specified investment business is not a question of whether the business is an active business (footnote 6).
Question to the CRA
Based on the Income Tax Act, technical interpretations and jurisprudence, it is difficult to determine what constitutes a business. Could the CRA provide guidance on its interpretation of the word "business"?
CRA Response
Subsection 248(1) provides an inclusive definition of the word "business". It states that "business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment." This definition is intended to clarify and extend the ordinary meaning of the word "business".
In that context, the courts have proposed certain definitions that are of a general nature.
The Supreme Court of Canada, in Stewart v. Canada, considered how to determine whether or not there is income from a source for the purpose of section 9. In that context, it provided guidance that can also be used to determine whether or not a business exists.
Because Parliament and the courts have given "business" a very broad meaning, the CRA does not intend to give specific guidance.
Ultimately, the question of whether the activities of a taxpayer constitute a "business" remains a question of fact which, for each particular situation, can only be resolved after a review of all relevant facts.
Michel Ostiguy
(514) 496-1890
October 11, 2019
2019-081276
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Stewart v. Canada, [2002] 2 S.C.R. 645.
2 Canadian Marconi, [1986] 2 S.C.R. 522 (S.C.C.).
3 Timmins v. Canada, 99 D.T.C. 5494 (F.C.A.).
4 Ollenberger v. Canada, 2013 FCA 74.
5 Weaver v. Canada, 2008 FCA 238.
6 Weaver, supra note 5, in paragraph 26.
7 Stewart supra, footnote 1.