Category Archives: Business

Trading Within an RRSP is NOT a Business

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Trading Within an RRSP is NOT a Business

Prochuk v The Queen, 2014 TCC 17

The taxpayer here sought to have losses incurred as a result of being defrauded characterized as a non-capital loss.  This case dealt with the question of when activities amount to a business or an adventure in the nature of trade.  This case in interesting in that activities within an RRSP were sought to support the taxpayer’s characterization of his activities outside of the RRSP.  The TCC held that “trading” inside an RRSP cannot be used as evidence of being a trader in respect of activities outside of an RRSP.


The taxpayer has education, training, and work experience in the financial trading and investing field.  He supported himself through the use of trades, within his RRSP, for many years and managed to increase the value of his RRSP 8 fold during this period.  He was involved as a victim in a number of fraudulent tax planning strategies, and made an investment into a foreign exchange business in the BVI that turned out to be a fraud.

He sought to deduct the losses of the fraudulent foreign exchange business as business losses, but the CRA reassessed on the basis that the losses were on capital account.


The Court, in determining whether the property at question was capital property or inventory, considered the decision in HMQ v Vancouver Art Metal Works Limited, [1993] 2 FC 179 (FCA), where the relevant factors of a trader were identified as:

  • frequency of transaction – traders have higher frequency
  • duration of holding – traders hold for shorter durations
  • intention to acquire for resale at a profit – traders want to sell to gain rather than make income from the property
  • nature and quantity of the securities
  • time spent on activity – traders spend time on trading

The TCC, however, stated that in considering the factors above, the activities within an RRSP cannot be considered in determining whether activities outside of the RRSP constituted a business.  This is because the RRSP is a unique regime that provides contributors with tax incentive: trustee hold assets, can only hold “qualified investments”, contribution deductible from income, growth within RRSP is tax deferred, withdrawals taxed pursuant to secs. 56(1)(t) and 146.4(5) of the ITA.  A person in the business of trading: has to report income yearly, profit is determined pursuant to  sec. 9 of the ITA.  Therefore, the ITA treats a trader inside an RRSP differently than a trader outside of the RRSP – supported by the TCC decision in Deep v HMQ, 2006 TCC 315.

The TCC also determined that the taxpayer’s activities did not amount to “an adventure in the nature of trade”.  The court referred to the decision in Canada Safeway Ltd v HMQ, 2008 FCA 24, where the criteria for determining whether a person was engaged in an adventure in the nature of trade were set out.  Here the taxpayer was a passive investor holding the investment on a long term basis, and he hoped to obtain passive yields during the holding period and a capital gain on the eventual sale of the property – thus not involved in an adventure in the nature of trade.

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Employee vs Independent Contractor – Order of Inquiry Reversed?

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Employee vs Independent Contractor – Order of Inquiry Reversed?

Mallon v MNR, 2014 TCC 14

The facts of this decision are not particularly interesting (other than the “refreshing” occurrence of witnesses telling “the same story”, the description being “identical”) , but the approach of Campbell J Miller J to answering the age-old question of whether a relationship is that of an employee or an independent contractor is interesting.  Miller J properly expresses the trouble with the reliance on intention in the existing two-step process.  He correctly highlighted, in order to provide guidance for future parties, that judges will look “foremost to the actions and behaviour that define the relationship and determine whose business it is” and that it is “action and behaviour will determine intention, not the other way round” (para 15).

The distinction between employees and independent contractors is an important one in the Canadian Income Tax system. The importance of the distinction is not discussed here.

Miller J highlighted the root of the recurrence of the employee-contractor issue as being the mistaken belief that persons can choose “with the stroke of a pen” the nature of their relationship, and the danger of placing too much emphasis on the intention of the parties.   After referring to, and quoting from, 1392644 Ontario Inc. (c.o.b. Connor Homes) v Canada, 2013 FCA 85, – to identify the two-step process: (1) identify intention of the parties as to the relationship; and (2) see whether reality sustains that subjective intention – and Royal Winnipeg Ballet v Canada, 2006 FCA 87,  Miller J, at paragraph 14, posited that the two-step process introduced by Royal Winnipeg Ballet:

requiring the second step to be an analysis through the “prism” of intention appears to place too great an emphasis on the factor of intention, that can so readily be manipulated with no regard for the true status of the working relationship, but more to the effect of avoiding source deductions.

Miller J recognized that he was bound by the FCA decision, and paid detailed attention to the actions of the parties to state that  the relationship does not support an “intention expressed by words only” that an independent contractor relationship was intended.  There was, therefore, no need to go to the second step of the inquiry, and all that was needed was to ask “whose business is it?”.  Miller J also expressed trouble with the fact that “intention” was never mentioned by the SCC in the leading case on the issue – 1671122 Ontario Ltd. v Sagaz Industries Canada Inc, 2001 SCC 59.

The interesting portion of this inquiry is that Miller J suggested that the two steps are in the wrong order.  He stated that the better approach is to first determine the true nature of the working relationship as between the parties and, only if this inquiry is not determinative, then look at the intention of the parties (para 15).  This order of the approach is much better and more in line with reality of the determination.  The reason for drawing the distinction in the ITA is based on a number of policy grounds (including administrative ease and tax base protection) rooted in the reality of Canadian income relations.  It would, therefore, make sense to consider the objective reality of the income relation first, and only resort to what the parties intended to do where their actions leave one in doubt of the actual relationship.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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