A December 20, 2024 Tax Court of Canada case reviewed the denial of losses from a dog breeding business. The Court undertook an extensive analysis of the taxpayers’ activities breeding champion dogs to establish a reputation for their kennel and generate revenues from stud fees and sales of puppies and semen, resulting in significant losses from 1999 to 2018. The Court first discussed whether the venture had elements of a hobby or other personal pursuit, concluding that the taxpayers’ lifelong connection to dogs suggested such elements.
Although the evidence demonstrated that the taxpayers intended to earn income, their dog-breeding activities were not a source of income as they were not conducted in a commercially reasonable manner. The Court cited the following factors as particularly relevant:
- recurring large losses over many years, with almost $1 million of losses over the 20-year period, with less than $50,000 in total revenues;
- use of credit card financing rather than securing less expensive commercial loans or lines of credit;
- rudimentary budgeting processes, lacking any plan to limit costs from various dog shows or on an overall basis;
- loose management of expenses, which were generally only summarized after the end of the year for income tax filings;
- unsophisticated books and records mingled with their law practices and rental operations;
- restrictive marketing that limited sales, which was not comparable to other commercial breeders; and
- the opinion of their own expert witness that activities generating such losses over a fifteen-year period cannot be a business.
The Court ruled that these losses were properly disallowed.
Statute-barred returns?
CRA had reassessed several years after the ordinary reassessment period of three years from initial assessment. The Court noted that this was permitted only if the taxpayers had made a misrepresentation attributable to carelessness, neglect, willful default or fraud. The Court noted that this is determined on an issue-by-issue basis and not on a year-by-year basis. Any reassessment can relate only to the misrepresentation(s) in question.
The Court concluded that the taxpayer had a bona fide belief that the dog activities were sources of income, a conclusion reached with the assistance of professional tax preparers. Their difference of opinion with CRA was either not a misrepresentation or was not attributable to carelessness or neglect. Where deductibility was a question of judgement, whether in determining whether a source of income existed or whether a specific expense was properly deductible, the returns could not be reassessed. As a result, several years were largely statute-barred.
However, some expenses were clearly not related to the income-earning activities. The taxpayers’ practice of accounting for expenses only after the end of the year, rather than as they were incurred, resulted in an increased risk of error. To the extent that clearly personal expenses had been claimed, this resulted from carelessness or neglect, and these expenses could therefore be disallowed after the ordinary reassessment period.
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