In two recent cases, the Tax Court of Canada dealt with the issue of “what is a business?” as opposed to a hobby, or something that is not quite yet a business. Callahan v. HMQ[1] and Hurwitz v. HMQ[2], were heard as informal procedure cases (limiting both the amount at issue and how much weight other judges give the decisions). They illustrate how the law looks at the transition from amateur hobby to professional activity. These cases also suggest that the law may be out of touch with new forms of commercial activity taking place in the modern world.
This issue of what is a business would seem obvious. Many people start businesses that grow out of their hobbies and personal interests, but there has to be a tipping point where the hobby ends, and the business begins. Also, the economy is evolving rapidly, and there are ways of making money that did not exist until recently. The roles of Instagram Influencer, YouTube Vlogger, E-sports Professional, and Cosplay Artist, are only a handful of examples. As a result, it is not always clear that expenses, which may seem personal in nature, could be legitimate costs incurred in the pursuit of becoming a personality that other people will pay, or derivatively pay (via ads, appearance or endorsement fees), to watch or hear online.
However, as in many of these cases, the issue is usually the lack of any bookkeeping or business planning that would provide evidence to the tax court that there was a valid business.
In the first case, Mr. Hurwitz was a retired concert violinist who had a lifelong interest in abstract photography. He travelled to several cities around the world and took photographs over a number of years, eventually publishing a book, The Gryphons. However, the CRA disallowed his losses from this endeavor on the basis that there was no business.
The case law in this area is well developed. Still, the difficulty is in applying the unique facts of every situation to the law. The first issue for any taxpayer seeking to claim business losses is to establish that they have a source of income from a commercial endeavour, as set out Stewart v. Canada[3]. More specifically, the question is whether the activity was undertaken by the taxpayer “in pursuit of profit.”
What counts as good evidence of a business?
The case law specifies that to start, a taxpayer must have a subjective intention to profit, supported by objective evidence that the activity was undertaken in a business-like manner and had the “usual hallmarks of commerciality.” In Stewart, the Supreme Court of Canada reaffirmed the non-exhaustive, unprioritized, variable, and malleable factors set out in Moldowan v. R[4] as: a) the history of profit and loss; b) training and education; c) intended course of action; and d) the capability to show a profit. However, this last factor does not mean that the venture must be a commercial success or show a profit in any given year. Rather, it means that the business must at least have the potential to show a profit at some point.
How do the cases stack up?
In Mr. Hurwitz’s case, these factors were not helpful. His business of abstract photography never made a profit, and indeed the losses stemmed mostly from a lot of travel to some very nice places, like Paris and New York. Furthermore, “most locations visited for attempted sales [had] collateral personal, historical or social connections to Mr. Hurwitz, existing separately, and prior to, the photography endeavour.”[5]
Mr. Hurwitz never had any formal training or education in abstract photography. He had just learned how to do it over the years of practising his hobby. He also had no training in accounting nor business administration, as he kept virtually no records[6]. Specifically, he did not have: a) a business plan; b) any itineraries or logs relating to specific dates, venues or persons visited on his trips for “business”; c) diaries of business meetings; e) emails or correspondence pointing to business meetings; or d) any budget projections, invoices or tracking of expenses. Generally, there was no record of the business every being carried on and certainly none of the “usual hallmarks of commerciality.”
Not surprisingly, Mr. Hurwitz lost. There have been similar cases in the past, usually involving authors of travel books and murder mysteries that never had anything published, and who also usually had no books or records showing there ever had been a business. Consequently, the result for Mr. Hurwitz was consistent with past cases.
However, in Callahan, Jorre J. of the Tax Court decided largely in favour of the taxpayer. In that case, Mr. Callahan, who worked for the government as his “day-job,” had won a national TV chili-cooking contest on TV while he still considered himself an “amateur.” Inspired by his victory, he launched a business with his wife focused on trying to become a “celebrity chef.” Anyone who has watched TV over the past several years would have to agree with Mr. Callahan’s proposition at trial that there had been an explosion of cooking and food competition shows, and that those programs all need new content and personalities.[7] Mr. Callahan also racked up some substantial losses in his efforts to become a personality and cash in on his name, image, and brands. Specifically, in contrast to Mr. Hurwitz, the travel and other expenses did not have the same element of being connected to nice tourist spots, his family or personal history.
Mr. Callahan might not have been able to make a go of it, but there was ample evidence that he tried, albeit in a somewhat convoluted manner combined with spotty record-keeping. The factors highlighted in the case included:
- The existence of a business plan and some financial projections.
- Evidence presented at trial that he taught some cooking classes, and engaged in continuing education such as taking media and photography classes to help boost his website’s quality and make his presentations in public more professional and polished.
- Evidence that he continued to enter and win BBQ and other cooking contests, and he tried to develop recipes that were unique to him.
- Invitations to appear on TV several times in cooking competition shows, although as a contestant rather than as a judge.
- Evidence that he had won several catering contracts, as well as evidence of some paid appearances at private and corporate events over the years.
Overall, there were revenues in virtually all of the tax years at issue, just nowhere near the costs incurred to generate those revenues. However, based on all of the evidence, it was clear to the court that Mr. Callahan had made sincere, ongoing and continuous efforts to create a profitable business. Moreover, he had had a couple of opportunities to make deals for significant income, but he turned them all down because he “thought he could do better.” Clearly, there had been a reasonable prospect of profitability, but it was never realized.
In the end, Jorré J. allowed Mr. Callahan’s appeals for his 2008, 2009, 2010, and 2011 taxation years and made minor adjustments to his 2012 through 2014 taxation years. More importantly, Jorre J. removed all of the “gross negligence” penalties of 50% of the tax owing on the reassessments.
Why the Cases Matter
The upshot of these two cases is that you do not have to be good at business to have a business. The key issue, for tax purposes, is to what extent there is personal vs. business activity, as well as whether there was any prospect, at any time, of creating a profitable business. A review of these cases suggests that the key to a positive result on a business losses claim always comes down to evidence and book-keeping. Mr. Callahan had some evidence of a lot of “sizzle” but, alas, no BBQ; Mr. Hurwitz had none of either.
Do New Business Models Pass Meet the Evidentiary Tests for a Business?
We also have to question if the factors set out in the case law are broad enough to encompass new business models. How could an Instagram Influencer show evidence of education and training for the position? Or, how can an e-sports star provide their business plan and revenue projections when the industry did not exist a few years ago, and they are still in their teens? How could a guy who trims cow hooves on Youtube.com[8] claim that there was a realistic prospect of making money on this on-line business until it actually happens? And what about the poor guy who, let’s say, lost money setting up a sheep-shearing instructional video channel based on seeing the success of the cow hoof-trimming enterprise?
As a firm, we work with several media
personalities and even some stars. They each have an interesting path to how
they got there. Still, the ones that are successful over the longer term tend
to keep themselves organized or hire people like those at our firm to help keep
them organized with regard to their tax matters, particularly if they are
crossing borders to make money. If you are a budding movie, music, internet,
TV, e-sports, cosplay, Youtube, or any other kind of star, you may want to get
your affairs in order before the CRA comes knocking. We can help you with that,
and we invite you to contact us.
[1] 2020 TCC 28, court file number: 2017-5026(IT)I.
[2] 2020 TCC 31, court file number: 2018-406(IT)I
[3] 2 SCR 645, specifically at paragraphs 50 and 51.
[4] 1 SCR 480 at paragraph 486
[5] Hurwitz, Supra, at para 22.
[6] Ibid at para 23, there were documents relating to one lease of some photos, but nothing else.
[7] My personal favourite is the “Great British Bake Off” just because it is so much more polite and “English” in the host’s constant innuendos that it is practically a parody of itself. But maybe that is just me… The show also seems to “get in trouble” from time to time, which just shows how closely fans pay attention to every detail.
[8] See The Hoof GP at https://www.youtube.com/watch?v=6mU_-3X6NtU for an example of something that is highly addictive yet too simple for words, and also clearly profitable. But what CRA officer would accept “Step 1: I will be funny/very Scottish and kind to cows as I trim their hooves and explain in detail all of the complex health and anatomy issues involved; Step 2: HUGE PROFITS” as a business plan or revenue projection?
In two recent cases, the Tax Court of Canada dealt with the issue of “what is a business?” as opposed to a hobby, or something that is not quite yet a business. Callahan v. HMQ[1] and Hurwitz v. HMQ[2], were heard as informal procedure cases (limiting both the amount at issue and how much weight other judges give the decisions) and they illustrate how the law looks at the transition from amateur to professional. These cases also suggest that the law itself may be a little out of touch with the modern world.
The issue of what is a business may seem obvious, but many people start businesses based on their hobbies and interests, and there is a tipping-point where the hobby ends, and the business begins. Also, the economy is evolving rapidly, such that there are ways of making money now that did not exist until recently. Take for example, the roles of Instagram Influencer, YouTube Vlogger, E-sports Professional, or Cosplay Artist, to name a few. As a result, it is not always clear that expenses, which may seem personal in nature, could actually be legitimate costs incurred in the course of becoming a personality that other people would pay, or derivatively pay (via ads), to watch or hear online.
However, in many of these cases, the issue is usually the lack of any bookkeeping or business planning that would provide evidence to a tax court that there was a valid business being conducted.
In the first case, Mr. Hurtwitz was a retired concert violinist who had a lifelong interest in abstract photography. He travelled to several cities around the world and took photographs over a number of years, eventually publishing a book entitled The Gryphons. However, the CRA disallowed his losses from this endeavor on the basis that there was no business.
The case law in this area is well developed, but the difficulty is in applying the unique facts of every situation to the law. The first hurdle a taxpayer must meet to claim business losses is that he or she must have a source of income from a commercial endeavour, as set out Stewart v. Canada[3]. More specifically, the issue is whether the activity was undertaken by the taxpayer “in pursuit of profit”.
The case law specifies that to start, a taxpayer must have a subjective intention to profit, supported by objective evidence that the activity was undertaken in a business-like manner and had the “usual hallmarks of commerciality”. In Stewart, the SCC reaffirmed non-exhaustive, unprioritized, variable and malleable factors set out in Moldowan v. R[4] as: a) the history of profit and loss; b) training and education; c) intended course of action; and s) the capability to show a profit. However, this last factor does not mean that the venture has to be a commercial success or show a profit in any given year. Rather, that the business has at least a could potentially show a profit at some point.
In Mr. Hurwitz’ case, these factors were not helpful. The business of abstract photography never made a profit, and indeed the losses stemmed mostly from a lot of travel to some very nice places, like Paris and New York. Furthermore, “most locations visited for attempted sales [had] collateral personal, historical or social connections to Mr. Hurwitz, existing separately and prior to the photography endeavour.”[5] Mr. Hurwitz never had any formal training or education in abstract photography, and had just learned over the years of his hobby how to do it.
He also clearly had no training in accounting nor business administration, as he kept virtually no records at all[6], and specifically did not have: a) a business plan; b) any itineraries or logs relating to specific dates, venues or persons visited on his trips for “business”; c) diaries of business meetings; e) emails or correspondence pointing to business meetings; and d) any budget projections, invoices or tracking of expenses. Generally, there was no record of the business every being carried on and certainly none of the “usual hallmarks of commerciality”.
Not surprisingly, Mr. Hurwitz lost. There have been similar cases in the past, usually involving authors of travel books and murder mysteries that never had anything published, and who also usually had no books or records showing there ever had been a business, so this is not surprizing.
However, in Callahan, Jorre J. of Tax Court decided largely in favour of the taxpayer. In that case, Mr. Callahan, who worked for the government as his “day-job”, had won a national TV chilli-cooking contest on TV while he still considered himself an “amateur”. However, his victory may have gone to his head, and he launched a business with his wife of trying to become a “celebrity chef”. Anyone who has watched TV over the past several years would have to agree with Mr. Callahan’s proposition at trial that there had been an explosion of cooking, food and competition shows over the past 15 years, and that those programs all need new content and personalities.[7] Mr. Callahan also racked up some very substantial losses in his efforts to become a personality and cash in on his name, image and brands. Specifically, in contrast to Mr. Hurwitz the travel and other expenses did not have the same element of being connected to nice tourist spots or connected to his family or personal history.
Mr. Callahan might not have been able to make a go of it, but there was ample evidence that he tried, albeit in a somewhat confused manner combined with very spotty record-keeping. Mr. Callahan did produce a business plan, and some financial projections. There was evidence presented at trial that he did teach some cooking classes, and did some continuing education, taking media and photography classes to help boost their website’s quality and make his presentations in public more professional and polished. He also continued to enter and win BBQ and other cooking contests and he tried to develop recipes that were unique to him. Mr. Callahan was also invited to appear on TV several times in cooking competition shows, although as a contestant rather than as a judge. Mr. Callahan also provided evidence that he had won several catering contracts, as well as evidence of some paid appearances at private and corporate events over the years. Overall, there were revenues in virtually all of the tax years at issue, just nowhere near the costs incurred to generate those revenues. However, based on the entirety of the evidence, it was clear to court that Mr. Callahan had made sincere, ongoing and continuous efforts to create a profitable business. Moreover, he had had a couple of opportunities to make deals for significant income, but he turned them all down because he “thought he could do better”. Clearly there had been a reasonable prospect of profitability, but it just was never realized due to what were in retrospect perhaps some overly optimistic decisions along the way.
In the end, Jorré J., allowed Mr. Callahan’s appeals for his 2008, 2009, 2010 and 2011 taxation years and made minor adjustments to his 2012 through 2014 taxation years. More importantly, Jorre J. removed all of the “gross negligence” penalties of 50% of the tax owing on the reassessments.
The upshot of these two cases is that you do not have to be any good at business to have a business. The key issue is to what extent there is personal vs. business activity, as well as whether there was any prospect of at any time of actually creating a profitable business. However, looking at these cases, it seems like the key issue always comes down to evidence and book-keeping. Mr. Callahan had some evidence of a lot of “sizzle” but, alas, no BBQ ribs; Mr. Hurwitz had none of either.
We also have to question if the factors set out in the case law are even broad enough to encompass new business models? How could an Instagram Influencer show evidence of education and training for the position? Or how can an e-sports star could provide their business plan and revenue projections when the industry did not exist a few years ago and they are still in their teens? How could a guy who trims cow’s hooves on Youtube.com[8] claim that there was a realistic prospect of making money on this business until it actually happens? And what about the poor guy who, let’s say lost money setting up a sheep-shearing instructional video channel based on seeing the success of the cow hoof-trimming dude?
As a firm we work with several media
personalities, and even some stars. They each have an interesting path to how
they got there, but the ones that are successful over the longer term, tend to
keep themselves organized, or hire people like our firm to help keep themselves
organized with regard to their tax matters, particularly if they are crossing
borders to make money. If you are a budding Movie, music, internet, TV, e-sports,
cosplay, Youtube, or any other kind of star, you may want to get your affairs
in order before the CRA comes knocking, and we can help with that.
[1] 2020 TCC 28, court file number: 2017-5026(IT)I.
[2] 2020 TCC 31, court file number: 2018-406(IT)I
[3] 2 SCR 645, specifically at paragraphs 50 and 51.
[4] 1 SCR 480 at paragraph 486
[5] Hurtwitz, Supra, at para 22.
[6] Ibid at para 23, there were some documents relating to one lease of some photos, but nothing else.
[7] My personal favourite is the “Great British Bake Off” just because it is so much more polite and “English” in the host’s constant innuendos that it is practically a parody of itself. But maybe that is just me… The show also seems to “get in trouble” from time to time, which just shows how closely fans pay attention to every detail.
[8] See The Hoof GP at https://www.youtube.com/watch?v=6mU_-3X6NtU for example of something that is highly addictive yet too simple for words, and also clearly profitable. But what CRA officer would accept “Step 1: I will be funny/very Scottish and kind to cows as I trim their hooves and explain in detail all of the complex health and anatomy issues involved; Step 2, HUGE PROFITS” as a business plan or revenue projection?
