Meaning of “Business”
The Supreme Court of Canada’s (SCC) definition of “business” seems much broader than the “system of risk minimization” test employed by the Tax Court of Canada in Leblanc et al. v. The Queen, 9 (that is, the SCC held in Stewart v. The Queen, 10 that there is no single factor that determines whether a taxpayer has a business, but in Leblanc, the Tax Court of Canada (TCC) reduced the test to one factor). Consequently, the Leblanc decision raises questions about the proper test for determining whether there is a business, which is applicable to both gambling and non‑gambling cases.
Question
Can the CRA provide its position on this matter?
Response
Assessing the taxability of gambling activities is unique in a number of ways. Games of pure chance, like lotteries, lack the badges of trade to which the traditional tests of business activity can be applied. Traditional tests to determine the existence of a “business” include an assessment of a taxpayer’s profit-making purpose (that is, “pursuit of profit”) and the commerciality of a taxpayer’s activity.
Gambling is always undertaken in “pursuit of profit.” This was addressed in Balanko v. M.N.R., where the court stated that gambling with a view to profit is an intention
“shared by all who gamble, and the presence of the intention to win or make money in gambling, which is there in all who gamble, does not lead to a conclusion that all who gamble, or even all those who gamble frequently, are carrying on a business.” 11
Usually the frequency and systematic nature of an activity would be indicative of a “business.” The traditional common-law definition of business is “anything which occupies the time and attention and labour of a man for the purpose of profit” 12
“Such a definition would usually be unexceptionable when one is talking about a commercial activity. If applied literally and mechanically it would include the activities of a person who consistently and regularly placed bets on horses, or played the lotteries or the gaming tables. It would mean that the gambling activities in every case that I have cited would be a business, yet we know that this is not so. Gambling-even regular, frequent and systematic gambling-is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances.” 13
There are some exceptional cases, which are noted in Leblanc, where gambling activities have been held to be taxable; however, these relate to taxpayers who applied inside information, knowledge and skill to their activities (for example, in Luprypa v. The Queen, 14 a pool player who in cold sobriety would challenge inebriated pool players to a game of pool was held to be taxable on his winnings) and can therefore be clearly distinguished from the facts in Leblanc.
The Stewart case recommended applying a two-stage test to determine whether a source of income exists. The first-stage test asks: “Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavor?” The second-stage test asks: “If it is not a personal endeavor, is the source of income a business or property?” Under the first-stage test, where a taxpayer’s undertaking could be considered a hobby or other personal activity but it is carried out in accordance with objective standards of businesslike behaviour, it will still be considered a “source of income.”
While the “pursuit of profit” test is meaningful in other cases, it is not a meaningful test to apply to a gambling activity. Gambling is anomalous because no one gambles for any reason other than in a pursuit of profit. Accordingly, when the first-stage test is applied to gambling cases, one would always conclude that the “pursuit of profit” element was satisfied. Furthermore, the usual indicia of commerciality, such as frequency and systemization, are also not relevant criteria to be applied to a game of chance.
If the TCC in Leblanc had specifically referred to Stewart and stated that it was applying the first-stage test, it likely would have determined that there was a pursuit of profit and a personal element involved (that is, the taxpayers were considered to be compulsive gamblers). It would have then determined whether the personal activity or hobby was undertaken in accordance with objective standards of businesslike behaviour in which the TCC would have considered the management of risk as the appropriate objective test to apply. On this assessment, the TCC would have again concluded that there was no “source of income.”
Accordingly, in our view, the “source of income” test and principles adopted by the TCC in Leblanc are not inconsistent with those applied by the SCC in Stewart. They simply reflect the uniqueness of gambling activities.
Link to source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/itnews-41/archived-income-tax-technical-news-no-41.html#P3