House not lived in, tax court finds

A taxpayer who claimed to have generated substantial losses as a self-employed, financial consultant has failed to persuade the Tax Court of Canada that his activities were business-like in nature.

The April ruling from the tax court means that Jeffrey Peckitt’s claim of a net business loss of $46,003 in 2011, with no business income that year, will not be available to offset his RRSP income of $129,075.

The decision shows the importance of keeping complete records of business income, including to whom the income is paid. It also suggests that an accounting picture showing a continued high level of business expenses in several subsequent years, with no evidence that steps are being taken to limit such losses in the face of no or little income, can undermine a taxpayer’s case. In other words, the appearance of running up losses merely to shelter other income may be fatal to a taxpayer’s position.

According to the decision, Peckitt was laid off in 2008 and decided to start a business to “leverage” business connections built over 25 years as an employee in the financial services industry, brokering deals in commercial lending. However, according to the decision, Peckitt’s sole proprietorship was unsuccessful in turning a profit in any of the years between 2009 and 2013, instead reporting losses each year. In 2009, 2011, 2012 and 2013, he reported no gross business income, in some cases after refiling.

In support of his claim that he was engaged in business activities, Peckitt filed various documents, which included: a summary of his operations and a partial client list; his LinkedIn profile; referral letters; sample of a referral agreement; and sale invoices from Peckitt to his personal corporation.

But, while the decision notes that the activities as a financial consultant could not be viewed as personal, the court raised questions about the relationship between Peckitt in his personal capacity and his corporation. The court also questioned whether he really intended to make a profit, and whether he conducted his activities in a business-like way.

Questions were also raised about the deduction of the same expenses, such as auto expenses, as both business-related and personal, as well as the lack of clarity provided by Peckitt’s accountant, who acted as both his and his corporation’s accountant. Indeed, it appears that the muddying of these two types of expenses and failure to show business-like behaviour in the pursuit of his consulting operations, led to Peckitt’s loss.

Noted Justice Réal Favreau: “I conclude that the appellant never intended to make a profit from his business activities and that he used the expenses strictly as a means to reduce his income from his RRSP. The course of action of the appellant does not demonstrate a capability to make a profit. Despite the realization of a business loss in 2010, the appellant has not changed the way he conducts his business activities. The expenses were continually kept at a very high level.”

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