Are you running a business or indulging a personal interest?
Howard Berger is a former hockey reporter who covered the Toronto Maple Leafs for the FAN 590, a Toronto sports radio station owned by Rogers Media. After being let go in June 2011, he started his own hockey blog, bergerbytes.ca. His goal was simple: he would write a quality hockey blog that would attract sufficient readership that sponsors would want to advertise on his site.
To this end, during 2011 and 2012, Berger travelled with the Maple Leafs, incurring significant travel expenses while on the road writing his blog. In those years, however, he only managed to collect $7,500 in advertising revenue, all from one source, Toronto based personal injury law firm Bogoroch & Associates LLP, which agreed to sponsor his blog through the duration of the 2012 Stanley Cup playoffs.
Since then, Mr. Berger has neither sought nor received other sponsorship revenue and, as a result, recently found himself in Tax Court trying to defend business losses he claimed in 2011 and 2012 - of $26,540 and $37,866 respectively.
A 2002 seminal Supreme Court of Canada decision provides helpful guidance to determine whether or not an individual has a source of income, or, in other words, is operating a business and thus can claim business losses.
The Canada Revenue Agency denied Mr. Berger's losses on the basis that he did not conduct any business activities
The first test is whether the nature of the activity is clearly commercial, in which case there is no need to analyze the taxpayer's business decisions; however, if there is a personal element to the activity, you then examine whether the taxpayer intended to carry on the activity for profit and whether there is sufficient evidence to support that intent.
As the Court said, "this requires the taxpayer to establish that his or her predominant intention is to make a profit from the activity and that the activity has been carried out in accordance with objective standards of businesslike behavior." It cites five objective factors to be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture to show a profit and any other factors.
The Canada Revenue Agency denied Mr. Berger's losses on the basis that he did not conduct any business activities or, in tax parlance, he had no source of income. Since Berger didn't prepare a formal business plan, or a formal budget or any financial projections, the CRA felt that his activity was not commercial in nature since "travelling across North America following a hockey team was indicative in and of itself of a strong personal element."
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While the Judge recognized the commercial aspect of Mr. Berger's blogging, he also acknowledged that there was a personal element to the blogging since, "for a sports fan like Mr. Berger to be travelling to New York City, for example, to watch the Maple Leafs play the Rangers, does have a personal element, as does the blogging itself. Indeed ... common sense suggests 'blogging' is by its nature as much a recreational pastime as possibly a commercial practice."
The Tax Court judge then weighed the five factors and concluded that the losses should be allowed, since "the activity does go beyond hobby." He found that Mr. Berger did have a "predominant intention to make a profit," at least in the first 18 months, and "behaved in a reasonable businesslike manner to pursue that end."