Canada: Rephrased source of income test (court decision)

Guidance on the rephrased source of income test from the Federal Court of Appeal decision

Guidance on the rephrased source of income test

A Federal Court of Appeal decision provides further guidance on the rephrased source of income test. Source of income is a fundamental concept in Canadian tax law. There can be no taxation without income and, subject to specific exceptions, no income without a source.

With respect to the first question of this source test—of whether there is a personal or hobby element to the activity—the Court of Appeal instructed that a personal reason for conducting an activity cannot, in and of itself, be considered a personal endeavour. This led to a finding that there was no personal element to the taxpayer’s activity.

The court then considered the test’s second question—of whether there was a pursuit of profit (which it found to be necessary in a source of income test). The Court of Appeal found that the evidence demonstrated a pursuit of profit by the taxpayer, and it referred the matter back to the Tax Court to determine whether the expenses claimed are deductible.

The case is: Brown v. Canada, 2022 FCA 200

Read a March 2023 report prepared by the KPMG member firm in Canada


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