The "Business" Test in Happy Valley Farms Ltd. v. The Queen, 1986 CanLII 7434 (FC)
If income is characterized as business income then 100% is subject to taxation. Only 50% of a capital gain is subject to taxation. Determining whether the business income characterization applies requires referring to the definition of a “business” as per subsection 248(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp).
According to subsection 248(1) a “business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and…an adventure or concern in the nature of trade but does not include an office or employment…”
adventure or concern in the nature of trade
According to the decision in Happy Valley Farms Ltd. v. The Queen, 1986 CanLII 7434 (FC), 86 DTC 6421, determining the business income versus capital gain characterization requires considering the following:
1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.
2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.
3. The frequency or number of other similar transactions by the tax-payer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the prop-erty.
4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.
5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original pur-chase.
6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.
SpenceDrake Tax Law – Tax Lawyers
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