The Canadian Federal Court of Appeals recently upheld a judgement made by a Tax Court judge, which found a Quebec lawyer’s losses from her side business to be non tax deductible.
Her original reported losses in 2011 and 2012 surpassed her full-time employment, averaging $1.70 an hour. These deductions were rejected by Canada Revenue Agency, and she began her journey through Tax Court. Subsequently the court launched an investigation into the full tax history of the lawyer’s self-employment between 2001 and 2014 and found similar variances.
Work expenses, from a personal or home business, are allowable deductions from your income when tax time rolls arounds. These type of costs are difficult to pin down and will need to be proved with receipts and employer certification.
If self-employed, many ‘work’ expenses can cover gray items, such as high-speed internet or anything that is needed to complete the job at home.
However, no years showed profit for the lawyer’s side business, and no income was reported for 3 years. These losses ranged from $1,956 in 2003 to $15,680 in 2012 when tax returns were initially rejected, resulting in the need for a Toronto Tax Lawyer.
The main question when examining the case was whether the taxpayer’s side business actually constituted a source of income. The courts determined the losses were too great to comply as a deductible source of income.
The taxpayer had argued that her business suffered such losses due to taking on low income clients. The rate the lawyer charges her clients is based on their income, so she could only give very uncertain ideas on how much she would receive per case, or even how many cases she was paid at all.
The taxpayer reported having 5 to 10 legal cases each month, ranging from simple legal advice to more in depth legal work. She claimed none of these cases were done without charge, so it did not fall under volunteer work.
In order for losses to be deducted they must come from a source of income. Both the Tax Court Judge and the Federal Court of Appeals referenced a 2002 ruling by the Supreme Court of Canada which determined that a source of income, must come from a venture done in the ‘pursuit of profit.’
After reviewing the taxpayer’s claim of a $1.70 hourly wage, the Judge was quoted saying “That is not even minimum wage. Even with the best management in the world, it is impossible to generate net earnings in a law practice with this level of income.”
The determination was that her work is humanitarian in its base form, and the judge commended the lawyer for this. However, the ‘business’ does not follow commercial standards or the ‘pursuit of profit’, so all losses were non-deductible.
