It’s Your Business – Vol 1, Issue 3 – October 2009
As reported in the May 2009 issue of “It’s Your Business”, the Province of New Brunswick is moving toward implementation of the Franchises Act which was passed in 2007 but has yet to be proclaimed in force. The Act and regulations will affect the relationship between franchisors and franchisees and is generally a statute partially protecting the interests of franchisees and deals with areas such as disclosure, duty of fair dealing and remedies which will affect the operation of the Act.
We are advised that the Franchises Act will be proclaimed into force, in all likelihood, during the first half of 2010. If you are a Franchisor adherence to the Act is advised. If you are a Franchisee, careful attention should be paid to the rights and obligations you may have under the new legislation.
Are all expenses that your business generates in a given year deductible? Can they be carried forward in future years?
At one time, Canada Revenue Agency (“CRA”) would deny expenses incurred by a business if the business generated consistent losses over consecutive years. The general rule was that if your business did not generate a net profit but instead had losses over three or four consecutive years, CRA would deem that the venture was not a “business” for income tax purposes and therefore would deny the deductibility and carrying forward of those losses. CRA’s reasoning was that if a business did not generate a profit within that timeframe, the business (and the taxpayer) did not have any “reasonable expectation of profit”.
CRA’s “reasonable expectation of profit” was particularly troublesome for businesses associated with real estate as, generally, they generate huge start up costs and pay large amounts of interest on the front end, only to enjoy great profits later on.
However, when tested, the Supreme Court of Canada modified CRA’s test. According to the Supreme Court, if the activity meets a “pursuit of profit test”, then the expenses can be deducted and any losses associated therewith can be carried forward against revenues in future years. According to the Supreme Court, a two part test should be used to determine whether the expense was incurred in the “pursuit of profit”:
- Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
- If it is not a personal endeavour, is it the source of the income or a business or a property? (Stewart v. R., 2002 SCC 46 at paras. 50 and 51)
Given the reasoning of the Supreme Court of Canada, and given that logically one does not enter into a commercial venture without some hope that at some point it will turn a profit, one can generally conclude that most activities (unless pursued simply as hobbies or strictly for recreational purposes) can be considered a business or property source of income. Furthermore, the Court has stated that in cases where:
[T]he nature of the activity is clearly commercial, there is no need to analyze the taxpayer’s business decisions. Such endeavours necessarily involve the pursuit of profit. As such, the source of income by definition exists, and there is no need to take the inquiry any further. (Ibid, at para. 53)
The Supreme Court of Canada, through its decisions on this issue, has expanded the availability of the deduction of expenses that are available to a taxpayer in any given year as well as the losses that are available to be carried forward. Effectively, the Supreme Court of Canada has ruled that so long as a taxpayer is operating a business, even if doing so badly, CRA should not be able to deny the deductibility of expenses related thereto, provided, of course, that those expenses were made “in the pursuit of making a profit”.
It is advised that business owners stay abreast of developments that may occur in this area. Should your business involve a “personal element” (example – seasonal sale of apple pies at the local market), CRA may deny your losses on the basis that there is no reasonable expectation of profit. Be sure to consult with your legal and tax advisors in order to employ strategies which will satisfy CRA and, to the greatest extent possible, remove “personal elements” from your business. Doing so will allow you to negate CRA’s argument that your business has not been operated in the “pursuit of profit”.
Recent changes to the Small Business Investor Tax Credit Act (the “Act”) have resulted in significant increases to the tax credits available to eligible investors who invest in qualified small businesses.
The Act provides eligible investors with a 30 percent non-refundable personal income tax credit of up to $75,000 per year (for investments of up to $250,000 per investor). No fewer than three investors must invest a minimum of $10,000. The minimum amount any one investor may invest is $1000.
In order to qualify under the Act there are a number of requirements which a business must meet:
- Must be incorporated and/or registered to carry on business in the Province of New Brunswick. This could include an extra-provincial corporation.
- Must have authorized capital consisting of shares without par value.
- Must not have net assets with a value in excess of $40,000,000.
- Must have all or substantially all of the corporation’s assets and income used to generate active business income in the Province of New Brunswick.
- Must ensure that the shares issued are newly issued, fully paid shares and that the issued shares do not constitute a replacement share.
A detailed investment plan must be delivered to the Minister which plan will identify the amount of capital required and how the corporation intends to use the investment capital. In addition to financial statements and your previous year’s tax returns, information about each of the investors is also required.
Upon receipt and approval of the application package, the Department of Finance will issue a certificate of registration to the corporation. The certificate will permit the business to issue eligible shares up to a specified value on or before a specified date.
In order to ensure that the spirit of the Act is complied with and that investors do not use the program for tax evasion purposes, strict holding requirements have been established which must be adhered to by both the corporation and the investor in order for the investor to retain the tax credits received.
In addition, the Act has placed strict limitations on what the corporation may do with capital raised. Once a corporation receives its investment capital, and once the Tax Credit Certificate has been issued, the Corporation must take care not to use the investment funds for a purpose not authorized by the Act.
The Small Business Investor Tax Credit Act provides significant tax relief to those who want to invest in New Brunswick businesses. The relief can be substantial—up to $75,000 in tax credits (not deductions) per year. Prior to investing money in any New Brunswick corporation, one should consider an application under the Small Business Investor Tax Credit Act. Note: Similar programs are available in the Nova Scotia Equity Tax Credit Act.
This is a Cox & Palmer publication prepared by our Corporate & Commercial Group in Fredericton, NB. It is intended to provide information of a general nature only and not legal advice. For assistance with any matter involving your business, call a member of our team:
Walter Vail Q.C. (506) 453-9602
Bruce Hatfield Q.C. (506) 453-9674
Matthew Tweedie (506) 462-4750
Deborah Power (506) 453-9645
Aaron Savage (506) 444-9284
Paul White (506) 453-9671
Daniel Stevenson (506) 462-4754