For a business entrepreneur and owner, there are many aspects of starting, growing and maintaining the operations of the business. It includes (but not limited to) quality of product development or service offering, marketing and promotion, compliance with legal requirements and human resources. But didn’t we miss something? Yes we did! We missed Finances!
Yes, Financial Organization is critical and a very important piece of any business. Over time, business owners lose track of real business growth because of lack of proper bookkeeping, financial analysis and tax compliance, all of which are very important specially in the early stages of a business. However, if that continues for a period of time, not only it could put a serious negative impact on the owner’s business decision making, but also, it can lead to serious tax repercussions for any business owner in the future, should CRA decide to challenge certain claims. A recent court case (Stroud v. The Queen. 2022 TCC 86) is a great example and reminder of the things that could potentially go wrong in a financially unorganized business.
Summary of Stroud v. The Queen, 2022 TCC 86 (Full case here)
The Appellant owned a horse farm for over 30 years. The Appellant bred and raced horses during that period, but has consistently lost money doing so. The Appellant claimed GST Input Tax Credits (ITCs) with respect to the expenses incurred in 2017, 2018 and 2019 reporting periods, that were disallowed by the Minister of National Revenue. Whether the Appellant is entitled to the ITCs claimed depends on whether he made supplies in those reporting periods “in the course of a commercial activity”. Whether he made supplies in the course of a commercial activity depends on whether the Appellant carried on his farm business with a “reasonable expectation of profit (REOP)”.
The court referred back to a 1977 Supreme Court case (Moldowan v The Queen) for the four criteria that the courts should consider whether the taxpayer had a REOP. One of the criteria listed were “Appellants profit and loss experience in past years”. The Appellant only had income tax filings and vague income statements up to 2015 reporting periods. The appellant was not able to provide any information on the revenues for 2016 and later years.
There were various factors that led the court to believe that the appellant was not carrying on their business with a reasonable expectation of profit, such as Appellant’s Training and their intended course of action with respect to farming business and the capability of venture as capitalized to show a profit (please refer to full case here). However, inability to provide the financial statements and any relevant financial information was one of the key factors that the court weighed heavily in their final ruling, before they dismissed the case and denied the ITC claim, without costs.
Key Takeway
“A mere hope or desire for profit is insufficient to meet the “reasonable expectation of profit”
test. A review of the farm’s financial statements, or similar records, would have been necessary for the Appellant to (a) understand why the business continued to lose money and (b) take the steps necessary to make the business profitable. It was impossible for the Appellant to diagnose and treat the problem without the appropriate financial tools“
In a nutshell, business owners need to understand the cost of poor financial planning and organization for their business. Staying financially organized is key for any business operating with a reasonable expectation of profit and helps you make better business decisions.
We at PSingh CPA Professional Corporation can help you stay financially organized so you can focus on growing your business. We provide full course bookkeeping, accounting and tax advisory services to small businesses. Contact us today to book an appointment and we’d be happy to help.
Sources:
https://www.canlii.org/en/ca/tcc/doc/2022/2022tcc86/2022tcc86.html
https://www.videotax.com/web-tips-articles/life-in-the-tax-lane-september-2022-episode-88
https://www.everplans.com/articles/how-to-keep-all-your-financial-accounts-assets-neatly-organized
